PACA MH/DS Fiscal and Data Committee Mini-Conference Identifying Red Flags in Audits

Introductions and CPA Continuing Professional Education Credit 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? Payroll/Compensation Coverage Ratio = Cash, cash equivalents and current receivables X 360 Salary, wages, employee benefits and payroll taxes The answer could be “no” if the result is below 14

Targeted Analysis Techniques – Liquidity Ratios Can a payment or budget approval delay be weathered? Expense Coverage Ratio = Cash, cash equivalents, and current receivables X 360 Total expenses less depreciation and amortization The answer could be “no” if the result is below 30

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 360 Total expenses less depreciation and amortization The answer could be “no” if the result is above 90

Targeted Analysis Techniques – Liquidity Ratios Quick Ratio Quick Ratio = Current assets less any inventories 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? Debt Ratio = Notes payable, other current debt and long-term debt 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? Debt To Tangible Net Worth = Notes Payable, other current debt and long-term debt 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

The Binkley Kanavy Group, LLC 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 Thomas Kanavy, CPA MBA, Partner County, Local Government and Provider HealthChoices Audit and Consulting Audit Practice Leader Practice Leader Binkley@BinkleyKanavy.com Kanavy@BinkleyKanavy.com (412) 434-0477 X204 (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