Accounting for Nursing Homes & Assisted Living Facilities

How to Avoid Internal Controls Issues

What first comes to mind when you think of a nursing home or an assisted living facility? It is probably the services they provide; however, the infrastructure of the company, including their internal accounting controls, can strengthen an organization or break it and because of this, their controls may suffer from the following conceptual failings.

CONCEPTUAL ACCOUNTING FAILINGS:

Assured Profitability

There is never an assurance to profitability, since it is primarily linked to marketplace positioning, price points, and other factors that are not related to the control system.

An organization does have the ability to benefit by developing a strong internal accounting control system.  This can provide the organization with at least the opportunity to predict and produce profitability.

Fair Financial Reporting

Low profitability events and poor employee moral may affect fair financial reporting.  Financial reporting may be directly affected by employees who conspire to evade the control system.  Not only is this a serious accounting department issue, but this may also be the sign of a larger Human Resources issue.  Fair Financial Reporting is a key component of planning your organization’s growth strategies accurately and effectively.

Judgement Basis

Accounting controls are also seriously affected by judgement.  These controls are always at risk to fail if people operating them practice poor judgement.  Furthermore, the systems may fail if management produces poor decision-making traits.  Again, all the systems in the world will not be enough if you do not have the right people in the right seats.

Determined Fraudulent Behavior

Controls are typically designed to catch fraud within a company, but this becomes difficult when the management team or several employees collaborate in engaging in the fraudulent act.

A continual review of controls is necessary to maintain it’s full effectiveness.  Let’s make sure that you have a system in place to review processes, review tasks and ensure that the correct outcomes are being accurately recorded.

TYPES OF ACCOUNTING CONTROLS:

Preventive and Detective Controls

– Preventative controls keeps a control breach from occurring

– Detective controls will detect a control breach after it occurs

– Detective Controls are used to fix problems after they have occurred

– A mix of both these controls will lead to the most effective system.  Both are necessary in order to react to real-life accounting problems that are bound to occur.

Manual and Automated Controls

These controls are computer-based and eliminate the human-error component.  Now these are not perfect and can take time to implement, but once they are operational, these accounting controls will save your organization time and money resources.

Some examples of automated accounting controls are the following:

• Setting an error message when a limit of spending allowed in a program is reached.
• Greying out a section that requires a higher level of security or blocking that section entirely from users without permissions.

Some examples of manual accounting controls are the following:

• Requiring a second signature on a check over a predetermined amount
• Segregating duties to increase specialization and reviews

The best type of accounting controls is preventative & automated because they are designed to recognize and actively prevent those errors from occurring.  This is also a form of risk management and can help identify issues within the system that may be causing these preventable errors.

Constructing a System of Controls for Assisted Living Facilities

Understand the new system

Flowcharts / testing transactions.

It’s important that all employees, not just upper management understand what the new system will look like and what the differences are from the previous system.  This can be a difficult transition, learning a new system will be, but this is especially true if people are unsure WHY they are learning a new system.

Explore possible control breaches

Working with external auditors / management.

This will lead to a robust system of accounting controls in which you understand where errors may occur, and this allows you to create a contingency for if or when they occur.

Exploring a system analyst to set up processes

Larger companies may use a controls analyst, whereas a small company may utilize their Controller or outsource the task to a consultant.  The key takeaway here is that your Assisted Living Facility needs to have a qualified accounting systems professional leading the charge on setting up new processes.  They will work to understand your business and the types of accounting controls that you should and should not have in place.

Quantify possible control breaches

This goes back to our preventative accounting controls systems.  You want to understand your system and estimate the number of occurrences possible.  The goal is to be prepared as well as to modify your current controls to eliminate these possible breaches.

Design Accounting Controls

Design controls that will effectively mitigate potential risks.  Use the Manual, Automated, Preventative and Detective Accounting Controls as needed to make sure your system of accounting controls for your Assisted Living Facility are comprehensive.

Implement the Accounting Controls

Now you are ready to install these accounting controls with the appropriate documentation, forms, systems, & training in place.  With strategy and planning done up-front, the implementation of these controls into your Assisted Living Facility will be a much smoother process.

Test the Your New System

Test your new accounting controls by giving it incorrect information to detect that the system is working correctly in picking up these transactional errors.  And you will want to be testing the system on a regular basis.  If bugs in the system do appear, this will provide your organization the opportunity to detect and mitigate the issue.

Conduct a Post-Implementation Review

Review the accounting controls systems at least annually to determine where adjustments need to be made.  Your Assisted Living Facility will always be evolving, adding new departments, employees, technology.  It is important to remember these maintenance check-ups to keep your organization running smoothly and providing the best service you can.

Special Case – Acquisitions

Hiring outside assistance during an acquisition

At BASS Accounting we recommend the existing Controller needs to hire consultants to review other company (acquiree’s) control systems / recommend changes.  This is part of the due diligence review.

Principles Review

Acquiree’s control system is to be reviewed for separation of duties, process integration, management support, responsibility for controls, and systems knowledge.

One major concern is if the acquirer wants to cut costs by reducing headcount.  This is not often a good idea because adequate staffing will be needed during the transition process.

Impact of change

Always prepare for more morale issues which will negatively affect the system of controls.  The Controller needs to be aware of this and the possibility of control breaches, that may result further, more complex issues for your Assisted Living Facility.

Special Case – Employee Turnover

Employee turnover can be a problem, weakening the accounting controls environment.  The best way to resolve this is to reduce employee turnover.  Easier said than done right?! However, providing higher payrates, benefits, and less oppressive working conditions and strengthening the control environment is more cost effective in the long run.

Special Case – Rapid Growth

Rapid growth is as detrimental to a company as high employee turnover because the problem is that the knowledge of business processes and accounting control systems is centered on the core group of original employees.  As more and more employees are added to the team, the processes can degrade or become muddled by other concerns.  Passing on this knowledge and impressing upon the new employees the importance of preserving these processes during the growth expansion is critical.

This may be prevented by providing system replication, written procedures, training, & employee dispersion. These solutions will require a robust system within your Human Resources department.  Remember, the systems are only as good as those that enforce them.

Accounting Control System Documentation

Detailed documentation of accounting controls is recommended, at a minimal level a checklist that can be easily updated and posted can be useful. It is better than nothing at all.  Try not to leave any room for interpretation, these systems should be clearly identified so there is no room for debate.

Then, be sure to implement an annual review of documentation and assurance of supporting documentation.  Systems will change and evolve depending on the organization’s goals, you should be prepared to updated your documentation.

Terminating Controls that are not working

A new control system should only be implemented if needed, since the process tends to slow down the flow of transactions within a business, resulting in additional costs to the company.

Too many controls can restrict the ability of employees to take responsibility for their actions.  To avoid complicated controls, review as processes change & review on scheduled, predetermined dates.

If it is decided that terminating any part of the control system is necessary, a discussion with the Controller, Chief Financial Officer, and company’s audit committee would be the next step.

From there, move into our steps for outlining and implementing new accounting controls for your Assisted Living Facility.

And remember, always document!

At BASS Accounting, our team specializes in the implementation of accounting controls systems for Assisted Living Facilities.  If you have questions during any of the above steps, please do not hesitate to contact our office.  We are here to provide any level of service that you require.

Learn more about how BASS can help save your organization time and money with streamlined accounting controls for your Assisted Living Facility.