Red flags raised in the opinion letter
External auditors play the role in providing independent opinion on the true and fair view of the financial statements of an organization. Reflectively, “an auditor’s opinion can either be unqualified, qualified, adverse, or disclaimer” (Finkler 2010, p. 25). The opinions are arrived at after reviewing the financial statements of the organization. The reviews are carried out on a sample basis.
It reviews the standards applied when preparing the financial statements. The auditors have the opinion that financial statements of an organization, the results of the operations, changes in net assets and cash flows presented fairly in all material, respects the true financial position of the company.
They further give the view that the statements are in conformity with the GAAP. Despite the favorable comments, the auditors do not give a straight unqualified opinion on the true and fair view of the financial position of the organization though there are no major concerns raised in opinion letter. This could raise concern on the financial condition of the organization (Finkler, 2010).
Review of the financial statements
Upon review of the statement of the financial position, it was observed that the Center had amount due from the third part reimbursement program amounting to $6,539,000 in 2012. This amount was not present in 2011. Further, long term investment increased from $618,000 to $1,132,000. Further, the amount of accrued salaries and accrued expenses increased from $20,096,000 to $25,572,000.
Further, inventory and pledges receivable declined by close to 50%. These are major areas of concern. Review of statement of the operation reveals that there was a decline in the amount of interest expense from $5,253,000 to $4,456,000 despite the increase in the amount of long term debt.
Further, increase in unrestricted net assets increased from $897,000 to $2,568,000. In the cash flow statement, operating income increased from $751,000 in 2011 to $2,429,000 to 2012.
Review of notes to financial statement
In general, notes to financial statements is expected to provide details of amounts reported in the financial reports. The notes also “give additional information on amounts that are not reported in the financial statements” (Finkler 2010, p. 31). The notes to financial statements does not give detailed explanations on significant changes in the financial statements highlighted above.
For instance, the notes on third party reimbursement programs does not give details and a breakdown of the amount involved I the program. On property, plant and equipment, the notes do not give details of the amount of depreciation for each category of assets. Also, the notes to financial statements do not give details of the amount in excess of $1,900,000.
This could create an indication of fraud. The notes did not provide the makeup of other income amounting to $731,000 in 2012 and $1,566,000 in 2011. Finally, the notes to financial statements do not provide an estimation of the amount of contingent liability from the litigation cases. It is necessary to have such information to enable he organization plan adequately for the loss (Finkler, 2010).
Analysis of financial status
The common size financial statements revealed some areas which require some in depth investigation. Examples of the items that require investigation are receivables for government grants, the amount due to third-party reimbursement programs, net assets released from restrictions, operating income and increases in unrestricted net assets.
These areas changed significantly from 2011 to 2012. A review of these balances needs to be done so as to ensure that the changes can be supported (Finkler, 2010).
Liquidity ratios or the company were relatively favorable. Both current and quick ratios were greater than one. This implies that the institution is in a position to pay the current obligation using current assets. However, the liquidity position of the company declined from 2011 to 2012.
The efficiency ratios for the company are relatively fair. For instance, accounts receivable turnover increase from 7.76 to 8.10. Fixed asset turnover ranged between 4.12 and 4.09. Total asset turnover ranged between 2.10 and 2.05. Considering the nature of the organization, the level of activity of the organization is fairly high.
Times interest earned ratio shows the ability of the organization to pay for the cost of borrowing funds using earnings before interest and taxes. Times interest earned ratio for the two years is less than one. This implies that the Center cannot pay for the interest expense. However, the value increased from 0.14 to 0.55.
It gives a bad indication to potential debt providers. Profitability of the Center is relatively low. The total margin of the institution ranged between 1.88% and 5.17%. Return on assets were quite low at 0.51% and 1.31%. Also, return on net assets ranged between 0.92% and 2.5%.
It is evident that the profitability of the institution increased between 2011 and 2012. The low profitability can be attributed to the fact that the medical center is not a profit making institution. Therefore, it is evident that ratio analysis gives an in depth view of the financial statement of the center (Eugene & Michael, 2009).
References
Eugene, B., & Michael, J. (2009). Financial management theory and practice. USA: South-Western Cengage Learning.
Finkler, A. (2010). Financial management for public, health, and not-for-profit organizations. Upper Saddle River, NJ: Pearson Prentice Hall.