74_Chien_AuditCommittees

74_Chien_AuditCommittees - 1 Audit Committees, Internal...

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1 Audit Committees, Internal Controls, and the Financial Distress of U.S. Public Hospitals Wen-wen Chien* Graduate Student Nova Southeastern University Roger W. Mayer Professor of Accounting Globe Institute of Technology 291 Broadway, New York, NY 10007 rmayer@globe.edu and contact author, John T. Sennetti Professor of Accounting Nova Southeastern University 3301 College Avenue., Fort Lauderdale-Davie, FL33314 sennetti@nova.edu
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2 The Audit Committees, Internal Controls, and the Financial Distress Found in the Largest U.S. Public Hospitals Wen-wen Chien Nova Southeastern University Roger W. Mayer Global Institute of Technology John T. Sennetti Nova Southeastern University ABSTRACT: From all the publicly available A-133 audit reports on internal controls over Federal reporting for 180 of the largest individual public hospitals and 700 public clinics operating in the United States, we find financial distress related to the absence of audit committees (ACs) and to committee control quality. The AC quality characteristics (independence, financial expertise, and increased activity) each improve with reduced frequencies of control problems. Just the lack of committee financial expertise alone correlates with financial distress. Quality committees reduce the misappropriation of assets and wasteful spending, and improve billings and collections. Consistent with prior research for public corporations, these results add to AC research for public hospitals, suggest ways to improve public hospital financial controls, to reduce financial stress and the corresponding increases in governmental debt, and contribute to the national debate on heath care. Key Words: A-133 audit reports; hospitals; financial
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3 I. INTRODUCTION We examine the influence of audit committees on the financial survival of public hospitals and healthcare systems (hereafter, public hospitals) in the United States (U.S.). 1 Public hospitals have an unsustainable financial model and bankrupt hospitals. In 2002, while non-government acute care hospitals reported profit margins of 4.5 percent in the U.S. The average margin for 61 public (safety net) hospitals and hospital networks enrolled as members of the National Association of Public Hospitals (NAPH) is a negative 0.3 percent (Regenstein and Huang 2005). 2 Bankrupt hospitals have poor care and medical errors (Dorshner and Goldstein 2006; Kalb 2006). The Federal government recognizes the financial burden that indigent and uninsured care places on public hospitals. Beginning in 1981, Congress established the disproportionate share hospital program (DSH) to give hospitals providing charity care additional Medicaid reimbursement (Office of Management and Budget [OMB] 1981). These payments provide about two-thirds of the $22.3 billion in uncompensated care
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74_Chien_AuditCommittees - 1 Audit Committees, Internal...

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