Investigating financial accounting improprieties

SITUATIONAL COMPANY ISSUES & OBJECTIVES

The board finance committee of a large urban community health system, upon being informed by the health system’s recently appointed CEO that members of the health system’s financial accounting team disclosed to the CEO that selected financial statement reserves were being intentionally understated by the health system’s CFO, immediately initiated an independent investigation. The independent investigation was directed by outside legal counsel, who worked in partnership with forensic accountants.

The board finance committee objectives for the investigation were to determine whether certain financial statement reserves were understated, the materiality of any understatements, whether any material accounts other than those disclosed to the CEO were misstated, why the system of internal control did not detect the misstatements, and whether the misstatements were intentional.

ACTIVITIES & RESULTS

Conducted forensic investigation through interviewing key witnesses, reviewing relevant accounting and email records, conducting walk throughs and process flows of the health system’s financial accounting and reporting processes, and conducting forensic accounting procedures for material financial statement account balances.

Identified several misstatements to the health system’s financial statements, including both intentional and unintentional misstatements. Developed estimates of the amounts of the misstatements.

Developed recommendations to strengthen financial reporting and internal control including recommendations such as creating a separate board audit committee, implementing enhancements and changes to the internal audit function’s scope of work around financial statement account analysis, implementing various enhanced revenue accounting control practices such as predictive tests and trend analysis, and implementing a policy for financial statement reserves (and reserve levels).

Developed a report for the health system’s board finance committee and management that outlined the events leading up to the investigation, the investigative procedures performed, the investigative findings, the recommendations to strengthen financial reporting and internal controls, and suggestions for the communications with key stakeholders such as the health system’s bondholders and employees.