Question

analyze the following aspects of your selected company: that Allegheny Health, Education and Research Foundation (AHERF)

• The participants and the way the fraud was committed
• Preventive controls and weaknesses/red flags
• Fraud discovery and evidence
• Nonfinancial information in this case study
• The internal controls that might have prevented the fraud

Answer 1

Answer:

AHERF had its "cast of characters"—corporate executives and professional advisers accused of wrongdoing by the public, the government or both. Articles, case studies, commentaries, papers and essays flourish on the corporate governance, operational and management lessons that can be learned from the AHERF debacle. Rather than examining the systemic breakdowns that contributed to AHERF's downfall, the focus of this article is to look at some of the people behind the organization and review what happened to those AHERF protagonists.

PROLOGUE

AHERF's collapse was thrust into the public spotlight in the summer of 1998, when it filed the then-largest nonprofit health care bankruptcy in this nation's history. At the time of its bankruptcy filing, AHERF was losing almost $1 million a day and was $1.5 billion in debt. When it was finally concluded, AHERF's unsecured creditors received roughly 12 cents on the dollar from the bankrupt estate.

Just 13 months prior to filing for bankruptcy, AHERF's economic forecasts had been much brighter. In its fiscal year 1997, AHERF and its affiliates reported $2.05 billion in revenues and $1.18 billion in incurred debt. At that time, AHERF was comprised of 15 hospitals in the Philadelphia and Pittsburgh markets, with a total of 29,500 employees, as well as the Philadelphia-based Allegheny University of Health Sciences, which enrolled about 3,300 students a year, and a physician practice management firm with more than 500 physicians. The decline of this once-booming mini-empire captured the attention of the health care, legal and government communities, along with the residents of the greater Pittsburgh and Philadelphia areas. In addition to the publicity surrounding the bankruptcy came government and public scrutiny of the actions of certain members of and advisers to AHERF's management team

Managerial Decisions And Accountability

1. Questionable strategy. In hindsight, all five elements of AHERF’s strategy were questionable.

• First, Pennsylvania has fewstatewide payers (other than Medicaid and U.S. Healthcare) or em- ployers (other than banks) that might wish to contract with a state- wide IDS.
• Second, few IDSs have amassed enough market share toleverage managed care payers, especially in markets such as Phila- delphia, which has high payer concentration and excess providercapacity.
• Third, hospitals’ zeal to assume capitated risk and health maintenance organizations’ (HMOs’) reluctance to pass it on have resulted in low capitated revenues and capitation rates as a percent- age of premiums, and thus huge provider losses.

2. Questionable acquisitions. In the push for horizontal inte- gration, AHERF acquired several financially “distressed” institutions.12 Each major acquisition had a financial millstone attached to
   it. Each also was looking for a capital partner.
3. Debt accumulation and debt financing. During the mid-
   1980s AGH was considered the “Fort Knox of hospitals.” It had only
   $67 million in debt and enjoyed a 15 percent margin. During the late
   1980s it earned $30–$38 million in excess revenues over expenses
   annually and was one of only forty hospitals nationwide with a bond
   rating of Aa. Then after it suddenly declined.
4. Failure Of External Oversight Mechanisms Problems with governance. While the growing managed care.
5. Oversight by accountants and auditors. While the commu- nity at large depends on a board to oversee a nonprofit corporation, board members tend to rely (to some degree) on a corporation’s
   accountants and external auditors for oversight. Such reliance pre- sumes ethical financial reporting and no negligence.
6. Lack of financial planning.