1. PACA MH/DS Fiscal and Data Committee Mini-Conference Identifying Red Flags in Audits

2. Introductions and CPA Continuing Professional Education Credit
Michael Wassil, CPA, MBA
Consulting Partner
The Binkley Kanavy Group, LLC
CPE sign-in sheet

3. Agenda Objectives Targeted Analysis Techniques Other Red Flags
Closing Comments

4. Objectives High profile and/or risky decisions:
Transition or transfer of consumers to new providers?
Startup of new provider services or sites?
Other?

5. Objectives
Provide financial statement analysis techniques to aid decision making and timely respond to providers that are or may become:
Financially unstable
Non-compliant with contractual terms and regulations

6. Targeted Analysis Techniques
Financial statements:
Needs of different users vary (e.g. banks, creditors, members, donors, counties, joinders, etc.)
Commonly encountered perceptions
Filters and trends

7. Targeted Analysis Techniques – Liquidity Ratios
Will the provider be able to deliver services in the future?
Will the next payroll be paid?
Payroll/Compensation Coverage Ratio =
Cash, cash equivalents and current receivables X
360
Salary, wages, employee benefits and payroll taxes
The answer could be “no” if the result is below 14

8. Targeted Analysis Techniques – Liquidity Ratios
Can a payment or budget approval delay be weathered?
Expense Coverage Ratio =
Cash, cash equivalents, and current receivables X
360
Total expenses less depreciation and amortization
The answer could be “no” if the result is below 30

9. Targeted Analysis Techniques – Liquidity Ratios
Are landlords and critical vendors being paid timely?
Account Payable and Accrued Liability Days Outstanding =
Accounts payable and current accrued liabilities X
360
Total expenses less depreciation and amortization
The answer could be “no” if the result is above 90

10. Targeted Analysis Techniques – Liquidity Ratios
Quick Ratio
Quick Ratio =
Current assets less any inventories
Current liabilities
Greater risk if the result is below 1

11. Targeted Analysis Techniques – Debt Ratios
Can the provider obtain financing to fund its existing operations or a new service or site?
Debt Ratio =
Notes payable, other current debt and long-term debt
Total assets
The answer could be “no” if the result is above .5

12. Targeted Analysis Techniques – Debt Ratios
Can the provider obtain financing to fund its existing operations or a new service or site?
Debt To Tangible Net Worth =
Notes Payable, other current debt and long-term debt
Net assets less intangible assets
The answer could be “no” if the result is above 1

13. Targeted Analysis Techniques
Additional considerations:
Available line of credit balances
Liquid investments and marketable securities

14. Targeted Analysis Techniques
Symptoms of being financially unstable or “ill”
Staff turnover
Hiring delays
Service delays, etc.

15. Targeted Analysis Techniques
Common causes of financial instability
Claim submission delays and errors from a lack of staff training or awareness
Fiscal staffing or systems not keeping pace with growth
Lack of short-term cash flow planning and forecasting
Limited banking relationships
Accounting processes and reliance on auditors

16. Targeted Analysis Techniques
Benefits:
Reduced decision making risk
Opportunity to provide additional guidance or set expectations
Avoidance of audit findings

17. Targeted Analysis Techniques
Questions?

18. Other Red Flags
Sales of county/joinder owned fixed assets and real estate (Statements of Cash Flow)
Related party or affiliate transfers, loans, purchases, sales and guarantees (Footnotes)
Going concern, qualifications and disclaimers (Independent Auditor’s Report)
Lawsuits and other legal contingencies (Footnotes)
Concentrations in revenues, workforces, locations and other factors (Footnotes)

19. Other Red Flags
Debt or lease covenant violations that can accelerate required payments (Footnotes)
Volatile employee benefit plan funding requirements (Footnotes)
Discontinued operations and impaired assets (Income Statements / Statements of Activities and Footnotes)
Accounting errors (Balance Sheets / Statements of Financial Position)
Sale and leaseback transactions (Footnotes)

20. Other Red Flags
Conditions and restrictions on significant contributions and other funding sources (Footnotes)
Unresolved audit findings, questioned costs and illegal acts (Schedules of Findings, Questioned Costs and Prior Audit Findings)

21. Other Red Flags
Filter Tools

22. The Binkley Kanavy Group, LLC
Closing Comments
Michael Wassil, CPA MBA
Consulting Partner
The Binkley Kanavy Group, LLC
Phone: (412) Ext.207

23. The Binkley Kanavy Group
The Binkley Kanavy Group thanks you for attending
We are a professional services firm that operates throughout the Commonwealth. We offer auditing and consulting services to our niche markets of County and Local Governments and Human Service Organizations. Our practice leaders and experts are:
Brian Binkley, CPA, Managing Partner Thomas Kanavy, CPA MBA, Partner
County, Local Government and Provider HealthChoices Audit and Consulting
Audit Practice Leader Practice Leader
(412) X204 (412) X203
Michael Wassil, CPA MBA, Consulting Partner
County and Provider Consulting Practice Leader
(412) X207
We invite you to visit our provider management services web page at