Issue Date
June 2, 2011
Audit Report Number
2011-DE-1002
TO: Roger Miller, Deputy Assistant Secretary for Healthcare Programs, HU
//signed//
FROM: Ronald J. Hosking, Regional Inspector General for Audit, 8AGA
SUBJECT: Blue Mountain Hospital, Blanding, UT, a HUD Section 242 Insured Mortgagee,
Did Not Have Adequate Written Procedures for Its Project Funds
HIGHLIGHTS
What We Audited and Why
We reviewed Blue Mountain Hospital (Hospital) based on a request from the
Office of Healthcare Programs. The objective of our review was to determine
whether the Hospital had adequate written procedures for collecting, dispersing,
and accounting for project funds.
What We Found
The Hospital did not have adequate written procedures for collecting, disbursing,
and accounting for project funds. This condition occurred because management
did not make the development of detailed written procedures a priority. As a
result, the Hospital’s project funds were vulnerable to misuse.
What We Recommend
We recommend that the Director of HUD’s Office of Healthcare Programs require
that the Hospital establish and implement written procedures for the financial
department positions involved with collecting, disbursing, and accounting for
project funds.
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For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided the draft report to Hospital officials on April 28, 2011 and requested
their written response by May 12, 2011. During the exit conference on May 11,
2011, we extended the written response date to May 16, 2011. The Hospital has
not provided a written response, nor has it responded to our attempts to follow up.
During the exit conference, Hospital officials stated that they concurred with the
finding and recommendations and were working on developing the written
procedures.
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TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding: The Hospital Did Not Have Adequate Written Procedures 5
Scope and Methodology 7
Internal Controls 8
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BACKGROUND AND OBJECTIVES
Blue Mountain Hospital (Hospital) is a Section 501(c)(3) nonprofit corporation established for
the purpose of constructing and operating an 11-bed acute care hospital which serves the medical
needs of residents in and around San Juan County, UT. The founding members, consisting of
two individuals and two organizations, signed articles of incorporation on October 15, 2002, and
contributed a combination of cash and in-kind services to establish the nonprofit corporation.
The Hospital’s four founding members had power to appoint board members, amend the bylaws,
and hold meetings. The founding members appointed a six-member board of directors. The two
individuals and two representatives from each of the organizations were the initial officers and
also the initial board of directors of the corporation. The board of directors was responsible for
managing all aspects of the Hospital’s financing, construction, development, and operations.
On December 20, 2006, the Hospital and the U.S. Department of Housing and Urban
Development (HUD) signed a Section 242 regulatory agreement for a HUD-insured mortgage of
more than $14.5 million. HUD’s Section 242 Mortgage Insurance for Hospitals program
encourages the provision of essential health care services by providing mortgage insurance for
the construction and development of hospitals within areas of proven need. To qualify for
mortgage insurance, borrowers must comply with applicable HUD requirements and standards.
On December 20, 2006, the Hospital and U. S. Bank National Association signed the mortgage
note to fund the development, construction, and initial operation of the Hospital. The Hospital
defaulted on the mortgage note before HUD’s final endorsement of the loan. As a result, U.S.
Bank National Association assigned the mortgage note to HUD in January 2011.
The Hospital completed construction and started operations in mid-2009. At the start of
operations, a chief executive officer, chief financial officer, and other staff responsible for
collecting, disbursing, and accounting for project funds were hired. In June 2010, the two
officers were dismissed, and officials from one of the Hospital’s founding member organizations
assumed the positions of chief executive officer and acting chief financial officer. At the time of
our review, they were working with HUD to establish a management agreement for the Hospital.
The objective of the review was to determine whether the Hospital had adequate written
procedures for collecting, disbursing, and accounting for project funds.
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RESULTS OF AUDIT
Finding 1: The Hospital Did Not Have Adequate Written Procedures
The Hospital did not have adequate written procedures for collecting, disbursing, and accounting
for project funds. This condition occurred because management did not make the development
of detailed written procedures a priority. As a result, the Hospital’s project funds were
vulnerable to misuse.
The Hospital Did Not Have
Adequate Written Procedures
The Hospital did not have written procedures for collecting, disbursing, and
accounting for project funds. The Hospital’s regulatory agreement and HUD
Handbook 4370.2 REV-1, Financial Operations and Accounting Procedures for
Insured Multifamily Projects, required an internal control structure that complied
with Generally Accepted Accounting Principles. These Principles include
establishing and implementing written procedures for cash handling and other
financial functions. The handbook contained specific requirements which needed to
be incorporated into the written policies.
The Hospital had only a general finance policy manual, which was developed after
operations started. It did not have the required written procedures for each of the
financial department positions; therefore, the staff members did not have ready
references detailing their responsibilities.
Management Did Not Make the
Development of Written
Procedures a Priority
Management did not make the development of detailed written procedures a
priority. The Hospital was concentrating on setting up a new operation and had a
high turnover of initial staff, and its financial managers had to reconstruct the
development and construction financial records.
The Hospital was a new facility, which started operations in about June 2009. All
aspects of the Hospital’s operations had to be established. The original chief
executive officer and chief financial officer did not ensure that the required
procedures were established. The chief executive officer and chief financial
officer of one of the Hospital’s founding member organizations assumed those
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positions for the Hospital in June 2010. They worked at the Hospital and also
retained their original positions.
As of November 2010, most of the staff members in the finance department had
been employed with the Hospital for only a few months. Management was
working with the staff members to provide on-the-job training but had not
established detailed written procedures.
The financial management team had to review extensive development and
construction records and reconstruct the books of account for 2002 through 2008.
They also had to determine the accuracy of the 2009 and 2010 operations books.
Project Funds Were Vulnerable
to Misuse
Without the required procedures, the Hospital’s project funds were vulnerable to
misuse. Although, we did not identify improper uses of the operations funds, the
control structure provided opportunities for misuse. For example, management
thought that two people were involved with preparing and making the bank
deposits. However, one person received all payments, entered the receipts into
the computer billing system, prepared the deposit, and took it to the bank. One
person performing all of the cash collections functions provided the opportunity
for inappropriate recording or misuse of funds.
Recommendations
We recommend that the Director of HUD’s Office of Healthcare Programs
1A. Require the Hospital to establish and implement written procedures for the
financial department positions involved with collecting, disbursing, and
accounting for project funds.
1B. Provide technical assistance to the Hospital to ensure that written
procedures comply with HUD requirements.
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SCOPE AND METHODOLOGY
Our review period relating to the initial operations of the Hospital was June 1, 2009, through
October 31, 2010. We performed our onsite review work from November through December 2010
at the Hospital at 802 South 200 West, Blanding, UT.
To accomplish our review objective, we identified and reviewed Section 242 of the National
Housing Act as amended in 1968, applicable HUD regulations, HUD handbooks, and Hospital
policies. We did not rely on computer-processed data to complete the review work. To evaluate
the controls over the operations of the hospital, we interviewed pertinent employees to gain an
understanding of what they do and reviewed the books of account and related original documents.
This process included reviewing monthly accounting reports, 20 vendor files which included the
largest operating purchases, and the bank reconciliations for the operations bank accounts.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
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INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
Effectiveness and efficiency of operations,
Reliability of financial reporting, and
Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objective:
Controls over collecting, disbursing, and accounting for project funds.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
The Hospital did not have adequate written procedures for all staff
positions involved with collecting, disbursing, and accounting for project
funds (see finding 1).
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Blue Mountain Hospital, Blanding, UT, a HUD Section 242 Insured Mortgagee, Did Not Have Adequate Written Procedures for Its Project Funds
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)