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Continuous Auditing at HCA Fifth Continuous Assurance and Auditing Symposium Chase Whitaker, CPA Audit Continuous Auditing at HCA Fifth Continuous Assurance and Auditing Symposium Chase Whitaker, CPA Audit Director HCA, Inc. Internal Audit & Consulting Services November 22, 2002 1

Overview § § About HCA Potential Areas for Continuous Auditing Lessons Learned – Diverging Overview § § About HCA Potential Areas for Continuous Auditing Lessons Learned – Diverging Paths HCA Automated Tools Developed & Next Steps 2

About HCA § § § § 180 hospitals 70 surgery centers 23 states, England, About HCA § § § § 180 hospitals 70 surgery centers 23 states, England, & Switzerland $18 B total assets $18 B annual revenue $2 B EBDITA 170, 000 employees 140 Internal Auditors 3

HCA Internal Audit Continuous Auditing Mission Statement Develop a continuous auditing methodology that will HCA Internal Audit Continuous Auditing Mission Statement Develop a continuous auditing methodology that will help management accomplish the strategic goals and objectives of the company through risk mitigation. This methodology will include: § Identifying key risk indicators related to Ø achievement of business objectives, Ø reliability and accuracy of financial information and Ø compliance with laws, regulations and company policies. Ø IT system and interfaces. § Designing automated processes, tools and a management reporting system to enable Internal Audit to continuously monitor these key risk indicators. 4

Challenges § § § § Significant investment in R&D and QA process What, when, Challenges § § § § Significant investment in R&D and QA process What, when, and how to test Level of assurance – attestation vs. exception reporting FTEs needed for preparation and review IT resources (Organization & Internal Audit) IT infrastructure Acceptance by organization management teams (e. g. difference in deliverables, commitment to respond) § Change management 5

Other Considerations § § § Strength of operations management Audit universe Understand key organizational Other Considerations § § § Strength of operations management Audit universe Understand key organizational risks Clearly defined audit objectives - Avoid “scope creep” Design “exception only” reports 6

Technology Tools Evolution § Currently used by HCA Ø Data downloads with Focus Ø Technology Tools Evolution § Currently used by HCA Ø Data downloads with Focus Ø ACL processing Ø Excel presentation Ø E-mail delivery § Future? Ø Data tags (e. g. XML) Ø Application intelligent agents Ø Embedded audit modules Ø Application or intranet “real time” reporting 7

Potential CA Areas § General ledger vs. subsidiary ledger balances § HR, Payroll, and Potential CA Areas § General ledger vs. subsidiary ledger balances § HR, Payroll, and Benefits § Unnatural or unexpected balances, transactions, statistics &/or relationships § Clinical or other operational trends/indicators § Information technology trends/indicators § Regulatory compliance § Adherence to system master file standards § Cash disbursement transactions/trends § Purchasing/inventory quantities, pricing, activity § Third party relationships 8

Silver Bullet Solutions 9 Silver Bullet Solutions 9

Lessons Learned - Diverging Paths § Continuous Audit Ø Deviations easily defined and explainable Lessons Learned - Diverging Paths § Continuous Audit Ø Deviations easily defined and explainable Ø Reports delivered following occurrence § Continuous Risk Assessment/Monitoring Ø Knowledge gathering and trending Ø Limited or no CA reports to management Ø Results may impact audit plan decisions Ø Time intensive to research initial results Ø Spurs ideas for new tests 10

Automated Tools Developed – Accounts Receivable § Monthly comparison of A/R on subsidiary system Automated Tools Developed – Accounts Receivable § Monthly comparison of A/R on subsidiary system to G/L control accounts to identify out-of-balance conditions. § Monthly comparison of patient A/R aging buckets on subsidiary system to G/L allowance for doubtful accounts control account to identify potential under reserves. § Quarterly analysis of Medicare cost report settlement account transactions § Periodic analysis of negative receivables 11

Automated Tools Developed – Human Resources/Payroll § Quarterly analysis of invalid Social Security Numbers Automated Tools Developed – Human Resources/Payroll § Quarterly analysis of invalid Social Security Numbers Ø Compare all SSNs to permissible Area and Group numbers Ø Search for ascending/descending SSNs Ø Search for serial numbers with all zeroes Ø Look for SSNs used in marketing Ø Consider SSNs Employee Verification Service (EVS) 12

Automated Tools Developed – Human Resources/Payroll § Analysis of unusual vacation/paid-time-off taken & available Automated Tools Developed – Human Resources/Payroll § Analysis of unusual vacation/paid-time-off taken & available Ø Limited or no PTO hours Ø Terminated employees with remaining PTO balance Ø PTO banks in excess of corporate limits § Analysis of unusual hourly rates, regular and OT hours, and/or gross earnings § Active employees without YTD earnings § Full time employees averaging less than 32 hours/wk § Incomplete or inconsistent key dates (e. g. DOB > DOH) 13

Automated Tools Developed – Patient Account Service Centers § Trending graphs & analysis of: Automated Tools Developed – Patient Account Service Centers § Trending graphs & analysis of: Ø “Promise to Pay” codes aged greater than 60 days Ø Average days to bill Ø Final bill alert exceptions Ø Insurance greater than 90 days § Daily analysis of selected master file settings § Comparison of credit balances – subsidiary system vs. management reporting system 14

Automated Tools Developed – Patient Account Service Centers First month results communicated to management Automated Tools Developed – Patient Account Service Centers First month results communicated to management 15

Automated Tools Developed – Assets/EBDITA Analyses § Changes to goodwill and related amortization accounts Automated Tools Developed – Assets/EBDITA Analyses § Changes to goodwill and related amortization accounts § § Review for non-performing assets &/or dormant entities Analysis of unusual general ledger/financial reporting activity Review entities with significant asset/EBDITA changes Review entities having assets but without earnings & vice versa 16

Automated Tools Developed – Vendors/Accounts Payable § Bio-Med & Diagnostic Imaging equipment servicing inventory Automated Tools Developed – Vendors/Accounts Payable § Bio-Med & Diagnostic Imaging equipment servicing inventory and billing Ø Duplicate records Ø Trend charges Ø Erroneous/illogical data elements § Duplicate payments: Ø Trend and report problematic vendors, facilities, employees, etc. Ø $17 million prevented or recovered to date – reduces/ eliminates need for review by 3 rd party vendor 17

Automated Tools Developed – Other § Daily analysis of changes in consolidation indicators including Automated Tools Developed – Other § Daily analysis of changes in consolidation indicators including any consolidating “test” entities § Monthly analysis of daily cash transfers from facilities to corporate treasury function 18

Next Steps § Dedicate FTE(s) to audit information generated from our automated tools § Next Steps § Dedicate FTE(s) to audit information generated from our automated tools § Develop an expedient management reporting process § Continue development of new automated tools and audit procedures for areas such as: Ø Adherence to system master file standards Ø Employee benefits Ø Purchasing/Inventory (inventory quantities, warehousing metrics, SKU usage, billing of high-cost supplies, etc. ) Ø Cash disbursements Ø Laundry/linen expenses 19

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Contact Information Chase Whitaker Audit Director HCA, Inc. Internal Audit & Consulting Services (615) Contact Information Chase Whitaker Audit Director HCA, Inc. Internal Audit & Consulting Services (615) 344 -5973 Chase. [email protected] com 21