The Enron effect - View Point - remedies to prevent bankrupticies like Enron Corp.'s - Brief Article - Column

Healthcare Financial Management, April, 2002 by Richard L. Clarke

Imagine a scenario in which a corporation undergoes a highly publicized failure, attributed in part to overly complex organizations and transactions and questionable policies regarding the transfer of money among multiple subsidiaries. The fallout leads to accusations of shady management practices and inadequate or deceptive financial disclosure, as well as lawsuits brought by investors against independent auditors for not uncovering the problems.

This scenario describes the Enron bankruptcy, right? Actually it describes the Allegheny Health, Education and Research Foundation (AHERF) collapse. There are similarities between AHERE and Enron--the most significant being the failure of internal controls to detect fraud and conflicts of interest and the lack of appropriate disclosure of financial transactions and arrangements.

The AHERF bankruptcy and bond defaults had a negative impact on investor confidence, resulting in more costly healthcare debt for healthcare borrowers because bond investors expected a premium for the perceived increased risk. And many bond analysts and investors called for more stringent disclosure requirements.

Although these issues have been hotly debated, not much has changed--until now The Enron bankruptcy is certain to change the status quo because of its size and broad-based impact on investors, employees, pension funds, and the public at large. A new term, "Enronitis," has been coined to describe the unhealthy effect of Enron's spectacular collapse on the stock market and public confidence.

So how will Enronitis affect healthcare financial managers? The following remedies have been proposed during the Congressional hearings and in numerous editorials on the Enron effect:

* Increased government oversight of the accounting and auditing standards-setting process, especially related to special-purpose entities;

* Increased disclosure requirements, including those related to special-purpose entities and unusual transactions;

* Increased scrutiny and, perhaps, regulation of non-audit-fee relationships between the independent auditors and the company being audited; and

* Increased disclosure about, and possible restrictions on, the hiring of independent auditors to work for firms being audited.

Congress is likely to adopt many of these remedies in some form. And healthcare organizations will be affected. The overall changes to accounting and auditing standards, disclosure requirements, auditor independence, and related areas will affect the scope, complexity and cost of healthcare audits and could lead to changes in the relationship between independent auditors and their clients.

The fundamental goal, however, is to present financial information objectively and fairly which is the foundation of HFMAs Code of Ethics. All HFMA members agree to abide by the Code and have an obligation to provide stakeholders with useful, timely and accurate financial and operational information. To assist members, HFMA's Principle and Practices (P&P) Board issued Statement No. 18, "Public Disclosure of Financial and Operating Information by Healthcare Providers," to improve and balance the understanding between those who provide financial and operating information and those who require it. Statement No. 18 includes the following considerations:

* Full disclosure fosters better understanding and trust. Providers have a responsibility to disclose useful information to stakeholders on a regular basis.

* Data must be defined consistently over time.

* The usefulness of data depends on clear definitions and agreement regarding the purpose of the data.

* Providers and users of information have an obligation to cooperate and consider the costs of preparing reports.

* Confidentiality of individual patient data and competitive management data should be respected always.

The P&P Board will continue to refine and enhance its guidance regarding the highest level of professional and ethical accounting standards. And HFMA will continue to monitor the proposed responses to the Enron situation and contribute the unique healthcare perspective to the debate. Finally, HFMA will provide professional development and training on current and new rules and standards as they evolve to ensure that healthcare financial managers have the tools and information they need to fulfill their obligations.