In what could be another sign that not-for-profit hospital and system boards may soon become subject to Sarbanes-Oxley-style accounting standards, new guidance on how to handle the sticky subject of financial auditing was made available in two recent publications by accounting groups.
The Public Company Accounting Oversight Board on July 26 released rules on auditor independence that essentially make it easier for hospitals and systems to hire their auditing firms to perform tax-related services.
And earlier this summer, the American Institute of Certified Public Accountants published the Audit Committee Toolkit for Not-for-Profit Organizations, which offers an operational framework for trustees of not-for-profit boards.
But the new rules won't help auditing firms, which are seeking improved guidance on how to handle healthcare-related auditing topics and aren't likely to get it anytime soon.
Auditing is playing a bigger role at both for-profit and not-for-profit companies as a result of the greatly beefed-up accounting standards contained in the Sarbanes-Oxley Act of 2002. The PCAOB standards and the AICPA toolkit both stem from Sarbanes-Oxley, and could make auditing oversight easier for hospital boards, industry executives said.
Attorneys say the new guidance could be a harbinger of a not-for-profit form of Sarbanes-Oxley. The new guidance being introduced, like Sarbanes-Oxley, doesn't apply directly to not-for-profits, but that could change, said Diane Romza-Kutz, Chicago-based partner with the law firm Epstein Becker & Green. The guidance "says the winds of change have started to blow," Romza-Kutz said.
Even if the standards issued by the PCAOB, which was created by Sarbanes-Oxley, don't apply directly to not-for-profit hospitals and systems, the standards should be viewed in the same way Sarbanes-Oxley is: as representing good policy, said Michael Peregrine, a partner in the Chicago office of law firm McDermott Will & Emery.
Sarbanes-Oxley restricts the amount of consulting work that a company's auditors can perform for the company, but does not specifically include tax services in that restriction, leaving it as a gray area, Peregrine said. The new standards essentially allow most of those services to be performed by the financial accounting auditor, he said.
Meanwhile, the AICPA's toolkit is designed to give audit board members a starting point in fulfilling their duties, said John Morrow, the group's vice president of new finance. The AICPA had already published an audit toolkit for public companies as a result of Sarbanes-Oxley and was working on a government-entity version when not-for-profit organization executives made a case for their own version, Morrow said. The task force working on the project didn't include any hospital executives but did involve some certified public accountants with healthcare industry clients, Morrow said.
The toolkit is a way for an audit committee to get started with its operations, rather than a blow-by-blow checklist, Morrow said. Creating a new audit committee is something some hospitals and systems are doing in the wake of Sarbanes-Oxley's audit committee mandates, even though it doesn't apply directly to them, governance executives have said.
The AICPA included 18 audit committee tools, such as ways to create an audit committee charter and a plan for conducting an executive session, including examples of questions to ask different company executives, he said.
The AICPA's best practices "are worthy of note," Peregrine said, but they may not address all of the legal issues an audit committee faces. "The smart audit committee is going to consult with its auditors and its lawyers" on how to best conduct itself, he said.
The AICPA toolkit can be downloaded for free from the group's Web site, aicpa.org, and will be sold in a hard-copy version for $25 to nonmembers and $20 to members, a price designed to cover costs, Morrow said.
Despite the progress in auditing oversight, executives are still waiting for new guidance on how to conduct healthcare industry audits. An AICPA-affiliated group called the Accounting Standards Executive Committee unveiled some tentative conclusions on how to account for areas such as charity care, derivatives and revenue recognition.
For years auditors have sought additional guidance to address the ever-changing practices of the healthcare industry. The current official auditing standard, a guide overseen by AcSEC, hasn't been updated since the mid-'90s. But because the committee no longer has the authority to set standards in the accounting world, if and when those recommendations would be adopted by the governing body, the Financial Accounting Standards Board, is an open question (Nov. 15, 2004, p. 28).
"I don't think there's much there," said Robert Valletta, national assurance leader for U.S. healthcare at PricewaterhouseCoopers.
Nobody knows when the FASB, which has the only say on what accounting rules are valid, might offer up more guidance to the healthcare industry, he said. "You can't act on the proposal," he said.