Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
January 24, 2008
PricewaterhouseCoopers LLP
1901 6th Avenue North
Suite 1600
Birmingham AL 35203
Telephone (205) 252-8400
Facsimile (205) 252-7776
Board of Trustees
Bay Medical Center
Panama City, Florida
Members of the Board of Trustees:
We have audited the financial statements of Bay Medical Center (the “Medical Center”), except for the
Private Purpose Trust Fund of Bay Medical Center, as of and for the year ended September 30, 2007,
and have issued our report dated January 22, 2008. The statements of the Private Purpose Trust
Fund were audited by other auditors whose report thereon has been furnished to us, and our opinion
insofar as it relates to the amounts included for the Private Purpose Trust Fund is based on the report
of the other auditors. The amounts for the year ended September 30, 2007 have been restated for a
prior period adjustment.
We conducted our audit in accordance with auditing standards generally accepted in the United States
of America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement.
In planning and performing our audit of the financial statements of the Medical Center as of and for the
year ended September 30, 2007, in accordance with auditing standards generally accepted in the
United States of America, we considered its internal control over financial reporting as a basis for
designing our auditing procedures for the purpose of expressing our opinion on the financial
statements, but not for the purpose of expressing an opinion on the Medical Center's internal control
over financial reporting. Accordingly, we do not express an opinion on the Medical Center's internal
control over financial reporting.
Our consideration of internal control over financial reporting was for the limited purpose described in
the preceding paragraph and would not necessarily identify all deficiencies in internal control over
financial reporting that might be significant deficiencies or material weaknesses, as defined in the
recent amendment to AU 325, Communicating Internal Control Related Matters Identified in an Audit,
of the AICPA Professional Standards and shown below:
Control deficiency – exists when the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis.
Significant deficiency - a control deficiency, or combination of control deficiencies, that adversely
affects the company's ability to initiate, authorize, record, process, or report financial data reliably
in accordance with generally accepted accounting principles such that there is more than a remote
likelihood that a misstatement of the entity's financial statements that is more than inconsequential
will not be prevented or detected.
Material weakness - a control deficiency, or combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of the financial statements will not be
prevented or detected.
Board of Trustees
Bay Medical Center
January 24, 2008
We have separately provided a full detail report of all operational or business observations that came to
our attention in performing our audit. See Attachment for detailed comments.
Additionally, our audit was conducted in accordance with the provisions of Chapter 10.550, Rules of
the Auditor General, which governs the conduct of local government entity audits performed in the
State of Florida and requires that the "Letter of Comments and Recommendations" address the
following matters:
•
The Rules of the Auditor General (Section 10.554(1)(i)1.), require that we comment as to
whether or not corrective actions have been taken to address recommendations made in the
preceding annual financial audit report. The current status of comments reported in fiscal year
2006 is included in the Status of Prior Year's Recommendations section of the attachment.
•
As required by the Rules of the Auditor General (Section 10.554(1)(i)2.), we determined that
the System complied with Section 218.415, Florida Statutes, regarding the investment of public
funds.
•
The Rules of the Auditor General (Section 10.554(1)(i)3.), require that we address in the
management letter any recommendations to improve financial management, accounting
procedures, and internal controls. In connection with our audit, we are submitting for
consideration the accompanying recommendations designed to help improve financial
management, accounting procedures, and internal controls.
•
The Rules of the Auditor General (Section 10.554(1)(i)4.), require that we address violations of
provisions of contracts and grant agreements or abuse that have an effect on the financial
statements that is less than material but more than inconsequential. In connection with our
audit, we did not have any such findings.
•
The Rules of the Auditor General (Section 10.554(1)(i)5.), require, based on professional
judgment, the reporting of the following matters that are inconsequential to the financial
statements, considering both quantitative and qualitative factors: (1) violations of laws, rules,
regulations, and contractual provisions or abuse that have occurred, or were likely to have
occurred, and would have an immaterial effect on the financial statements; (2) improper
expenditures or illegal acts that would have an immaterial effect on the financial statements;
and (3) control deficiencies that are not significant deficiencies, including, but not limited to; (a)
improper or inadequate accounting procedures (e.g., the omission of required disclosures from
the financial statements); (b) failures to properly record financial transactions; and (c) other
inaccuracies, shortages, defalcations, and instances of fraud discovered by, or that come to
the attention of, the auditor. We are submitting for consideration the accompanying
recommendations designed to help improve internal control, achieve operational efficiencies
and ensure compliance with laws and regulations as required by the Rules of the Auditor
General (Section10.554(1)(i)5.).
Board of Trustees
Bay Medical Center
January 24, 2008
•
The Rules of the Auditor General (Section 10.554(1)(i)6.), require that the name or official title
and legal authority for the primary government and each component unit of the reporting entity
be disclosed in this management letter, unless disclosed in the notes to the financial
statements. The Medical Center, the Primary Government, was established by mandate of the
Laws of Florida, Chapter 23183 (1945), and is disclosed in the notes to the financial
statements, along with its component units.
•
The Rules of the Auditor General (Section 10.554(1)(i)7.a.), require a statement be included as
to whether or not the local governmental entity has met one or more of the conditions
described in Section 218.503(1), Florida Statues, and identification of the specific condition(s)
met. In connection with our audit, we determined that the System did not meet any of the
conditions described in Section 218.503(1), Florida Statutes.
•
As required by the Rules of the Auditor General (Section 10.554(1)(i)7.b.), we determined that
the annual financial report for the Medical Center for the year ended September 30, 2007 was
filed with the Department of Banking Finance pursuant to Section 218.32(1)(a), Florida
Statutes. In connection with our audit, we determined that these two reports were in
agreement.
•
As required by the Rules of the Auditor General (Sections 10.554(1)(i)7.c. and 10.556(7)), we
applied financial condition assessment procedures. It is management’s responsibility to
monitor the entity’s financial condition, and our financial condition assessment was based in
part on representations made by management and the review of financial information provided
by same. In connection with our audit, our procedures did not disclose deteriorating financial
conditions as defined in the aforementioned section.
This letter is intended solely for the information and use of the Board of Trustees of Bay Medical Center
and management, and officials of applicable Federal and State agencies and is not intended to be and
should not be used by anyone other than these specified parties.
Yours very truly,
Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
Page(s)
I.
Recent Auditing Standards and Accounting Pronouncements
• Recent Accounting Pronouncements............................................................................................ 1-3
II.
Operational Recommendations
• Monitoring of Non-Hospital Accounts Receivable............................................................................ 4
• Review the Cash Account Reconciliation Process ......................................... …………………….4-5
III.
Develop and Implement a Policy Surrounding Manual Journal Entries (Significant
Deficiency).............................................................................................................................................. 6
IV.
Status of Prior Year’s Recommendations………...…….…………………………....... …………...…….7
Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
I.
Recent Auditing Standards and Accounting Pronouncements
Financial Accounting Standards Board No. 157, Fair Value Measurements
The Financial Accounting Standards Board ("FASB") issued FASB Statement No. 157, Fair Value
Measurements ("FASB No. 157"), which addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure purposes under
accounting principles generally accepted in the United States of America ("GAAP"). As a result of
FASB No. 157, there is now a common definition of fair value to be used throughout GAAP. The
FASB believes that the new standard will make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. A one-year deferral for recognizing
non-financial assets and liabilities was granted.
The Medical Center will need to adopt FASB No. 157 for financial statements issued for fiscal
years beginning after November 15, 2007 (e.g. Fiscal Year 2009 for the Medical Center) and
should begin analyzing how this will impact the organization's financial statements and make
preparations for implementation.
Subsequent to the issuance of FASB Statement No. 157, the FASB issued FASB Statement No.
159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment
of FASB Statement No. 115 (FASB No. 159).
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. Compliance with to this audit standard includes but is not limited to audit
procedures, internal controls, and financial statement integrity.
Financial Accounting Standards Board No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities
Under FASB No. 159, entities are provided with an option to report selected financial assets and
liabilities at fair value. The standard permits an entity to elect the fair value option on an instrumentby-instrument basis; and once the election is made, it is irrevocable. As stated in paragraph 1 of
FASB No. 159, "The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This statement is
expected to expand the use of fair value measurement..." In addition, FASB No. 159 establishes
presentation and disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and liabilities. FASB No. 159
does not eliminate disclosure requirements included in other accounting standards, such as the
requirements for disclosures about fair value measurements included in Financial Accounting
Standards Board Statements No. 157, Fair Value Measurements (FASB No. 157), and FASB No.
107, Disclosures about Fair Value of Financial Instruments (FASB No. 107). The effective date of
FASB No. 159 is for fiscal years beginning after November 15, 2007.
The Medical Center will need to evaluate whether or not to they want to adopt FASB No. 159 for
financial statements issued for fiscal years beginning after November 15, 2007 (e.g. Fiscal Year
2009 for the Medical Center) and the potential impact on the organization's financial statements, if
they choose to adopt the standard.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. Compliance with to this audit standard includes but is not limited to audit
procedures, internal controls, and financial statement integrity.
GASB Statement 49, Accounting and Financial Reporting for Pollution Remediation
Obligations
GASB Statement 49, Accounting and Financial Reporting for Pollution Remediation, is effective for
fiscal year 2009 for the Medical Center. The standard requires recognition and measurement of
liabilities resulting from clean up efforts of existing pollution that may occur now or in the future.
The costs may be capitalized in certain limited circumstances. The Medical Center will need to
evaluate all potential sources of pollution and then determine if the events are obligating events in
order to identify the potential liability. The related assets or liabilities will then need to be valued
and recorded in the ledger of the Medical Center.
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. The compliance includes but is not limited to auditing standards associated with
the audit procedures, internal controls, and financial statement integrity.
GASB Statement 50, Pension Disclosures - an amendment of GASB Statement Nos. 25 and
27
GASB 50, Pension Disclosures- an amendment of GASB Statements Nos. 25 and 27,(GASB 50)
was issued in May 2007 and is applicable for the year ending September 30, 2008. GASB 50
requires disclosure in the notes of the financial statements of the significant methods and actuarial
assumptions, the funded status of the Plan, a schedule of funding and legal or maximum
contribution rates and disclosure of the methods used to determine the fair value of plan assets.
The Medical Center will need to work with its third-party actuaries to ensure that the appropriate
information is analyzed and included in the actuarial reports that will support the September 30,
2008 disclosures.
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. The compliance includes but is not limited to auditing standards associated with
the audit procedures, internal controls, and financial statement integrity.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
GASB Statement 51, Accounting and Financial Reporting for Intangible Assets
This Statement requires that all intangible assets (with limited exclusions) be classified as capital
assets. This Statement requires that an intangible asset be recognized in the statement of net
assets only if it is considered identifiable. Additionally, this Statement establishes a specifiedconditions approach to recognizing intangible assets that are internally generated. Effectively,
outlays associated with the development of such assets should not begin to be capitalized until
certain criteria are met. Outlays incurred prior to meeting these criteria should be expensed as
incurred. This Statement also provides guidance on recognizing internally generated computer
software as an intangible asset. This guidance serves as an application of the specified-conditions
approach described above to the development cycle of computer software.
This Statement also establishes guidance specific to intangible assets related to amortization. This
Statement provides guidance on determining the useful life of intangible assets when the length of
their life is limited by contractual or legal provisions. If there are no factors that limit the useful life
of an intangible asset, the Statement provides that the intangible asset be considered to have an
indefinite useful life. Intangible assets with indefinite useful lives should not be amortized unless
their useful life is subsequently determined to no longer be indefinite due to a change in
circumstances.
The requirements of this Statement are effective for financial statements for periods beginning after
June 15, 2009. (fiscal 2010 for the Medical Center) The provisions of this Statement generally are
required to be applied retroactively. Retroactive reporting is required for intangible assets acquired
in fiscal years ending after June 30, 1980, except for those considered to have indefinite useful
lives as of the effective date of this Statement and those that would be considered internally
generated. Retroactive reporting is not required but is permitted for intangible assets considered to
have indefinite useful lives as of the effective date of this Statement and those considered to be
internally generated. The Medical Center will need to begin to evaluate any possible intangible
assets.
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. The compliance includes but is not limited to auditing standards associated with
the audit procedures, internal controls, and financial statement integrity.
GASB Statement 52, Land and Other Real Estate Held as Investments by Endowments
GASB Statement 52, Land and Other Real Estate Held as Investments by Endowments, requires
organizations to report land and other real estate at fair value with changes in fair value reported in
investment income. The statement is to be applied for fiscal periods beginning after June 15, 2008
(fiscal 2009 for the Medical Center) and is applied as a restatement of prior periods.
Management Response:
Management will work with its audit firm to implement this audit standard as applicable to the
Medical Center. The compliance includes but is not limited to auditing standards associated with
the audit procedures, internal controls, and financial statement integrity.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
II.
Operational Recommendations
Monitoring of Non-Hospital Accounts Receivable
Approximately $1.8M, or 7%, of the Medical Center's net accounts receivable at September 30,
2007 is considered "non-hospital" accounts receivable and is analyzed separately from the
"hospital" accounts receivable. The non-hospital accounts receivable consists of patient account
re-billings with HealthCheck, contract accounts receivable resulting from contracted medical
services with local groups, schools, etc, and physician billing accounts receivable with ARISTOI.
For each of these types of non-hospital accounts receivable, the Medical Center relies upon limited
billings and collections data to record the gross amounts and the related allowances. The data is
limited as compared to the hospital accounts receivable and as such provides challenges to
management to perform detailed analysis on the collectibility of the recorded accounts. The
inability to perform detailed analysis regarding collections and review of the recorded non-hospital
accounts receivable balances could potentially result in a misstatement which may be unprevented or detected.
We recommend the Medical Center establish more rigorous processes and procedures for
monitoring its non-hospital receivables. We suggest the Medical Center work with the third-party
billers and collectors to obtain detailed reports which provide more reliable evidence of historical
collections on the applicable AR balances and allow it to effectively monitor its balances on an ongoing basis. For the contract accounts receivable, which is monitored by the business office, we
recommend the business office begin tracking collections over time related to specific balances.
Management Response:
Management agrees with this comment and will work with third party billers and collectors to obtain
detailed reports needed for audit and analysis. The business office will explore options to obtain
needed information for analysis and audit from contract vendor to enhance contract accounts
receivable monitoring. Management is committed to continuous improvement in this critical area.
Review the Cash Account Reconciliation Process
There were improper reconciling items included on the cash reconciliations. Manual checks that
are cut outside the weekly check run are not included as reconciling items on the bank
reconciliation until the following month, remittance advice notices are being posted to cash in
advance of receiving the payments and payroll checks were deducted from the cash balance
although the checks had not been cut or paid.
Without proper reconciliation controls in operation over cash cutoff, misstatements could occur in
the reported cash balance. We recommend the Medical Center re-examine its controls around the
reconciliation process and implement the necessary controls to ensure all reconciling items are
captured on a timely basis and that reconciliations are performed for all accounts, regardless of the
recorded balance. In addition, the use of clearing accounts would be beneficial for identifying
remittances that should be posted to accounts.
Management Response:
Management agrees in concept with the issues highlighted by its auditor. However, some of these
referenced reconciling items were not material in nature and are not indicative of a substantial
defect with the Medical Center’s cash reconciliation process.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
Management has been engaged in significant process changes in recent years which have
enhanced the cash account reconciliation process. These process changes required significant
resource investment and cross department collaboration. The solutions from these projects have
increased the accuracy of cash account reconciliations which are viewed by management as
acceptable.
Management agrees that some processes can be improved in capturing reconciling items.
However, process improvements will only be considered if they can be reasonably supported with
information system and employee resources. Management agrees that process improvements
related to reconciling item capture will be implemented if items are material in nature and have a
high risk.
Management has already adopted some of the auditor suggestions related to setting up cash
clearing accounts. This concept will be beneficial in the area of large third party remittances and
cash transactions associated with third party billing vendors. Please note that patient accounting,
reimbursement, and financial accounting areas will all need to take ownership of related processes
to insure process improvements are properly implemented and effective. The cash clearing
account concept will increase the need for timely accounts receivable reconcilement.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
III. Develop and Implement a Policy Surrounding Manual Journal Entries (Significant Deficiency)
There is no documented policy in place to ensure that significant and nonstandard journal entries are
reviewed and approved prior to being recorded in the general ledger system. All significant journal
entries should be approved prior to being recorded in the general ledger system to avoid the
recording of improper or incorrect journal entries. While management, as a mitigating control, does
review the balance sheet and P&L monthly, this control does not provide the detailed level of
assurance that inaccurate entries will not be posted to the general ledger.
We recommend that management develop and implement a documented policy regarding review
and approval of significant and nonstandard journal entries. For example, the review should be
documented by initialing or signing the journal entry prior to posting based upon pre-determined
authorization levels.
Management Response:
Management will develop and implement a documented policy for review and approval of significant
nonstandard journal entries. Management agrees with the stated recommendation.
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Bay Medical Center
Letter of Comments and Recommendations
September 30, 2007
IV.
Status of Prior Year's Recommendations
In connection with an audit of the Medical Center's September 30, 2006 basic financial statements,
we made certain comments and recommendations, which have been reviewed in order to determine
the status of implementation. A summary of the status of prior year’s recommendations is as follows:
Recommendations
I.
Status
Corporate Governance
•
II.
IRS and Congress Focus on Exempt
Organizations
Comment has been addressed by
management during fiscal 2007.
Recent Pronouncements
•
SAS No. 104, Amendment to Statement on
Auditing Standards No. 1, Codification of
Auditing Standards and Procedures ("Due
Professional Care in the Performance of
Work")
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 105, Amendment to Statement on
Auditing Standards No. 95, Generally
Accepted Auditing Standards
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 106, Audit Evidence
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 107, Audit Risk and Materiality in
Conducting an Audit
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 108, Planning and Supervision
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 109, Understanding the Entity and
Its Environment and Assessing the Risks of
Material Misstatement
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 110, Performing Audit Procedures
in Response to Assessed Risks and
Evaluating the Audit Evidence Obtained
Statement addressed by management
for implementation during fiscal 2007.
•
SAS No. 111, Amendment to Statement on
Auditing Standards No. 39, Audit Sampling
Statement addressed by management
for implementation during fiscal 2007.
III.
Operational Recommendations
•
Payroll System Access
Comment has been addressed by
management during fiscal 2007.
•
Opening and Closing of Bank Accounts
Comment has been addressed by
management during fiscal 2007.
•
Third-Party Access to Inventory
Comment has been addressed by
management during fiscal 2007.
•
Capital Asset Disposal Authorization
Comment has been addressed by
management during fiscal 2007.
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