Bondholder disclosure and Sarbanes-Oxley; how one medical center aligned best practices: by adopting some sections of Sarbanes-Oxley as best practices in accountability and compliance, Bush University Medical Center achieved its goal of enhancing bondholder disclosure

Healthcare Financial Management, August, 2005 by Patricia S. O'Neil, Thomas C. Cutting

Timely and accurate financial reporting has been highlighted as a key issue for 2005 ("40 Things to Think About in 2005," hfm, February). Given the impact of the Sarbanes-Oxley Act of 2002 and the need for enhanced disclosure to stakeholders, financial reporting continues to gather momentum in the not for-profit arena.

That fact has resonated with corporate financial managers at Bush University Medical Center, an 830-bed academic medical center in Chicago. RUMC has focused for more than a year on implementing disclosure practices and financial reporting processes that move it toward Sarbanes-Oxley compliance and best practices for bondholder disclosure.

Laying the Groundwork

The medical center's operating divisions com prise hospital services, education, research, and medical service plans. It is also a member of the RUMC Obligated Croup, including four hospitals in the Chicagoland area.

The Obligated Group had $345 million of long term debt at the end of FY04 and is required to issue unaudited quarterly financial statements and audited annual financial statements to the credit enhancement providers, bond insurers, and repositories. Moreover, given its credit-enhanced debt, the Obligated Group has no standalone credit rating and has had limited communication with the investor community since its last bond issuance in December 2998.

In FY04, RUMC also began developing a master facilities plan, which includes significant plant expansion over the next three to five years, to be funded through operations, monetization strategies, capital campaign proceeds, and debt issuance. The plan included strategies for accessing the capital markets and providing potential investors with the information they need.

Given the expected increase in the scope of disclosure, the BUMC Finance and Audit Committee was seeking an enhanced level of assurance in regard to financial reporting accuracy. Many of the committee members were involved with for profit entities that were devoting substantial resources to Sarbanes-Oxley compliance efforts. These members suggested that BUMC determine the feasibility of adopting similar Sarbanes-Oxley compliance efforts.

As a not for-profit entity, BUMC is not required to comply with the Sarbanes-Oxley Act. However, senior management recognized that partial adoption of Sarbanes Oxley provisions made good business sense and would provide both the board and the investment community a higher degree of confidence in RUMC's quarterly financial reporting and bondholder disclosures. Both RUMC senior management and members of its Finance and Audit Committee agreed that a cost-versus benefit approach to Sarbanes Oxley implementation would be applicable given RUMC's overall capital conservation strategy.

With the assistance of the Finance and Audit Committee. RUMC senior management set the following goals:

* To comply voluntarily with selected sections of the Sarbanes-Oxley Act

* To incorporate best practices in quarterly bondholder disclosures and investor relations

Voluntary Compliance with Sarbanes-Oxley

The first step was to analyze the differences between Sarbanes Oxley Act requirements and current RUMC practices. From this analysis, senior management decided to concentrate initially on the areas of corporate governance and officer certification. Both areas are critical to ensure accurate financial reporting and would require little additional spending to implement. A financial reporting internal control assessment, required by Section 404 of the Sarbanes Oxley Act, was not included in the immediate plans because of cost and resource constraints.

From the existing Finance and Audit Committee membership, separate finance and audit committees were formed. The independence and experience requirements of the Sarbanes Oxley Act were carefully followed in selecting the audit committee membership. An audit committee charter was developed that was consistent with Sarbanes-Oxley, National Association of Securities Dealers Automated Quotation, and New York Stock Exchange requirements. To help ensure that all audit committee responsibilities detailed in the charter are executed, a responsibility checklist was developed. The checklist is used to plan the agenda for meetings, and an updated copy is included with the materials distributed prior to meetings. Annually, committee members conduct a self-review to ensure compliance with charter requirements.

The audit committee charter requires that the committee approve quarterly bond disclosure documents before they are released. To provide additional assurance to the committee, officer certifications were developed and included with the bond disclosure documents. Individual certification statements are now signed by the CEO and CFO from each Obligated Group entity.

The assertions included in the certification statements parallel the requirements of Section 302 of the Sarbanes-Oxley Act with some notable exceptions. The major difference is the exclusion of any reference to an assessment of the controls over financial reporting because it has not been performed. The certification documents are not distributed externally because certifications with this level of detail are not currently required as part of the standard bond disclosures.