Accountants are poring over financial statements at Bon Secours Health System after it revealed last week that it misstated earnings in fiscal 2003 by inflating revenue and expenses at one of its Michigan hospitals.
The questionable financial statements center around Bon Secours Cottage Health Services, a 65-bed facility in Grosse Pointe Farms, Mich., where Chief Financial Officer David Zilli resigned several months ago and was succeeded this fall by Nick Vitale, who stepped down from Detroit Medical Center in July.
Michael Cottrell, senior vice president of finance and CFO at the Marriottsville, Md.-based system, said Zilli's resignation was voluntary and is in no way related to the financial misstatements.
"His departure had no connection with this pattern," Cottrell said. "We are at the beginning of the investigation."
A group of forensic accountants from PricewaterhouseCoopers and the system's legal counsel are trying to determine the impact of the misstatements and whether prior periods are affected, Cottrell said. The entries in question, covering the fiscal year ended Aug. 31, are inconsistent with the system's accounting policies and resulted in the overstatement of receivables and incorrect revenue and expenses, he said. Cottrell expects the system's 2003 audited statement to be released in January.
"We are very concerned that something of this nature could happen within our organization," said Chris Carney, president and chief executive officer of Bon Secours Health System. "While the resolution of this matter could have a material impact on consolidated operating income, we have no reason to believe that it would have a material impact on our financial condition or liquidity."
Bon Secours, a Roman Catholic system that operates 24 hospitals in nine states, was informed of the misstatements during the course of its annual independent audit by KPMG, he said. The system's audit team then hired PricewaterhouseCoopers to perform forensic accounting and determine the nature and impact of the faulty reporting.
"They will be reviewing the facts and circumstances," Cottrell said. "They are part of the investigation."
Bon Secours Cottage Health Services was formed in 1998 when Cottage Hospital and neighboring Bon Secours Hospital in Grosse Pointe jointly consolidated outpatient surgery and diagnostic services at Cottage and inpatient medical, surgical and obstetric services at Bon Secours.
The hospital reported operating income of $10.5 million on total operating revenue of $202.2 million in fiscal 2002. The Michigan hospital accounted for 8.8% of total system revenue and 14.3% of total operating income. The Bon Secours system reported $74 million of operating income on $2.3 billion of revenue in 2002, according to its annual report.
Vitale, who came to Bon Secours Cottage Health Services after 18 years at Detroit Medical Center, including the last four years as CFO, referred all questions to system headquarters.
Bond rating agencies are waiting for more information about the misstatements before taking action. Moody's Investors Service maintained its stable outlook on an aggregate $1.1 billion of Bon Secours outstanding debt. A Moody's analyst said no rating action is warranted at the time because the investigation has just started.
"We are going to wait to make a rational decision based on the disclosure they will provide us," analyst Beth Wexler said. "This is certainly not an everyday occurrence."
While there has been a spate of accounting scandals among investor-owned companies, some of them healthcare providers, the news that a major Catholic health system that espouses a faith-based mission could have misstated earnings was disappointing for some.
"Typically where there is smoke, there tends to be fire," said Paul Danello, a Washington-based healthcare lawyer with Ropes & Gray who specializes in canon law. "The mere acknowledgement that this could have occurred signals a red alert because it is an extremely rare situation among faith-based institutions."