An effort to make it easier for healthcare organizations to keep their books straight has been derailed-at least temporarily-by major organizational changes taking place at the leading financial accounting standards agency.
The holdup centers on a widely used accounting and audit guidebook specifically targeting healthcare organizations. The guidebook, used by both external auditors and healthcare industry executives, needs to be updated to reflect changes taking place in the industry, observers say.
But because of a major change in how the Financial Accounting Standards Board, or FASB, sets and presents accounting standards, the guidebook is scheduled to lose most of its standard-setting authority. Moreover, there is a question as to how the group that publishes the guidebook-the American Institute of Certified Public Accountants-should structure its suggested revisions. The AICPA may want to keep parts of the guidebook intact so that those sections retain authority under the FASB as it restructures accounting and auditing standards.
And the uncertainty regarding the guidebook comes at a time when auditing is under the microscope as a result of the Sarbanes-Oxley Act of 2002, the act of Congress designed to improve accountability in the wake of widespread accounting scandals in corporate America.
For healthcare accountants and executives, the process turns into a waiting game, leaving them needing guidance in those areas of healthcare that have grown in scope but weren't covered in the last revision, which took place in the mid-1990s.
"That is what the healthcare expert panel is grappling with," says Martha Garner, a managing director for PricewaterhouseCoopers, who sits on the AICPA healthcare expert panel working to revise the book. The guidebook needs changes, but the restructuring at the FASB is slowing the process. "It's a bit of a rock and a hard place what you do in the meantime," Garner says.
An ever-growing tangle of accounting standards was the reason why the FASB decided to reconstitute its standard-setting process, so the confusion in the near-term is expected to be outweighed by the benefits of having clearer, easier-to-use accounting standards when they're finished.
Historically, the FASB has been the leading body in setting accounting and auditing standards for industry. While the Norwalk, Conn.-based organization is not a governmental organization, it was given authority to set corporate accounting standards by the Securities and Exchange Commission.
And given the broad nature of its mandate, the FASB found it couldn't tend to every corner of the accounting universe and farmed out certain types of standard-setting to other bodies, such as the AICPA and a FASB affiliate called the Emerging Issues Task Force.
One of the tasks adopted by the AICPA, New York, was publishing guidebooks that address industry-specific accounting and auditing issues.
The healthcare version has proved to be very useful, healthcare executives say. "It's pretty universal," says Barbara Potts, director of financial reporting for Ascension Health, St. Louis, discussing the book's application in healthcare. She also sits on the panel that is revising the guide.
Just about every healthcare provider and external auditor will use the book in either preparing or auditing financial statements, Potts says.
Executives at Sisters of St. Francis Health Services, Mishawaka, Ind., are big users of the guidebook, says Jennifer Marion, vice president of finance for the system. "I find it very helpful," partly because the organization's accountants look for guidance as they write their financial statement footnotes, she says.
Illustrative financial statements, found in appendixes of the guidebook, also are useful, she says.
The guidebook also carried a lot of weight at Partners HealthCare System, Boston, because of its role as part of the generally accepted accounting principles, or GAAP, says Peter Markell, vice president of finance at Partners. The guidebook is "definitely useful because it's part of the GAAP hierarchy," Markell says. "We definitely pay attention to it."
But the guidebook's role in the GAAP is going to be reduced as part of the restructuring taking place at the FASB, called the Codification and Retrieval Project. The project was launched in 2001 but was temporarily sidetracked by the fallout from the passage of Sarbanes-Oxley. This year, the project got rolling again with its mission to make it easier to use accounting standards, a daunting task given the number of standards outstanding and the different places they reside. Accountants may have to reference as many as four different bodies when researching accounting standards under the current setup. "There's no consistent structure at all," says Tom Hoey, a consultant hired by the FASB to help lead the codification project.
As a result, the project team will assemble all accounting standards in one place, creating a more logical means to find standards. The project will make it easier for the industry to function but essentially will remove the standard-setting authority of the healthcare guidebook.
A major catch, though, is that the newly codified standards won't be ready for use for three to five years, even though there are pressing issues that accountants and auditors would like addressed now, such as charity-care and managed-care accounting. And making a change to the guidebook may or may not take away the authority it currently has. The matter of how to carry forward the standard-setting authority of existing accounting rules depends on how things shake out among the various parties involved, including the FASB and the AICPA.
Amid the effort to update the guidebook is a top-down effort to improve the audit function at healthcare organizations. The effort is a secondary outgrowth of the passage of Sarbanes-Oxley. Even though Sarbanes-Oxley is written for the private sector and doesn't apply directly to not-for-profit healthcare systems, many executives are working to voluntarily adopt aspects of it, says Ed Kazemek, chairman and chief executive of Accord, a healthcare consulting firm. "There's an immense amount of interest," Kazemek says. "I get a lot of questions about Sarbanes-Oxley."
The ways in which healthcare organizations are addressing the Sarbanes-Oxley issue vary from group to group, he says. But many are expanding audit oversight through hospital boards, either with a finance subcommittee or a separate audit committee, he says.
Finding qualified candidates
A big issue is finding qualified board members-ones with financial and auditing knowledge-to sit on those boards, Kazemek says.
In the meantime, the AICPA's healthcare expert panel will work to compile potential issues that could be addressed by a revision resulting in a guidebook that carries only partial or no standard-setting authority. Among the areas they'll look at are accounting for charity care, managed care and derivatives, which are complicated securities used by financial managers in many industries, including healthcare.
With accountants treating charity care in different ways, it can lead to confusion within communities being served by the hospital, Ascension's Potts says. Generally speaking, hospitals can choose costs, charges or volume to put a value on the charity care being provided. "In my view it would be nice if it were consistently (calculated)," she says.
Charity care is of particular interest given that hospitals are under fire in their communities, in Congress and in the courts, with regard to their responsibilities as tax-exempt facilities. Marion says Sisters of St. Francis follows recommendations offered by the Catholic Health Association on how to account for charity care, but she would be interested in knowing how the guidebook addresses the matter.
Another guidebook chapter that's due for revision involves managed-care accounting. Managed care is covered by a very short section in the book that leaves large gaps in guidance on that segment of the healthcare industry, Garner says. For example, accounting treatment of the long-standing practice of capitation-negotiated per-capita rates for a specified range of services-has little guidance in the healthcare accounting and auditing book, she says. "People are operating in a vacuum" when it comes to managed care, Garner says. "The guidance in the current (version) is two pages and that's it. We had really hoped to take on the issue," she says.
Garner also pointed to third-party reimbursement from Medicare and Medicaid as an area that could use additional clarification because the government's methods for reimbursing are constantly evolving. For example, Medicare established procedures for making episodic payments to healthcare providers that are not included in the guidebook, Garner says. Given the way third-party payment structures have changed over the years, it would be useful to get the guidebook up to speed on ways to account for the payments, she says.
Accounting for a growing segment of healthcare finance, derivatives could also benefit from an updated guidebook. Given their unusual nature, additional guidance on the subject would be useful, Garner says. Healthcare systems have gotten more sophisticated in using swaps contracts and other derivatives to manage their financial situation, Garner says. A not-for-profit hospital might use a swaps contract to shift some of its variable-rate debt into payments that are fixed for certain amount of time. These types of transactions are not covered as thoroughly as they could be in the guidebook, she says.
Before any changes are made, the parties involved will need a better idea of the effects revisions might have on the guidebook's authority. One possibility is things won't change dramatically. Recommendations from the AICPA group currently behind the guidebook-the Accounting Standards Executive Committee, or AcSEC-may end up contributing to standards-setting within the codification project. "A lot of that is still being worked out right now," Hoey says.
One concern the AICPA expert group has is that by changing the guidebook they would make the situation worse, Garner says, by diminishing or eliminating its standards-setting authority. For example, depending on how the codification project shakes out, changing one part of the guidebook might nullify the authority of other parts, something the AICPA panel doesn't want to do.
At the same time, the industry needs more guidance on issues not currently addressed in depth, even if it's not authoritative. That leaves the AICPA's expert panel with an uncertain mission as the FASB plows through the codification project. "Right now it's sort of a no man's land," Garner says.
The AICPA expert panel will continue to work on the guidebook revision in a general way until the members know for sure how the changes will affect the guidebook's authority under the FASB. "We're going through every chapter of the guide," Potts says. Advancement on the issue is expected at the next AcSEC meeting, which is being planned for early 2005.
Garner and others say the predicament resulted from a confluence of circumstances. "There's no villain here," Garner says. "FASB's plate is completely full."
Though a resolution is not imminent, it's expected that something will be worked out among the interested parties, which includes the FASB, the AICPA and the SEC. "We all do share the same objective," Potts says, "to improve the quality of financial reporting."
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