In the past year I was a speaker at ten different Healthcare Financial Management Associations (HFMA) conferences. In my speech I describe how the financial fraud at HealthSouth began in the area of revenue recognition. At the conferences I am amazed by the number of HFMA members who approach me and tell me they have been exposed to similar accounting indiscretions at their institutions. The number of publicly held healthcare companies that have misstated their revenues and accounts receivables is well documented.
Why is this type of fraud so prevalent? Fraud prevention experts tell us that the propensity for fraud occurs when three critical elements come together: motive, opportunity, and rationalization. The motive here of course is the desire to improve the financial appearance of the entity. The opportunity occurs because the revenue recognition process in healthcare is very complex and requires a tremendous amount of estimating on the part of the accountants. Healthcare providers have complex contracts with Medicare, HMO’s, Medicaid, large companies and of course substantial amounts of bad debts. What the patient is initially charge and what is eventually paid are very different. In many cases the difference can be 50%. The opportunity is there for the accountants to “play” with the numbers. Rationalization occurs along the lines of: everyone is doing it. Why penalize the numbers by being too conservative. It will be difficult for auditors to justify changing the numbers, etc.
In my next blog I will outline how to deal with this problem to improve the quality of healthcare financial reporting.