Integrity, Integrity....3/24

From the Boston Globe:

Emerson Hospital misstated financials

Investigation finds senior executives created documents
By Jeffrey Krasner, Globe Staff March 21, 2008

Two senior executives of Emerson Hospital in Concord created documents that misstated the hospital's financial condition over parts of its last three fiscal years, the hospital found after an investigation and audit that concluded last week.

The misstatements made the hospital's performance appear better than it actually was, at a time when it was seeking donations for a major expansion that is now nearing completion.

As a result, Emerson violated some promises it made to lenders. That, in turn, forced the hospital to reclassify some of its borrowing as short-term debt, a technical measure that could limit its borrowing ability.

Emerson has not missed any payments and officials said it is not in danger of defaulting on its bonds. The audit completes an inquiry that began last August when a midlevel manager noticed billing irregularities and told a supervisor, said chief executive Christine Schuster.

In all, the hospital had to wipe out $7.1 million in improperly recorded revenue. Because of accounting rules, however, it only had to formally restate its books for fiscal 2006.

The two senior executives - Dana P. Diggins, Emerson's chief financial officer, and Michael Collins, its controller - left Emerson last year. Officials declined to say whether they resigned or were fired. A third financial executive, who the hospital would not name, was let go.

The matter has been referred to the office of Attorney General Martha Coakley, said John M. Lowe III, chairman of the hospital's board of directors.

John O. Wilhelm Jr., interim chief financial officer, said the misstatements were accidental.

"They weren't aware they were misstating it - they thought they were correctly stating it, but they were wrong," said Wilhelm. "People make mistakes and they move on. That's life. They were big mistakes."

Diggins is now chief financial officer at Harrington Memorial Hospital in Southbridge. Collins is chief executive at Merrimack Valley Hospital in Haverhill. Neither responded to calls seeking comment.

Schuster said the former employees manipulated the hospital's earnings by misusing contractual allowances - a term that describes the discounts hospitals give to insurance companies on the "official" prices they charge for services and procedures. Each month, the hospital must adjust the amount of money it expects to receive to account for such discounts.

"The controller at the time overrode the estimates that the contractual allowance model was generating," said Schuster. "That resulted in an overstatement of revenue."

The restatement is particularly sensitive because the hospital is required to keep its lenders and bondholders informed of any changes in its financial condition. A failure to file audited statements can constitute a technical violation of the many promises and ongoing commitments lenders require of borrowers.

Footnotes to the restated financial results, by the accounting firm PricewaterhouseCoopers, state Emerson was "not in compliance with certain debt covenants" for a $3.9 million loan from Bank of America.

In addition, the footnotes state Emerson was not in compliance with covenants for a $63 million bond offering conducted in 2005 by the Massachusetts Health and Educational Facilities Authority, a quasi-public agency that facilitates borrowing for smaller institutions.

Wilhelm said that after the audit was completed, the hospital was able to forge a new agreement with Bank of America that waives the violations. He said that contrary to what PricewaterhouseCoopers reported, there was no violation of loan agreements with the Massachusetts authority.

"This was a fluid issue going back and forth with the auditors," said Wilhelm. "There were a lot of rewrites (to the footnote) and there was a little hurry-up at the end. We are not, and have not, been in violation of any of our bond covenants."

The facilities authority, which arranged the bond offering, declined to comment.

The restatement also comes at a difficult time for Emerson. The hospital made a small profit, $1.7 million, on its healthcare operations in fiscal year 2006. But in fiscal year 2007, it lost $8.1 million on healthcare operations. Some of the losses were offset by investment income, yielding a loss of $4.7 million for the most recent year.

For the first four months of the current fiscal year, the hospital has broken even. But officials said the results were dragged down by a series of one-time charges, some associated with the accounting problems.

In particular, the hospital paid $490,000 to FTI Consulting Inc. - a healthcare consulting firm hired to improve the hospital's financial operations - and about $100,000 to the law firm of Wilmer Cutler Pickering Hale and Dorr LLP, which conducted the investigation.

"The board was concerned when this came to light, but because Chris (Schuster) had kept us informed all along, we were comfortable we were taking the right steps," said Lowe, the chairman. "We're now focusing on regaining our financial strength."

Jeffrey Krasner can be reached at krasner@globe.com.

This might be a non-story, except for two names that we're familiar with: FTI Consulting, and Michael Collins. Wonder if the GE Capital mortgage will be the next subject for Mr. Krasner's reporting skills?