Arizona Arthritis Center: Financial Management

Transcription

1 Internal Audit of Arizona Arthritis Center: Financial Management July 2005 FY06 #02 Submitted to: Keith A. Joiner, Dean, College of Medicine Jeffrey R. Lisse, Interim Director, Arizona Arthritis Center Copies to: Audit Committee, Arizona Board of Regents Peter W. Likins, President George H. Davis, Executive Vice President and Provost Joel D. Valdez, Senior Vice President for Business Affairs Judith E. Leonard, Vice President, Legal Affairs & General Counsel Edith S. Auslander, Vice President and Senior Associate to the President Charles E. Ingram, Assistant Vice President, Financial Services Office Patricia A. St. Germain, Associate Dean for Administrative and Financial Affairs, College of Medicine Issued by: Frances Foy, CPA, CIA, CGFM, Chief Auditor Internal Audit Department

2 Table of Contents I. Purpose...1 II. Objectives...1 III. Scope...1 IV. Summary Conclusions, Recommendations and Management Responses...1 V. Background...4 VI. Compliance with University Financial Policies and Procedures...4 VII. Compliance with Federal Rules and Regulations for Sponsored Grant Funding...6 VIII. Compliance with Donor and Gift Sponsor Wishes...6 IX. Center Business Practices...9 The University of Arizona July 2005

3 Executive Summary I. Purpose In July 2005, Internal Audit completed a special audit of the Arizona Arthritis Center s ( Center ) financial management that was not a FY05 planned audit. Keith Joiner, dean, College of Medicine requested an evaluation of the Center s business practices subsequent to his making a change in Center leadership. Senior Auditor Leslie C. Clark, Jr. served as the lead auditor. II. III. IV. Objectives The primary audit objectives were to test compliance with o University financial policies and procedures, o federal rules and regulations for sponsored grant funding, o donor and gift sponsor wishes for gift funding; to examine Center business practices; and to provide recommendations that seek to improve internal controls and the efficiency of business operations, at reasonable cost. Scope The audit objectives were accomplished through review of applicable University policies and departmental procedures, e.g., procurement, purchasing card, travel, timekeeping, payroll and disbursement; review of applicable federal laws governing disbursement of federal monies, e.g., A-21; examination and tests of transactions recorded in the University s Financial Records System ( FRS ) for the 20-month period ended 2/28/05, i.e., all of FY04 and eight months of FY05; examination of Integrative Rheumatology Chair account activity (FRS ) from the account s 2/27/02 inception through 7/31/05, after salary transactions inconsistent with the donor s wishes were identified; verification of entries and balances recorded in the Center s financial subsystem to FRS; and, discussions or interviews with the Center s former director, interim director, development director, and Business Office personnel; financial officers at the College of Medicine ( COM ), Department of Medicine and the University of Arizona Foundation ( UAF ); and a Sponsored Projects Services fund accountant. In addition, there was a discussion between the chief auditor and the donor s representative regarding the provisions of the Integrative Rheumatology Chair Agreement and Exhibit 2B. Note: Prior to the start of audit fieldwork, the Center s long-term business manager, senior commenced leave and terminated employment on 5/27/05, and thus she was unavailable for the duration of the audit. Conclusions, Recommendations and Management Responses A. Compliance with University Financial Policies and Federal Rules for Sponsored Funds We found good compliance with University financial policies and procedures and federal rules and regulations, with the following exceptions. The University of Arizona Page 1 of 14 July 2005

4 During calendar year 2004, former Business Office employees charged $474 of personal expenses to Center accounts; created an unauthorized petty cash fund with cash that was to reimburse the University for personal expenses; and made a $16K purchase of Center computers that circumvented the purchasing cardholder s $1,500-per-transaction limit, the $5K PCard limit, and a Procurement buyer s involvement required for purchases over $5K. Recommendations Ensure Business Office employees understand, follow, and enforce the University s financial policies; remind Center employees that personal expenses are prohibited on University accounts; a single PCard purchase cannot exceed $5K; and, deposit the petty cash fund to an appropriate FRS account. Management Responses Employees have been retrained. Business Office employees met with all authorized signers regarding the proper use of funds and University resources; questionable purchases will be reviewed internally and FSO will be contacted for clarification, when necessary. The PCard administrator provided online training to current employees; all employees are now aware of PCard policies and procedures. The petty cash fund was deposited 8/22/05 to an appropriate FRS account. B. Compliance with Donor and Gift Sponsor Wishes The expenditures tested were consistent with the respective donor s wishes, with the exception of the Integrative Rheumatology Chair account (FRS ). Portions of the chairholder s base compensation were charged to the account since FY03, which are contrary to the April 2000 Agreement and Exhibit 2B provisions. A copy of the final Exhibit 2B was not on file in the Center, the COM or the UAF; its provisions differed from the other four endowed chairs at the Center. We were informed that the Center has resolved the error to the donor representative s satisfaction and that the funds are being reassigned to another unit within the COM. Recommendation Ensure complete donor agreements are on file and any restrictions are thoroughly understood and followed by those who are responsible for administering donor funds. Management Response During the audit we made a careful review of Center records and only the Integrative Rheumatology Chair account was in question, which has been corrected. By 10/31/05, we will have completed a comparison of Center Foundation gift account records, e.g., agreement and correspondence files, with those of the UAF to ensure accuracy of donor wishes. We will ensure new gift accounts have complete documentation of donor wishes prior to making a disbursement. The University of Arizona Page 2 of 14 July 2005

5 C. Center Business Practices Overall, the Center business practices were found to be good. The auditor identified areas where the efficiency of a business process or data communication could be improved, e.g., payroll processing, accounting subsystem, administrative cost accounting, and communication of financial data to others. Recommendations In summary, standardize the Center s accounting subsystem and cross-train employees; streamline the administrative cost-accounting process and consult with other COM centers on best practices; eliminate an error-prone and redundant payroll-processing step, i.e., the transcription of 40 employees bi-weekly hours, by pay type, onto an internal form instead, write the data directly onto the Payroll Time Roster Worksheet; and provide timely, detailed, and accurate financial data to other units using a consistent format. Management Responses The Center, is cross-training employees on all systems and by 9/30/05 plans to implement a new accounting subsystem ( UMS ), purchased by the COM; has consulted with the Arizona Cancer Center and a more streamlined system to allocate administrative costs will be implemented by 10/31/05; has eliminated the error-prone internal payroll form that is not necessary; and has re-established good communications with the Department of Medicine s Business Office with good financial practices already taking place, and, accounting information should become more readily available among departments and physicians with the implementation of the UMS accounting subsystem. Details of the audit s results are set forth on the following pages. /s/ Frances C. Foy, CPA, CIA, CGFM Chief Auditor /s/ Leslie C. Clark, Jr., CPA, CGFM Senior Auditor The University of Arizona Page 3 of 14 July 2005

6 V. Background The Arizona Arthritis Center is committed to both care and research to improve the quality of life for people living with arthritis. In 2001, it was ranked as one of the top 50 centers for Rheumatology in the United States according to a U.S. News and World Report survey. The Arizona Arthritis Center is guided by its Advisory Board comprised of key community citizens committed to the long-term success of the Arizona Arthritis Center. 1 The Center was established in 1994; the Clinical Research Unit ( CRU ) within the College of Medicine ( COM ) predates the Center. The Center has access to donated funds that are on deposit at the University of Arizona Foundation ( UAF ). Over the past year, the dean has made leadership changes that are displayed in the table below. To simplify the audit report narrative, David Yocum is referred to as the Center s former director and Jeffrey Lisse as the Center s interim director. Timeframe Department of Medicine Clinical Research Unit Arizona Arthritis Center Until 8/04 From 8/04 to 2/05 Since 2/05 David Yocum Rheumatology Section Chief Jeffrey Lisse Rheumatology Section Chief Jeffrey Lisse Rheumatology Section Chief David Yocum Director David Yocum Director Jeffrey Lisse Interim Director David Yocum Director David Yocum Director Jeffrey Lisse Interim Director VI. Compliance with University Financial Policies and Procedures We found generally good compliance with University financial policies and procedures; however, there were exceptions that occurred in calendar year Former Business Office employees charged $474 of personal expenses to Center accounts and created an unauthorized petty cash fund with reimbursed cash amounts that were not deposited into the FRS account to offset the personal expenses. A $16K purchasing card ( PCard ) purchase of Center computers was split into several transactions to bypass the purchaser s per-transaction limit. A. Operating Expenditures A reasonableness test was applied to a listing of the 3,805 operating expenditure transactions, totaling $810K, that were processed during the 20-month period ended 2/28/05. We examined supporting documentation for 86 (2%) of the transactions, totaling $142K, or 18% of the dollar value. We noted that when a detailed receipt was not available, a signed, justification memorandum was attached that allowed the document to be processed by the Financial Services Office ( FSO ). Several policy violations were found and are reported below. The details were provided to the Center s interim director. 1 Arizona Arthritis Center s Web site The University of Arizona Page 4 of 14 July 2005

7 1. Personal Expenses Charged to Accounts Two (former) Business Office employees 2 during calendar year 2004 charged $474 in personal expenses, e.g., postage stamps, Federal Express mailings, and a mirror, to FRS accounts; furthermore, they did not deposit reimbursements in FRS to offset the expenses. One of the two employees reimbursed her Federal Express charges in cash, which was added to an unauthorized petty cash fund the two employees managed. The fund had $47 in it on 4/15/05. Only FSO can authorize establishment of a petty cash fund, which the custodian obtains from the Bursar s Office. The auditor found that the other employee s home address appeared as the ship to address on an invoice for a $253 mirror purchased 10/19/04. The transaction description entered was, Mirror and frame for center; the employee approved her own transaction. The interim director requested an explanation from the employee; she advised him the purchase was in lieu of her requesting reimbursement for airfare to a Washington, D.C. conference. To date, the (former) employee has not submitted the requested receipt showing she incurred the airfare expense. The auditor confirmed that the employee had not been reimbursed for the trip s airfare with either Center or UAF funds. The purported offset was neither documented on the PCard transaction, which instead stated the mirror was for the Center, nor in the memorandum attached to the employee s Travel Expense Report. 2. Purchasing Card Transaction Splitting (Fragmenting) One incident of University PCard splitting (a.k.a. fragmenting ) was found. A $16K purchase (1/23/04) of computers and related equipment was processed by the vendor as 12 smaller transactions to circumvent the PCard holder s $1,500 per-transaction limit. This action also circumvented the $5,000 PCard single-purchase transaction limit and thus buyer involvement in obtaining quotes from three vendors. Per Purchasing Policy 4.5, Purchases from $5,000 to $35,000 will be made on the basis of informal competitive proposal (RFP) practices (i.e., fax, phone or written) to a minimum of three (3) vendors. Recommendations 1. Ensure Business Office employees understand, follow, and enforce the University s financial policies, which are primarily contained in the FRS Department Manual and the Procurement Manual. Obtain refresher training from the Financial Services Office and Procurement, as may be necessary. 2. Remind Center employees that personal expenses are prohibited on University accounts; and a single PCard purchase cannot exceed $5K and that there are severe penalties for fragmenting (splitting) a purchase. 3. Eliminate the unauthorized petty cash funds by depositing the cash into an appropriate FRS account; consult with a FSO fund accountant. Management Responses 2 The administrative associate transferred to another department in March 2005; the business manager, senior, did not return from leave and was terminated in May The University of Arizona Page 5 of 14 July 2005

8 1. Business Office employees met on or around 4/1/05 with all authorized signers regarding the appropriate use of funds and university resources. They were shown the online resources available for FRS and FSO systems. If there are any questionable purchasing items, the group will discuss what is appropriate, or consult with the FSO fund accountant for clarification. 2. On 4/7/05, the PCard administrator provided online training to current employees. All employees are now aware of PCard policies and procedures 3. The remaining petty cash was deposited on 8/22/05 to FRS and off-set Federal Express charges. The Center has eliminated the use of a petty cash fund and provisions to work without cash were made. B. Payroll Expenditures No errors were found in our tests of personal services payments to employees from Center accounts; calculations of overtime hours were correct. There is no recommendation. C. University of Arizona Foundation Accounts The auditor tested UAF disbursements between 7/1/03 and 2/28/05 for possible employees personal expenses and found none. There is no recommendation. VII. Compliance with Federal Rules and Regulations for Sponsored Grant Funding All test results were in compliance with federal rules and regulations. The test consisted of 18 (3%) operations transactions, totaling $42K (22%), which were recorded in the Center s one federal cost-reimbursement account (FRS ; NIH) and four sub-federal accounts. Recommendation There is no recommendation. VIII. Compliance with Donor and Gift Sponsor Wishes The auditor tested expenditures charged to 5 of 6 Center gift accounts and 5 of 7 Center endowment distribution ( expendable ) accounts that received transfers from the UAF during the 20 months ended 2/28/05. (See Exhibit A.) The expenditures tested were found to be consistent with the respective donor s wishes, with the exception of the chair s base compensation payments that were charged to the Integrative Rheumatology Chair account. The donor s representative brought recent FY05 non-compliance transactions to the attention of the COM, while the audit was in progress. Details are provided below. Integrative Rheumatology Chair ( IRC ) Account (FRS ) The donor s Grant and Donation Agreement, signed in April 2000, states that distributions from the endowed chair may be used to pay incentive or supplemental compensation to David Yocum, the chairholder. The Agreement s Exhibit 2B, which was not on file at the Center, COM, and UAF, further stipulates that, The base compensation of the chairholder, is payable by the College. The chairholder s base compensation is not to be paid from the IRC funds. File Copy of the Agreement Missing Exhibit 2B The University of Arizona Page 6 of 14 July 2005

9 The Arthritis Center, College of Medicine and the University of Arizona Foundation each had on file a copy of the signed Agreement without an Exhibit 2B. This has now been rectified. The Center erroneously referenced an early draft of Exhibit 2B in its files that stipulated the compensation of the chairholder shall be paid from the fund. The Center advised the auditor that this is standard endowed-chair wording. We noted that the Center s other four endowed chairs allow salary support for the chairholder. UAF relies on University departments to ensure that transfers of UAF funds are consistent with donor restrictions. The Request for Gift Disbursement to the University of Arizona form requires that an authorized signer on the UAF account sign the following certification statement, this transfer of funds is consistent with the donor restrictions for this account. The donor is reassigning the chair s funding to the Program in Integrative Medicine, which is also within the COM. The agreement will contain restrictions that will need to be closely monitored. In light of the above, the examination of the IRC account was expanded to include all transactions posted to the account from its 2/27/02 inception through 7/31/05. The following items were found. 1. Contrary to donor wishes, in fiscal years 2003, 2004 and 2005 portions of the chairholder s base compensation were charged to the IRC account. As other funds became available, some of the base compensation expenditures were transferred from the IRC account to other Center accounts. This was accomplished through the processing of Payroll Expense Transfer ( PET ) transactions. (See the table on page 8.) 2. The net chairholder base compensation charged to the IRC account each year is, as follows: $36K (FY03), $10K (FY04), and $162K (FY05). 3. The COM agreed to return a total of $163K to the UAF endowment distribution account (UAF # ); the calculation is displayed below. This was recorded as a University payable at 6/30/05; on 7/18/05 a University check for $163,006 was deposited by the UAF into the account. Repayment Breakdown June 30, 2004 IRC account balance $ 27,622 FY05 UAF transfer to IRC 137,595 FY05 Operating expenses (2,211) Total Repayment $163, With the return of funds to UAF, there was a $178,280 deficit in the IRC account at 6/30/05. In July 2005, $178,280 of expense was transferred from the IRC account to another University account in order to clear the IRC account. To cover the expense, a $169, UAF transfer from other Center gift monies that are allowable for this purpose was deposited on 8/12/05; the remaining $8, was covered from another Center account. The University of Arizona Page 7 of 14 July 2005

10 5. Also, $1,000 belonging to the Educational Gifts account (FRS ) was erroneously deposited 12/23/03 (FY04) to the IRC account. The Center s Business Office had detected the error; however, it was not corrected. The IRC account transactions are summarized on the following table. Integrative Rheumatology Chair Account (FRS ) Center Director: D. Yocum D. Yocum D. Yocum D. Yocum J. Lisse Description FY02 FY03 FY04 Clinical Salaries + ERE Chairholder 1 Payroll system payments PET Transfers - In PET Transfers Out Net Chair Salary Support $30,069 6,015 36,084 $28,815 9,605 (28,815) 9,605 To 2/28/05 FY05 $60,339 (42,333) 18,006 After 2/28/05 FY05 $53,409 96,720 (6,082) 144,047 Clinical Salaries + ERE Other Physicians 2 PET Transfers - In $31,646 Net Classified Staff and Students + ERE 14,671 1,972 2,571 13,656 Operating expenses 1,400 2,211 Total funds used 31,646 50,755 12,977 22, ,703 Transfers in from UAF 50,000 40,000 32, ,595 Due to UAF at 6/30/05 (163,006) 4 Uncorrected deposit error 1,000 3 Ending Balance 6/30/xx $18,354 $7,599 $27,622 $4,834 ($178,280) 5 Note 1: Base compensation payments ( Clinical Salaries ) to the chairholder, David Yocum, are not allowed by the final Agreement and Exhibit 2B. Note 2: Base compensation payments ( Clinical Salaries ) to other physicians are not specifically disallowed. Note 3: A $1,000 gift receipt was erroneously deposited to account rather than FRS , which was identified by Center accounting staff but was not corrected; ending FY04 and FY05 balances include the $1,000 error. Note 4: The COM agreed to return $163K to the UAF endowment distribution account as unspent IRC account funds, calculated as the 6/30/04 balance, less FY05 operating expenses, plus a return of the FY05 transfer received (28K 2K + 138K = 163K). The UAF deposited the $163K on 7/18/05. Note 5: On 7/31/05, the $178K was transferred to another University account to clear FRS To cover the $178K, a $169K UAF transfer from other Center gift monies that are allowable for this purpose was deposited on 8/12/05; the remaining $9K was covered by FRS The University of Arizona Page 8 of 14 July 2005

11 Recommendation Ensure complete donor agreements are on file and any restrictions are thoroughly understood and followed by those who sign certifications, e.g., the Request for Gift Disbursement to the University of Arizona form. Management Response By 10/31/05, we will have completed a comparison of Center Foundation gift account records, e.g., agreement and correspondence files, with those of the UAF to ensure accuracy of donor wishes. A brief synopsis of the donor s wishes and intentions will also be included to ensure a clear understanding of the use of funds. This will be accomplished at the same time as the comparison. During the audit we made a careful review of Center records and only the Integrative Rheumatology Chair account was in question, which has been corrected. We will ensure new gift accounts have complete documentation of donor wishes prior to making a disbursement. As new accounts are setup or changes are made to current ones, the documentation will be kept in an accessible file to all employees processing expenses and transfers from that account. A brief review of the donor s intentions will be necessary before sending documentation over to the Foundation. IX. Center Business Practices Overall, the Center business practices were found to be good. We did, however, identify areas where the efficiency of a business process or data communication could be improved, e.g., payroll processing, accounting subsystem, administrative cost accounting, and communication of financial data to others. A. Center Payroll Processing The Center s Business Office processes bi-weekly payroll for approximately 40 employees, who complete the Employee Time Record ( ETR ). A properly prepared and approved ETR was on file for employees included in the auditor s test sample; the ETR was signed by both the employee and supervisor to show their agreement with the hours worked and leave taken. The auditor found that the manner in which the Center processes data into the on-line Payroll Time Roster increases the risk that a data-transcription error would occur and not be detected resulting in a payment error; however, no errors were found in our test. A non-value added manual calculation of sick and vacation accrual balances was also identified. Each is described below. 1. The Center has added a transcription step that increases the chance for errors; the payroll approver does not use the ETR as the source document to verify the accuracy of hours entered into the on-line Payroll Time Roster. o First, hours, by pay type, are transcribed from each employee s ETR to an internal AAC Timesheet that lists employees in alphabetical order. This step is not part of the university s payroll instructions. o Second, hours are transcribed from the AAC Timesheet to the paper Payroll Time Roster Worksheet, increasing the risk of a transcription error. The University of Arizona Page 9 of 14 July 2005

12 o Third, hours from the Payroll Time Roster Worksheet are entered into the on-line Payroll Time Roster. o Finally, the payroll approver uses the Payroll Time Roster Worksheet alone to verify the accuracy of the entries into the on-line Payroll Time Roster, rather than using the original source document (ETR), as required by the FRS Policy Each pay period, the payroll representative manually computes and enters onto the paper ETR each employee s sick and vacation (hours) accrual balance activity. These calculations are time-consuming and do not add value. The PSOS system tracks the official sick and vacation accrual balances, which also appear on the employee s biweekly pay advice and are available on-line. Recommendations 1. The payroll roster approver should utilize the Employee Time Record ( ETR ) as the source document to review the accuracy of the entries into the on-line Payroll Time Roster. 2. Discontinue the practice of manually computing sick and vacation accrual balances. Management Responses 1. The adoption of utilizing the Employee Time Record to enter into the PSOS online system was accomplished immediately after the auditor identified the multiple step entries. The center is now using this process and has eliminated the additional page for reconciling and entering the payroll. 2. The Center has stopped the manual computation of sick, vacation and compensatory hours earned, used, and the new accrual balances. Activity and balances are entered onto the ETR from the bi-weekly Vacation and Sick Leave Reporting report. B. Accounting Subsystem The Center s Business Office maintains an accounting subsystem to FRS, the University s official accounting system. While the former business manager, senior used Excel spreadsheets to communicate Center financial data (see also D. 1. below), the accountant 3 and the administrative associate each used a separate Access database to manage his or her assigned accounts. The auditor tested database balances and found they were in agreement with FRS. The auditor identified database-management weaknesses, as follows. There are two Access databases, rather than one, and neither the accountant nor the administrative associate had been cross-trained to support the other s database during absences; the administrative associate recently transferred to another department. Recommendation Identify an accounting subsystem approach that would be utilized for all accounts. In the interim, cross-train employees to support both Access databases that are in use. 3 Effective 3/14/05, the accountant became the Center s current business manager, senior. The University of Arizona Page 10 of 14 July 2005

13 Management Response The three different reconciliation systems were eliminated when the two employees left the Center. Currently, personnel in the Business Office are being trained on all systems in favor of a team effort in financial accounting and reporting. The COM has purchased a new accounting subsystem, UMS, to be used throughout its units, including the Center. The COM will provide technical and training support for the new system, which has the capability of pulling information from FRS and the Foundation and will allow for timely reconciliations. Implementation of UMS is expected by 9/30/05. C. Administrative Cost Accounting The Center s administrative costs e.g., salary support for accounting, computer technology and graphic design, are funded through a 10% (5% in some cases) administrative charge that is deducted from each gift and endowment distribution (expendable) account receipt. As to clinical trials, once the fixed-price-complete status has been reached and a residual balance determined, a consistent allocation was applied, i.e., an amount equal to 10% of the study s total receipts amount was deducted, provided the residual balance was sufficient. 4 A major purpose of the accounting subsystem is to track the administrative funds that are available within each account and the costs charged against the funds. The administrative, cost-accounting process is cumbersome and should be simplified to be more efficient and to facilitate analyses of these costs. Each pay period, the Business Office must determine which accounts have administrative support funds available to pay administrative staff salaries, which results in a single employee s salary being paid on different FRS accounts throughout the fiscal year. Other centers use an auxiliary model whereby administrative fees are collected into an account(s) from which administrative costs are paid. Recommendation Streamline the Center s administrative cost accounting process, e.g., consider the auxiliary model. Consult with other College of Medicine research centers, such as the Arizona Respiratory Center and the Arizona Cancer Center, to develop best practices regarding administrative cost-accounting. Management Response The Center is moving towards a proper allocation of administrative and clinical trial management costs, using an auxiliary accounting model. This model is the result of consultation with the financial officer at the Arizona Cancer Center. We expect to have this allocation system in place by 10/31/05. 4 After the administrative charge deduction was made, the remaining residual balance was subject to a fixed percentage for: Center director discretionary uses, capital equipment, CRU faculty and CRU staff salaries. The University of Arizona Page 11 of 14 July 2005

14 D. Working Relationship between the Center and the Section In addition to heading the Center, the former director headed the Department of Medicine s Rheumatology Section ( Section ), which includes the Wilmot Clinic operated by University Physicians Healthcare ( UPH ), and the Clinical Research Unit ( CRU ) within the College of Medicine. The former director utilized the Center s Business Office as the primary repository of financial data that affected both Center and Section operations, and advised the auditor that during his tenure the financial records were open and the Business Office employees were available to answer questions. In January 2005, the Department of Medicine s financial officer reported, in writing, to the dean that the Department of Medicine and the Rheumatology Section have a strained working relationship with the Center. Among the reported problems were the following for which we made inquiry. 1. Communication and Reliability of Rheumatology Section Financial Data Reported Problem a) Rheumatology Section-related financial data provided by the Center were not timely, accurate or reliable, and explanations did not make sense, which created a lack of confidence in the Center s data. For example, numbers could not be tied back to FRS. b) The financial officer was not provided with FRS account numbers and amounts available to be used to cover Rheumatology Section physicians salaries ( salary coverage ) in the event a physician s actual clinical revenue fell below the budgeted revenue, the basis for the salary. The Center might agree ahead of time to provide a certain level of funding, should that event occur. c) Funds to which the physician would typically have been entitled to use, such as fixedprice-complete monies, were designated as salary-coverage funds by the Center. Results of Auditor s Inquiry The Center s former business manager, senior had data extracted from the Access databases (described in IX. B.) to which she added her own data and explanations. Her Excel spreadsheet schedules and analyses were distributed outside the department, including to the Department of Medicine s finance officer, who we interviewed. The Center s former business manager, senior was on extended leave and terminated employment during the audit, thus she was unavailable to be interviewed. No one else in the Center had the in-depth knowledge necessary to provide Center responses to the reported problem. Recommendation Provide timely, detailed (e.g., adjustments, assumptions & FRS account numbers) and accurate financial data in a consistent format that allows both the Center and the Rheumatology Section to manage the financial resources available to cover physicians salaries. The University of Arizona Page 12 of 14 July 2005

15 Management Response The Center s Business Office has re-established good communications with the Department of Medicine s Business Office; open lines of communication and good financial practices are already taking place. Accounting information should become more readily available among departments and physicians with the implementation of the UMS accounting subsystem. 2. Administrative Charge Reported Problem The Center charges a 10% tax ( administrative charge ) on all chairs, etc.; it is used for unknown purposes; and is a practice the financial officer is not aware of being employed by any of the other centers. Results of Auditor s Inquiry An explanation of the administrative charge and our recommendation for improvement are described above in Section IX. C., captioned, Administrative Cost Accounting. 3. Transfer of an MRI Machine to the Section Reported Problem The Center purchased an office-based MRI machine with Center funds and transferred cost of the machine to the Section, with expenses charged to Section faculty members. Results of Auditor s Inquiry The former director, who held the leadership position over both the Center and Section, purchased an MRI machine with Center funds for use within the Center. Subsequently, the machine was sold to UPH for use in the Section s Wilmot Clinic, and its costs were allocated to Section physicians. In our interview, the former Center director stated his decision to transfer the MRI machine from the Center to the Section (Wilmot Clinic) was predicated on placing the equipment in a convenient location for patient access, i.e., the patient would not have to travel to the Center for an MRI scan. He further stated that, in retrospect, he may not have made the same decision, because an MRI machine was no longer readily available for Center researchers. We learned that the former director had requested the purchase of a new MRI machine for the Center, but it had been denied. Following are the key events. o In February 2004, the Center s $106K MRI machine, purchased 18 months earlier, was sold for $105K to UPH, operator of the Section s clinic. This shifted the related MRI costs from the Center to the Section, via cost-allocations by UPH. o The Section Chief instructs UPH how to allocate the equipment charge. The monthly cost of equipment already in the clinic at the time of the MRI s transfer, i.e. a bone density machine, was allocated to all clinic physicians with clinical revenue that month. Numerous physicians used and were able to bill third parties for the bone density machine readings. The University of Arizona Page 13 of 14 July 2005

16 o The $1,750 monthly MRI costs were allocated to all clinic physicians with clinical revenue that month; however, only David Yocum, Section Chief at the time, and one other physician derived revenue from the MRI billings. (A certification is required in order to bill third parties.) o In FY04, David Yocum had 25 (92%) MRI readings and another physician had 2 (8%) readings that resulted in MRI revenue. o Each physician s UPH incentive payment is calculated by deducting expenses from the revenue generated by the physician. o With the Section Chief leadership change in August 2004, Jeffrey Lisse changed the UPH allocation of MRI costs to charge only physicians that received MRI revenue. o Following David Yocum s recent departure from the University, there is currently little on no MRI revenue generated. We were informed by Jeffrey Lisse that each clinic physician will again be charged for a portion of the MRI machine s monthly costs; it will be through the general overhead allocation, per the Department of Medicine s financial officer. There is no recommendation. The University of Arizona Page 14 of 14 July 2005

17 The following two tables display transfers from the UAF to University FRS accounts during the 20-month period (7/1/03 2/28/05) and the transactions we audited. The first table relates to gift accounts and the second to endowment distribution ( expendable ) accounts. Gift Accounts Transfers to Center Accounts Audited FRS Account # Number Amount Number Amount $83,973 3 $60, $36, $42,865 2 $30, $83,136 1 $20, $19,000 1 $19, $152,589 2 $105,996 Total 36 $417,763 9 $236,673 Percentage 100% 100% 25% 57% Endowment Distribution Accounts Transfers to Center Accounts Audited FRS Account # Number Amount Number Amount $116,536 3 $67, $118,476 2 $62, $27, $32,000 1 $32, $40, $25,000 2 $25, $74,000 4 $74,000 Total 24 $433, $260,612 Percentage 100% 100% 50% 60% Expenditures were largely for salary support, including a 10% (5% in some cases) administrative charge against the gift revenue for administrative salaries; operating expenditures were generally minimal. From the sub-system maintained by the Center and reconciled to FRS came the names of individuals paid from these funds, which we agreed to the record of allowable uses. The only exception was that associated with FRS (Integrative Rheumatology Chair). The University of Arizona Exhibit A