Sarbanes-Oxley Is Strong Medicine For Health Care Organizations

–Adopting a code of ethics that applies to the organizations principal officers and executives.

–Streamlining corporate lines of reporting, conducting periodic corporate governance training and enforcing conflict-of-interest policies.

–Restricting the accounting firm providing audit services from contemporaneously performing non-audit services for the provider, such as bookkeeping or actuarial services relating to the providers accounting records or financial statements. The appointment of a competent, independent auditor is critical, particularly in the health care industry, where the deviation between the providers billed charges and actual reimbursement can result in retroactive adjustments and government audits.

Many nonprofit organizations have, in fact, already implemented mechanisms that comport with Sarbanes-Oxleys requirements. For example, a number of health care providers have adopted an independent audit committee, consisting of board members who are not executives or otherwise employees of the organization. Indeed, the composition and responsibilities of an audit committee are in many regards consistent with the fundamental duties of care and fidelity to which directors of nonprofit organizations are already subject.

Additionally, the chief financial officer of a nonprofit health care provider such as a hospital is presently required to certify the organizations Medicare cost reports, essentially requiring the CFO to verify personally the accuracy and completeness of the providers financial statements and the reliability of its internal financial controls.

Many states, in line with Sarbanes-Oxley, also prohibit loans by any nonprofit to its officers or directors, or to any corporation, firm, association or other entity in which one or more of its employees are officers or directors, or hold a substantial financial interest.

State Regulators Follow Suit

Government regulators and state attorneys generally are likely to cite public policy considerations as a basis for adopting the Sarbanes-Oxley standards into their oversight of nonprofit health care providers, insofar as the interests of charitable donors, tax-exempt bondholders and the communities served by not-for-profit organizations are akin to those of public company shareholders protected by the Act. In New York, for example, Attorney General Eliot Spitzer last year proposed a still-pending bill patterned after the federal governance reforms enacted under Sarbanes-Oxley that would amend the states Not-for-Profit Corporation Law to protect the public against financial fraud and misconduct.

Additionally, just recently, Mr. Spitzer initiated a national probe into brokerage fees paid by insurance carriers for the sale of employee benefits such as life, disability and health insurance that is also certain to propel new governance and accounting reforms.

In sum, although non-compliance with Sarbanes-Oxley may not have direct ramifications for private or nonprofit health care organizations, because the new sentencing guidelines and state laws are adopting many of the Acts requirements, such providers would be wise to adopt governance practices, to the extent feasible, that comply with Sarbanes-Oxley standards. The fallout from the HealthSouth and more recent insurance brokerage firm scandals should cause any health care organization to reevaluate its accounting and governance practices.

Attorney Christopher Turcotte is a senior associate with the national law firm of Edwards & Angell, where he is a member of the firms Corporate Integrity and White Collar practice group. He can be reached at [email protected].

Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.