PACA MH/DSFiscal and Data Committee Mini-Conference

Identifying Red Flags in Audits

Introductions andCPA Continuing Professional Education Credit

• Introductions

– Michael Wassil, CPA, MBA

Consulting Partner

The Binkley Kanavy Group, LLC

• CPE sign-in sheet

Agenda

• Objectives

• Targeted Analysis Techniques

• Other Red Flags

• Closing Comments

Objectives

• High profile and/or risky decisions:

– Transition or transfer of consumers to new providers?

– Startup of new provider services or sites?

– Other?

Objectives

• Provide financial statement analysis techniques to aid decision making and timely respond to providers that are or may become:

– Financially unstable

– Non-compliant with contractual terms and regulations

Targeted Analysis Techniques

• Financial statements:

– Needs of different users vary (e.g. banks, creditors, members, donors, counties, joinders, etc.)

– Commonly encountered perceptions

– Filters and trends

Targeted Analysis Techniques – Liquidity Ratios

• Will the provider be able to deliver services in the future?

– Will the next payroll be paid?

Payroll/Compensation Coverage Ratio =

Cash, cash equivalents and current receivables

X 360

Salary, wages, employee benefits and payroll taxes

The answer could be “no” if the result is below 14

Targeted Analysis Techniques – Liquidity Ratios

– Can a payment or budget approval delay be weathered?

Expense Coverage Ratio =

Cash, cash equivalents, and current receivables

X 360

Total expenses less depreciation and

amortization

The answer could be “no” if the result is below 30

Targeted Analysis Techniques – Liquidity Ratios

– Are landlords and critical vendors being paid timely?

Account Payable and Accrued Liability Days Outstanding =

Accounts payable and current accrued liabilities

X 360

Total expenses less depreciation and amortization

The answer could be “no” if the result is above 90

Targeted Analysis Techniques – Liquidity Ratios

– Quick Ratio

Quick Ratio =

Current assets less any inventories

Current liabilities

Greater risk if the result is below 1

Targeted Analysis Techniques – Debt Ratios

– Can the provider obtain financing to fund its existing operations or a new service or site?

Debt Ratio =

Notes payable, other current debt and long-term debt

Total assets

The answer could be “no” if the result is above .5

Targeted Analysis Techniques – Debt Ratios

– Can the provider obtain financing to fund its existing operations or a new service or site?

Debt To Tangible Net Worth =

Notes Payable, other current debt and long-term debt

Net assets less intangible assets

The answer could be “no” if the result is above 1

Targeted Analysis Techniques

• Additional considerations:

– Available line of credit balances

– Liquid investments and marketable securities

Targeted Analysis Techniques

• Symptoms of being financially unstable or “ill”

– Staff turnover

– Hiring delays

– Service delays, etc.

Targeted Analysis Techniques

• Common causes of financial instability

– Claim submission delays and errors from a lack of staff training or awareness

– Fiscal staffing or systems not keeping pace with growth

– Lack of short-term cash flow planning and forecasting

– Limited banking relationships

– Accounting processes and reliance on auditors

Targeted Analysis Techniques

• Benefits:

– Reduced decision making risk

– Opportunity to provide additional guidance or set expectations

– Avoidance of audit findings

Targeted Analysis Techniques

Questions?

Other Red Flags

• Sales of county/joinder owned fixed assets and real estate (Statements of Cash Flow)

• Related party or affiliate transfers, loans, purchases, sales and guarantees (Footnotes)

• Going concern, qualifications and disclaimers (Independent Auditor’s Report)

• Lawsuits and other legal contingencies (Footnotes)

• Concentrations in revenues, workforces, locations and other factors (Footnotes)

Other Red Flags

• Debt or lease covenant violations that can accelerate required payments (Footnotes)

• Volatile employee benefit plan funding requirements (Footnotes)

• Discontinued operations and impaired assets (Income Statements / Statements of Activities and Footnotes)

• Accounting errors (Balance Sheets / Statements of Financial Position)

• Sale and leaseback transactions (Footnotes)

Other Red Flags

• Conditions and restrictions on significant contributions and other funding sources (Footnotes)

• Unresolved audit findings, questioned costs and illegal acts (Schedules of Findings, Questioned Costs and Prior Audit Findings)

Other Red Flags

Filter Tools

II. Audit Report Package Components and Disclosures - Continued

No. Component or Disclosure Yes No N/A

14 Interest costs when the provider received advances?

15 Sale and leaseback transactions?

16 Debt and lease covenant violations which may cause provider’s debt or lease payments to be immediately payable?

17 Leases, lines of credit and other short term debt agreements that expire

within the next year which may hinder the provider’s future cash flow?

18 Significant future retirement plan funding requirements that may hinder

the provider’s future cash flow?

19 Deferred compensation plan arrangements for provider owners or

management which may cause their compensation to exceed regulatory limits upon being payable?

20 Related party transactions and guarantees?

21 Interfund or affiliate transfers, receivables and payables that may indicate

the improper use county funds?

22 Real estate sales or lease amendments at locations where clients are

served?

III. Financial Condition Analysis

No. Ratio Yes No

Closing Comments

Michael Wassil, CPA MBA

Consulting Partner

The Binkley Kanavy Group, LLC

Email: Wassil@BinkleyKanavy.com

Phone: (412) 434-0477 Ext.207

The Binkley Kanavy Group

The Binkley Kanavy Group thanks you for attending

We are a professional services firm that operates throughout the Commonwealth. We offer auditing and consulting services to our niche markets of County and Local Governments and Human Service Organizations. Our practice leaders and experts are:

Brian Binkley, CPA, Managing Partner Thomas Kanavy, CPA MBA, Partner

County, Local Government and Provider HealthChoices Audit and Consulting

Audit Practice Leader Practice Leader

Binkley@BinkleyKanavy.com Kanavy@BinkleyKanavy.com

(412) 434-0477 X204(412) 434-0477 X203

Michael Wassil, CPA MBA, Consulting Partner

County and Provider Consulting Practice Leader

Wassil@BinkleyKanavy.com

(412) 434-0477 X207

We invite you to visit our provider management services web page at

http://www.binkleykanavy.com/industries/provider_monitoring_management_services.html