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Auditor General Criticizes Capital Health Accounting Practices

Auditor General Criticizes Capital Health Accounting Practices

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Published by Charles Rusnell
Here is the story I wrote back in 2007 about controversial accounting practices by Allaudin Merali at Capital Health.
Here is the story I wrote back in 2007 about controversial accounting practices by Allaudin Merali at Capital Health.

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Published by: Charles Rusnell on Aug 02, 2012
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01/15/2014

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Capital Health vows to clean up accounting: Auditor General'stongue-lashing over padded costs sparks change
Edmonton JournalMon Jan 8 2007Page: A10 / FRONTSection: CityplusByline: Charles
Rusnell
 Dateline: EDMONTONSource: The Edmonton Journal
EDMONTON -- Auditor General Fred Dunn's sharp criticism of Capital Health's auditing practices has forcedthe health region to change the way it reports its finances to the public.In 2004 and 2005, Dunn privately told the health region to stop overstating its liabilities to hide the true state of its finances.Despite two warnings, Capital Health again overstated its liabilities in 2006 -- and by an even larger amountthan in the previous two years. After the health region fixed $22 million in overstatements at the auditor general's request, its surplus jumped from $24 million to $46 million.Organizations sometimes overstate their future costs to reduce or eliminate surpluses in order to increase their chances of getting more -- or at least the same amount -- of money for their next year's budget.When Capital Health overstated its liabilities again in 2006, Dunn decided to get tough. He included a formalrecommendation in his annual report, which would require the health minister to provide a written response tohis complaint about Capital Health's questionable auditing practices. At his annual news conference in October, Dunn sharply criticized Capital Health."Auditing should not be a hide-and-seek exercise whereby management hides the truth and auditors seek toget adjustments made in order that the financial statements reflect reality," Dunn said. After the news conference, Capital Health spokesman Steve Buick insisted the health region had not attemptedto hide anything. He said if Capital Health's estimates were off, it was because the organization was pressedfor time at the end of its fiscal year."That is misleading," Dunn said in a recent interview.Capital Health, with a budget of more than $2.5 billion, is one of the region's largest corporations.Faced with questions about auditing practices, chief executive officer Sheila Weatherill repeatedly stated therewas no intention to mislead the auditor general or the public.She repeatedly said Capital Health's failure to heed Dunn's warning for three consecutive years was due to amisunderstanding, and because she and her executives had not taken his advice seriously enough. Shestressed Capital Health will comply in the future.But Dunn wondered how Capital Health could think he wasn't serious.He pointed out the health region's chief financial officer, Allaudin
Merali
, who is paid $487,000 a year, hadpreviously worked for the office of the Alberta auditor general for 16 years.
 
Dunn also took issue with the region's decision to repay a $27-million debt in the same fiscal year it borrowedthe money. The early repayment incurred an $880,000 penalty.Buick defended the decision after Dunn's October news conference."With all respect to the (auditor general), we looked at the numbers on that debt repayment and thought it wasgood business for us," Buick said.Dunn rejected this explanation as "superficial and flawed." He said his auditors, led by assistant auditor generalJim Hug, spent a long time putting the auditing trail together. Most of the debt came from buying buildings on107th Street in downtown Edmonton."They (Capital Health) went through a great deal of angst over the financing," Dunn said. Capital Healthexplored its financial options before deciding to borrow from the government's Alberta Capital Finance Authority."They should have known that I audit that too," Dunn said, in explaining how his auditors unravelled thecomplex trail.Capital Health borrowed $27 million in 2005 at a fixed 25-year rate of 4.95 per cent, a "very favourable rate,"Dunn said.But the health region repaid the money within the same fiscal year, incurring the $880,000 penalty."Why would anyone do this?" Dunn said. The answer, he said, is something accountants call window dressing. An accounting term, window dressing occurs when an organization "carries out artificial transactions that willlater be reversed in order to improve temporarily the financial position shown by the financial statements,without disclosing that the financial position will later be reversed," according to the Dictionary of AccountingTerms.Dunn said someone in Capital Health's management made a conscious decision to employ these accountingpractices."Yes, because you have to record these things," he said. "You have to put them in your books and it takes timeand effort to do it because the auditors are going to come in and look for some rationale, some documentation,to explain it, so you have to put a story together."And of course then we go in and start banging away at the story to try determine what is incorrect," he said,adding that window dressing requires "a lot of time and effort and creativity."While Weatherill said there was no intent to mislead, Dunn disagreed. "Your question was, 'Was this doneconsciously?' and in my opinion, it was done with a conscious effort."Dunn said the auditing trail showed the decision to pay off the debt was made late in Capital Health's fiscalyear."It had to get done before March 31 in order to accomplish the impact, which is to reduce your cumulativesurplus," Dunn said.Weatherill defended the decision to repay the debt early, saying it was based on the best available information.

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