As the executive Michael Drobot at Pacific Hospital of Long Beach pleaded guilty on paying tens of millions of dollars in kickbacks to doctors so they would steer business to his hospital, I can't help but wonder if Pacific Hospital ever had an external auditor? Many hospitals this size hire external auditing firms to conduct annual financial statements audits for state reporting compliance, licensing compliance or financing compliance, and I would assume it would be very unlikely that Pacific Hospital never engaged any external auditor for financial statements audits.
According to Wall Street Journal, Michael Drobot who built Pacific Hospital had engaged in massive health-care fraud which is also called the largest insurance-fraud case in history. Again what have been Pacific Hospital's auditors doing all these years to allow illegal kickbacks to doctors to accumulate to tens of millions of dollars, and also the excessive insurance billing fraud scheme to be carried on for so many years?
It's been over 10 years since Sarbanes Oxley overhauled the auditing standards to require auditors to perform risk assessments by considering how any illegal acts or frauds may exist that may cause material misstatements on the financial statements. Any illegal activity like massive kickbacks and bribery, engaged by the client and the client's management poses tremendous risks that the financial statements may not be reasonably presented. If you are a CPA and you are practicing auditing and you are asking me why, then I think you should stop practicing from now on.
The unrecorded contingent financial liabilities that may be caused by any legal implications of illegal acts committed in the case of Pacific Hospital would be too material a misstatement on the financial statements. The illegally earned revenue as a result of excessive fraudulent billing to insurance companies would be too much an overstatement on the company's revenue. This is why upon seeing substantial referral checks paid to doctors and upon understanding how the hospital's executive also owns a spinal-implant distributorship that distributes overly priced implants to doctors and surgeons who received referral fees to steer surgeries to the hospital; auditors would have to stop doing further work and refer such understanding of related parties and knowledge of referral charges for further investigation. It's usually during the further investigation that bribery and illegal kickbacks are found to potentially exist, along with excessive insurance billing. This will prompt the auditor to report the issue to those in charge of the hospital's governance so they can report it to the external parties specified by law or regulation. Or, if they don't, the auditor will have to report the issue directly to the external parties specified by law or regulation.
In the case of the Pacific Hospital of Long Beach, there seems to have been a chain of missing steps and reporting in the process of auditing throughout the years, if only there was ever a competent audit conducted by an external auditor.
