Healthcare Fraud
Question 1
According to Section 404 of the Sarbanes-Oxley (SOX) Act, publicly traded companies must create internal procedures and controls to guide their financial reporting. Additionally, the procedures and controls must be documented, tested, and maintained to guarantee their efficiency. The controls and procedures are also designed to curb instances of corporate fraud. The Act empowers a company’s board members for the purpose of overseeing all financial transactions and auditing procedures to safeguard the investors’ interests. The Public Company Accounting Oversight Board is mandated with enforcing auditing standards for public companies (Grunewald, 2008). For non-profit making organizations, the Sox regulations are only recommended but not enforceable by law. However, it is advisable for medium and large non-profit organizations to adhere to some recommendations as outlined in the Sox Act.
According to the Grunewald (2008), non-profit organizations are not mandated to conduct external audits. However, most of them create financial committees to handle issues such as audits, finance management, and investment management. Although the organizations have the authority to select the members of these committees, it is likely that some members may be granted high positions yet they possess little or no financial literacy. In such instances, it is deemed prudent for the organization to adopt the Sox Act regulations and appoint an external auditor to their board to facilitate the accurate auditing and reporting of financial performance. When non-profit entities engage an independent auditor or financial expert, they are likely to follow the Sox Act recommendations, thus, increasing their accountability (Grunewald, 2008). Such a move may create public confidence in the organization and even facilitate federal and state government collaborations.
Mitka (2012) observes that mandating Sox regulations among non-profit organizations would help to curb incidents of fraud and encourage corporate governance. First, organizations would have to disclose their audited financial reports for analysis by federal or state authorities thus reducing their chances of engaging in fraudulent activities. Secondly, the organizations would find it necessary to invest in corporate governance to maintain internal checks to avoid incidences and practices that may be regarded as unethical or unlawful. Besides, accountability among non-profit organizations can enhance efficient service delivery and create opportunities for public-private partnerships (Johnson & Nagarur, 2015).
Question 2
The Sox Act has largely been ineffective in regulation ethical behavior among for-profit health care organizations. Since its enactment in 2002, several fraudulent operations have been uncovered in the health care sector. Despite its stringent measures to enforce accountability, its core area of focus has been on the disclosure of financial information through audits and their accompanying reports (Jesilow, 2005). However, investors and practitioners in the sector have established unethical ways of defrauding either their patients or federal and state governments. For example, many healthcare facilities that have been accused of fraud achieved their objectives by charging for services they did not deliver or by initiating unnecessary treatment procedures. In the Tenet Healthcare Corporation case, for instance, the hospital and its subsidiaries gave kickbacks and bribes to clinic owners so they could refer their patients to Tenet facilities across the country. Such fraudulent payments are never recorded in the financial books, thus, making it difficult for audits to reveal that they were made.
In instances where unethical payments are made, it is likely that the organizations inflate their claims from the federal or state governments. Consequently, the governments lose considerable revenues while minimal or no services were rendered to the patient. According to Johnson and Nagarur (2015), the auditors reviewing the financial statements largely focus on the accuracy and the legality of the transactions recorded. Therefore, it is possible for organizations to engage in illegal transactions that result in legal activities yet the illegal bit will go unnoticed. Indeed, the Sox Act has been effective in streamlining corporate governance and enforcing accountability but has failed to curb financial misconduct among for-profit organizations.
It is also worth noting that financial misconduct in health care organizations is usually conducted by lead doctors and other high-ranking members of the organizations. However, the application of the Sox regulations evaluates the transactions between patients and caregivers at the healthcare facility. As such, it is difficult for the auditors to establish whether any form of misconduct took place (Mitka, 2012).
Question 3
In October 2016, Tenet Healthcare Corporation, through two of its subsidiaries, was found culpable for financial crimes including attempts to defraud the U.S government. The ruling was a culmination of investigations that focused on the period between 2013 and 2016 (The United States Department of Justice, 2017). The audit report, released in February 2017, indicated that the firm had accrued legal liabilities that stretched throughout the period. The company had also paid $517 million which covered settlements, forfeitures, and interest costs for the payable charges (Tenet Healthcare, 2017).
According to the report, the auditors considered all the necessary facts and controls. They were also able to make crucial follow-ups and reveal some critical information as determined by the Department of Justice (DOJ) such as the company’s retention of independent monitors to oversee, assess, and monitor its operations for a three-year period from February 2017 to February 2020 (The United States Department of Justice, 2017). Another critical consideration in the audit was the disclosure of other lawsuits filed by various shareholders for errors made by the firm in its financial reporting before and after the shareholders made crucial decisions regarding the company’s financial position.
The role of external auditors is to verify the available financial statements presented by an organization. In the case of Tenet Healthcare Corp, it is evident that the audit report released in 2017 considered the necessary procedures and regulations set by the various policy boards and statutes. Additionally, the auditors presented extracts of the relevant financial documents such as balance sheets and reconciliation statements indicating the firm’s financial position after considering the happenings between 2013 and 2016. It is worth noting that several assumptions had affected the figures on these financial documents before the company was held liable by the DOJ (The United States Department of Justice, 2017). Therefore, the audit was effective in highlighting the current state of affairs at Tenet Healthcare Corp. and providing insights into the firms expected outlook regarding its operations and financial performance in the next few years.
Question 4
The CEO and CFO at Tenet Healthcare Corp. violated the Sox financial reporting provision that requires them to certify all quarterly and annual reports before they are published. In this instance, it is evident that the two colluded to conceal that information from the company’s shareholders. Consequently, they caused the firm to suffer a loss of $517 million in fines for fraudulently obtaining money from the government for services they had not rendered to patients. Similarly, their failure to certify the financial reports led to the misrepresentation of the company’s financial position, hence, causing investors to lose their finances after the share price suddenly dropped from $60 to around $30. According to the Act, such misrepresentations or negligent acts are regarded as criminal offences and are punishable by fines, imprisonment or both (Mitka, 2012).
Johnson and Nagarur (2015) argue that the essence of disclosing the actual or changes in a firm’s financial operations or condition is to protect the investors’ interests as well as that of the public. Policy makers and investors rely on the reports given out by a company regarding its financial performance. Therefore, it is likely that the misrepresented information given out by the CEO and CFO of Tenet Healthcare between 2013 and 2016 led stakeholders in various capacities to make wrong decisions or to respond to situations in inappropriate ways. For example, federal government officers who create national health care policies may have assumed that more Americans are seeking healthcare or certain health conditions are on the rise. Consequently, they could have allocated more funds to the scrupulous health facilities at the expense of more urgent and genuine issues.
In response to such activities, the Act should introduce more stringent measures such as heavier fines, longer jail sentences or even the suspension of operating licenses for those found guilty. Mitka (2012) notes that in the current state, offenders are assured of paying fines and signing non-prosecution agreements that protect them from imprisonment and license suspension.
Question 5
Tenet can adopt two strategies to eliminate the possibility of facing lawsuits in the future. The first recommendation would be to appoint at least one financially literate major shareholder to their board to offer oversight services and to collaborate with external auditors in the preparation of quarterly and annual financial reports (Jesilow, 2005). The presence of a significant shareholder in the board would deter the management team from engaging in activities that would compromise the firm’s financial position through lawsuits and other illegal dealings. The shareholder should also report to other shareholders in a personal capacity to ensure that the management team does not conceal relevant information that may cost the company at a later date (Hampton, 2015). Besides, the individual may have the rights to engage an external auditor at a personal level to make regular follow ups on select financial transactions.
Second, the board can formulate a policy that makes its mandatory for all financial transactions to pass through a number of reviews from either the management team or the board. Jesilow (2005) holds that although some transactions may require faster processing times than others, creating a review strategy can help to curb illegal payments before they are made or received. For instance, the board can review an incoming payment and demand to be supplied with all the relevant paperwork that supports the transaction. Besides, the plan to obtain money from the federal government for services that were never rendered could have been halted if competent individuals were tasked with verifying the payments being demanded (Hampton, 2015). The board can also dictate that external auditors be involved whenever the preparation of quarterly or annual reports is taking place (Johnson & Nagarur 2015). Currently, the auditors are only called in on annual basis. The regular involvement of different auditors can significantly deter any plans to defraud the company or those which may jeopardize its integrity. As the topmost decision makers, board members have the authority to question and determine actions before or after they are executed. Besides, the board can determine when to carry out spontaneous audits just to ensure that all financial transactions are carried out in accordance with the firm’s fiscal regulations.
References
Grunewald, D. (2008). The Sarbanes-Oxley Act will change the governance of nonprofit organizations. Journal of Business Ethics, 80(3), 399-401. doi: 10.1007/s10551-007-9450-0.
Hampton, T. (2015). Billions Recovered by Anti–Health Care Fraud Effort. JAMA, 313(16), 1608. http://dx.doi.org/10.1001/jama.2015.3821
Jesilow, P. (2005). The Effects of Fraud on the Evaluation of Health Care. Health Care Analysis, 13(3), 239-245. http://dx.doi.org/10.1007/s10728-005-6452-x
Johnson, M., & Nagarur, N. (2015). Multi-stage methodology to detect health insurance claim fraud. Health Care Management Science, 19(3), 249-260. http://dx.doi.org/10.1007/s10729-015-9317-3
Mitka, M. (2012). Health Care Fraud. JAMA, 307(6), 553. http://dx.doi.org/10.1001/jama.2012.90
Tenet Healthcare (2017, February). Quarterly results presentation fourth quarter of 2016. Retrieved from https://tenethealth.investorhq.businesswire.com/sites/tenethealth.investorhq.businesswire.com/files/doc_library/file/Tenet_4Q16_Quarterly_Results_Presentation.pdf
The United States Department of Justice, (2017). Hospital chain will pay over $513 million for defrauding the United States and making illegal payments in exchange for patient referrals; two subsidiaries agree to plead guilty. Retrieved from https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-513-million-defrauding-united-states-and-making-illegal-payments
