Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training

Symposium

Federal and Non-Federal Receivables: Path to Audit Readiness

June 5th – 6th, 2012

FOR OFFICIAL USE ONLY

Audit ReadinessContext DoD is required to assert audit readiness for the Statement of

Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicine’s audit readiness effort, the Federal and Non-Federal Receivables business processes has been identified as an assessable unit for which assertion must take place.

Purpose To discuss the Key Control Objectives (KCOs), Key Supporting

Documents (KSDs), identified gaps and potential corrective actions for Federal and Non-Federal Receivables.

Outcome An understanding of the status of the Federal and Non-Federal

Receivables assessable units, including major deficiencies and what can be done now at the field level to facilitate a successful financial statement audit. Some assessable units may not require field action at this time.

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Receivables Scope & Definitiion

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Definition Federal Receivables: Includes medical treatment receivables due from federal entities such as U.S. Coast Guard (USCG), National Oceanic and Atmospheric Administration (NOAA), the U.S. Public Health Service (PHS) and the Veteran’s Administration (VA)

Non-Federal Receivables: Includes medical treatment receivables due from non-federal entities (e.g. Health Insurance Companies, Third Party Collections, Medical Affirmative Claims Medical Service Accounts, paid patients)

Assessable Unit Lead/Team

Mel BeckerBill Condon

Assessable Unit Support

Kevin Norman – knorman@deloitte.comKim Mackey – kimackey@deloitte.com

Q1 FY12 Collections Federal Receivables: $10.5 Million

Non-Federal Receivables: $9.7 Million

Audit Readiness Timeline

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FY12 FY13 FY14

Assessable Units – Wave 2 Max Assertion Date

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Travel 4 SEP 2012

Consumables 3 DEC 2012

Reimbursable Work Orders – Grantor

3 DEC 2012

Reimbursable Work Orders – Performer (Non-UBO)

1 APR 2013

Military Payroll (including RPN) 1 APR 2013

Contract Administration 1 JUL 2013

Non-Federal Receivables (UBO/Medical Treatment)

1 JUL 2013

Federal Receivables (UBO/Medical Treatment)

3 SEP 2013

Civilian Payroll 2 DEC 2013

Financial Reporting 2 DEC 2013

Funds Management (FBWT) 2 DEC 2013Assessable Unit AssertionInterim Progress

Milestones (90 Days, 50 %, 75 %)

Control Testing Time Period

Audit Readiness Process

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Tasks Work ProductsComplet

ed

Document Assessable Units

1Determine which key business processes are Assessable Units

• Process Narrative

• Process Flowchart

Mar. 1st

2Document Assessable Units through interviews and observation

Assess Internal Controls3 Determine control objectives for each Assessable Unit

• Control Assessment

Mar. 1st

4 Highlight internal controls in process documentation

5Assess whether controls are effective in meeting control objectives

Assess Supporting Documentation

6Determine what supporting documents exist for each transaction type • Key Supporting

Document Matrix

Apr. 16th

7Assess whether there are any unsupported transactions

Identify and Prioritize Deficiencies

8Create list of deficiencies for any objectives that are not met or transactions that are not supported • Deficiencies

ListingApr. 30th

9 Prioritize deficiency list based on audit criteria

Key Control Objectives (KCOs)

KCO # KCO Description

Establish Agreement

1Anticipated and accepted orders do not exceed authority

2aAll unfilled customer orders are recorded in the correct period

2bUnfilled customer orders in the correct amount and line of accounting

2cUnfilled customer orders represent a valid need that is authorized and approved

Billing

3Obligations do not exceed unfilled customer orders

4aAll revenues/receivables are recorded in the proper period

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KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated.

Key Control Objectives (KCOs)

KCO #

KCO Description

4bAll revenues/receivables represent valid transactions that are authorized and approved

4cAll revenues/receivables are recorded in the correct amount and line of accounting

Collections

5 All collections are recorded in the proper period

6aAll Collections are recorded in the correct amount and line of accounting

6bAll collections represent valid transactions that are authorized and approved

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Key Control Objectives (KCOs)

KCO #

KCO Description

Outstanding Receivables

7aAll uncollectible receivables are recorded in the proper period

7bAll uncollectible receivables are recorded in correct amount & line of accounting

7cAll uncollectible receivables represent a valid need that is authorized and approved

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Key Supporting Documentation – Federal

Receivable

Execution Code

Description of Transaction

Key Supporting Documentation

TBD To record the unfilled customer order

• TBD

121, 201 To record service rendered and work estimate and cost transfer

• SF 1080• NC 2275

610, 202 To record the collection and reduce the receivables

• SF 1080

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KSDs – Documentation retained to support individual financial transactions and accounting events.

Key Supporting Documentation – Non-

Federal Receivable

Execution Code

Description of Transaction Key Supporting Documentation

TBD To record the unfilled customer order

• TBD

121, 201EST

To record service rendered and work estimate and cost transfer

• Invoice

610, 202REF

To record the collection and reduce the receivables

• SF 215 • DD 1131

TBD To record the net realizable value (NRV)

• Monthly NMACT Package

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Deficiency Types

Material Weakness: A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected timely.

Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Control Deficiency: A deficiency that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner.

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Considerations For Deficiency Type

Quantitative Materiality - Dollar impact or potential impact to the financial statements

Qualitative Materiality - Non-quantitative factors such as complexity of transactions, legal or regulatory concern or system deficiencies

Pervasiveness - Number of activities or transactions affected by the deficiency

Audit Dealbreaker - Issues that prevent an audit from occurring

Existing Guidance - Determining whether current policy or SOP is in place that meet financial reporting requirement

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Federal and Non-Federal Receivable Material

Weaknesses

Material Weakness 1: Unfilled customer orders are not recorded in the accounting system

Material Weakness 2: Medical billings/Receivables are not recorded in the accounting system until collections are received

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Unfilled customer orders are not recorded

Issue Detail No unfilled customer orders are recorded in STARS-FL. Unfilled customer orders should be recorded to present authority

derived from providing services for which costs will be incurred. By not recording unfilled customer orders, we are causing a required

cost transfer once collections are made for services provided. This is a departure from GAAP, and an audit deal breaker.

Impact on Audit Readiness If the unfilled customer order is not recorded, the authority to

provide services to other federal agencies is not being adequately reported on the financial statements until after those services are provided, which will result in a materially misstated “Change in Unfilled Customer Order" line item on the SBR.

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Unfilled customer orders are not recorded

Path ForwardA Corrective Action Plan will be Developed for implementation by the Activities. Potential solutions would vary between Federal and Non-Federal business processes:

For Federal Receivables, implementation of the Inter-Agency Agreement currently being put into place with the United States Coast Guard could materially change the accounting for this process and may remediate this Material Weakness if implemented correctly as written. The corrective action would focus on how to implement and execute similar IAA for other agencies services at Navy Medicine MTFs.

For Non-Federal Receivables, Navy Medicine is a unique service provider, and industry experts will need to be consulted to determine how to derive an expected authority from insurance companies based on eligible personnel being serviced who have Other Health Insurance (OHI).

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Receivables are not recorded until collections are received

Issue Detail Receivables are not entered into STARS-FL until they have

been collected. Current Navy Medicine guidance dictates that the MTFs should not establish reimbursable authorization until collection and therefore cannot recognize the receivable at the time services are rendered.

DOD Comptroller issued Defense Health Program (DHP) Accounts Receivables Policy dated May 2, 2008 stating all DHP-funded activities will recognize and record a receivable when it establishes a claim based on goods or services provided.

This is a departure from GAAP, and an audit deal breaker.

Impact on Audit Readiness Recording accounts receivable upon receipt of collections

causes the account receivables balances to not be recorded in the proper accounting period, if at all. This material weakness significantly impacts the SBR because the account receivable and revenues balances are not fairly represented.

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FOR OFFICIAL USE ONLY

Receivables are not recorded until collections are received

Path ForwardThe Federal & Non-Federal Assessable Unit Team will document a formal Corrective Action Plan to address this issue. Potential solutions may vary between Federal and Non-Federal business processes, but would include two key phases:

Phase One: Development of a GAAP compliant, achievable, sustainable ‘to-be’ business process that incorporates current internal controls and key supporting documents where possible.

Phase Two: Development of a plan for implementation of the ‘to-be’ process across the organization, including:

Timeline for implementation Actions necessary to implement new process Roles and responsibilities for affective personnel Reporting requirements to document process with Audit

Readiness PMO. 17

Other Receivables Deficiencies

Control Deficiency 1: Inconsistent or inaccurate execution of patient registration for completion of Third Party Collection Program/Medical Service Accounts/Other Health Insurance (OHI) – DD 2569 forms

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Inconsistent Use or Inaccurate Completion of

DD 2569 FormsIssue Detail The Assessment Team identified several Activities that are not

obtaining an accurate and current DD 2569 for all patients that receive treatment.

Currently, procedures/methods/controls used by clinic personnel are subject to error and great variation in the DEERS check. An incorrect patient registration and/or failure to obtain/enter OHI data potentially results in non-recognition of a receivable.

Impact on Audit Readiness Missing or incomplete DD 2569s affects the Activity’s ability to

properly bill and collect from the responsible party, resulting in unrecorded accounts receivable.

Path Forward / Potential Activity Action Improve the collection and completion of DD 2569 forms

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FOR OFFICIAL USE ONLY

Questions?

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