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353.64
L72WS
1977



PLEASE RET



ETATE DOCUMENTS COLLECTION

MAR 1 1978

JilONTANA STATE LIBRARY
930 E Lyndale Ave.
Helena, Mo





OFFICE OF THE LEGISLATIVE AUDITOR

STATE OF MONTANA
STATE CAPITOL • HELENA



Montana Stale Ubrary




3 0864 1003 7041 3




STATE OF MONTANA
WARM SPRINGS STATE HOSPITAL

AUDIT REPORT

Conducted Under Contract By
Authur Andersen & Co.

June 30, 1977



Digitized by the Internet Archive

in 2010 with funding from

Montana State Library



http://www.archive.org/details/stateofmontanawa1977mont




MORRIS L BRUSETT

LEGISLATIVE AUDITOR



STATE OF MONTANA



(^Uitt itf tW 'ft:$hlntxixt ^nititxtt



STATE CAPITOL

HELENA, MONTANA 59601

406/449-3122



November 8, 1977



DEPUTY LEGISLATIVE AUDITORS:
JOSEPH J. CALNAN

ADMINISTRATION AND
PROGRAM AUDITS

ELLEN FEAVER

FINANCIAL-COMPLIANCE AND
CONTRACTED AUDITS

STAFF LEGAL COUNSEL
JOHN W. NORTHEY



The Legislative Audit Committee
of the Montana State Legislature:

Transmitted herewith is the report on the audit of Warm Springs
State Hospital for the year ended June 30, 1977.

The audit was conducted by Arthur Andersen and Company, Certified
Public Accountants, under a contract between the firm and our office.
The comments and recommendations contained in this report represent the
views of the firm and not necessarily the Legislative Auditor.

The agency's written response to the report recommendations is
included in the back of the audit report.

Respectfully submitted,

Morris L. Brusett, C.P.A.
Legislative Auditor



TABLE OF CONTENTS



PAGE



General

Overview 1

Administrative Officials i\

Financial Statements

Auditors' Report 5

Statement of Assets and Liabilities 7
Statement of Revenues, Expenditures,

Encumbrances and Transfers 8

Statement of Changes in Fund Balances 9

Notes to Financial Statements 10

Recommendations for Improvements in
Accounting Procedures and Internal

Control 18

Prior Year Recommendations 29

Agency Reply 31



WARM SPRINGS STATE HOSPITAL

AUDIT OVERVIEW
SEPTEMBER 15, 1977

Our examination of the financial statements of the
Warm Springs State Hospital was conducted primarily to enable
us to render an opinion on such statements. However, in
conjunction with the examination, we were asked that our
procedures include the following:

1. Testing for compliance with all state laws
applicable to the Hospital;

2. Examination of the patient deposit fund, which
is not recorded in the Statewide Budgeting and Accounting
System (SBAS);

3- Examination of payments for capital construction
projects administered for the benefit of the Hospital
by the Architecture and Engineering Bureau;

4-. Examination of transactions with the Warm
Springs State Hospital Foundation;

5. Examination of contracts relative to the Community
Service program;

6. Examination of grants from the Department of
Health, Education, and Welfare and the Department of Labor.

In addition, we were requested to audit fixed asset

and inventory records. In the bidder specification it was

indicated that accounting records for such items were available

(although not recorded in SBAS ) . As discussed later in our

report, the Hospital does not record fixed assets and inventories



-1-



of supplies, therefore, the requested work could not be performed
However, the Hospital did physically count certain of its
inventories which were recorded on perpetual inventory records
(the perpetual inventory records are not integrated with the
general ledger). We observed such physical inventory counts
and tied the quantities we test counted into the perpetual
inventory records. V/e found no significant differences between
the actual count and the perpetual inventory records.

During our examination of the Hospital's financial
statements, several items came to our attention which we feel
should be considered by the Hospital management and which have
been transmitted to them under the title "Recommendations for
Improvements in Accounting Procedures and Internal Control."
These items were considered by us during our examination;
however, they do not modify the opinions expressed in our
auditors' reports. The Hospital's actions relating to these
suggestions should result in improved procedures and controls
in future periods.

In addition to the suggested improvements discussed
above certain other items should be brought to your attention:



1. Certain discretionary expenditures, most notably
for equipment purchases, did not occur ratably throughout
the. fiscal year, as one might expect. For instance, approx-
imately 87^ of the $178,000 expended or encumbered for care
and custody equipment was expended or encumbered during



■2-



June, 1977. Hospital management informed us that equipment
purchases are typically delayed until they are certain that
appropriations will not be overspent.



2. We we
current approp
will be approp
specified numb
be reduced if
level. We agr
more flexibili
The Legislatur
management. S
as budgetary c
medical goals
rates, and sue



re informed by Hospital management that the
riation is flexible in that additional funds
riated if the patient load exceeds a
er, and likewise the appropriation will
the patient load falls below a certain
ee with the Legislature's attempt to introduce
ty and control into the appropriation process.
e should continue to develop means to evaluate
uch evaluations include financial goals such
ontrol and control of reimbursements and
such as average length of stay, recidivism
cess of Community Health Centers.



3. Our "audit contract" called for us to perform an
audit in accordance with generally accepted auditing
standards and to opine on statements prepared in accordance
with the AICPA industry audit guide entitled Audit of State
and Local Government Units. Warm Springs State Hospital
follows procedures that are not in accordance with generally
accepted accounting procedures; thereby creating the
situation in which an "adverse opinion" must be rendered
by the independent public accountants. In order to avoid
this situation it may be advisable to (i) request a "special
report" in which the audit precedures to be performed are
specifically delineated by the Legislative Audit Committee
or the Legislative Auditor. The public accountant would
then report that he had completed the specified auditing
procedures or (ii) the Legislative Audit Committee specify
the accounting principles being followed by the individual
agency and require that the independent public accountant
report on financial statements prepared in accordance with
those specified accounting principles.



-3-



ADMINISTRATIVE OFFICIALS
WARM SPRINGS STATE HOSPITAL

Harry C. Xanthopoulos Superintendent
Richard T. Moore Administrator

Keith H, Wilson Fiscal Bureau Chief



Arthur Andersen & Co.
Boise , Idaho



To the Legislative Audit Committee
of the Montana State Legislature:



We have examined the statement of assets and liabil-
ities of the Warm Springs State Hospital (the "Hospital",
herein), an agency of the State of Montana, as of June 30, 1977,
and the related statements of revenues, expenditures, encumbrances
and transfers and changes in fund balance for the year then ended.
Our examination was made in accordance with generally accepted
auditing standards, and accordingly included such tests of the
accounting records and such other auditing procedures as we
considered necessary in the circumstances, except as explained
in the following paragraph.

As discussed in Note 1 to the financial statements,
certain of the transactions recorded in the Hospital's accounts
are initiated by agencies of the State of Montana other than
the Hospital. Our examination was therefore limited to the
amounts recorded in the accounts of the Hospital and to such
underlying documentary support as was available at the
Hospital .

As more fully explained in Note 1 to the financial
statements, the Hospital follows certain accounting practices
which are not in accordance with generally accepted accounting
principles. These practices, the effect of which cannot be
reasonably determined, include; (i) failure to record fixed
assets and inventories of supplies and proper charging of the
cost of such items to operations, (ii) failure to distinguish
between accounts payable, accrued liabilities, and encumbrances,
(iii) failure to record vested accrued employee vacation and
sick pay expense, and (iv) failure to utilize inter-fund
receivables and payables to record transactions affecting more
than one fund.

As more fully explained in Note 3, the Hospital has
not recorded certain adjustments as of June 30, 1977. Had
these adjustments been recorded, accrued liabilities and
expenditures would have increased in the general fund by
$116,256. In the insurance fund, receivable from the Department
of Architecture and Engineering would have been reduced to zero
and expenditures increased by $79,896.



-5-



Arthur Andersen & Co.



Because of the significance of the matters discussed
in the preceding paragraphs, it is our opinion that the accom-
panying financial statements cannot and do not present fairly
the financial position of the Warm Springs State Hospital as
of June 30, 1977, or the results of its operations and changes
in fund balances for the year then ended, in conformity with
generally accepted accounting principles.



ARTHUR ANDERSEN & CO,



Boise, Idaho,

September 15, 1977.



-6-



WARM SPRINGS STATE HOSPITAL

STATEMENT OF ASSETS AND LIABILITIES
AS OF JUNE 30, 1977

ASSETS LIABILITIES AND FUND BALANCES

Federal Federal

General Grants Canteen Insurance General Grants Canteen Insurance

Fund Fund Fund Fund Fund Fund Fund Fund

Cash in State Treasury (Note 1) $ 46,-462 $6,678 $4,685 $15,235 Accrued expenditures

and encumbrances $756,436 $ 391 $3,830 $ -
Other cash 3,005 - -

Liability to State
Appropriation authority Treasury for cash

available to pay and advances (Note 1) 50,816 - -

accrued expenditures (Note 1) 756,436 - -



Miscellaneous receivables 1,349 - -

Receivable from the Department

of Architecture and Engineering - - - 79,896



Fund balance (Note 1) - 6,287 855 95,131



The accompanying notes are an integral part of these financial statements

-7-



$807,252 $6,678 $4,685 $95,131 $807,252 $6,678 $4,685 $95,131



WARM SPRINGS STATE HOSPITAL

STATEMENT OF REVENUES, EXPENDITURES, ENCUMBRANCES AND TRANSFERS

FOR THE YEAR ENDED JUNE 30, 1977



General Fund



Federal Grants Fund



Canteen Fund



REVENUES:

Sale of merchandise
Grant revenue
Rental revenue
Insurance proceeds
Miscellaneous (Note 1)

Total revenues

TRANSFERS FROM STATE
TREASURY



INTERFUND TRANSFERS

Total revenues and
transfers



Final
Budget



55,500

2,000

57,500



Actual

56,953

779

57,732



Over
(Under)
Budget



Final
Budget Actual



Over
( Under ) Final

Budget Budget Actual



Insurance Fund



Over
(Under) Final
Budget Budget



$ - $ - $ - $220,000 $127,998 $ (92,002) $

187,438 135,473 (51,965)
1,45 3 -

(1,221) - (687) (687)

232 187,438 134,786 (52,652) 220,000 127,998 (92,002)



15,142,918 15,142,918

2,208



15,200,418 15,202,858



2,208 _ _ - - -

2,440 187,438 134,786 (52,652) 220,000 127,998 (92,002)



Over
(Under)
Actual Budget

$ - $ .

2,517 2,517

2,517 2,517



(2,208) (2,208)
309 309



EXPENDITURES AND
ENCUMBRANCES:
Administration
Care and custody
Developmental services
Community services
Center and recreation

hall
Insurance proceeds

expended
Other (Note 1)

Total expenditures
and encumbrances

TRANSFERS TO STATE
TREASURY 'Note 1)

Total expenditures,
encumbrances and
transfers



1,183,699

10,664,585

2,133,224

1,161,410



1,150,312 (33,387)

9,616,044 (1,048,541)



1,826,053
1,023,310



39,000
(307,171) 185,925
(138,100)



(237,266) (237,266)



17,419
116,207



(21,581)
(69,718)



10,863 10,863



298,454 128,839 (169,615)



284



284



15,142,918 13,378,453 (1,764,465) 224,925 144,489 (80,436) 298,454 129,123 (169,331)
57,500 1,824,405 1,766,905 _ _ _ - -



15,200,418 15,202,858



2,440 224,925 144,489 (80,436) 298,454 129,123 (169,331)



15,563 15,563



15,563 15,563



15,563 15,563



EXCESS (DEFICIENCY) OF
REVENUES AND TRANSFERS
OVER EXPENDITURES,
ENCUMBRANCES AND
TRANSFERS



$(37,487) $ (9,703) $ 27,784 $(78,454) $ (1,125) $ 77,329 $



$(15,254)$(15,254)



The accompanying notes are an integral part of these financial statements

-8-



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WARM SPRINGS STATE HOSPITAL



NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1977

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Comparability of Financial Statements

The financial statements included herewith are not comparable
in certain respects with previously published financial
statements because of more complete adherance to the
recommendations of the AICPA Audit Guide for Audits of
State and Local Governmental Units .

Basis of Accounting

Inventories of Supplies - The Hospital maintains significant
amounts of medical and surgical supplies, pharmaceuticals,
food, clothing for patients, and other miscellaneous items.
The exact amounts of such supplies are unknown, as the
Hospital charges all expenditures for such items to expense
as purchased. This accounting treatment is not in accordance
with generally accepted accounting principles.

Land, Buildings, and Equipment - The Hospital has significant
amounts of land, buildings, and equipment used in the
housing and treatment of patients, as well as in the
administration of agency activities. The expenditures
for such land, buildings, and equipment are charged to
expense at acquisition, which is not in accordance with
generally accepted accounting principles.

Interfund Accounting - Principles of fund accounting require
that each fund within the Hospital be treated as a separate
entity. As separate entities, each fund would be charged
for all and only its expenditures. Any expenditures by
one fund for the benefit of another fund would be recorded
as a receivable by the expending fund and payable by the
benefiting fund. The Hospital does not record such inter-
fund receivables and payables.

Payables, Accruals and Encumbrances - The Hospital does not
distinguish among accounts payable, accrued liabilities,
and encumbrances. Accounts payable and accrued liabilities
represent actual or estimated amounts payable. Encumbrances
are obligations in the form of purchase orders or contracts.



•10-



They cease to be encumbrances when the goods or services
are received and a liability established. Thus, the
amount shown as accrued expenditures and encumbrances
in the accompanying statement of assets and liabilities
represents the total of all these.

Vacation and sick pay accumulated by employees but not
yet taken by them is not accrued by the Hospital.
Vacation and sick pay vests with the employees and,
therefore, should be recorded in the accounts. The
amount of this liability is not known, but is potentially
significant .

Reversions - Any general fund state appropriations un-
expended or unaccrued by fiscal year-end revert back
to the state. Therefore, a liability to the state for
all general fund assets is shown. A receivable from
the state for funds to pay accrued liabilities is also
established and therefore the fund balance has a zero
balance. Normally, Cash in Treasury has no balance at
year-end. A balance is shown on the statements because
the state allowed the Hospital to record expenditures
made on July 1, 1977, as fiscal year 1977 expenditures.
These expenditures were reclassified.

Prior Year Expenditure and Revenue Adjustments - These
accounts include revenue and expense that apply to the
previous year that were not accrued at year-end. They
are included in Miscellaneous revenue and Other expendi-
tures .



Description of Funds

General Fund - The general fund is used primarily to

account for operations of the Hospital that are funded
through state appropriations, such as the care and
custody of patients, developmental treatment, and
administration. Miscellaneous revenues, such as housing
rent, are also included in the general fund.

Federal Grants Fund - Monies received from federal grants
and the expenditures made against them are recorded in
the federal grants fund. Expenditures consist largely
of salaries, but include other items allowed under the
grant .

Insurance Fund - The insurance fund is used to account
for receipt of insurance proceeds and the subsequent
expenditure of those proceeds. After two years, un-
expended proceeds are transferred to the general fund.

-11-



Canteen Fund - The operations of the canteen and

recreation hall located on the Hospital grounds are
accounted for in a separate fund. Receipts consist of
income derived from the sale of food. The cost of the
food and its preparation and serving are included in
expenditures of the canteen fund except for food that
is obtained from the Hospital cafeteria food inventory.



Transactions Initiated by Other Agencies - Certain other

state agencies frequently access the Hospital's accounting
system. Payroll transactions, fund balance transactions,
and closing entries are made by other agencies. Documentary
support for those transactions is sometimes unavailable to
the Hospital.



PATIENT FUNDS

Description - The Hospital acts as custodian for patients'
monies. Such monies are deposited in a non-state treasury
bank account called the patient deposit account. If a
patient has more cash than is necessary to meet short-term
needs, the excess is deposited in an individual savings
account in his name. Balances in the patient accounts
are summarized below:



ASSETS



Cash



$161,660



$161,660



LIABILITIES

Patient fund-operating $14-4, 4-62

Patient funds-savings 12,966

Unredeemed canteen coupons 4,232

$161,660



These balances are not included on the Hospital's financial
statements .



AUDIT ADJUSTMENTS

Certain material audit adjustments were not booked by the
Hospital .

General Fund

Certain liabilities relating to fiscal year 1977 were not
accrued. This adjustment would have increased accrued
liabilities by $116,256. Expenditures were increased as
follows: Community Services by $86,799, Care and Custody
by $18,357, and Developmental Services by $11,100.



The effect of these adjustments on the financial statements
is summarized below:



STATEMENT OF GENERAL FUND



ASSETS AND LIABILITIES



ASSETS:

Cash in state treasury

Other cash

Appropriation authority available

to pay accrued expenditures
Miscellaneous receivables



AS

REPORTED



$ 46,-462
3,005

756,436
1,349



WITH
ADJUSTMENTS



$ 46,462
3,005

872,692
1,349



$807,252 $923,508



LIABILITIES AND FUND BALANCE:
Accrued expenditures and

encumbrances
Liability to state treasury

for cash and advances
Fund balance



$756,436 $872,692
50,816 50,816



$807,252 $923,508



•13-



STATEMENT OF GENERAL FUND REVENUES, EXPENDITURES,
ENCUMBRANCES AND TRANSFERS



Total revenues and transfers

EXPENDITURES AND ENCUMBRANCES
Administration
Care and custody
Developmental services
Community services
Other

Total

Transfers to state treasury



AS

REPORTED

$15,202,858



$ 1,150,312

9,616,0^4

1,826,053

1,023,310

(237,266)

$13,378,^53
1,824,405



WITH
ADJUSTMENTS

$15, 202,858



$ 1,150,312

9,634,401

1,837,153

1,110,109

(237,266)

$13,494,709

1,708,149



Total expenditures, encumbrances,
and transfers



$15,202,858



$15,202,858



Excess (deficiency) of revenues
and transfers over expenditures,
encumbrances, and transfers



-0-



-0-



■14-



Insurance Fund

Most expenditures for construction during fiscal year 1977
were not recorded until the following year. The adjust-
ment increased expenditures and reduced transfers to
construction in progress by $79,896.

The effect of this adjustment on the financial statements
is as follows:



STATEMENT OF INSURANCE FUND ASSETS
AND LIABILITIES



AS WITH

REPORTED ADJUSTMENTS



ASSETS:

Cash in state treasury
Transfer to construction
in progress account



$15,235 $15,235

79,896
$95,131 $15,235



LIABILITIES AND FUND
BALANCE:

Fund balance



$95,131
$95,131



$15,235
$15,235



•15-



STATEMENT OF INSURANCE FUND REVENUES, EXPENDITURES,
ENCUMBRANCES, AND TRANSFERS



AS WITH

REPORTED ADJUSTMENTS

Total revenues and transfers $ 309 $ 309



EXPENDITURES AND ENCUMBRANCES:

Insurance proceeds expended 15,563 95,459

Transfers to state treasury



Total expenditures, encumbrances,

and transfers $ 15,563 $ 95,-459



Excess (deficiency) of revenues
and transfers over expenditures,
encumbrances, and transfers $(15,254) $(95,150)



■16-



-4. TRANSFERS TO THE DEPARTMENT OF ARCHITECTURE
AND ENGINEERING:

The Department of Architecture and Engineering handles

construction projects for all state agencies. Any funds
appropriated to the Hospital that are transferred to the
Department for construction are recorded in the "Transfer
to Construction in Progress" accounts (referred to as
"Receivable from the Department of Architecture and
Engineering" on the Statement of Assets and Liabilities).
During fiscal year 1977, $45,000 was reappropriated from
the Hospital's construction in progress account to the
Department of Architecture and Engineering. The money
is recorded by the Department, but will be used for
Hospital construction projects.


1 3

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