PACA MH/DS
Fiscal and Data Committee Mini-Conference
Identifying Red Flags in Audits
Introductions and
CPA 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?
Cash, cash equivalents and
current receivables
Payroll/Compensation Coverage
Ratio
=
X
Salary, wages, employee
benefits and payroll taxes
The answer could be “no” if the result is below 14
360
Targeted Analysis Techniques –
Liquidity Ratios
– Can a payment or budget approval delay be weathered?
Cash, cash equivalents,
and current receivables
Expense Coverage Ratio
=
X
Total expenses less
depreciation and
amortization
The answer could be “no” if the result is below 30
360
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
Total expenses less depreciation
and amortization
The answer could be “no” if the result is above 90
360
Targeted Analysis Techniques –
Liquidity Ratios
– Quick Ratio
Current assets less any
inventories
Quick Ratio
=
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?
Notes payable, other current
debt and long-term debt
Debt Ratio
=
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?
Notes Payable, other current
debt and long-term debt
Debt To Tangible Net Worth
=
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
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?
Yes
No
N/A
Yes
No
III. Financial Condition Analysis
No.
Ratio
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
County, Local Government and Provider
Audit Practice Leader
Binkley@BinkleyKanavy.com
(412) 434-0477 X204
Thomas Kanavy, CPA MBA, Partner
HealthChoices Audit and Consulting
Practice Leader
Kanavy@BinkleyKanavy.com
(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