Allegheny Health, Education and Research Foundation said its financial statements for fiscal 1998 are incorrect because it overstated system income.
As a result, AHERF said, the full report on its financial health by former auditor Coopers & Lybrand, which recently merged with Price Waterhouse, and the financial statements themselves are unreliable.
After an ongoing financial review is completed, the books for fiscal 1998 will be restated.
In a written statement, AHERF acknowledged two specific problems:
Some reserves to cover liabilities for 198-bed Graduate Hospital, Philadelphia, were incorrectly classified as income.
Earnings and trading gains from some restricted accounts may have been incorrectly reported as "net assets released from restrictions" and "investment income."
Those acknowledged errors artificially boosted income, so AHERF's adjustment will decrease the system's finances for the year ended June 30, 1997. Analysts expect the adjustment to be significant but don't know how large it will be.
For fiscal 1998, AHERF reported net income of $22 million on revenues of about $2 billion.
At the heart of the financial mess is a series of cash transfers from AHERF's Western Pennsylvania hospitals to shore up its now bankrupt hospitals in Philadelphia.
"This look-back is a review of all intercompany transactions," said AHERF spokesman Thomas Chakurda. He declined to estimate the length of the review and the extent of the restatement.
Uncertainty about AHERF's books casts a shadow on the auction of the system's eight Philadelphia hospitals scheduled in U.S. Bankruptcy Court in Pittsburgh on Sept. 29. Further, the financial irregularities raise doubts about the extent of AHERF's financial distress.
At the very least, the acknowledged problems underscore a lack of proper financial controls and a potential expansion of financial liability for AHERF's Pittsburgh hospitals, analysts said.
"This announcement points to broader systemwide issues that go beyond the difficulties in the East" said Lisa Martin, a senior analyst at Moody's Investors Service, New York. Those issues pose uncertainty and risk for the Western Pennsylvania facilities, she added.
Another influential bond rating agency said more financial revelations may be forthcoming.
"We were not entirely surprised" by AHERF's announcement, said David Peknay, an analyst with Standard & Poor's in New York. "I would also not be surprised if other peculiar items about the financial reporting of AHERF surface."
Officials at Tenet Healthcare Corp., Santa Barbara, Calif., and Vanguard Health Systems, Nashville, which have bid for AHERF's eight Philadelphia hospitals, said the announcement won't deter them from pursuing the hospitals at auction later this month.