You have created a dental practice that you are proud of, and you want to ensure its long-term success. It is a terrible realization to build a business where your profits are walking out the door. Creating an environment that makes fraud difficult can help protect your business and hard work.

In the 2020 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) estimates that organizations lose five percent of their revenue to fraud each year. Unfortunately, small businesses stand to lose the most. The median loss for a small business was $150,000. The ACFE study also found that a lack of internal controls contributed to nearly a third of all fraudulent activity.

By implementing internal controls, you can safeguard your practice and detect fraud sooner. Here, we have outlined five internal control processes that can help small business owners and dental practices alike secure their financials.

Segregation of duties (SOD) means that different people have shared responsibilities within their key processes.

When creating processes in your office, avoid making one employee accountable for all steps in the accounts receivable or payable procedures. Having different people authorizing transactions, recording transactions, and reconciling transactions creates shared accountability and transparency.

SOD can be challenging for small offices with limited staff and could require additional owner participation for some of the processes. For example, the employee who writes the checks should not also sign them. Instead, require that all checks have supporting documentation, like an invoice, and review all documents before signing it yourself. Similarly, handling an asset is a key responsibility that should be segregated from the recording or authorization of that asset.

Small business owners can offset limited staff numbers with increased oversight. Creating budgets and key performance indicators are crucial for monitoring financials outside of the day-to-day activity. While being involved in back-office operations may necessitate increased time and attention, it prevents additional fraud risk exposure.

Business owners can use reconciliations to identify any errors or fraudulent transactions. Even if fraud is not your primary concern, reconciliations are an excellent way to verify financial activity.

We recommend personally reviewing bank statements and transactions personally each month. Use statements and invoices directly from your banking institution and be sure to check the following:

• Ensure there are no unexplained reconciliation differences
• Verify that vendor names on cleared checks match the accounting system
• Review for suspicious transactions, such as cash withdrawals, missing deposit amounts, or payments made to unauthorized vendors

When you receive your credit card statement, you should take the time to review the charges in detail. Are there any charges that were not authorized or look suspicious?  If a charge seems amiss, investigate these payments to avoid improper use of the company credit card.

We also recommend assessing payroll reports monthly to confirm that correct amounts are paid only to the right employee.

Conducting regular audits is a great way to give yourself peace of mind. In sampling a few transactions to check the accuracy, you can create another layer of defense for your business. When auditing a selection of payments received, you are looking to ensure the reporting matches deposits made, and any discounts are documented appropriately.

You should also audit payments your business made. Select a sample of payments and confirm they were made to an authorized vendor for the correct amount. Unfamiliar or unusual vendors should be reviewed with the supporting documentation and invoice.

Before hiring a new employee, conduct a proper background check. While the person you’re hiring may have interviewed well or is highly recommended, background checks verify credentials. We recommend this, especially if the employee will be handling company money or transactions.

Vacation time can be an indicator of suspicious behavior. When an employee refuses to take time off, it could reveal fraudulent activity. Often, bad-actors are exposed when out of the office and another staff member takes over their duties. Enforcing vacation time can both deter fraud and detect it when it does happen.

Due to COVID-19, many staff members work remotely or have altered their schedules to reduce office time. With employees in and out of the practice, owners find discrepancies that would have previously gone unnoticed. The work environment changes have exposed fraudulent behavior and demonstrated just how critical it is to maintain multiple internal controls best practices.

The recent pandemic has dramatically affected cash flow for small businesses. Before accusing any employee of fraud, be sure that the downturned collections or suspicious transactions are not a result of delayed insurance payout or decline in business activity.

Setting up internal controls is important for your business’s health, but it is not always easy to see the risks in your current processes. Aldrich Advisors can help you design and implement internal controls that work for your business. If you need assistance or have questions about creating additional oversight in your business, please contact your Aldrich Advisor.