Feedback loop established…..

I guess my question, had I been there, is what in the heck is taking ya’ so long Kevin? After all the gang at SRHS has been yammering about this for close to a year now.

SRHS pursuing action against former auditing firm KPMG for erroneous financial reports ~ April Havens

The follow up question would have involved something about top management excluding financing arrangements that had been repo’d from the books and the general lack of financial statement disclosures (management’s responsibility for the uninitiated) regarding off balance sheet arrangements with certain area lenders to finance patient balances but since I wasn’t there all we have is Kevin’s word on this that management had no clue their own books were off by $88 million dollars.

The word that comes to mind here is infantilized.  What Holland is saying using other words is what you have at SRHS is management that is good enough to collect fat six figure paychecks but also simultaneously completely clueless about their own bookkeeping being off by $88 million dollars.  These people, like me are all CPAs to boot. One word folks:

Of course we know from published reports there was one guy a bit further down the food chain that knew the score and tried to warn them and the gang running the show at SRHS choose to ignore him.

If this is how that crisis management PR firm is earning their money God help the Jackson County taxpayers.

Additional background here.

19 thoughts on “Feedback loop established…..”

  1. Holy People Pissin’ Pants and PR BS Batman,

    Yo’ know the sh*t is getting deep when an “it”, namely the Jackson county news release, starts leakin’ info to the press :

    ” Despite budgets that reflect the pension plan expenses,’ contributions to the plan had not been made’, it said.” Now dat really bees a smokin’ gun !

    Dadgumit, too bad the press can’t interview “it” for a bit mo’ clarification and few mo’ followup questions.

  2. “The audit adjustment had an enormous impact on our organization beyond the $88 million that we had to account for,” Holland said.

    I would hope so. A place the size of SRHS ‘discovering’ a ‘surprise’ $88 million crater in the financials thanks only to a newly hired auditor? How can they sure it wasn’t the MIB in cahoots with KPMG? Discovery might solve that one. I’ll believe this SRHS/KPMG lawsuit posturing when a lawsuit is actually filed. I’d speculate that such a lawsuit will never happened, but self immolation is a rare but well understood occurrence.

    There are a number of other significant SRHS financial events which occur more or less simultaneously with the timing of this $88 million ‘mistake.’ When showcase capital projects go forward built on a foundation of financial quicksand, that is a noteworthy coincidence imo. When the retirement plan is not funded at the same time these same showcase capital projects are under construction and cost overruns are occurring, that is another noteworthy coincidence imo.

    The kicker of that and why it was so devastating to us is that when you expect to collect a certain amount of money, you report that on your financial statements as net revenue.

    Here are two questions:

    Who told SRHS to expect to that the accounts would be collected?

    Who failed to reclassify those uncollectible accounts in a timely fashion (over a period of years) to the cumulative amount of $88 million?

    Someone should have been establishing reserves; and classifying and reclassifying AR on a regular basis as a part of a designed,documented and monitored process.

    I doubt that KPMG was actually performing the accounting at SRHS. It would be a significant conflict of interest to have the accountant doing the auditing. Was all the accounting and book keeping done internally at SRHS? Someone needs to ask if SRHS had outsourced any of the financials related to the $88 million bungle. Other than to the known unknowns like GCOG and so on.

  3. great questions and here is a little help with answers:
    Srhs did their own accounting pretty much
    Lots of CPAs employed and finace people there. Including to Gogo dancer mentioned earlier

    The very likable idiot of a CFO, mike crews was in charge of this mess. He would tell his employees to change their book keeping entries

    It was no secret to the executives that Chris Anderson and mike crews would play with the numbers before presenting to the board of trustees

    Then those poor board of trustees .. Educated businessmen but they never questioned Chris or Mike. And why would they? Chris could sell ice to Eskimos! How did the SH describe him?…charismatic. Yes that’s the word. Fancy word for shyster

    Until the Board of Supervisors or better yet The FBI and CMS boot all the original gang members from Srhs nothing will be right, no one will trust anyone of them again

    As the queen of hearts would say, ” off with their heads” If only Disney really ran this hospital

  4. Doug, what do you guess KPMG used as their materiality figure for the budget? Surely the $88,000,000 in receivables from customers would have been over that number and at the very least examined and documented in the workpapers as a pass on adjustment.

    Also, I think the Management Rep Letter is going to come back to bite them should they file suit on KPMG and you know KPMG has a rock solid engagement letter with precise legal wording. They’ve also got a larger budget to lawyer up than SRHS. End of the day, best case scenario for SRHS to sue KPMG is they get a gross negligence settlement from their E & O insurance. Worst Case, and most likely, they get a large legal bill and KPMG shines the light on things they don’t want the light shined on.

    1. My guess is that the $88M was not all related to past periods (ie when KPMG was performing the reviews). The 2012 A/R Balance net of the Allowance for Doubtfull Accounts was $122M per the audited Financial Statements (performed by KPMG). 2011 was $99M. My guess is the balance kept growing for the 9/30/13 preliminary financial statements (when I believe Horne took over doing the audits). Based on these numbers, it would seem likely a large portion of the questionable A/R was buiding up in the more recent periods. I have not run across the 9/30/13 audited financial statement. What was the net A/R that was published for that period?

      As for materiality on an engagement like that, I am sure it would be a lot lower than $88M. Looks like the SRHS Revenue runs about $350+M. Using something like 5% of Revenue as a materiality threshold (which is probably on the high side for that audit), you would get $18M.

        1. Per Holland earlier this week the gang at SRHS had no clue this had happened. Per Horne on the very last page of the audit:

          Criteria or Specific Requirement – Proper internal controls surrounding accounts receivable require accurate monthly calculations of the allowance for bad debt and contractual allowances.

          Condition – The Health System overestimated its ability to collect on patient accounts including active accounts and accounts that were written off but for which collections were being pursued through the Health System’s internal collection department.

          Context – Adjustments were required to adjust the net realizable value of patient accounts receivable. These adjustments resulted in a restatement adjustment of approximately $61,608,000 to the net position as of September 30, 2012 and a current year adjustment of approximately $27,130,000 to decrease net position.

          Effect – Prior year financials, as well as monthly and annual financial statements did not accurately reflect the financial position of the Health System.

          Cause – Failure to apply accurate collection percentages, both in the accounts receivable system and those handled by the internal collection agency.

          1. Reading the 2013 report and the description of the auditors finding of a material weakness in the AR process makes me question the sales pitch SRHS is using. SRHS can makes comments that they had no clue about the need for adjustment or try to blame past auditors, but at the end of the day what is actually the case is that the SRHS internal processes and controls were significantly broken or non-existent in this area – thus the “material weakness” finding noted in the report.

        2. So the AR (net) for 9/30/13 was brought down to $47M after the adjustments. Also in the Continuing Disclosure they noted they did not actually go back in re-state prior years financials for the amount of the $88M they thought related to prior periods. Suffice it to say, that if the prior 5 years had been restated with the $61M (of the $88M) of adjustments Horne said were related to prior years, I would suspect each of those years SRHS would have shown a net loss for the year versus the minimal amount of net income they did show on their financials.

          I see the 2013 report took about 10 months to get issued after the period end (7/29/14). I guess it will be a while before the 2014 one gets issued.

          1. Since the days of cooking the books is supposedly over those financials should be available for release at any time. If the gang is still trying to hide stuff all bets are off.

              1. Friday afternoon so soon it’s time for a six pack!

                I thought people were aware of those filings (linked above) and contents therein. Puts whole new twist on some of the public statements.

                That’s why my reference above to SRHS suing KPMG being similar to an act of self immolation (and thus unlikely to go forward with the current players still in charge.)

                Actually what the SRHS insiders might need to worry about is that they may be deposed and then the new team files a suit against KPMG.

    2. Excellent question Daniel. For kicks I ran the 2012 SRHS financials through my materiality calculator based upon the guidance found in PPC. Planning materiality worked out to just under $2,400,000. We have a clue as to how much the allowance was off from that March 2014 April Haven’s piece:

      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.

      The run rate on the misstatements going back to 2008 works out to about $12,000,000/year on average with the SRHS gang doubling down on the misstatement in 2013. My guess would be it started smaller in 2008 and went up exponentially.

      Absolutely no doubt KPMG whiffed. Your analysis on why suing them is a waste of time comports with my understanding. That said the best way to find out how management cooked the books is via such a suit, which would also end up airing every bit of the dirty laundry.

      MO, thank you for your invaluable sight. Do not be a stranger. :-)

      I’ve seen this happen too many times to believe it won’t happen with SRHS so I’ll warn those of you still at SRHS that read this website and those of your that were formerly on the inside of accounting and finance that Crews, Bond, Anderson and Holland are gonna be looking for scapegoats as the pressure grows. If you’re in accounting and have not heard of Phar-Mor study up quick and watch your backs.

      I’ve been doing Slabbed for over 7 years and we’ve never had an auditing discussion. This is beyond cool.

  5. There is a paragraph in the 2011 audit explanation that says the bad debt expense had decreased from 2010 because of “our enhanced efforts to convert self-pay patients into Medicaid-eligible patients and better reporting of charity care.” So on paper at least, they expected to be able to shift some of the bad debt to Medicaid and to book more as charity care, which was another avenue for Medicaid DSH subsidies. That could be the source of the accounting failure. It also is directly related to the outsourcing contract that provided caseworkers to sign uninsured patients up for Medicaid or disability coverage.

    1. I think you’re very close Brian but there is another insider company that took over pursuing bad debts that we have not yet discussed. :-)

      So if you shift revenue back and forth between Charity care, which is tracked but not recognized, that would be one way to massage the results.

      Anyone else catch the inherent contradiction contained in the Holland quote above where he differentiated and quantified the misstatement between the KPMG years of 2008-2012 and the Horne year of 2013 which was off by $27M. Following his logic it appears they should sue Horne too if the auditors get the blame for management not keeping a decent set of books.

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