Draft audit uncovers messy financials at CHCC

Members of the Commonwealth Healthcare Corp. board were alarmed yesterday over what they described as “scary revelations” about the organization’s finances after an audit uncovered several unrecorded disbursements and unsupported and unidentified transactions.

The board spent over seven hours yesterday reviewing the initial findings of the independent audit report for fiscal year 2012—the first ever commissioned for the healthcare institution.

Based on the draft findings, read by trustee Roy Rios in the open session yesterday, there were serious findings identified in several areas including CHCC’s general fund where the auditor discovered unrecorded disbursements of $38,517 in the general ledger. These represent six checks issued in November 2011, January 2012, and August 2012.

When asked for an explanation, CHCC interim CFO Cora Ada and interim CEO Esther Muña told the board that “manual checks were issued” and were probably not recorded in the account. They revealed that access to the account is limited to the CEO, CFO, and the organization’s treasurer. Muña said she came onboard as interim CEO, along with Ada, only last year. She succeeded Juan N. Babauta, who ran the corporation since its inception in 2011.

Rios revealed that the payroll account bank reconciliation included fund transfers of $776,298 and disbursements of $10,315 that have cleared the bank that were not recorded in the general ledger.

Still on the payroll, Rios revealed that disbursements totaling $508,414 were made by the Department of Finance and recorded as a reduction of CHCC’s cash account. Of that amount, $502,598 was used for payroll in October 2011, but the remaining disbursement of $5,816 could not be identified. For this specific finding, Rios disclosed that the independent auditor had recommended that CHCC investigate this.

Unsupported or unidentified transactions totaling $2,916 were also recorded in fiscal year 2012, as well as unrecorded fund transfers to the account and bank charges totaling $101,612 and $19,593 respectively that were not recorded in the ledger.

Additionally, $9,077 in unrecorded or unposted items were disclosed: $7,909 from credit card reimbursements; unposted collections of $400; and $1,568, others.

In the organization’s savings account, the draft audit discovered that fund transfers to the general fund and payroll accounts totaling $6.6 million and $776,298 respectively, and fund transfer from the credit card account totaling $101,612, were not recorded.

Even daily collections and deposits from both Tinian and Rota clinics where unrecorded, including unidentified deposits of $1.1 million.

CHCC is now finalizing its response to the audit findings.

Huge receivables

Still based on the draft audit as read by Rios, CHCC recorded total receivables of $180.1 million and allowance for doubtful accounts of $180.1 million. It was disclosed yesterday by trustees that the auditor noted that receivables should be periodically assessed for validity and collectability. The adequacy of the “allowance for doubtful accounts” should also be assessed and collections efforts must be pursued.

Board vice chair Pete Dela Cruz questioned the “very high” amount allocated by the organization for “allowance for doubtful accounts.”

“Why are we so generous in providing this huge number for ‘allowance for doubtful accounts’?” he asked.

Rios revealed that based on the auditor’s observation, it appears that receivables are not properly recorded and/or reconciled. A subledger of outstanding account balances is also not available and as a result, receivables recorded in the ledger for fiscal year 2012 are unsupported and possibly misstated.

Another concern that alarmed Rios was this portion of the auditor’s note to CHCC: “Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the U.S. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about CHCC’s financial position, results of operations and cash flows…”

At this point, board chair Joaquin Torres called to arrange a meeting with the auditor to seek more clarifications on this particular finding.

Potential case of fraud

Dela Cruz is convinced that once the audit for 2012 is fully completed, there’s a need to call for a thorough investigation by the Office of the Public Auditor.

“[The way I look at these] there’s criminality involved or bordering on criminality on this regard because you’re doing deposits and not recording it. It’s a red flag and there’s probably fraud, embezzlement on this!” he told the board, adding that the board cannot simply ignore the “serious findings.”

Board trustee Phillip Mendiola-Long, himself a financial expert, also expressed deep concerns about the findings, fearing that the same will hit the 2013 audit if deficiencies are not immediately addressed.

Mendiola-Long’s biggest concern, he said, is the lack of reconciliation in the “cash” of the corporation.