By Rick Harvey

Eureka Springs Times-Echo

The results of the annual audit for Eureka Springs Hospital came back better than she anticipated, hospital commission chair Sandy Martin said earlier this week.

Representatives from national auditing firm Forvis Mazars presented the hospital’s 2024 audit during a special meeting of the hospital commission on Tuesday, Sept. 23, and commissioners — along with Mayor Butch Berry and some members of the city council — came away pleased with what they heard.

“I’m pleasantly surprised,” Martin said after the presentation. “I kind of expected a little worse, but this is good news and our cash position is positive.”

Michael Westerfield, a representative of Forvis, went through the audit, pointing out auditor-proposed and management-recorded adjustments, any uncorrected misstatements, along with any deficiencies, significant deficiencies or material weaknesses in hospital finances.

In the category of most importance — “Material Weaknesses,” some of the items listed in the audit report include:

• “Material general ledger accounts that were not being incorporated into the monthly internal financial statement prepared by management.”

• “Manual journal entries do not require independent review by a second qualified person prior to posting into the general ledger, resulting in improper segregation of duties in critical financial statement processing roles.”

• “Automated journal entries were incorrectly set up during Cerner conversion, which caused several financial statement areas to be materially misstated.”

• “Prior period audit adjustments were not incorporated into the unadjusted financial information.”

• “During system conversion, certain beginning balances and transaction mapping into the financial statements were incorrectly established, resulting in unbalanced general ledger during 2024.”

• “Material audit adjustments were required to prepare GAAP-compliant financial statements.”

• “Past adjustments and omitted disclosures were identified during the audit. While the impacts are not material individually or in the aggregate, we recommend that all misstatements be corrected as identified.”

• “Insufficient monitoring of patient accounts receivable resulted in material errors in this financial statement line up which involves significant judgment and complex modeling.”

• “Unsatisfactory design of accounts payable controls and processes presents a reasonable possibility that material misstatements would not be prevented or detected and corrected in a timely basis.”

Some of those accounts payable control and processes systems used by the hospital in 2024 that the auditors noted included:

• “The accounts payable detail is not reconciled to the general ledger.”

• “Cutoff of accounts payable is not adequately monitored, resulting in improper recording of invoices across accounting periods.

• “The Chief Financial Officer (CFO) has the ability to issue purchase orders, approve invoices for payments, make computer entries to generate payments, change computer entries for accounts payable and disbursements, adjust all general ledger accounts, and reconcile bank balances and accounts payable. These conflicting duties present the risk that the CFO could issue a fraudulent purchase order and invoice, then authorize a payment and conceal the balances through reconciliations and adjustments.

“Despite the presence of complementary controls, including three-way matching in accounts payable and checks requiring the signature of two Hospital Commissioners, the CFO’s ability to complete all functions in the cash outflows cycle presents higher risk that fraud could be perpetrated and concealed.”

“Material weaknesses are the ones that would probably be the area to focus the most on as you’re planning for the future and identifying ways to improve internal control,” Westerfield said. “That’s certainly where I would begin to focus.”

Listed in the “Significant Deficiencies” category was:

• “Cash account reconciliations are not being completed accurately, which resulted in audit adjustments to correct recorded balances.”

Under “Deficiencies,” the lone items states: “We observed a matter that we consider to be a deficiency that we communicated to management orally.”

Many of the issues discussed centered around the hospital’s transition in 2024 from a Critical Access Hospital to a Rural Emergency Hospital, commissioners were told, and no fraud was suspected, auditors wrote in a letter to the commission.

“The system conversion definitely added a layer of complexity for this particular period, and I think you’ll be happier with the new system …,” Westerfield said.

FINANCIALS

Westerfield said there weren’t any significant changes in the balance sheet side of the financials in 2024 “One thing that I did want to point out, while it’s not a real significant item, but you’ll notice that the estimated amounts due from third parties went from about $600,000 to $221,000 [in 2024],” he said. “The primary cause of that relates to moving from a Critical Access Hospital to a Rural Emergency Hospital. So, when we filed the cost report, there was about a $300,000 settlement related to Medicaid. But we’re still waiting for confirmation that Medicaid will be able to follow through with their plan of paying Rural Emergency Hospitals like Critical Access Hospitals. So until that gets approved by CMS, we added a reserve to that estimate so it did not go through income and you don’t see it on the balance sheet at this time.”

Westerfield said the audit showed that operating revenues were approximately $5.6 million in 2024 compared with $5.9 million in 2023.

“Decrease in operating revenues is expected given the transition …,” he said. “The loss of inpatient business, you know, you would anticipate some decline in revenues now that is offset. …” Operating expenses were consistent in the audit in 2024, Westerfield added, at $8.2 million in 2024 compared with $8.5 million in 2023.

“Again, you would anticipate seeing that as you reduce staffing to right-size the facility, moving from critical access with inpatient and other services to a Rural Emergency Hospital, focusing on providing emergency care,” he said.

The decrease in net position was approximately $250,000 in 2024, Westerfield said.

“I’m pleasantly surprised at the difference of only $250,000 considering what we went through during 2024,” Martin said.

The commission chair pointed out to Berry and city council members present at the meeting the bottom-line cash numbers reflected in the report.

“The bottom line of cash beginning at the end of the year in 2023 was $3,134,300,” Martin said. “At the beginning of year for 2024, it was $6,014,985. At the end of the year in 2023 it was $6,014,985, which included the $3.6 million from the licensure sales. The cash at the end of the year, 2024, was $7,534,608.”

COVID FUNDS EXPLANATION

Commissioner Brian Beyler asked Westerfield to explain COVID money that’s still being reflected in the budget. The line item has been a subject of recent questions from the city council.

“The COVID money has been a huge issue from the commission and from the city council as far as that big dollar amount that we were exposed to,” Beyler said. “Can I just ask you to clarify?”

Westerfield said the root of the issue is when the commission took over operation of the hospital from a private management firm.

“The COVID money is a balance that is set over there as a liability,” Westerfield said. “It’s currently considered unearned. During COVID, when the hospital commission kind of took over from the previous provider, that was right during COVID. It was right when all of the federal PRF money was coming out. That money went to the commission’s bank account, essentially, because when the commission took over, they took over the bank account and all of the assets, and then the money was actually sent, though, to the tax ID of the previous entity.

“So, it’s the belief of management that those funds were used for what the intended purpose of using those were, which was to make sure that the hospital could provide access to prevent, prepare for, you know, the COVID-19 pandemic. But because those funds were technically issued to the tax ID of the predecessor, there’s some question about whether or not those funds can be retained by the hospital commission. Until that uncertainty is relieved, which is more of a legal opinion and less of an accounting auditor opinion, then we’ve disclosed and held those as unearned revenue with the disclosure noting that should the federal government or other auditors come in, that they could potentially try to claw those funds back, and so they’ve been set as a liability.

“… Once a legal opinion is able to be rendered and that uncertainty is relieved, then that money would go through the financial statements as income at that time. Now, that would be a non-cash transaction, should you recognize it as revenue, because that cash was already received, you know, in prior years. Of course, if you had to pay it back, it would show up as a cash transaction at that time.”

OVERALL PICTURE

Martin specifically asked Westerfield if the audit found anything “shocking.”

“No, I wouldn’t say shocking,” he said. “Having adjustments to financial statements is pretty common in smaller rural facilities with limited accounting staffing. It’s to some degree the tradeoff that you have by trying to right-size your facility in all of your departments, including administrative departments. So I think again, some of the controls we mentioned or some of the items listed here, if those are able to improve year over year, I think you’ll be in the right track.

“I think reporting that we were able to get this year compared to, you know our first years right after the transition, was improved and we’re able to see more more structure, with the new EHR system. So, I think that’ll allow management to more quickly prepare financial statements or to reconcile accounts and things like that. So I think that moving that direction is a positive.”

POSITIVE FEEDBACK

After the commission approved the audit, Berry and city council member Terry McClung commented on the process and results.

“I’m looking forward to looking over the audit and seeing what you have to say,” the mayor said. “It looked like there’s some areas, of course, that we all need to work on. Of course, it’s always true in any audit that we do, but it looked pretty well. You did a good job and I think the hospital did a great job, too, for the last year.”

McClung took it step further, saying the report cleared up a lot of questions that have been lingering for the council.

“I would just like to say that what I got to listen to just now… it verifies what’s really been on my mind the whole time,” McClung said. “What has caused all the uproar and the confusion and the concern, and primarily the concern of the community and the city council has been the simple fact that it’s the transition. It’s highly difficult, and he’s explained that to me. … It verifies what I’ve thought all along.

“There’s no one that sits on this hospital commission that has ideas of causing the hospital to go away or subvert or whatever you want to call it. Everybody is here with good purpose. And what he just said has verified that to me. You know, it’s good that the city council has taken the interest that it has because it has been a difficult time and it’s a difficult time for the community, but we’re all experiencing these growing pains or the the pains of change and nobody likes change, but it’s forced upon us and we’ve had to do it. So, it’s flying by the seat of our pants, and the hospital commission has had to do that.”

“Without pants,” Martin responded with a laugh.

“Yeah, well, thank goodness you wear steel underwear then,” Mc-Clung replied. “But, I appreciate that and understand that the city council is not your enemy by any means and you know we certainly want to be supportive and get through these problems the best we can and hopefully keep the hospital open. Me, I’m still scared on that issue.”

Martin said it’s been a learning experience for everyone over the past year.

“We have taken everything that has happened to the hospital and the commission seriously and we appreciate what the council has done even though it’s been difficult at times, but it’s been good,” she said. “It’s been a learning experience and we … welcome all the questions. I hope we’ve demonstrated that we were fully transparent. I’m glad that Michael’s presentation clarified what we obviously were not able to make clear.

“But yeah, 2024 and the transition was horrible for a lot of reasons. But, I’m very proud of how we came through it.”