Financial Audit of the John A. Burns School of Medicine of the University of Hawaii A Report to the Governor and the Legislature of the State of Hawaii THE AUDITOR STATE OF HAWAII Report No. 03-02 May 2002 This is trial version www.adultpdf.com Office of the Auditor The missions of the Office of the Auditor are assigned by the Hawaii State Constitution (Article VII, Section 10). The primary mission is to conduct post audits of the transactions, accounts, programs, and performance of public agencies. A supplemental mission is to conduct such other investigations and prepare such additional reports as may be directed by the Legislature. Under its assigned missions, the office conducts the following types of examinations: 1. Financial audits attest to the fairness of the financial statements of agencies. They examine the adequacy of the financial records and accounting and internal controls, and they determine the legality and propriety of expenditures. 2. Management audits, which are also referred to as performance audits, examine the effectiveness of programs or the efficiency of agencies or both. These audits are also called program audits, when they focus on whether programs are attaining the objectives and results expected of them, and operations audits, when they examine how well agencies are organized and managed and how efficiently they acquire and utilize resources. 3. Sunset evaluations evaluate new professional and occupational licensing programs to determine whether the programs should be terminated, continued, or modified. These evaluations are conducted in accordance with criteria established by statute. 4. Sunrise analyses are similar to sunset evaluations, but they apply to proposed rather than existing regulatory programs. Before a new professional and occupational licensing program can be enacted, the statutes require that the measure be analyzed by the Office of the Auditor as to its probable effects. 5. Health insurance analyses examine bills that propose to mandate certain health insurance benefits. Such bills cannot be enacted unless they are referred to the Office of the Auditor for an assessment of the social and financial impact of the proposed measure. 6. Analyses of proposed special funds and existing trust and revolving funds determine if proposals to establish these funds are existing funds meet legislative criteria. 7. Procurement compliance audits and other procurement-related monitoring assist the Legislature in overseeing government procurement practices. 8. Fiscal accountability reports analyze expenditures by the state Department of Education in various areas. 9. Special studies respond to requests from both houses of the Legislature. The studies usually address specific problems for which the Legislature is seeking solutions. Hawaii’s laws provide the Auditor with broad powers to examine all books, records, files, papers, and documents and all financial affairs of every agency. The Auditor also has the authority to summon persons to produce records and to question persons under oath. However, the Office of the Auditor exercises no control function, and its authority is limited to reviewing, evaluating, and reporting on its findings and recommendations to the Legislature and the Governor. THE AUDITOR STATE OF HAWAII Kekuanao‘a Building 465 S. King Street, Room 500 Honolulu, Hawaii 96813 This is trial version www.adultpdf.com The Auditor State of Hawaii OVERVIEW Financial Audit of the John A. Burns School of Medicine of the University of Hawaii Report No. 03-02, February 2003 Summary    The Office of the Auditor and the certified public accounting firm of Deloitte & Touche LLP conducted a financial audit of the John A. Burns School of Medicine of the University of Hawaii for the fiscal year July 1, 2001 to June 30, 2002. The audit examined the financial records and transactions of the school; reviewed the related systems of accounting and internal controls; and tested transactions, systems, and procedures for compliance with laws and regulations. We found deficiencies in the internal control practices of the school. The school’s administration and management of its contracts with health care organizations that provide training and medical services are deficient. The contracts require the organizations to reimburse the school for salary, fringe benefit, and professional malpractice insurance premium costs of faculty providing medical services for the respective organizations while conducting training. We found that all of the contracts, 28 during FY2001-02, were signed and executed subsequent to the contract start date. School faculty provided services for at least four months and approximately $2.3 million in expenses were incurred, before the health care organizations could be billed. As a result, the school’s cash flow was negatively impacted and interest that could have been earned on the amounts outstanding was lost. Also, the performance of services in the absence of executed contracts could expose the school to potential disagreements with the health care organizations and legal risks. We also found that the school does not complete final reconciliations of the amounts due from the health care organizations in a timely manner. As of mid- October 2002, the final reconciliations for FY2001-02 were not completed, and bills that would cover the final month of service, as well as any necessary adjustments, had not been sent out. Here also, the school’s cash flow was negatively impacted as funds remained outstanding for about four months and any potential interest income was lost. Finally, we found that the school does not comply with University of Hawaii policies and procedures regarding conflict of interest situations involving school faculty. University faculty are encouraged to promote the state’s cultural and economic development by utilizing their special abilities and skills in research, teaching, or other areas over and above their university positions. However, limits are placed on such outside employment to ensure that employment does not interfere with the faculty’s primary obligation to the university. University faculty are required to submit disclosure forms and outside employment forms. We found that a significant portion of these forms were either not This is trial version www.adultpdf.com Report No. 03-02 February 2003 Marion M. Higa Office of the Auditor State Auditor 465 South King Street, Room 500 State of Hawaii Honolulu, Hawaii 96813 (808) 587-0800 FAX (808) 587-0830 completed or were not submitted in a timely manner. We also found that the policies and procedures were not enforced by school administrators. By not enforcing the requirement for submitting disclosure forms and outside employment forms, potential conflict of interest situations which interfere with an employee’s obligation to the school may not be identified or adequately resolved. Employees could spend too much time supplementing their income with outside activities at the expense of their responsibilities to the school. Also, in cases where research is funded by non-university sources, the sponsor may even sanction the university, if appropriate, because of a conflict of interest. We recommend that the school revise the way it handles contract negotiations with health care organizations, and commence services only after contracts are finalized and executed. The school should also review the process used to prepare the final contract reconciliations and ensure that the final bills are sent out in a timely manner. We also recommend that the school enforce policies, procedures, and deadlines for completion and submission of the annual disclosure forms and outside employment forms. The university agrees with our recommendations and responded that it has already taken steps to implement some of our recommendations. Recommendations and Response This is trial version www.adultpdf.com Financial Audit of the John A. Burns School of Medicine of the University of Hawaii Report No. 03-02 February 2003 A Report to the Governor and the Legislature of the State of Hawaii Conducted by The Auditor State of Hawaii and Deloitte & Touche LLP THE AUDITOR STATE OF HAWAII Submitted by This is trial version www.adultpdf.com Foreword This is a report of the financial audit of the John A. Burns School of Medicine of the University of Hawaii for the fiscal year July 1, 2001 to June 30, 2002. The audit was conducted pursuant to Section 23-4, Hawaii Revised Statutes, which requires the State Auditor to conduct postaudits of all departments, offices, and agencies of the State and its political subdivisions. The audit was conducted by the Office of the Auditor and the certified public accounting firm of Deloitte & Touche LLP. We wish to express our appreciation for the cooperation and assistance extended by officials and staff of the John A. Burns School of Medicine of the University of Hawaii. Marion M. Higa State Auditor This is trial version www.adultpdf.com v Table of Contents Chapter 1 Introduction Background 1 Organization of the John A. Burns School of Medicine of the University of Hawaii 3 Other Entities Involved with the Medical School 3 Objectives of the Audit 5 Scope and Methodology 6 Chapter 2 Internal Control Deficiencies Summary of Findings 7 The Administration and Management of Contracts Are Deficient 7 Recommendations 10 The School Does Not Comply with University of Hawaii Policies and Procedures Regarding Conflict of Interest Situations 10 Recommendation 14 Chapter 3 Financial Audit Summary of Findings 15 Independent Auditors' Report 15 Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 17 Description of Financial Statements 18 Notes to Financial Statements 18 Response of the Affected Agency 43 This is trial version www.adultpdf.com vi List of Exhibits Exhibit 1.1 Organization Chart of the John A. Burns School of Medicine of the University of Hawaii 4 Exhibit 3.1 Statement of Net Assets, June 30, 2002 37 Exhibit 3.2 Statement of Revenues, Expenses, and Changes in Net Assets, For the Year Ended June 30, 2002 39 Exhibit 3.3 Statement of Cash Flows, For the Year Ended June 30, 2002 41 This is trial version www.adultpdf.com 1 Chapter 1: Introduction Chapter 1 Introduction This is a report of our financial audit of the John A. Burns School of Medicine of the University of Hawaii. The audit was conducted by the Office of the Auditor and the independent certified public accounting firm of Deloitte & Touche LLP. The audit was undertaken pursuant to Section 23-4, Hawaii Revised Statutes (HRS), which requires the State Auditor to conduct postaudits of the transactions, accounts, programs, and performance of all departments, offices, and agencies of the State of Hawaii (State) and its political subdivisions. The John A. Burns School of Medicine (school) is part of the University of Hawaii’s College of Health Sciences and Social Welfare. The University of Hawaii (university) is a statewide system of postsecondary education, comprised of two four-year campuses and one upper-division campus, seven community colleges, research institutes, experimental stations, and a cooperative working arrangement with the federally supported East-West Center. The university was established by the state Constitution. The School of Medicine was established in 1965 as a two-year program of basic medical sciences, and enrolled its first students in 1967. It became a four-year degree-granting program in 1973. Since then, nearly 1,600 individuals have received their M.D. degrees from the school, and approximately 60 percent of practicing physicians in the state are graduates of the M.D. program or one of its residency programs. The school also offers advanced degrees in public health and basic sciences. The school’s original purpose was to provide a previously unavailable opportunity for a medical education to residents of Hawaii and other Pacific nations. Currently, the school’s primary focus is to teach and train students to become quality physicians, biomedical scientists, and allied health workers to improve health care in Hawaii and the Pacific region. Two unique features of the school’s programs include its problem-based learning curriculum and community-based medicine program. Traditional education systems emphasize teacher-directed learning, passive student participation, and memorization of large quantities of information. In a problem-based learning approach, students are self- directed and responsible for their own learning. According to the school, students are trained to think critically and evaluate new information and Background This is trial version www.adultpdf.com 2 Chapter 1: Introduction research data. They are also required to apply their new knowledge to current problems and situations. The school further states that instead of merely listening in crowded, impersonal lecture halls, students discuss health-related issues with a faculty member in small group settings. The school also uses a community-based medicine program. It does not own a university teaching hospital, but bases its clinical instruction in affiliated community hospitals and clinics. According to the school, this approach has many benefits: it is more economical, students are placed into the real world of day-to-day clinical activity from the start of their medical training, and it involves extensive participation of community physicians and other health professionals in the training of future physicians. The first two years of medical school activities take place in community health sites and the Biomedical Sciences Building on the campus of the University of Hawaii at Manoa. The second two years of instruction consist primarily of advanced clinical instruction and take place in affiliated community hospitals and clinics. Effective July 1, 1998, the University of Hawaii autonomy bill – Act 115, Session Laws of Hawaii (SLH) 1998 – paved the way for university autonomy in matters involving its internal structure, management, and operations. In November 2000, voters granted the university constitutional autonomy to allow the university’s Board of Regents greater freedom in governing its internal matters. Accordingly, the university is now exempt from certain Hawaii Revised Statutes that regulate other state agencies. The school’s mission is to educate students to become outstanding physicians, scientists, and other health care professionals; and to conduct research in areas of specific interest to the region and community. Due to the lack of its own teaching hospital, the school maintains affiliations, both formal and informal, with the following community hospitals and medical facilities for medical student and resident training: Kapiolani Medical Center for Women and Children, Kapiolani Medical Center at Pali Momi, St. Francis Medical Center, St. Francis Medical Center-West, The Queen’s Medical Center, Tripler Army Medical Center, Straub Clinic and Hospital, Kuakini Medical Center, Shriners’ Hospital, Kaiser Medical Center, Wahiawa General Hospital, Waianae Coast Comprehensive Health Center, Kalihi-Palama Health Center, Rehabilitation Hospital of the Pacific, Leahi Hospital, U.S. Veteran Affairs Outpatient Clinic, and the Hawaii State Hospital. Autonomy Mission Hospital affiliations This is trial version www.adultpdf.com . Financial Audit of the John A. Burns School of Medicine of the University of Hawaii A Report to the Governor and the Legislature of the State of Hawaii THE AUDITOR STATE OF HAWAII Report. trial version www.adultpdf.com The Auditor State of Hawaii OVERVIEW Financial Audit of the John A. Burns School of Medicine of the University of Hawaii Report No. 03-02, February 2003 Summary    The. 2003 Summary    The Office of the Auditor and the certified public accounting firm of Deloitte & Touche LLP conducted a financial audit of the John A. Burns School of Medicine of the University of Hawaii