Capital Health vows to clean up accounting: Auditor General's tongue-lashing over padded costs sparks change

Edmonton Journal Mon Jan 8 2007 Page: A10 / FRONT Section: Cityplus Byline: Charles Rusnell Dateline: EDMONTON Source: The Edmonton Journal

EDMONTON -- Auditor General Fred Dunn's sharp criticism of Capital Health's auditing practices has forced the 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 amount than 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 formal recommendation in his annual report, which would require the health minister to provide a written response to his 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 to get 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 attempted to hide anything. He said if Capital Health's estimates were off, it was because the organization was pressed for 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 there was 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 a misunderstanding, and because she and her executives had not taken his advice seriously enough. She stressed 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, had previously 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 borrowed the 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 was good business for us," Buick said. Dunn rejected this explanation as "superficial and flawed." He said his auditors, led by assistant auditor general Jim Hug, spent a long time putting the auditing trail together. Most of the debt came from buying buildings on 107th Street in downtown Edmonton. "They (Capital Health) went through a great deal of angst over the financing," Dunn said. Capital Health explored 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 the complex 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 will later 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 Accounting Terms. Dunn said someone in Capital Health's management made a conscious decision to employ these accounting practices. "Yes, because you have to record these things," he said. "You have to put them in your books and it takes time and 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 done consciously?' 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 fiscal year. "It had to get done before March 31 in order to accomplish the impact, which is to reduce your cumulative surplus," Dunn said. Weatherill defended the decision to repay the debt early, saying it was based on the best available information.

Hug, who is responsible for auditing Capital Health, doesn't accept this explanation. "We used the word superficial, which would suggest it was not done to the level of diligence that you would expect from an organization of that size," Hug said. "Our expectation would have been a higher standard. It is a huge organization and they have got plenty of resources to do this kind of analysis." Dunn recommended that in the future, such debt repayment decisions should be vetted by the board that oversees Capital Health. That policy change has been made, Weatherill said. Despite the public drubbing of Capital Health's auditing practices by the auditor general, Weatherill said Capital Health and the office of the auditor general are on good terms. But twice during the interview, she mentioned the health region is not required to have the auditor general as its auditor. In fact, as Buick pointed out, three health regions in the province are not audited by the auditor general. The auditor general's office is aware that its criticism of Capital Health could lead to it being dropped as the organization's auditor. "It does put us in a difficult situation," Hug said. "We're trying to audit for the public and there are billions of dollars that go through the health system and in situations where we are brutally honest, we run the risk of perhaps not being reappointed. "Our objective is to get greater transparency into the health authorities. It has taken this kerfuffle, but I think it has finally driven home the message." crusnell@thejournal.canwest.com