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Accounting and Audit Enforcement

In: Business and Management

Submitted By Cyndflor
Words 2164
Pages 9
Assignment 2: Accounting and Audit Enforcement
ACC 599 – Graduate Accounting Capstone

After so many scandals in regards to financial frauds, Sarbanes-Oxley Act Section 404 mandates that all publicly-traded companies must establish internal controls and procedures for financial reporting and must document, test and maintain those controls and procedures to ensure their effectiveness. Non-for-profit healthcare organizations do not hold themselves to the same standards as the for-profit organizations. Although whether SOX guidelines apply to businesses in the healthcare industry depends on whether the business is a for-profit or non-for-profit organization, some voluntarily adopt SOX in an effort to strengthen internal management controls and increase the quality of healthcare financial reporting (Lohrey, n.d., ¶1).
Non-for-profit organizations could certainly benefit from the SOX Section 404 to help reduce the possibilities of corporate fraud by increasing the stringency of procedures and requirements for financial reporting. Many health care executives and board members have concluded that SOX created a new benchmark for best practices, as well as provided extra protection from liability by evidencing direct board attention and oversight of organization compliance (Kusserow, 2013, ¶1). Without audit committees, non-for-profit organizations are at higher risk of financial disaster.
Following the SOX compliances can be very beneficial for the non-for-profit healthcare businesses because it will increase the business’s public reputation by increasing the community trust and confidence in the organization. Having better internal controls will help eliminate the possibility of any type of frauds that could cause serious financial problem to any company. Stricter ethics will help the board of directors make better decisions that will benefit the company and the healthcare recipients rather than allowing doctors and other members to benefit themselves by committing fraud. Adopting the SOX principles may serve as evidence of a non-for-profit organization’s good-faith efforts to reduce illegal or unethical conduct.
All for-profit health care organizations must comply with the Sarbanes-Oxley Act and the Board of Directors have responsibilities that need to be met relating to corporate compliance requirements pertaining to the health care industry and are critically important to all health care organizations. SOX has been effective in regulating the ethical behavior of for-profit health care organizations and have also helped reduce the significant abuse in federal health care programs by implementing stricter compliance requirements. These provisions have been cost-effective for the health care organizations because the fraud possibilities have been reduced by requiring better internal controls. Being subject to higher scrutiny has forced the for-profit health care organizations to implement and follow a code of ethics and whistleblower policies.
Although SOX has not eliminated illegal and unethical conduct in the health care industry, it certainly has helped reduced it. Board of Directors of all health care organizations are obligated to exercise their duty of care and make sure the company is in compliance with SOX’s regulations and protect the corporate stakeholders’ interests. Hiring external auditors is also a way of making sure the organizations are meeting the requirements. This also helps find any possible fraud or mistake that can lead to financial problems to the organization. The goal is to continue improving the U.S. health care system and reduce financial fraud to a system that is essential for all U.S. citizens. Organizations in this industry have the opportunity to help achieve this goal by comply with the regulations stipulated by SOX.
In 2003 the Securities and Exchange Commission (SEC) accused Tenet that their strong earnings growth from 1999 to 2002 was driven largely by its exploitation of a loophole in the Medicare reimbursement system and filed a suit against the company. Tenet’s annual reports were prepared by KPMG and after reviewing them, they seem to comply with the SEC requirements. Tenet included the audit report in its FY 2002 Form 10-K, which failed to disclose that Tenet’s substantial earnings growth was driven by an aggressive pricing strategy designed to trigger an increase in outlier payments, a component of Medicare revenue. On March 30, 2006, the SEC announced that KPMG and senior management failed to properly complete Tenet Healthcare Corporation's fiscal year 2002 financial statements and made after-the-fact modifications to the audit working papers which created the false impression that the audit had been adequately performed. The Commission found that the improper modifications included adding substantive comments to the working papers, backdating documents, and creating audit documentation after the fact.
The auditors were negligent in preparing the audit report for Tenet Healthcare Corporation. They tried to conceal their audit failures by altering documents; this misconduct reflects their lack of competence in their most basic functions. Their misconduct violated the integrity of their audit. The auditors’ job is to ensure that the company they are auditing is following the rules and is not committing fraud; they should never hide this information and manipulate the data to make it seem like everything is in compliance with the rules and regulations of GAAP, GAAS and the SEC. By doing this, the auditors are failing to comply with their responsibilities as well and become their accomplice instead of making the individual(s) who committed the fraud pay for their crime.
One of the internal controls violated in this case is the proper implementation and enforcement of the company’s Code of Ethics. Management and auditors tried to cover up the scheme that cost Tenet Healthcare Corporation a $900 settlement in 2006. The Board of Directors was not involved in the process of selecting the auditors and it is very likely that the auditors were not rotated on a regular basis as they should to avoid situations like this one. The auditors certainly failed to comply with the Generally Accepted Auditing Standards (GAAS) because they failed to exercise due professional care in the performance of the audit and the preparation of the report. They also failed to report that the company’s financial statements were not presented in accordance with Generally Accepted Accounting Principles (GAAP). They also broke the AICPA’s Code of Professional Conduct by engaging is such misconduct.
Many provisions of SOX were violated in the health care fraud by Tenet Healthcare Corporation because the company overcharged Medicare by filing improper diagnostic codes. They certainly violated the False Claims Act because they “knowingly” presented a false or fraudulent claim to Medicare. Tenet also committed Health Care Fraud under 18 U.S.C. § 1347. The company knowingly and willfully executed a scheme to defraud any health care benefit program, or to obtain money or property from a health care benefit program through false representations. The two key provisions of SOX are Section 302 that requires senior management to certify the accuracy of the reported financial statements and Section 404 that requires management and auditors establish internal controls and reporting methods on the adequacy of those controls. Both of these provisions were violated by Tenet Healthcare Corporation and the auditors of KPMG.
SOX provides sanctions to deter the behavior and criminal charges are filed against anyone who commits fraud to the health care system or any other type of fraud that will risk the investors of any publicly traded company. The penalty may include the imposition of a fines, imprisonment of up to 10 years, or both. In addition, the provider can be excluded from participation in Federal health care programs. SOX can also make changes to the regulations if necessary in order to remedy the issue(s) and thus ensure compliance. Those changes will certainly not be beneficial for anyone who violated the SOX provisions, it will just make things tougher and the compliance requirements will be harder to meet. The main goal of SOX is to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures. By imposing fines and imprisonment it is clear that the rules and regulations stipulated by SOX and the SEC must be followed.
It is unfortunate that the fraudulent activities such as the one described above will continue to occur, hopefully not to the same extend. It is true that since SOX was passed by the U.S. Congress in 2002 the number or financial frauds have diminish but they have not been eradicated and that is why we need to continue improving the compliance rules and regulations to make them tougher to break. To avoid other similar frauds I would recommend a second group of auditors to check the first group of auditors’ work just to make sure the audit was performed in accordance with Generally Accepted Auditing Standards. It is true that this implies extra work and extra money, but that would be a good way of making sure the auditors followed the 10 audit standards approved and adopted by the AICPA.
I would also recommend an external company to verify the claims sent to the insurance companies and to Medicare or Medicaid before they are actually submitted. This will help ensure that the companies are filing for the correct diagnose, practice, service and the correct amount. In addition, I would also recommend the health care system to perform sporadic and unexpected audits to any health care organization just to ensure that they are not violating the SOX provisions concerning the health care programs and willingly or unintentionally committing fraud.
Unfortunately the U.S. health care system is a tempting target for many thieves. Approximately $2.7 trillion, or 17% of GDP is spent each year in health care by the U.S. and it is estimated that fraud and the extra rules and inspections required to fight it add as much as $98 billion, or roughly 10%, to annual Medicare and Medicaid spending and up to $272 billion across the entire health system (The Economist, 2014, ¶2). The 2009 creation of the Health Care Fraud Prevention and Enforcement Action Team (also known as the HEAT task force) elevated the fight against Medicare fraud to a “cabinet-level priority.” As a result, HHS and the Justice Department reported record recoveries of $4.1 billion for fiscal 2011and then topped that number the following year with recoveries of $4.2 billion (Kutscher, 2013, ¶5). Health care fraud is a serious crime that affects everyone and should concern everyone because beyond the monetary consequences, many human lives are put at risk by many unscrupulous individuals that are supposed to provide health care to those in need.
Baker, K. (2004, July 26). United States: Corporate Accountability and Compliance in Health
Care - Will Health Care be the Next Enron? Retrieved from:
Kusserow, R. (2013, July 18). Sarbanes-Oxley’s Continuing Impact on Health Care
Organizations. Retrieved from:
Kutscher, B. (2013, March 2). For-profit hospital chains boost their defenses as regulators step up anti-fraud scrutiny. Retrieved from:
Lohrey, J. (n.d.). How to address issues of SOX Compliance in Healthcare. Retrieved from: Moffeit, M (2014, February 20). Tenet faces fraud investigation into payments made to women's clinics. Retrieved from:
NHCAA (n.d.). The Challenge of Health Care Fraud. Retrieved from: O’Hare, P. (2002, November 21). Sarbanes-Oxley Raises Red Flag for Not-for-Profit. Retrieved from:

Owen, J. (2003, March 13). Nonprofits without Audit Committees Risk Financial Disasters.
Retrieved from:
Tenet Healthcare Corporation (n.d.) Investing in a healthier future for all. Retrieved from: Tenet Healthcare Corporation (2002, August 14). Form 10-K – Annual Report to SEC. Retrieved from: The Economist (2014, May 31). The $272 billion Swindle. Retrieved from: U.S. Securities and Exchange Commission (2006, March 6). SEC Charges Three Former KPMG
Auditors for Altering Audit Working Papers. Retrieved from:
U.S. Securities and Exchange Commission (2007, April 2). Securities and Exchange
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