Public Hospital District Public Hospital District Financial Reporting,Financial Reporting,

Board Responsibility & Board Responsibility & ComplianceCompliance

Doug Albright-Chair, Health Care Practice

Ogden Murphy Wallace

1601 Fifth Avenue-Seattle, WA 98101

206.447.7208

omwlaw.com

Panel and FormatPanel and Format

• Ivan Dansereau, State Auditor’s Office

• Don Hansen, Moss Adams, CPAs

• Doug Albright, Ogden Murphy Wallace - Healthcare Practice Group

• Presentations

• Extended Q & A

ThemesThemes

• Good governance/financial compliance = largely common sense

• Current law provides significant, but incomplete, comfort & guidance

• Importance of compliance programs and Board of Commissioners (Board) education

• The future is uncertain, but hospital districts should be proactive

Themes (continued)Themes (continued)

• Driven by Medicare/Medicaid fraud and perceived fraud

• “Headline Test”

Panel Member RolesPanel Member Roles

• Ivan will emphasize the state’s auditing role and issues he sees

• Don will cover state & federal issues from a CPA auditor’s viewpoint

• I will emphasize developing Board financial/compliance oversight duties

The Future is UncertainThe Future is Uncertain

• “The future ain't what it used to be.” Yogi Berra

• Enron/Sarbanes-Oxley

• Increased healthcare regulation

• Increased emphasis on obligations of Boards/executives

• Increased economic pressure on physicians (turf battles, etc.)

• Increased financial scrutiny

The Good Governance MottoThe Good Governance Motto

• A good governance Board/committee member is, like a good Scout:

Trustworthy, Loyal, Helpful, Thrifty, Obedient, Brave and Reverent

• And, add to the list:Law Abiding, Prudent, Educated, Inquisitive, Diligent and Involved

• If you were a Scout, what is missing?

Answer to the TestAnswer to the Test

• Friendly

• Courteous

• Kind

• Cheerful

• Clean

Board Financial ResponsibilitiesBoard Financial Responsibilities

• Based on general Board responsibilities

• In addition to specific auditing standards to be discussed by Ivan and Don, the financial responsibilities of the Board should be considered in the context of the general duties of the Board and developing standards

Core Duty - The ObviousCore Duty - The Obvious

• A core duty of any Board or committee member is to serve the purpose of the organization

• Committee members should also be focused on the duties and responsibilities of the committee

• Finance, Audit and Compliance Committees are key to financial and legal compliance

The Board’s ResponsibilitiesThe Board’s Responsibilities

• The Board is responsible for:establishing the District’s policies,

making major decisions,

delegating to the Superintendent, and

providing effective oversight of District operations

The Right to RelyThe Right to Rely

• In the private sector, a director is entitled to rely on information, opinions, reports, or statements, financial statements and other

financial data, prepared/presented by: Officers or employees of the corporation whom the director believes to be reliable and competent in the matter presented

The Right to Rely (continued)The Right to Rely (continued)

Counsel, public accountants, or other persons as to matters which the director believes to be within such person's professional or expert competence

The Right to Rely (continued)The Right to Rely (continued)

A committee of the Board . . . duly designated . . . as to matters within its designated authority, which committee the director believes to merit confidence; so long as,. . . the director acts in good faith, after reasonable inquiry when the need therefor is indicated

The Good NewsThe Good News

• The law recognizes that a public official should not be liable for discretionary decisions or failure to make a discretionary decision within his/her official capacity (RCW 4.24.470)

The Limits of the Good NewsThe Limits of the Good News

• Scope of “discretion” ill-defined and likely to change “post-Enron”

• Breach of fiduciary duty

• Intentional misconduct or a knowing violation of law

• Conflict of interest/personal benefit (RCW 42.23)

• Open Meetings and other statutory requirements

Intentional/Knowing ViolationIntentional/Knowing Violation

• How determine if a violation is knowing?Effective regulatory compliance program?

Reliance on management and advisors

Acquiescence to conduct may equate to knowing violation

Reasonable to expect courts to interpret “knowing” more broadly, and if a Commissioner knows of a violation, cannot claim failure to act was discretionary

Elements of Fiduciary DutiesElements of Fiduciary Duties

• The duty to act as a fiduciary in the best interests of the organization includes a number of elements that can be separately delineated:

Duty of OversightDuty of Oversight

• Duty to manage the organization through delegation to managers

• Board/committee members cannot be expected to manage the day-to-day activities of an organization, and thus courts will normally give deference to decisions of the Board as to what matters in which it will (or will not) become involved

Duty of Care/Attention/InquiryDuty of Care/Attention/Inquiry

• Board/committee members should:Educate themselves with all reasonably available information before taking action

Act with attentiveness and care appropriate under the circumstances in the discharge of their duties

Make reasonable inquiry regarding the operations and compliance of the organization

• Remember - hindsight is 20/20

Duty of LoyaltyDuty of Loyalty

• Board members should discharge their duties to benefit the district, not themselves, disclose conflicts, avoid activities that may conflict with the district’s mission and avoid competition with the district

• RCW 42.23.070 contains the basic requirements

Duty of ObedienceDuty of Obedience

• Board/committee members should be faithful to the underlying governmental purposes and goals of the district

Effective delivery of quality health care services to the community

That’s Enough That’s Enough BackgroundBackground

What’s happening now?

Auditor IndependenceAuditor Independence

• Ivan and Don will discuss

• Example of increased attention to conflicts of interest in the broadest sense of the concept

Audit StandardsAudit Standards

• Don will discuss impact of Sarbanes-Oxley

Internal AuditingInternal Auditing• “an independent, objective assurance and

consulting activity designed to add value and improve an organization’s operations”

• “a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance”

• Microsoft/large health care systems v. a District hospital

Increased EnforcementIncreased Enforcement

• Hospital criminally liable for not taking appropriate credentialing action for medically unnecessary procedures (i.e. peer review has financial impacts)

• Hospitals and officials are responsible for assuring the institution’s agreements are not “sham”

• Increased suspicion regarding destruction of documents

Compliance ProgramsCompliance Programs

• In the limelight due to:Regulatory oversight

Corporate integrity agreements

Federal Sentencing Guidelines

Auditors

Public Accountability

Appropriate checks and balances

U.S. Sentencing GuidelinesU.S. Sentencing Guidelines

• Seek to encourage effective compliance programs

• Sentencing standards now more severe due to recent scandals

• Recent Advisory Group Report - Small organizations should have a compliance program, but less formal program is acceptable

Board’s Role-OIG ResourceBoard’s Role-OIG Resource

• April 2003 by Office of the Inspector General and American Health Lawyers Association

• The intent is “to be an educational tool for health care boards and committees, with a focus on compliance issues”

• Relates to Board duty of inquiry and information systems

OIG/AHLA Board ResourceOIG/AHLA Board Resource

• Based on the Caremark case (not Washington) which held that a Board member’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the Board concludes is adequate, exists

Reliance on ManagementReliance on Management

• The Board has the right to rely on management’s information provided that the information can reasonably be deemed reliable; otherwise, a director is obligated to ask questions and obtain answers until any concerns are satisfactorily addressed

• Duty to inquire arises based on the unique facts and circumstances

Board Due DiligenceBoard Due Diligence

• Sets out a series of questions intended to help Boards assess the realities of their corporation’s compliance program

• The “suggested” questions for Board members will probably become the minimum questions

Structural Due DiligenceStructural Due Diligence

• “Structural” questions relate to how the compliance program is organized:

Who runs the compliance program, who do they report to, and how often and in what detail?

What are its goals and inherent limitations and how are those limitations addressed?

What resources are allocated and are they adequate?

Operational QuestionsOperational Questions

• Operational questions relate to the corporation’s:

Code of Conduct

Policies and procedures and compliance infrastructure

Measures to prevent, respond to and report violations

Board EducationBoard Education

• Should be subject of Board education and action

• Will become a “standard”?• The bottom line:

CEO should assure the Board understands the Compliance Program, and assure procedures are in place to respond to compliance issues

Status of Compliance Officer is elevated

Board’s RoleBoard’s Role

• Be informed and ask questions

• Assess and determine that the Compliance Officer has sufficient personnel and financial resources to fully implement Compliance Program, including organization-wide training

• Require updates on material regulatory and industry developments

• Make a record - hindsight is 20/20

If Issues Develop?If Issues Develop?

• A compliance plan is not enough

• The power of the press is awesome

• Get the bad facts out there and apologize

• Engage your Board and organization

The Future?The Future?

• Sarbanes-Oxley concepts expanded and applied to hospital districts?

• Expanded/reinvigorated interpretation of “knowing” violation of laws?

• Narrowing of “discretion”?

• Potential new legislation

A Proactive ResponseA Proactive Response

• Focus on the proper purpose

• Continue to avoid Board, employee, and consultant conflicts of interest

• Board education

• High(er) standards of compliance

• Balance roles of management v. Board v. audit committee

• Facilitate communication

ConclusionConclusion