Wellmont audit shows erroneous accounting entries from 2006 to 2008, no theft involved

Rick Wagner • Jan 27, 2009 at 12:00 AM

KINGSPORT — An ongoing financial review of Wellmont Health System has found “erroneous” accounting entries from 2006 to 2008 but none that involved theft, personal gain or government contracts.

As part of an update on the review of the audits Wellmont first announced in December, the system in a Tuesday night news release reiterated that in June 2008, at the conclusion of its 2008 fiscal year, it “transitioned to a new financial auditing firm, KPMG.”

“As the entities prepared for Wellmont’s year-end audit, KPMG and Wellmont’s Audit Committee decided to initiate a review of certain historical accounting entries,” states the news release.

The release said that independent review — led by an outside legal counsel, Alston & Bird — is completed, with key findings to bondholders and other interested parties as follows:

•“Wellmont concluded that a number of erroneous accounting entries were made, beginning in 2006 and concluding in 2008.

“As a result of our findings, Wellmont plans to restate its financials for Fiscal Year 2006 and Fiscal Year 2007. The restated financials will be announced upon completion of the review process in mid-2009.”

•“During the extensive review which included interviews with dozens of past and present Wellmont employees and review of several hundred accounting entries, neither Wellmont nor its independent legal counsel found any evidence of theft or personal gain associated with the erroneous entries.

“Furthermore, the erroneous entries did not involve any payments received or owing to government contracts or payors, and they do not present any regulatory issues for Wellmont.”

•“Despite a challenging economic and health care environment across the country and regionally, Wellmont remains financially strong and expects to report a positive operating profit for Fiscal Year 2008.”

The release said Wellmont’s Audit Committee and leadership “have already taken steps to ensure similar accounting issues do not occur in the future. These include strengthening Wellmont’s internal auditing function among other measures.”

Fitch Ratings has placed a BBB+ rating on outstanding bonds issued on behalf of Wellmont for a negative rating watch.

“The Rating Watch Negative reflects Wellmont’s failure to complete and disseminate its fiscal 2008 audit within the time period specified in its bond documents, as well as a significant decline in Wellmont’s liquidity and a negative operating margin through the first five months of fiscal 2009,” states a Jan. 12 news release from Fitch. “Wellmont is currently not compliant with its continuing disclosure agreement that requires financial statements for the year ended June 30, 2008, to be filed with the bond trustee within 150 days.”

The Fitch release said Wellmont management “has indicated to Fitch that the delay in the audit’s completion is due to the identification of certain items that were classified to the incorrect fiscal years. Wellmont expects to have the fiscal 2008 audit completed by June 2009. “

Dr. Richard Salluzzo, chief executive officer, and Chris Knight, chief financial officer, both have left Wellmont.

Fitch in its ratings change also cited a “significant decline in liquidity, with days cash on hand dropping approximately 48 percent since June 2007; operating losses through the first five months of fiscal 2009; and the departures of the CEO and CFO.”

Wellmont and its chief competitor, Johnson City-based Mountain States Health Alliance, Jan. 16 announced a series of cost-cutting measures because of the downturn in the economy.

MSHA announced the elimination of 109 positions, representing 1.4 percent of its work force of 7,863 people.

For Wellmont, changes included elimination of 86 jobs and a reduction in corporate and administrative expenses at Wellmont. Another 60 positions that are now vacant will not be filled.

The 86 jobs are just more than 1 percent of Wellmont’s work force of 6,900 people in the region. And a new patient tower at Holston Valley Medical Center, part of the $100 million Project Platinum renovation, has been delayed.

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