Audit survival: a look at seven characteristics of organizations well-prepared for audits.

We all have experienced many kinds of audits in our tenures in behavioral healthcare: financial audits, workers' comp audits, IRS audits, accreditation audits, and on and on ad nauseam. There are many ways to survive an audit, some serious and some more whimsical; sometimes our judgment has been so impaired that we do not survive.

I (J.M.C.) will never forget an experience I had 33 years ago as a young auditor with Arthur Anderson. My companions and I were auditing a large paper mill in a small southern town. We were given a small, non-air-conditioned office to work in, and as we got closer and closer to discovering a serious problem with the wood chip inventory, we were sent on several wild goose chases by management around a hot, dangerous manufacturing plant. We persevered and ultimately required a million-dollar adjustment to write down the wood chip inventory, as the core of the chip pile was so large that spontaneous combustion was occurring and rendering the chips unusable.

While audits in behavioral healthcare may not involve such colorful characters, audits are very important management tools, which may be used in a variety of ways to help management implement best practices and the latest in science-based technology from the accounting field.

Since audits are inevitable, and even potentially beneficial to an organization, we all should seek definable characteristics of well-run organizations that enable them to successfully undergo audits; that is, to "survive" them with minimal disruption and end up with a "clean" audit report. We think seven characteristics and related best practices reflect such management excellence. They can be summarized as follows:

The organization engages in meaningful, long-range planning. We must set time aside to engage our staff in meaningful, long-range planning. Successful strategic planning will result in a healthier organization with goals and objectives that will strengthen the agency's ability to achieve its mission. A healthy organization living its mission is much more likely to have successful audits of all kinds. Strategic planning is critical but often difficult to accomplish organization-wide.

The chief financial officer is a certified public accountant. While many organizations have done well with non-CPAs at the helm of their finance departments, the odds are better with a CPA, especially one who previously has done audit work. A CPA with this background has the knowledge and training to research and understand the myriad of announcements, guidelines, laws, rules, and regulations that govern audits.

Furthermore, an experienced CPA will understand the audit process as an insider and can help the organization be well prepared for the process. This background can substantially increase the CFO's effectiveness. The CFO must share this information with other key management personnel, especially the executive director/CEO who, in most behavioral healthcare organizations, is less likely to have a financial background.

The accounting staff is competent. The backbone of a successful accounting department is adherence to accounting principles and proper internal controls. As with our clinical departments, a caring, competent accounting staff is a necessity if we want a good audit outcome.

We all have had the experience of hiring staff who are caring and "nice" but not competent. In the accounting department, this could lead to audit disaster--or worse. Competent accounting department staff will provide accurate and timely monthly and year-to-date financial reports. Competent accounting staff also ensure the existence, orderliness, and proper maintenance of financial records, documents, and processes. Such a staff is capable of assessing the management team's needs and presenting information to auditors that conveys the organization's adherence to its mission and objectives within the guidelines of sound financial practice.

The executive director/CEO and senior managers are knowledgeable about accounting and applicable financial rules. The CFO or an outside consultant should conduct a training seminar attended by all managers and executives to cover applicable accounting principles and financial rules. This ensures that they are aware of their fiduciary responsibilities and the potential price of noncompliance, to themselves and the organization.

Too often clinical managers are unaware of how little they know about financial practices; they are particularly ignorant about how clinical, expense management, and billing decisions create compliance risk and liability for the organization's financial operations. A little education in this area can go a long way toward guaranteeing the organization's survival and a clean audit.

The staff is honest. Honesty in our daily ministrations is essential to ensuring the organization's integrity. While it may be seemingly impossible to determine a person's commitment to absolute honesty during the hiring process, we should glean what we can through appropriate interview questions, references, and thorough background checks.

The staff's honesty is further assured by a functioning system of internal controls that are documented, understood by all affected employees, and monitored continuously by competent staff. These controls are an essential part of an internal compliance program. Such a system is the best defense against dishonest, "ethically challenged" staff. If auditors perceive the staff to be dishonest, the relationship between the audit team and the organization will be severely strained.

There is a well-developed, fully implemented compliance program. Many of the preceding practices contribute significantly to reducing compliance-related risk and the promotion of effective financial management practices. A strategic plan defines the business's scope, mission, vision, and values, and thus the areas of risk. An audit-savvy CFO ensures that the finance department's policies and procedures conform to acceptable standards and laws. A competent staff is able to execute daily tasks and conform to these policies and procedures while understanding their connection to the organization's mission and values. They disseminate information that makes the organization's financial operations transparent to management and other stakeholders. Managers are trained to understand financial information and can evaluate problems or risks before a compliance or audit issue exists.

Yet, beyond these risk management strategies, there needs to be a well-thought-out compliance program. Even with the best internal controls, employees will make errors or deliberately commit fraud and abuse. A well-designed, properly administered compliance program will tie these elements together and will help detect issues that could result in adverse audit findings, ranging from a simple warning letter to management to financial sanctions or--in the worst case scenario--the organization's demise.

The staff prepares for the audit and has a friendly attitude toward auditors. In an audit early in one of our careers, the finance department moved just days before the audit. Many of the records were in boxes; comfortable space was not yet set up; and not even the department's coffee pot was to be found. While there were no adverse findings, the audit took much longer than necessary and no one was happy. In contrast, having everything ready, a work space identified, and access to people and materials make the audit process smoother and present an image of efficiency and competence.

As with all staff, finance staff need customer service training that includes internal and external customers. Being nice to consumers helps ensure continuity in the client base. A customer service orientation among coworkers helps make your organization an ideal place to work. And being nice to auditors can result in audit survival instead of audit disaster. Obviously, if fraud or defalcation is involved, serious consequences cannot be averted. However, where the issue is more subjective, you can benefit from the "emotional points" gained by good customer service.

As in all other areas of our business, maintaining best practices in addition to the application of common sense go a long way to ensuring audit success. If we have a solid business plan and competent leadership and staff, emphasize honesty and transparency, and apply a well-designed set of monitoring tools (i.e., the compliance program), then our attitude when confronting an audit can be welcoming, secure in the knowledge that we have nothing to hide and much to learn.

Cherry and Dr. Labarta both are active members of the Mental Health Corporations of America and the National Council for Community Behavioral Healthcare. Cherry can be reached at [e-mail], and Dr. Labarta can be reached at [e-mail].

BY JONATHAN M. CHERRY, CPA, AND MARGARITA M. LABARTA, PHD

ABOUT THE AUTHORS

Jonathan M. Cherry, CPA, is President and CEO of LifeStream Behavioral Center, which provides comprehensive mental health and substance abuse treatment, along with an array of social services, in Central Florida. He is a past Chair of the Florida Council for Community Mental Health.

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Margarita M. Labarta, PhD, is President and CEO for Meridian Behavioral Healthcare, which provides comprehensive mental health and substance abuse treatment, supportive vocational and housing services, and child welfare services in 11 rural counties in northern Florida. She is the current Chair of the Florida Council for Community Mental Health.

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