Elijah Mwendwa

 July 25, 2020 To: Florida Medicaid Program From: Elijah Mwendwa Mwelu CPA, CFE Reference:Review of Brandywyne Convalescent Centre Cost Report. A Forensic Audit Report to the Lake Mariam Management, LLC. For the financial period 1st August 2017 to 31st July 2018. Scope of Review: As per your request, I examined the documentation provided for the purpose of offering my expert impressions as both a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE) impressions concerning the case. My focus was to determine if the elements of fraud exists and to what extent the different parties contributed to the fraud, based upon the prima-facie examination of the documentation provided. Summary of Documentation Reviewed Mandatory disclosure guidelines, pursuant to the basic disclosure guidelines and International Auditing Standards (IAS 500) on examination of audit evidence, the Cost Report for Brandywyne Convalescent Centre was examined and analyzed. The financial period for the report is 8/01/2017 to 7/31/2018. Definition of Fraud While all frauds involve some form of deception, all deceptions are not necessarily fraud. According to the Public Company Accounting Oversight Board (PCAOB) Accounting Standards, AS 2401: Consideration of Fraud in a Financial Statement Audit, there are four generally accepted elements that must be present for a fraud to exist: 1. A materially false statement; 2. Knowledge that the statement was false when it was uttered; 3. Justifiable reliance on the false statement by the victim; 4. Damages resulting from the victim’s reliance on the false statement. Summary of Findings and Auditors Opinion The cost report is not comprehensive and detailed enough to support all the figure and fact as indicated in the financial statements. With the lack of supporting documentation and extensive supportive evidence, the financial statements can therefore be categorized as overstated. Some of the figures that are indicated appear to be overstated and without any financial documents to back them up, there interpretation is that they have been inflated to increase expenses and reduce the profits declared. Therefore the auditor opinion for the cost report is ‘Unqualified Except for’ for the unsupported figures in the statements that are provided. Audit Findings Section I Audit Evidence Findings 1. Statistical Data- The statistical data provided is unsatisfactory. It is not as detailed as it is required. It does not provide the number of patients that were allocated to the cost centers as per each expenditure schedule. It does not specify how many patients were allocated to each department or sector for care and treatment. Thus it is impossible to link the expenditure of each cost center or department with the statistical data provided and justify the expenditure. 2. Trial Balance- Several aspects that point towards manipulation of the expenses to inflate them appear in the trial balance. The purpose is to overstate expenses with the view of decreasing the profit declared. They include the following: Current Assets: The allowance for doubtful debts is high: $568,932/-. No material evidence has been provided to justify the same. Non-current Assets: The leasehold improvements amounting to $ 1,032,170/ are not justifiable in the year. The cost report should have a schedule that shows how the figure has been arrived at as a result of appreciation of the property. More so, some of the building is rented. Current Liabilities: The amount indicated as trade accounts payable-non related party raises doubtful questions. $735808/- is a lot for a single year alone. No creditor aging analysis or report is provided to support the figures. Resident Trust Liabilities and Other Current Liabilities: ($43339 and $177197 respectively) are not supported. Which other liabilities are being spent such a huge amount? Operations and Maintenance: The expenditure of $157467 on utilities should be justified. This should be broken down on the amounts spent on electricity, water, gas and other utilities that amount to the figure. Administration: The following expenditures are neither supported by documented evidence that justifies the them nor does the statistical data prove the same: Management Fees Related Party ($409779), General and Professional Liability ($65972), Nursing Home Quality Assessment ($893,774) and Recruitment Expense of $20375. Others are Other Nursing Service Expenses and Other Supplies and Services. 3. Salaries- The salaries amount to $4,073,085/-. This is almost half the total expenses that the institution has. The above figure is likely to be higher due since it does not factor FICA, Workers compensation and taxes. This figure is not justified nor supported by a payroll schedule and structure. There exists no data to show how many employees exist in the institution and how much is paid per hour. Also, some of the cost centers and sectors existence is not justified. For example, a huge chunk of salaries goes to speech/audiological therapy, occupational therapy and complex medical equipment. No schedule exists to show how many staff are allocated to these cost centers and how much they are paid per hour for the services they offer. No data also exists to justify the huge expenditure on these cost centers and if they should be merged or scrapped off. 4. Allowance for Bad Debts- There should be a debtors aging report that shows how the allowance for bad and doubtful debts was arrived at. The adjusting entries on the trial balance that have been made to knock of the bad debts amounting to $214217 should be supported by evidence of accounting entries. 5. Cost Center Analysis- The highest is Administration which has a sum of $917,777/-. However on the Ancillary Cost Centers more data is needed to justify the expenses and provide the link with the statistical data. A lot is spent on the following with no proof of what is being spent on. They include: Physical Therapy, Speech/ Audiological therapy, occupational therapy and Complex Medical Equipment. 6. Legal and Accounting Fees- The legal fees for a period of one year is high. ($52,250/-). What makes it more questionable is that there are more than 12 legal firms that have transacted with the institution in the past 12 months alone! It would be wiser and more economical for the institution to limit the firms to a maximum of two or three in order to limit the expenses to minimum as possible. On accounting fees, the amount spent on producing the cost report ($8000) is higher than even the amount spent on auditing the financial statements which raises questions. The reverse would be reasonable. Section II The question is… were the elements of fraud present in this case? In my expert opinion as a Certified Fraud Examiner my conclusions are: Did the Management of Brandywyne Convalescent Centre collude with DHG LLP to manipulate the financial statements to overstate the expenses and declare less profits? The Answer is yes. Though there exists no direct documents that links the two in form of written instructions either thru email or printed media that tie either of the parties, evidential proof in the form of unsubstantiated figures in the cost report exists. As outlined in the various audit findings above, the expenses have been inflated to cut down on the profits made from the institution. Did the management of Brandywyne have information about the above fraud in its dealings with the DHG LLP? The Answer is yes. The audit findings above justify that the management is well aware of the inflation of the expenses declared in the cost report. DHG LLP is supplied with the information that it has published in the report by the management of the institution. The management of the institution did not also provide the correct detailed statistical data that links the various cost centers with the documented expenditure in the cost report Did DHG LLP as a firm commit fraud by publishing the Cost Report? The Answer is yes. It is the duty of every accounting firm to ensure that proper due diligence and verification of the financial statements is done to justify the figure declared in them. Publishing unsubstantiated statements with overstated expenses arising from inflated expenditures is committing fraud. Proceeding on with publishing the Cost Report without detailed evidence is not only lying to the shareholders but also intentionally committing fraud. Does sufficient audit evidence exist to convict the managers of Brandywyne Convalescent Center? The Answer is No. This Forensic. Audit Report is based on findings obtained from the Cost Report only which is made by DHG LLP on behalf of the institution. It serves as a whistle blower that the financial statements and books of accounts are cooked and not supported by complete, detailed and substantial evidence. It should initiate an investigation into the books of the institution where more forensic audit evidence will be obtained to successfully meet the threshold for a successful conviction of the managers of Branywyne Convalescent Center and DHG LLP. Section III In the discovery of the overstatement of expenses and consequent declaration of low profits from the financial statements extracted from the Cost Report of Brandywyne Convalescent Center Inc-; 1. Was there materially false statements? Yes. The false statement arises from the financial statements that are manipulated to declare low profits. The unsupported figures that have been used to overstate the expenses amount to an amount more than half the quoted expenses of $ 9,328,882/-. 2. Was there knowledge that the statement was false when it was uttered? Yes, upon review of all the mandatory financial statements filed by DHG LLP on behalf of Brandywyne Convalescent Center including exhibits: 1. Patient Day Statistics 2. Medicaid Day Statistics 3. Trial Balance (Detailed) 4. Trial Balance (Summary) 5. Explanation of Adjusting Entries to Trial Balance Accounts 6. Statement of Costs 7. Schedule of Payroll and Raw Food Costs 8. Schedule of Direct Patient Care Costs 9. Cost Allocation (Step Downs) 10. Cost Allocation Statistical Basis 11. Computation of Allowable Medicaid Costs 12. Allowable Medicaid Return on Equity or Use Allowance on Equity Capital 13. Statement of Costs of Services from Related Organizations 14. Schedule of Legal and Accounting Fees. DHG LLP prepared the above financial statements without sufficient proof and document evidence for the figures that were being declared. There exists no substantial evidence in form of supporting books of account that should be attached in the cost report to fully substantiate the figures declared in the Cost Report. Thus, in producing a publishing the Cost Report with unsupported figures which are overstated, the management and DHG LLP acted in full knowledge that the Cost Report Document they were producing was not authenticated and declaring the correct state of financial affairs of the institution. 3. Was there justifiable reliance on the false statement by the victim? The financial statements are already published which means that the shareholders, related parties like creditors, debtors and the public have been duped to believing that they represent the correct state of financial position of the organization. This is in contrary to the Companies Act that prohibits the publishing of false or misleading financial statements by a company. 4.Were there damages resulting from the victim’s reliance on the false statement? Yes. The following is the documented proof of the areas where the financial statements were overstated. These cumulatively led to an increase in the overall reduction of profits. A: Trial Balance: Allowance for Doubtful Debts Leasehold Improvements Resident Trust Liabilities, Other Current Liabilities Unjustified, Unjustified Expenditure on Utilities Allowance for Bad Debts without evidence of debtors aging statement Other Nursing Services Expenses Trial Balance Summary Cost Center Analysis. Are the following centers really required? There exists no document proof that can support the expenditure on the same. Schedule of Legal Firms Schedule of Accounting Firms Conclusion Based upon my review, it is my opinion that justification appears to exist that the elements of fraud are present in this case, both on the part of DHG LLP which prepared the Cost Report and the Management of Brandywyne Convalescent Center, Inc. which is Lake Mariam Management LLC which supplied false unsubstantiated information with a view of overstating expenses for the preparation and publishing of the financial statements contained in the Cost Report. Sincerely, Elijah Mwendwa Mwelu CPA, CFE Senior Forensic Auditor, DK Wambua and Associates. CURRICULUM VITAE EDUCATIONAL BACKGROUND Bachelor of Commerce (Finance and Accounting Option) Egerton University. Njoro campus. PROFESSIONAL CERTIFICATION Certified Public Accountant (CPA) - KASNEB. ICPAK No. 1675 Certified Fraud Examiner. (CFE). – Association of Certified Fraud Examiners. Member No. 751731 Certificate in Cyber Forensics Training. – Global Forensics Services. Certificate in Strategic Planning and Management of Projects. PROFESSIONAL ASSOCIATIONS Association of Certified Fraud Examiners. (ACFE). Austin, Texas USA. March 2016 to date. Association of Certified Fraud Examiners. Local Kenya Chapter. View Park Towers 3rd Floor. Nairobi. Kenya- March 2016 to date. WORK EXPERIENCE Senior Forensic Auditor. DK Wambua and Associates. Bellevue, Nairobi. Nairobi Sept. 2018 to date INTERNAL AUDITOR, Green Energy Limited. Embakasi, Nairobi. November 2016 to August 2018