Why Dental Practices Fail Accounting Audits

The auditor finds problems. The findings report grows. Suddenly a routine review becomes an expensive correction project. Most of these failures are preventable.

Why Audits Happen

Dental practices face various types of financial review:

CPA reviews: Annual or quarterly review by your accountant for tax preparation and financial statements.

Bank audits: Lenders may require audited financials for loans.

Compliance audits: Insurance carriers or regulatory bodies may audit for billing compliance.

Pre-transaction audits: Buyers conduct due diligence before acquiring a practice.

Internal audits: Larger organizations audit their own locations for control verification.

Each type looks for different things, but they share common failure patterns.

The Most Common Audit Failures

1. Unreconciled Bank Accounts

The fundamental failure: bank statements do not reconcile to books.

What auditors find:

• Outstanding items months or years old
• Unexplained differences between bank and books
• Missing bank reconciliations
• Reconciliations that do not actually reconcile

Why it happens:

• Reconciliation not done monthly
• Problems deferred rather than investigated
• Staff turnover losing institutional knowledge
• Nobody assigned responsibility

The consequence:

• Cannot verify cash balance accuracy
• Revenue and expense may be misstated
• Control environment questioned
• Material weakness findings

Prevention: Monthly bank reconciliation completed within 15 days of month-end, with all items resolved or documented.

2. Revenue That Cannot Be Verified

Collections claimed that cannot be traced to deposits.

What auditors find:

• PMS collections exceed bank deposits
• Large unidentified deposits
• Missing ERA/EOB documentation
• Adjustments without support

Why it happens:

• Posting errors accumulate
• Insurance payments not matched to deposits
• Cash handling weaknesses
• Documentation not retained

The consequence:

• Revenue may be overstated
• Potential fraud concern
• Financial statements unreliable
• Valuation implications

Prevention: Daily reconciliation of collections to deposits, with documentation retained.

3. Accounts Receivable Accuracy Issues

AR on the books does not reflect reality.

What auditors find:

• Old AR that should have been written off
• Inflated AR from posting errors
• Credit balances improperly included
• AR aging that does not make sense

Why it happens:

• Write-off decisions delayed
• Posting errors not corrected
• AR not reviewed regularly
• Credit balances ignored

The consequence:

• Assets overstated
• Collection rate misleading
• Working capital inaccurate
• Financial health misrepresented

Prevention: Monthly AR review, timely write-offs with documentation, credit balance monitoring.

4. Inadequate Documentation

Records do not support the numbers.

What auditors find:

• Missing invoices for expenses
• Adjustments without explanations
• Transactions without approval
• EOBs not retained

Why it happens:

• Documentation not prioritized
• Filing systems inadequate
• Records lost in transitions
• Staff not trained on requirements

The consequence:

• Expenses may be questioned
• Adjustments not supportable
• Control environment concerns
• Additional audit procedures required

Prevention: Documentation policy requiring support for all transactions, organized filing system, retention schedule.

5. Segregation of Duties Failures

One person controls too much.

What auditors find:

• Same person collects, posts, and reconciles
• No oversight of financial functions
• Bank statements go unopened to bookkeeper
• Adjustments made without approval

Why it happens:

• Small staff with limited options
• Trust in long-term employees
• Cost avoidance on staffing
• Convenience over control

The consequence:

• Fraud risk dramatically elevated
• Control environment compromised
• May require compensating controls
• Insurance implications

Prevention: Segregate duties where possible, implement compensating controls where not, document control structure.

6. Payroll and Contractor Issues

Employment and contractor classification problems.

What auditors find:

• Workers misclassified as contractors
• Payroll taxes not properly remitted
• Compensation not properly documented
• Owner compensation unusual

Why it happens:

• Misunderstanding of rules
• Intentional avoidance of taxes
• Poor recordkeeping
• Informal arrangements

The consequence:

• Significant tax liability
• Penalties and interest
• Legal exposure
• Operational disruption

Prevention: Proper classification guidance, timely tax remittance, documented compensation.

7. Fixed Asset Record Problems

Equipment and improvements not properly tracked.

What auditors find:

• Assets on books no longer exist
• Assets in use not on books
• Depreciation calculated incorrectly
• Disposals not recorded

Why it happens:

• Asset register not maintained
• Acquisitions not communicated to accounting
• Disposals not recorded
• Depreciation run on autopilot

The consequence:

• Asset values incorrect
• Depreciation expense wrong
• Tax implications
• Insurance coverage questions

Prevention: Asset register maintained, annual physical verification, communication process for changes.

8. Related Party Transaction Issues

Transactions with owners, family, or related entities.

What auditors find:

• Undisclosed related party transactions
• Non-arm's length pricing
• Personal expenses in practice books
• Unusual arrangements with related entities

Why it happens:

• Owner treats practice as personal account
• Family arrangements not documented
• Intentional obscuring of relationships
• Ignorance of disclosure requirements

The consequence:

• Disclosure failures
• Tax implications
• Potential fraud concerns
• Valuation complications

Prevention: Identify and document all related party transactions, arm's length pricing, proper disclosure.

Industry-Specific Failures

Insurance Billing Compliance

Dental-specific audit concerns.

What auditors find:

• Unbundling or upcoding patterns
• Services billed without documentation
• Payments received for services not rendered
• Unusual adjustment patterns

Why it happens:

• Aggressive billing practices
• Documentation shortcuts
• Inadequate billing training
• Pressure to maximize revenue

The consequence:

• Carrier audit and recovery
• False claims exposure
• Practice reputation damage
• Potential criminal liability

Prevention: Compliant billing practices, documentation standards, regular self-audits.

HIPAA Compliance

Privacy and security requirements.

What auditors find:

• Missing or inadequate BAAs
• Security risk assessment not done
• Breach notification failures
• Access controls inadequate

Why it happens:

• HIPAA seen as low priority
• Requirements not understood
• Compliance effort deferred
• False sense of security

The consequence:

• OCR investigation and fines
• Reputation damage
• Patient trust lost
• Operational disruption

Prevention: HIPAA compliance program, regular risk assessment, BAAs in place, staff training.

What Triggers Deeper Investigation

Auditors dig deeper when they see:

Red flags:

• Unexplained variances
• Defensive responses to questions
• Missing documentation
• Unusual patterns
• Resistance to access

When triggered:

• Scope expands
• More testing required
• Costs increase
• Timeline extends
• Findings likely increase

Prevention: Transparency, organized records, responsive communication, no surprises.

Preparing for an Audit

Before the Audit

Organize:

• Compile requested documents
• Ensure records are complete
• Review for obvious issues
• Prepare explanations for unusual items

Review internally:

• Bank reconciliations current
• AR reviewed and documented
• Adjustments supported
• Documentation available

Prepare staff:

• Brief on audit process
• Assign point of contact
• Set expectations for information requests

During the Audit

Facilitate:

• Provide requested items promptly
• Answer questions directly
• Do not volunteer unrelated information
• Document what is provided

Communicate:

• Regular status updates
• Address questions as they arise
• Escalate issues appropriately

After the Audit

Address findings:

• Understand each finding
• Develop remediation plan
• Implement fixes
• Document corrections

Prevent recurrence:

• Address root causes
• Update procedures
• Train staff
• Monitor compliance

Building Audit-Ready Operations

Monthly Disciplines

Bank reconciliation:

• Complete within 15 days
• All items resolved or documented
• Reviewed by someone other than preparer

Revenue verification:

• Collections reconciled to deposits
• Unidentified items investigated
• Documentation retained

AR review:

• Aging reviewed
• Problem accounts addressed
• Write-offs documented

Quarterly Disciplines

Control review:

• Verify segregation of duties
• Test key controls
• Address gaps

Documentation audit:

• Sample transactions for support
• Verify filing systems working
• Address gaps

Annual Disciplines

Asset verification:

• Physical inventory of fixed assets
• Reconcile to records
• Record disposals

Policy review:

• Update procedures as needed
• Verify compliance
• Train staff on changes

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