Why didn’t my accountant find the embezzlement?

My accountants just did my year-end three months ago.  How could they possibly miss the embezzlement that Prosperident found?

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, a 2007 study by the American Dental Association determined that external accountants discovered less than 9% of embezzlement in dental offices (which actually is pretty good compared with other industries — in its 2016 Report to the Nations, the Association of Certified Fraud Examiners determined that external accountants were responsible for detection of about 3% of embezzlements found). I think it is safe to conclude that most dentists overestimate the embezzlement protection provided by the annual 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.

First, 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.

Second, 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 — “review” or “compilation” engagements.In a review engagement, 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 or analysis.There is another factor that most dentists don’t consider.  Most US dental practices are allowed to use the “cash basis of accounting” for income tax purposes. Larger businesses are required to use something called “accrual” accounting, which measures revenue based on billings instead of when money is collected.  “Cash basis” accounting is a simplification that is permitted for small businesses and allows revenue to be measured based on when money is actually received.  The downside of this simplification is that it permits “lazy accounting,” where an accountant can completely ignore a dentist’s accounts receivable and perform their work from your practice’s bank statements only.  This simplifies the accountant’s work but may mean that any discontinuity in receivables, which would be identified if you were using accrual accounting, will not be spotted.

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 in terms of the accountant’s knowledge level and the “window” through which the accountant can view your practice.

Normally, in the course of the annual work performed on your file, accountants may make use of summary reports from your practice management software.  However, I have never seen one look at individual transactions in a client’s software — doing so would be beyond their scope, and normally also their expertise. This limits the possible types of embezzlement that could be spotted by your accountant to a minority of the embezzlement actually committed.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 have embezzlement concerns — can my accountant investigate for me?

For many dentists who have embezzlement concerns, their first call is to their CPA.  While the accountant’s perspective can be valuable, there may be some limitations in effect that the dentist should know.

Many of us fall into the trap of considering someone who knows more than we do as an “expert.”  However, in a similar way to how dentistry divides itself into general dentists and specialists in specific areas, so does the accounting profession.

Many dentists deal with “generalist” CPAs who do not specialize in dealing with dentists (or for that matter, embezzlement investigation).  While the generalists can bring a valuable perspective to your situation, they may not have the basis for comparing your practice to others that a “dental CPA” can.

Even if using a dental CPA, it is unlikely that they have much specific training in embezzlement, or its investigation.  The “gold standard” for fraud investigation is the Certified Fraud Examiner (CFE) designation, which relatively few CPAs possess.

To properly assist you with an embezzlement concern in your practice, you need to find someone who possesses several distinct competencies:

1.  They need to understand how a dental office works, dental terminology, coding, etc.
2.  This person needs experience in working with practice management software, preferably  your practice management software.  This does not mean that they have looked at reports that you printed for them; they need to have worked in the software as a user and, at a minimum, should be able to find a specific transaction and generate a custom report.  The needed level of expertise is far beyond what most CPAs can bring.
3.  They need to have training in embezzlement investigation and preferably considerable experience in performing dental embezzlement investigation.  Experience in investigating embezzlement at a pharmacy or building supply company really isn’t of much value here.

So it is entirely possible that your bright, knowledgeable, and otherwise well-qualified accountant can’t provide the kind of assistance that you need for this problem.  Unfortunately, I have seen many “well-intentioned dabblers” who aren’t fully aware of the knowledge and experience needed to complete this kind of work successfully.

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.

Our investigators have normally spent a decade or more working in the dental field before commencing their training with us.  Many are Certified Fraud Examiners; all of them live and breathe dental embezzlement on a daily basis, and are incredibly well trained.

David Harris is a CPA, Certified Fraud Examiner, and is Certified in Financial Forensics.  He considers himself to be an expert in dental office embezzlement.