When business owners defraud their partners

Too many medical practitioners fall victim to a particular type of fraud, where the thief is also their business partner and making off with a practice’s profits.

CPAs can help these practitioners avoid becoming victims in the first place by flagging questionable accounting practices and talking early on to clients about the warning signs their partner may be skimming off the top.

Doctors’ offices tend to be closely held by a small number of partners, and operations can be opaque and mired in regulatory and bureaucratic complexity. Complicating matters further, doctors, dentists, and their ilk are too often unfamiliar with the accounting side of their practice. They prefer to focus on treating patients and tend to entrust one or two parties with the practice’s financials.

The forensic accounting team at Wiss & Company, the New York City-area accounting firm where I work, has seen an uptick of medical practitioners who approach us worried that they have been fleeced by their partners, with a half-dozen in 2019 reporting this concern. These experiences can end up being emotionally as well as financially devastating, with perpetrators often being close friends or relatives of the victims. This type of fraud can be costly.

One of our medical practice clients approached us after growing suspicious because his earnings were low but the practice was busy. The client, who joined his uncle’s practice five years earlier, was concerned because his uncle and aunt, who kept the practice’s books, dodged his requests to review the business’s tax returns. Our firm uncovered almost $2 million in damages, discovering that the uncle and aunt had paid all their personal expenses through the practice and drew unusually high salaries. Our client eventually settled with his aunt and uncle out of court and took over as full owner with full access to financial records. He now runs a thriving practice. Unfortunately, his case is not unique. Medical partner fraud is more common than most medical professionals realize.

A number of red flags may indicate a business’s vulnerability to partner fraud. When advising clients, ask them to watch out for the following:

Unfamiliarity with the business side of a practice

Some professionals such as attorneys complete years of schooling to practice their trade and generally don’t spend much time learning about accounting. Many don’t want to have to mess around with spreadsheets and billing software. But therein lies the danger — ignorance about a practice’s financial operations provides an opportunity for partners to take advantage and pocket money that isn’t theirs.

Lack of access to books and records

Being denied access to financial documentation should tip off a business partner that something isn’t right. Owners should be able to review any and all business documentation at will and should exercise this authority regularly. Not being able to do so is a significant red flag.

Bookkeeping handled by associates close to a partner

Fraudsters are often aided and abetted by those close to them. Books kept by a partner’s relative or loved one indicate vulnerability to fraud, and CPAs should recommend that their medical clients hire a bookkeeper with no familial or other close connections to any of the partners. Alternatively, the partners can engage an external bookkeeping service that has no preexisting relationship with any of the doctors.

Commingling funds with other ventures

Another client of ours had a podiatry practice with another podiatrist and grew concerned about the practice’s growing debt and diminishing cash flow. Our analysis found that her partner, who held interests in several other ventures, was paying expenses for the other businesses through the podiatry office and used the practice to assume some of the debt generated by the other businesses. Doctors often have interests in multiple businesses, and the same is true of other professions. It is imperative that you stress the importance of keeping each set of books well clear of one another.

Earnings are suspiciously low

Another client was a junior partner of a large and busy dental practice and was motivated to investigate the practice’s finances when several dentists complained about withheld wages. The managing partner handled the company’s accounting and insisted that the practice was experiencing increasingly diminishing revenue, even asking for a loan of several hundred thousand dollars from his partners to keep the practice afloat. As it turned out, that managing partner was using the dental practice to fund lavish vacations and expensive dinners. If a client finds out the practice’s earnings sound lower than they should be, it could be a sign something is amiss. Ideally, businesses should outsource their bookkeeping responsibilities. At the very least, recommend to your clients that each partner should have equal access to the practice’s books.

Out of sync with industry benchmarks

When the dentist in the above scenario finally researched his practice’s financial standing, he realized that the debt-to-income ratio didn’t make sense based on the business’s revenues and expenses. CPAs can encourage clients to talk to other professionals in their area and read industry publications to educate themselves about industry benchmarks.

PREVENTIVE MEASURES

Ensure your clients take the necessary steps to protect their practices from partner fraud by insisting on total transparency, engaging with outside accounting firms, and exercising the financial authority they hold as business partners. Doing so will allow them to avoid the financial strain and heartbreak that others had the misfortune to endure.

About the author

Joshua Wiesenfeld, CPA, is a forensic accounting supervisor at Wiss & Company in Florham Park, N.J.

To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com or 919-402-4607.

AICPA resources

Article

• “Uncovering Bribes Hidden in Books and Records,” JofA, Oct. 2019

Podcast

• “Simple Fraud Prevention Tips,” JofA, Feb. 12, 2019

CFF credential

• Certified in Financial Forensics (CFF) credential

Webpages

• AICPA Forensic and Valuation Services (FVS) Section
• “Eye on Fraud: Employee Corruption Fraud … What’s the Big Deal?” FVS Eye on Fraud, Fall 2017