This is a question that we get asked a lot. Most dentists expect their CPA to be on their “front-line” of embezzlement protection. And yet, in a 2007 study by the ADA showed that external accountants discovered less than 9% of embezzlement in dental offices. I think it is safe to conclude that most dentists overestimate the embezzlement protection provided by the accounting relationship.
Before you reach the conclusion that CPAs are letting the dental community down (and as a CPA myself, I feel some obligation to defend the accounting profession) let me explain some of the elements of the relationship between dentist and CPA that you might not have considered:
Many dentists deal with “generalist” CPAs, who do not specialize in dealing with dentists. While the generalists can bring valuable perspective to your situation, they may not have the basis for comparing your practice to others that a “dental CPA” can.
CPAs can perform three different levels of scrutiny and analysis when doing your work. The highest level of assurance is provided by an “audit”. In an audit, your CPA will do sufficient analysis and independent verification to obtain “reasonable assurance that the financial statements are free from material misstatement”. An audit’s primary focus is financial statement integrity, not embezzlement, and while an audit increases the chance of embezzlement detection, this is not the primary focus of an audit. Even so, audits can be expensive, and for that reason, most dental practice owners elect for a lower level of scrutiny; either a “review” or compilation.
In a review, the accountant normally performs ratio analysis to obtain “limited assurance” that your statements do not need modifications. In a compilation, which is the most common engagement for dental practices, the CPA simply turns your raw information into financial statements, without any particular scrutiny.
So it isn’t that the accountants are asleep at the switch; it’s that most dentists aren’t prepared to pay for any scrutiny of their information from their accountant. And even if they did, there are some further limitations you should consider:
Most accountants aren’t well equipped to think like criminals. For most of what they do, this is hardly a character flaw. However, it reduces their ability to spot embezzlement. In general, accountants have limited ability to navigate through your practice management software. Most embezzlement happens inside your software, with a much smaller amount taking place outside your software (such as stealing funds out of your bank deposit.
Accountants typically have a strong seasonal pattern to their workflow, and most dentists interact at their CPA’s busiest time of year. This limits the amount of mental energy and proactivity that your accountant can offer you.
We have the privilege of working with some truly excellent CPA firms, and I am quick to defend the accounting profession against the sometimes unrealistic expectations of its clients. The lesson here is to ensure that you and your accountant understand each other; accountants are happy to accept a mandate to provide higher assurance about your financial statements, but you have to mandate them to do so and be prepared to pay for it.
I’ve said it before — your best defense against embezzlement is to watch employee behavior closely. Our Embezzlement Risk Assessment Questionnaire is free for a short time — click here to find out how at-risk your practice is.