The Value of Good Auditors

As I discussed in my first blog, revenue recognition is a fertile area for healthcare financial fraud.  What measures can be taken to prevent this problem.

The potential of being caught most often persuades likely perpetrators not  to commit the fraud.  Stated another way: if you think there is a good chance of being caught you will not commit fraud.  The potential of being caught and the existence of a thorough control system are critical to any effective fraud prevention program.  It is best to be proactive rather than reactive. At Healthsouth the first time we fraudulently adjusted our revenues we  discussed the chance of being caught. All involved agreed we did not think what we were doing would attract the auditor’s attention.

The audit committee of the board must be staffed with people with some understanding of healthcare revenue recognition.  These board members must spend more time at the  company than just board and committee meetings.  The directors must have contact directly with the accounting personnel making the revenue entries.  Management cannot be a filter.  The very presence of board members sends the signal to employees that they can be caught if they are tempted to cook the books.

When financial results are being discussed at board meetings revenue recognition should receive significant exposure.  Management should outline the areas of concern and discuss what procedures are in place to deal with these issues.  The ratio of total revenue generated and the amount of net revenue eventually booked must be analyzed with great care.  Most importantly  the amount of subsequent cash collected compared to the receivables book in prior periods must be monitored constantly.  If the days in accounts receivable are growing, this is of grave concern. 

I would suggest that every few years another expert accounting firm be hired to review all aspects of the revenue recognition process.  This firm would be separate from the retained audit firm.  This may seem to be over kill and probably will be and extra cost that many will not want to incur.  However, the total ultimate cost of fraud is tremendous.  Just look at history.  Again the best prevention of fraud is the fear of being caught.

At HealthSouth the very first time we finally adjusted our revenue we discussed the chance of being caught.  All involved agreed we did not think what we were doing would attract the auditors attention.

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