And folks that has been the 500 pound gorilla in the room that most informed observers see but for which there has been no media reporting. Today that changes and to set things up we need to hop into the Wayback machine and set the dial for March 3, 2014:
Singing River Health System leaders went before the Jackson County Board of Supervisors this morning to say they will likely collect $88 million less on patients’ bills than they expected.
System representatives met with the board during an executive session under “potential litigation” and spoke to the media afterward.
The county’s legal team said the system discussed its bond status with supervisors in the meeting.
For a five-year period ending in 2012, the hospital can expect to collect $61 million less than previously anticipated, CEO Kevin Holland said after the executive session meeting. For 2013, that figure is $27 million.
“We have a substantial amount of patient balances in our system … on past services rendered,” Holland said.
And of course this was mostly discussed in a secret, out of the taxpaying public’s eye under the guise of an executive session to discuss potential litigation. To the extent SRHS hasn’t sued the former audit firm KPMG and crystal balls foretelling the coming retiree suits against the system are the stuff of fantasy, I’m struggling, with the benefit of hindsight, to understand why this discussion was held in an executive session. As I’ve previously opined, KPMG was not sued because there was too much dirty laundry potential. Before I explain why it helps to understand why the above story is nothing more than SRHS/Jackson County Supervisor political spin:
The estimated loss of revenues was found as Horne reviewed account records and worked with Singing River’s finance department, leaders said, but the health system has developed a more precise method of estimated collection amounts.
To make up for the anticipated losses, Holland said the system will “continue doing more of the same that we’ve been doing over the last three years.”
Over the last several years, the system has reduced operating expenses by eliminating more than 200 jobs, mostly through attrition and consolidation of management, he said.
The adjustment represents “a local and national problem,” Holland said, and “every hospital … has this issue to manage.”
While we do not at this point know enough to understand how much of the blame for not catching the material misstatement rests with the audit firm KPMG I can say for certain that estimating the bad debt allowance is not a “local or national problem” except for those entities that engage in fraudulent financial practices and we’re going to explore that because what management did at Singing River Hospital is not a particularly innovative form of accounting fraud:
Anatomy of a Financial Fraud: A Forensic Examination of HealthSouth ~ Leonard G. Weld, Peter M. Bergevin, and Lorraine Magrath, New York State Society of CPAs (Emphasis added)
On January 23, 2003, the SEC issued its “Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002.” Section 704 directed the SEC “to study enforcement actions over the five years preceding its enactment in order to identify areas of issuer financial reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management.” The study period began July 31, 1997, and ended July 30, 2002.
Over the study period, the SEC filed 515 enforcement actions for financial reporting and disclosure violations arising out of 227 separate Division of Enforcement investigations. Those investigations fell into three categories:
Revenue recognition, including fraudulent reporting of fictitious sales, inaccurate timing of revenue recognition, and improper valuation of revenue.
Expense recognition, consisting of including improper capitalization or deferral of expenses, incorrect use of reserves, and other understatements of expenses.
Business combinations, relating to myriad improper accounting activities used to effect and report combined entities.
All but one of these investigations included revenue-related issues, and many investigations identified violations in two or all three of these categories.
As I’ve mentioned to multiple people off blog, the Allowance for Doubtful Accounts does not get $88 million dollars off on its own. Maybe there was a incompetent Casino dancer involved as intimated in the comments that operated with no oversight. The far more likely explanation however is that management covered up bad financial results by overstating revenues by understating the Bad Debt allowance. This would be my guess. Now lets visit with the folks at AccountingDegree.Org:
Before we rewrite the above template for SRHS using information contained April Havens piece above, we must examine what KPMG should have done when auditing the Bad Debt Allowance at Singing River Health System and for that we turn to the Journal of Accountancy:
Assessing the Allowance for Doubtful Accounts: Using historical data to evaluate the estimation process ~ Mark E. Riley, CPA and William R. Pasewark, CPA, PH.D.
Calculating estimates of the collectibility of accounts receivable and auditing those estimates is difficult. This article describes three techniques for assessing allowance for doubtful accounts estimates.
And those three techniques are:
- Technique 1: Compare bad debt expense (BDE) to write-offs (WO)
- Technique 2: Compare beginning allowance for doubtful accounts (BADA) to write-offs (WO)
- Technique 3: Assess the allowance exhaustion rate.
The above list is not exhaustive by any means but before we can assign blame to the audit firm it would really be helpful to know what procedures they actually performed on the bad debt allowance. To the extent it appears neither the Jackson County Board of Sups or SRHS is interested in suing their former audit firm, we may never know the answer to this question. Like I said folks, there is too much dirty laundry potential in a KPMG lawsuit which is why it is not being pursued IMHO.
Asset based lenders are also well attuned to potential problems in this area as this article explains. In a nutshell:
Opening the door to fraud
When you assess a company’s allowance for doubtful accounts, understand that accounting estimates are subjective and might be used to manipulate earnings. How? Well, suppose one of your borrowers postponed write-offs indefinitely and reduced the allowance to artificially inflate its profits and collateral base. That’s fraudulent behavior!
In my opinion, this is why the former CEO (a former KPMG CPA) and the former CFO (also a former KPMG CPA) are in hiding not talking to the media. Like I said, the allowance for doubtful accounts did not get $88 million dollars off on its own and this brings me to evidence and the smoking gun because it exists of that I am convinced (unless the Shred-it Truck paid a visit). I know this because there are other smoking guns that have also been highlighted in the media:
Ex-Singing River Health System exec says he sounded alarm about pension plan and accounting issues ~ Karen Nelson (link now 404):
Greg Shoemaker, who served as an interim CFO at Singing River Health System and executive vice president of Business Development for five years, told the Jackson County Board of Supervisors in a letter this week that he warned top leaders at the county hospital system two years ago that the retirement system was in trouble.
Shoemaker, who left the Singing River system in 2012, told county supervisors that he now holds a leadership position at another healthcare system in the area and has no axe to grind with Singing River. But he said that he also sounded the alarm about the system’s way of understating contract adjustments, stringing along debt that overstated its income, which lead in part to the $88 million shortfall in income the system announced in March.
In both cases, he made recommendations that the board chose not to follow.
Shoemaker ended the article saying the system may be to blame rather than people. That charitable viewpoint is belied by his other quotes in the article, however. And frankly if management staffed high level management positions with Casino dancers, they should have reasonably anticipated the end result. And none of this counts the “Lieability factor”:
Singing River told employees pension funded when it wasn’t ~ Karen Nelson and Anita Lee (Link now 404):
Singing River Health System sent statements in 2009, 2010 and 2011 to each employee showing how much the system paid into their individual retirement, with a colorful pie chart that showed millions invested overall int he pension plan.
It turns out the health system contributed no money to the pension plan after 2009, SRHS executives now acknowledge.
This is why I’ve wondered why the investigative community has seemingly been on the sidelines here:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail or such carrier according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency (as those terms are defined in section 102 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122)), or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Speaking of predicate acts I’m seeing several myself starting with those bullshit account statements the gang sent out:
Current SRHS management only think their lives have gone to hell in a handbasket. When 70 and 80 year old retirees start declaring bankruptcy because of gross mismanagement, the price to be paid by the perpetrators will likely go beyond money as it should.
Now, lets re-frame April Haven’s story above in the context of the ten worst accounting scandals graphic:
Singing River Health System Scandal (2014)
Company: Jackson County based community hospital system
What happened: Reported $88 million dollars in fake earnings
Main Players: Former CEO Chris Anderson, Former CFO Mike Crews, KPMG
How they did it: Material misstatement of the Allowance for Doubtful Accounts
How they got caught: New management and new auditors discovered the problem
Penalties: To be determined
Fun Fact: Rumors swirling of Casino dancers being hired to important managerial positions