Auditor finds CHCC instances of noncompliance

An independent auditor has found during their tests some instances of the Commonwealth Healthcare Corp.’s noncompliance with certain provisions of laws, regulations, contracts, and grant agreements, based on its audit of CHCC’s financial statements for the year ended Sept. 30, 2019.

Auditor Ernst & Young informed CHCC chief executive director Esther L. Muna last Nov. 7 on the results of their tests that showed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Ernst & Young identified certain deficiencies in internal control to be material weaknesses.

Material weakness refers to “a deficiency, or a 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, on a timely basis.”

CHCC chief financial officer Perlie Santos, Procurement director Cora Ada, and WIC program manager Marie Attao shared to the auditor their corrective actions to address the findings.

Ernst & Young was hired by the CNMI Office of the Public Auditor to audit CHCC’s financial statements, which comprise the statement of net position as of Sept. 30, 2019.

The auditor also audited the related statements of revenues, expenses and changes in net position, and cash flows for the year then ended, and the related notes to the financial statements.

As part of obtaining reasonable assurance about whether CHCC’s financial statements are free from material misstatement, Ernst & Young performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant statements.

Ernst & Young also issued a report on Nov. 7, 2024, stating that the scope of their audit on the financial statements was not sufficient to enable them to express, and that they did not express, an opinion on such statements.

The auditor stated in that Nov. 7 report that they did not express an opinion due to the inability to obtain sufficient appropriate audit evidence to support significant account balances and due to CHCC not recording pension expense and related net pension asset or liability, deferred inflows of resources and deferred outflows of resources as of and for the year ended Sept. 30, 2019 as required by Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions.

The auditor said they do not express an opinion on the effectiveness of CHCC’s internal control over financial reporting.

Regarding CHCC’s financial statements as of and for the year ended Sept. 30, 2018, they were audited by another auditor who expressed a qualified opinion in those financial statements on Feb. 18, 2022.

CHCC disclosed that its net position decreased by $988,903 or 14% from $6,851,281 in 2018 to $5,862,378 in 2019.

CHCC said this decrease in net assets is significantly lower than the $4,535,287 or 40% decrease from $11,386,568 in 2017 to $6,851,281 in 2018.

CHCC attributed the improved results of operations in 2019 primarily to the increase in operating revenues. Pertaining to deficiency finding on the general ledger and financial statement close process, Ernst & Young found that the subsidiary ledger schedules of six ledger account balances were not provided on a timely manner, and that accordingly, no audit procedures were performed to substantiate the account balances at year end.

The auditor found that beginning balances of certain funds do not match the prior year audited balances, and that material audit adjustments were proposed to correct the beginning balances.

Ernst & Young found that as of Sept. 30, 2019, CHCC recorded $23,690,573 due to the Commonwealth Utilities Corp.

The auditor said the amount confirmed by the CUC was $31,587,293, resulting in a difference of $7,896,719.

The auditor said a reconciliation of the variance was not available.

The auditor said CHCC provided a revised Schedule of Expenditures of Federal Awards (SEFA) on Sept. 4, 2024 and Oct. 4, 2024 to correct some errors.

The initial SEFA did not include the total amount provided to subrecipients from federal program–Substance Abuse and Mental Health Services Projects of Regional and National Significance.

The auditor said this matter was subsequently corrected on Sept. 4, 2024, however, the $484,000 reported as pass-through to subrecipients on the revised SEFA differ from the $468,864 per the general ledger expenditure details, resulting in a variance of $15,136.

The auditor said such was corrected on the final SEFA provided on Oct. 4, 2024.

The names of the pass-through entities for Crime Victim Assistance, Crisis Counseling, and Disaster Assistance Projects and the pass-through entity identifying number for Crime Victim Assistance were not specified in the initial SEFA.

The auditor said such was corrected on the final SEFA provided on Oct. 4, 2024.

Ernst & Young found that the cause is that there appears to have been a combination of lack of timely reconciliation of subsidiary ledgers to the general ledger, improper performance of cut-off procedures, ineffective communication with related parties, and insufficient supervision and review relating to significant classes of transactions.

Ernst & Young said the effect is that material errors over the financial statement may occur, resulting into a disclaimer of opinion being issued for seven accounts.

The auditor said the other effect is that CHCC is in noncompliance with federal SEFA requirements. The auditor recommended that CHC should improve controls to ensure all transactions are reconciled in a timely manner and recorded in the proper accounting period.

Ernst & Young said CHCC should also improve controls to help the SEFA is prepared accurately and completely.

In its response, CHCC’s corrective action plan states partial agreement with one auditor’s finding and provides a detailed rationale for disagreement with four findings.

The auditor’s response is that the supporting schedules were not provided timely to perform the audit procedures necessary to conclude on the significant account balances.

Due to significant delay in the submission of the supporting schedules, the auditor was unable to obtain sufficient appropriate evidence to provide a basis for an audit opinion on the financial statements and that their finding remains.

On deficiency findings pertaining to inventories, the auditor found that the pharmacy inventory system is not linked to the general ledger, changes to the inventory master file/database are not documented, and an assessment of inventory obsolescence was not provided.

The auditor noted that the cause is that CHCC lacks controls over reconciliations to the general ledger, over policies and procedures to value inventories at net realizable value, and over management reviews of the inventory valuation report.

Ernst & Young found that the effect is that inventories and related expenses could be materially misstated, and the potential for fraud exists.

The auditor recommended that CHCC should establish policies and procedures to monitor, record and reconcile inventory to the general ledger and adopt a perpetual inventory system.

The auditor said CHCC should determine and record inventory at net realizable value. In its response, CHCC’s corrective action plan provides a detailed rationale for disagreement with the auditor’s three findings.

On deficiency findings pertaining to capital assets, the auditor noted that CHCC’s operating policy is that inventory control requires an annual physical inventory count of all capital items at least once every two years.

The auditor said CHCC did not perform a capital asset physical inventory for fiscal year 2019, and that no physical inventory was performed in fiscal years 2018 and 2017.

Ernst & Young determined that the cause is that CHCC did not adhere to the policies and procedures over the accounting, physical inventory, and maintenance of capital assets and over adequate file maintenance.

The auditor said the effect is that capital assets could be materially misstated.

Ernst & Young recommended that CHCC should complete the physical inventory of capital assets and should reflect the results in CHCC’s financial statements.

In its response to the auditor’s finding, CHCC’s corrective action plan stated partial agreement and provides a detailed rationale for disagreement with the finding.

Ernst & Young responded that documentations evidencing physical inventory count of capital assets conducted in fiscal year 2019 were not provided.

On deficiency finding about equipment and real property management pertaining Special Supplemental Nutrition Program for Women, Infants and Children (WIC), the auditor’s tests of program expenditures noted that the Materials Supply Office (MSO) did not perform a fixed asset physical inventory for FY 2019 and no physical inventory was performed in FYs 2018 and 2017.

The auditor found that property records maintained by MSO were not provided.

The auditor noted that total fixed assets schedule per the program did not agree to the general ledger details, resulting in a variance of $39,995.

The auditor found that a reconciliation was not performed between the program and MSO.

Ernest & Young said the program’s fixed assets schedule did not include required information such as whether title is vested with the CNMI or U.S. government and the use of the assets.

The auditor noted that of five fixed assets tested for existence verification, aggregating $121,553 of a total population of $249,070, for one (or 20%), a vehicle with a certain property tag number that was traded-in for another vehicle, for which was surveyed on Oct. 4, 2018, is still included in the program’s fixed assets schedule as of Sept. 30, 2019.

Ernst & Young said the cause is that CHCC did not enforce compliance with applicable equipment and real property management requirements.

The auditor said the effect is that CHCC is in noncompliance with applicable equipment and real property management requirements.

The auditor said a summary of the program’s total capital outlays for FY 2019 was $39,995.

Ernst & Young recommended that CHCC should consider identifying a fixed asset team and provide training on applicable equipment and real property management requirements, including documentation requirements.

The auditor said the responsible personnel should coordinate and conduct the required annual physical inventories and should reconcile results to the property records in accordance with applicable equipment and real property management requirements.

In its response, CHCC’s corrective action plan provides a detailed rationale of what resulted to one finding, however, management did not provide comments to four other findings.

Saipan Tribune will write in the next issues the auditor’s report on CHCC’s compliance for each major federal program.