A Cornerstone of the Singing River Financial Disaster: Management perpetrates an accounting fraud

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 likely to collect $88 million less on bills than previously anticipated ~ April Havens

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:

The 10 Worst Corporate Accounting Scandals of All Time

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:

18 U.S. Code § 1341 – Frauds and swindles

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:

18 U.S. Code Chapter 96 – RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS

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

Stay tuned.

31 thoughts on “A Cornerstone of the Singing River Financial Disaster: Management perpetrates an accounting fraud”

  1. Well, here you have it again Doug!!! Just like the DMR group. They hire unqualified people or people from other failing organizations (Mr. Spraggins, Bill Feidt, a child molester and felon-Miss Wagoner, – just to name a few of the unqualified). They keep the old crooks that they can, in place (Bill Walker and McKay’s old cronies – Jan Boyd, Rhonda Price, to name a couple), and then they keep who they HAVE TO that know how to run the place (I could name those too, but won’t because those people haven’t done anything except be afraid). And only one crook got a fitting sentence….the rest were slapped on the hand and the taxpayers’ money was not collected by our State Auditor from his “dear friends and family’.

    It sounds like to me that SRHS is DMR book #2 with a spin. From the same circle of crooks, this story is spun also. The loosers are again, the poor hard-working employees who have done nothing to deserve this. They have to sit back and keep their mouths shut while they watch their retirement being stolen by crooks with no conscience or interest in humanity and love only the mighty dollar and their mansion homes and BMWs. They have no concern for the workers who EARNED their retirement over a long span of time – they just want fast, quick, free money for themselves!!!! This who is running our State now!!!

    Do not forget this at the voting box. These Republican crooks MUST GO!!!! If you do not vote against this, you have no reason to complain because you are part of the problem. I don’t care if they are your “friend” or not. They are truly not the friends of anyone but themselves. Get rid of them!!!!

      1. That would be Wilder Eye – sorry for the cross-up. I guess I was typing too fast. It the the Wilder girl that was a teacher and written up in the newspaper for having sex with a student and his father at East Central School in Hurley. You can google it to read up on it. She must have some serious connections like Tina Shumate, because FatA$$ pardoned her from her FELONY charge and then gave her a job at the DMR (where she can look for more children to have fun with) in my opinion.

  2. Mr. Doug, shine some light on the legal dept. at one time we had 2 lawyers. One just took selfies, wrote silly books and had a silly leadership class and the other does who knows what? And we have the firm Roy and his boy- mrs st Pe is a member of the firm too- making serious $. Why all the outside lawyering if we have one??? Please tell me they didn’t shred those bills!

  3. Thank you Charlene Silkwooder; I could not have explained the situation at DMR & SRH better!

    In yesterday’s Sun Herald was a fabulous Editorial against the Jackson County Board of Supervisors in the SRH pension plan corruption deal. As Charlene mentioned, unless we, the voting public, do not vote these crooks out of office, we are the problem. They only want to be reelected so they can continue to feed at the hog trough of the public dollars and then retire with thousands of dollars for work they did not do while the ‘Average Joe’ is busting his butt to make a living. They are laughing all the way to the bank.

    Had you Singing River Hospital retirees and workers considered a protest march on the Jackson County Courthouse while the Jackson County Board of Supervisors are conducting how they can cover their butts and continue to screw you all? Just get a marching permit and advertise on Facebook.

  4. Okay, I am choking on my lunch! The SH just posted that the BOS of Jackson county have asked the hospital trustees to step down. That is good. But what about the BOS stepping down???? This happened on their watch!!! It is like allowing the fox to guard the hen house!!!! Come on. They are asking the trustees like they have a leg to stand on themselves, or like they are any better than the trustees!!! Lord help us all!!!

  5. Excellent post.

    A minor correction may be needed (since everyone is reading carefully):

    “In my opinion, this is why the former CEO (a former KPMG CPA) and the former CEO (also a former KPMG CPA) are in hiding not talking to the media.”
    Should this be a former CEO and a former CFO?

    Question of the day: Who dropped a dime? The Sun Herald apparently knew something was wrong at SRHS and had filed record requests in advance of the $88 million dollar announcement.

    From the same Sun Herald November 14, 2014 story referenced above (the 404 link):

    First, a reminder of what Sargent Hans Georg Schul whoops Supervisor John McKay had to say in the same article:

    Interviews with several county supervisors and the State Auditor’s Office, which also has some oversight of county-owned hospitals, indicate they relied on SRHS’ management, board and accounting firm to keep them abreast of finances. Though they had access to the 50-page audits, several supervisors said, they did not review them in detail.

    “We have always been given positive reports about Singing River’s finances,” said John McKay, the county’s longest-serving supervisor. “But you could tell they were beginning to have some problems around three years ago, when they started laying a few people off and consolidating things.

    ” … Nobody realized how bad it really was, I guess.”

    Note: Still wondering what those ellipsis dots replaced. Another mud hole someone accidentally fell into? Apparently almost everyone except the Jackson County Supervisors knew something was wrong.

    Now- who dropped which dime? Same article.

    SRHS’ financial woes started coming into public focus March 3, the day Holland stepped into the CEO’s job and after the Sun Herald filed requests for SRHS financial records. The former CEO, Chris Anderson, departed for an executive position at Baptist Hospital in Jackson before the news broke.

    Holland, who had been chief operating officer directly reporting to Anderson, told supervisors in March that SRHS had to write off $88 million in bad debt that had been listed as operating income.

    Just a few things to keep in mind as the powers that be try to keep a lid on the SRHS/ Jackson County Supervisor’s Scandal. #SRHSworsethanDMR

        1. We covered frauds, swindles and mans inhumanity to man but Slabbed’s never been blessed with a local accounting scandal of such a major magnitude until now. I’m game.

          1. #SRHSworsethanDMR has been on a low slow heat for a while.

            The sewer lid has started jumping like I knew it would sooner or later.

            Exclusive video from the Supervisor’s meeting this morning! CLICK HERE TO SEE!!!

            I am sure the revelations are only beginning.

            Question: If the SRHS board does resign as requested. then how do SRHS decisions get made? Can the Supervisors appoint a special master of some sort? I don’t see that the Supervisors will find enough suckers/bag holders to allow appointment of a new board in a timely fashion.

            Observation: SRHS/Jackson County Supervisors/Jackson County/Mississippi Development Bank collectively have to be near some major triggers- cash flow problems, bond covenants, continuing disclosure filings (haven’t seen anything for months and I have looked).

            1. They will have to get a new board unless the legislature can conjure up a very quick alternative.

              I have seen this before and in fact worked one many years ago. It think it may be the best for SRHS if someone could get the courts to appoint a receiver while the mess get untangled:

              http://yourbusiness.azcentral.com/mean-company-forced-receivership-25748.html

              I’m not saying Hollard or Bond should step aside but a court appointed receiver in place of the BOD would solve things that way.

  6. This may just be the tip of the iceberg. What relationships tie the DMR to SHRS? What “business opportunities” have parties invested into to provide “services” to SHRS. What other governmental entities are said parties working for/through? Where did that 88 million (or more) run off to?

    1. The Walkers were so deep into Jackson County politics they likely had social connections at the minimum with each and every one of the names mentioned in the SRHS scandal. And of course this does not count Mississippi Laundry Services.

      The list of Jackson County politicos that got taxpayer funded DMR booze cruises and fishing trips is impressive.

    2. This is a crime scene.

      The $88 million is one thing.

      The busted retirement fund is another thing.

      Here is what probably has lots of people in the club really worried: The list of accounting and other financial and management issues that would be found and disclosed doing a real forensic examination of the crime scene. Friends and family employment and contracting plan?

    3. There are individuals in charge at the DMR that can answer those questions. If the FBI would interview them and ask the right questions, under deposition, they would have to tell it all. Those employees are just doing what they have to do to keep from getting fired. Then there are those that are snoops for the crooks on the top floor that work below. They keep the upper floor informed of all the goings and comings. And then there are a couple of employees that are now gone that keep in touch with the bottom floor and keep the top floor informed. So you see, there are spies looking out everywhere for the upstairs crooks. Puh-la$$-o and Philly and Billy have all of their tracks covered. If anyone sneezes on the bottom floor, the top floor knows about it. People are fired and punished for no reason other than not being “part of the clan”. The top floor is awarded with new office renovations, more money, and doing whatever they want to. Even Walker’s old pal, Christie Royals is still working on the top floor. She is another blast from the past. Nothing has changed folks. Where is the FBI?? This disease has now spread to the SRHS!!!

      1. P. S. And I forgot to mention the “monitoring systems” that the upper floor has installed to listen to all that is being said by the lower floor. That is illegal, isn’t it???? Maybe someone needs to check out the new telephone installations at the DMR and see what their capabilities are????

  7. The value of uncompensated care has been greatly exaggerated by hospitals for years. Medicaid provided an additional federal subsidy to hospitals with high UC costs. The Disproportionate Share Hospital (DSH) payments were needed to discourage hospitals from refusing or rationing care needed by poor uninsured people.

    However DSH created an incentive to bill uninsured patients at much higher rates than they billed Medicare or Medicaid or Blue Cross or any other insured patients. The hospital might work with the uninsured patient and offer a “discount” for agreeing to a payment plan that was still higher than the BCBS rate and the hospital counts the discounted portion as UC for DSH purposes.

    The DSH payments are going away because with the Affordable Care Act all those uninsured people are supposed to have either expanded Medicaid or subsidized private insurance. That did not cause the SRHS problems but it removes the main incentive for grossly overcharging uninsured patients.

    1. I am not saying that Obama Care is the greatest thing but I believe many parties brought it on themselves or were going to be subject to some other healthcare ratification. We had hospitals charging X-dollars and running every kind of test imaginable on those insured, the insurance companies dictating what they will pay and whats allowed and not allowed, drug companies pushing drugs and doctors caught in the middle.

    2. Brian,

      I would actually like to see the figures on “uncompensated health care”. I have reason to believe they are probably sky high with the amount of Mexican workers we have in the state, the amount of people without health insurance and the elevated levels of teen pregnancy.

      1. Yes there is quite a bit of uncompensated care, but most of the things you mentioned have not increased or are covered by government programs. Teen pregnancies have declined and Medicaid covers poor pregnant women and infants. Medicare and Medicaid cover a huge proportion of Mississippi medical costs even without the state accepting the federal money for expanding Medicaid. Many people do not realize that Medicare is a huge cash transfer to states like Mississippi. The retirees who are covered by Medicare paid payroll taxes into the system, but because of the relatively low earnings and high chronic health problems in Mississippi, as a group they did not pay in nearly as much as they receive in benefits. The Affordable Care Act would have added to the rate of transfer of money from the rest of the country to Mississippi. The hospitals needed it more than anyone else because the specialists are skimming off the well-insured outpatient procedures to their offices or ambulatory surgery centers and leaving the problem cases to the hospitals. But that is not what I am talking about.

        I am talking about the exaggeration in the book value of the uncompensated care, not the actual costs of uncompensated care. Say for example that Medicare or Blue Cross would pay about $100 to $150 for a procedure. Hospitals might bill an uninsured patient around $400 for it and then when they got no payment, they claimed $400 in uncompensated care costs toward the DSH subsidy request. But their actual cost probably was not more than $100. They were not out $400.

        Hospitals have been doing this for a long time. There is a wide range of prices for an identical procedure based on the insurance status of the patients, but the people who can afford to pay the least usually get the highest price. It is the stupidest thing about the health care market.

  8. Pension fraud usually attracts the feds like no other crime because it affects the contributory/ retirement finances of innocent third parties and besides one would have to assume that the Democrats with Eric Holder would love to pin the donkey tail on the Republican Party in Mississippi.

    So I agree something, someone or some people is/are causing a ” failure to launch” a proper timely investigation unless the feds are allowing the civil litigants to do all the grunt work revealing the pertinent facts and then they are going to suddenly jump in and do their thing.

    1. I’ve been before a Federal Grand Jury one time in my career, it involved a client of the firm I broke into the accounting profession with – and you guessed it the gang looted their pension fund. People ultimately ended up in the Federal Pen on that one and the numbers are peanuts compared to SRHS.

  9. Slabbed is the only news outlet which can truly cover this story in depth. If you have insider information Slabbed is the News organization to contact. People who engage in white collar crime in this area need to pay attention. Slabbed can shine light into the darkest of criminal scams. Institutional corruption is now on display. The swamps which feed it need to be identified and drained.

  10. I think this is like the pot calling the kettle black. I continue to call for the resignation of the entire Jackson County Board of Supervisors, especially Troy Ross and Mike Mangum, who can’t seem to tell the truth! For the past seven years the JCBOS have been asleep at the wheel. Senior Supervisor McKay, who has served for the last 15 years is certainly highly responsible for turning a blind eye on this travesty, and needs to be the first to resign!!!! Don’t play the blame game without accepting responsibility for being part of the problem.

    1. Franklin,

      I respect the fact that you have the luxury of being able to comment under your own name.

      I will anticipate that McKay will be in denial until he is literally removed from office like his little buddy Dr. Walker.

      Didn’t we see a photograph of our Governor with McKay within the last few weeks? Bryant continues to walk around with someone else’s shit splattered all over him. IE: McKay; Frontier; Miller and the list goes on.

  11. Thank you Mr. Leach for your remarks. Yes, I agree all the JCBOS need to resign but I will not hold my breath until they do. And yes, they are all a bunch of liver little a– holes that cannot tell the truth.

    I’m wondering if they didn’t take lessons from the DMR gang? Oh, well, some of the same players are involved with SRH so I am not surprised.

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