Fact Pattern –
Rachel knew something was wrong but she couldn’t put her finger on it. Her four-year-old dental practice had enjoyed a great couple of years and with positive online reviews and a growing referral network her practice should have been doing well by now. But Rachel was constantly in overdraft territory with her bank and she hadn’t been able to take a reasonable salary from her practice for almost half a year. By contrast, her office manager, Jane, who oversaw both the billing and collection processes, had just bought a new house and a particular luxury car that Rachel had mentioned wanting to buy herself, if things got better.
Fortunately, Jane never took vacations so she was always on hand to help out with administrative duties. Jane had even offered to loan Rachel some money to help with the practice’s current cashflow deficiencies, and Rachel was thankful that her friend was willing to use a recently acquired inheritance to help Rachel out of a bind.
Surprisingly, when Rachel met with her banker to discuss how she could tap into her home’s equity to help with the practice’s rough patch, Rachel’s banker asked her if it was possible that one of her employees was stealing from her, since the practice’s growing patient base didn’t comport with the reduction in revenues being deposited into the practice bank account.
Important Considerations –
In a situation such as this one, a forensic accountant might suggest various procedures to gauge the potential for employee theft. Important considerations in these types of analyses include testing the segregation of job functions to assess the ability of a single employee to remove funds from the company without detection, reviewing the integrity of the accounting process (which can encompass either an expansive or a restricted review, depending upon the scope of engagement and the existence of “red flags” or troublesome observations), and correlating trends in business activity with reported financial performance.
While the scenario presented above appears to lead to a possible culprit in dependable office manager Jane, this exact same fact pattern could still exist in a scenario where Jane is no more than a well-meaning friend and the real culprit is mismanagement or changes in insurance reimbursements. As such, a forensic accounting analysis may also be able to provide peace of mind by process of elimination.
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