Shuttered by Audit Findings​

Separate investigations by an outside auditor and a state attorney general's office come to drastically different conclusions about fraud allegations at nonprofit health agencies.​

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Findings from independent audits have resulted in the closure of 15 New Mexico-based nonprofit agencies that provided behavioral health services in that state, according to Nonprofit Quarterly. In each case, the state cut off Medicare funding to those agencies after audits by outside consulting firm Public Consulting Group (PCG) found evidence of fraud. The firm estimates that the agencies mishandled US$36 million in state Medicaid funds. However, the New Mexico attorney general's office has disposed of most of the cases and announced that it did not find a pattern of fraud in 10 nonprofits that had been part of PCG's audits. Three agencies had overpayments but no fraud, the office found. Following the agency closures, New Mexico transferred its Medicaid funds for behavioral health to providers based in Arizona.​

Lessons Learned

Readers of the fraud column will recognize, if not have memorized, the typical steps in the internal audit process (it's similar for an external audit as well):

  1. Notification.
  2. Planning.
  3. Opening meeting.
  4. Fieldwork.
  5. Communication.
  6. Report drafting.
  7. Management response.
  8. Closing meeting.
  9. Report distribution.
  10. Follow-up.

Although some of these steps may be combined or labeled differently, the 10 elements are addressed in some fashion. Yet if the audit process was followed correctly in this case, why is there such a discrepancy between the conclusions of PCG's audit work and those of the New Mexico state attorney general's office? I have reviewed both the PCG audit and the attorney general's office report, and note that at least two critical audit steps were not followed appropriately:​ 

  • At the Fieldwork stage, the audit appears to have included mistakenly flagged claims, based on two main observations: that "unqualified staff" had performed services, and that there was missing documentation for several claims, indicating a pattern of billing without supporting documentation. But the attorney general's report found that most of the credentials issues were resolved by reviewing the credentialing files and speaking with staff. For example, PCG flagged numerous claims because it thought one therapist wasn't credentialed to provide rehabilitation services. But the attorney general's office carefully reviewed that employee's credentialing file and found that the individual did have the necessary qualifications. With regard to the second issue, the attorney general's investigators noted they had located paperwork for most of the missing documentation so that there did not appear to be a pattern of billing without supporting documentation. Overall, the attorney general's office found that the costs associated with errors and discrepancies within the New Mexico nonprofits amounted to a small fraction of the amount asserted in the PCG audit.​

  • Perhaps the biggest lapse in the audit process occurred at the Management Response stage and in the process the Human Services Department (HSD) and PCG used to ensure the audit was accurate before deciding to suspend Medicaid funds to the nonprofit orga​nizations. PCG and HSD did not share the audit's findings with any of the 15 organizations whose Medicaid payments HSD froze. It also is unclear whether HSD did a systematic check itself to make sure claims that were flagged weren't mistakenly identified as inappropriate. It is critical that auditors present findings to staff of audited organizations to give them an opportunity to refute findings or address misunderstandings. The damage that can be caused by a failure to do so is evident in this story. HSD used the overbilling claim made in the PCG audit, in part, to find "credible allegations of fraud," a finding that led to the payment freeze that put the 15 organizations out of business and sparked criminal investigations by the attorney general and other state and federal agencies.

Auditors should take heed of the perils of not fully understanding and following the audit process.​​​​

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