Jupiter Hospitals Ltd., (JHL) is a renowned corporate house owning a famous hospital called "Jupiter Hospitals". Two family groups (L and M) controlled the majority of the shareholdings in the company. The hospital is op

CS Professional · Forensic Audit · PYQS · June 2019
Jupiter Hospitals Ltd., (JHL) is a renowned corporate house owning a famous hospital called "Jupiter Hospitals". Two family groups (L and M) controlled the majority of the shareholdings in the company. The hospital is operated in Coimbatore, a non-metro city, where electronic and cheque transactions were not much high and patients mostly were making payments in cash. The management of the company facing problems because of some disturbing events taken place during the financial year 2018-19. All these events are summarized as under: (i) Robbery in Pharmacy: A robbery took place in the pharmacy in the night of 29-3-2019 and cash of around ₹ 20 lakh was lost in the robbery. The robbers had entered through a window pane during 2 a.m. to 3 a.m. when none was present in the pharmacy. They decamped with all the cash in the cash chest, leaving nothing behind. No traces were found to have left behind by the robbers. Fingerprints were seen on the chest as they had not been wiped off. However, none belonged to an outsider (other than employees). The CC TV camera had turned defective a day earlier being 27-3-2019 and had been given for repairing and accordingly no help was available through CC TV recording. Two key personnel in the pharmacy, the manager and the cashier, were supposedly doing a good job, showing remarkable growth in the night sales of the pharmacy. It is further to be noted that in nights high priced medicines were sold in huge quantities. The sales in comparison during day time was found to be less. The increase in sales was also having issues and complaints from the patients that the bills issued by the pharmacy for the goods purchased by them and cash received when asked to be verified for onward transmission for making claims, were not authenticated by saying that the same were not issued by the pharmacy. It transpired to the management that the employees involved are being in the habit of issuing the duplicate bills. It was further reported by the internal stock auditor that there is collection of the expired goods in the pharmacy and why the same has not been got replaced or exchanged from the companies as per policy. The police who came for investigation hence concluded that the act of robbery might have been done by a North Indian gang who were committing similar crimes in the locality and area and thus closed the case file. Insurance policy for loss of cash in safe had expired on 20-3-2019 and was not been renewed, since it was felt that no robbery would take place in a hospital which is always having movement of patients. The management entrusted the work to a forensic auditor to investigate the issue. (ii) Related Party Transactions: There were complaints put in the suggestion box by the various persons that some directors were making money from the purchase contracts which the hospital was entering into with the concerns in which these persons were interested. Till 15th March, 2019, the hospital had made purchases of around ₹ 22 crore from such related parties. However, on comparison with the earlier year, this was marginally higher by 5% and was thus not taken care by the management of hospital. The allegations were that the prices paid were higher than the market prices and that some of the concerns were not reputed and have been earmarked by the drug authorities also. There was a Purchase Committee which monitored the purchases and so the allegations were initially ignored. However, when they started pouring in, the Audit committee decided to investigate the matter and entrusted the job of ascertaining the correctness of the allegations to the forensic auditor. (iii) Drop in Hospital Revenues: There is an arrangement between the two groups of the shareholders that each group will administer the hospital for three years on a rotational basis. Group L's tenure had ended on 31-3-2018 and during the current year, group M had taken over the administration. Despite the number of surgeries and of other patients had not been dropped, there was a sharp fall in the revenues of hospital in the year 2018-19, except from the pharmacy. The cashier desk was managed by a director or his relative for having control over the cash. Group 'L' desires a forensic audit of the affairs to be conducted and entrusts the same to an outside forensic auditor. In this backdrop you are being appointed as an 'Outside Forensic Auditor' to investigate all the three issues and required to give your report on the matters indicating: How the forensic auditor should plan his course of action to investigate and find out the cause of drop in revenue of hospital ?

Answer & Explanation:

Drop in Hospital Revenues Major avenues from which Jupiter Hospital derives income need to be examined such as from surgery and room rent, from laboratory and Scan & X-Ray Unit and from OPD Patients. Hospital rate charts for last 3 years needs to reviewed and compared with current year to see if there is any major negative variance. The register of patients maintained at the three wings being surgical ward laboratory, scan and X - Ray and OPD must be verified. The same should be compared with the earlier year to compare the number of patients. Bank account in which payments get credited from patients' needs to be reviewed. Bank and revenue account needs to be reconciled to see payment received has been completely accounted. Invoices/Bills to be reviewed to see if there are any red flags. Given that there is an increase in the number of patients opting for surgery, visiting the laboratory and using the scan facilities has not diminished, it is unlikely that there will be a reduction in the surgery fees charged (It is most likely that there will be a hike ). In this scenario, the only obvious thing is that the receipts are under invoiced/ billed. Given that a director or his relative sits at the cash counter, this could easily happen. Reason for appointing a director or relative as Cashier needs to be checked. Auditor should interview some patients who had recently undergone surgery, visited the lab, etc., to ascertain how much they have actually paid and what amount was stated in the receipt issued to them. Further, the auditor can interview employees or former employees so as to get some insider information. The Auditor may found that for surgeries, a mere acknowledgement was issued to patients which merely stated that they had paid the amount. There was no issue of proper receipt. Later on the receipts were prepared for lower amounts by Group M, so as to lower down the revenue and deflection of cash. For the lab, receipts issued are to be looked into as no test took place prior to the issue of the receipts. Can arrange for some known persons to use the hospital facilities and gather live evidence as to payments and receipts issued and the modus operandi employed by the cashier. The cumulative effect of the above leads to the inescapable conclusion, to be taken by the Forensic Auditor in his report that Group M had been suppressing the receipts of the hospital and same being drawn by them through the cashier's desk which was managed by their relative and to falsify, the drop in the revenue.

Topics: Forensic Audit

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