Although the letter of the law applies only to publicly traded corporations, not-for-profit healthcare organizations may voluntarily begin to carry out the new Securities and Exchange Commission rules approved last week.
Many of the major publicly traded hospital companies said they do not anticipate significant expenses or headaches tied to the new federal rules governing internal corporate control of financial reporting. Meanwhile, however, the SEC's mandate for public companies to improve their financial accountability could prompt some not-for-profit organizations to adopt procedures they are not legally bound to follow, analysts and providers said.
Precipitated by Enron-era scandals that eroded the public's trust in corporate America, the SEC requirements released last week stem from the passage last year of the Sarbanes-Oxley Act, a federal law designed to overhaul corporate accounting procedures (March 24, p. 26).
The new internal control rules will be published in the Federal Register later this month and will become effective in June 2004. Under the rules, publicly traded companies are required to carefully document management's knowledge of internal accounting processes and any problems that could impede accurate reporting (See chart).
"That additional documentation is really the only new thing that will come out of this," said Jeffrey Prescott, spokesman for 200-hospital HCA, based in Nashville. "This is not a particularly big deal." For HCA, Prescott said, compliance with the latest provisions of Sarbanes-Oxley will represent only nominal costs tied to the production of documents and records.
Last year the SEC issued the first set of rules under Sarbanes-Oxley, requiring, among other things, that chief executives personally sign off on all corporate financial statements. Under the latest round of rules, senior managers also will have to certify that they are aware of all internal processes governing informa-tion collected for public finan- cial reporting.
As companies with shareholders sort through the new requirements, some not-for-profit organizations also are taking a look at Sarbanes-Oxley to determine how much of it they should implement voluntarily.
"Most large, nonprofit, nonpublic organizations will follow a Sarbanes-Oxley-like approach, and their boards will require management teams to follow those rules," said Ken Weixel, deputy industry leader of healthcare and life sciences at Deloitte & Touche in Columbus, Ohio.
At 31-hospital, not-for-profit Catholic Health East in Newtown Square, Pa., system officials examined the SEC's new rules last week and continue to assess how much of laws like Sarbanes-Oxley they should adopt. Already the system has embraced some ideas from the law, including imposing limits on the amount of consulting work done by the firm's auditor and improving communication between independent auditors and the system's internal audit committee.
"Even though Sarbanes doesn't apply to nonprofits, most boards and management teams are looking at what it says . . . irrespective of the fact that it is not legally binding on us," said Michael Hemsley, general counsel and vice president of corporate compliance at Catholic Health East.
For Health Management Associates, a for-profit hospital chain based in Naples, Fla., the new SEC rules represent a continuation of efforts, said John Merriwether, Health Management's director of financial relations. The chain has hired an outside auditing firm-different than the one used for routine corporate reporting-to "confirm that our internal controls are what we say they are," Merriwether said.
Not-for-profit healthcare organizations "might tweak some of the provisions, but that whole idea of addressing corporate responsibility and financial integrity" is registering with the not-for-profit sector, said Richard Gundling, a vice president of the Healthcare Financial Management Association in its Washington office.
As for how difficult the internal control rules will be to put in practice, "I haven't gotten a sense of this being so burdensome," Gundling said.
But not everyone agreed the new costs and procedures would be so painless. Some publicly traded hospital companies could see their annual audit fees increase 30% to 40%, according to Deloitte & Touche's Weixel.
Providing detailed documentation of financial reporting and its potential gaps represents "an investment in time and effort-a lot of work," Weixel said. The new internal control rules, he added, "are not necessarily a bad thing but may be overkill for medium- or small-sized organizations."