“Governments don’t do stupid things…” – Prime Minister Perry Christie
Approximately one year ago, three independent accounting firms submitted separate reports to their client, the Public Hospital Authority (PHA), that addressed various aspects of the operations of the facilities that the PHA administers. Those institutions include Princess Margaret Hospital and the Sandilands Rehabilitation Centre in New Providence and Rand Memorial Hospital in Freeport, Grand Bahama.
The auditors, namely Grant Thornton, UHY Bain & Associates and HLB Galanis & Co. – all member firms of reputable worldwide accounting networks – were appointed by the PHA board, which subsequently accepted the reports of each of the accounting firms.
Many months following the submission and acceptance of the reports by the board, the managing director of the PHA, Herbert Brown, asked the minister of health to seek the intervention of the auditor general, specifically in the UHY Bain & Associates report, perhaps because it was the most critical of the reports submitted by the accounting firms. The minister responded by appointing yet another firm, Kikivarakis & Co., to audit the Bain report.
Therefore this week we would like to Consider This… Does the government’s decision to spend additional funds for yet another audit of one of the auditors represent an extremely stupid idea?
The PHA audits
In 2013, the PHA board engaged three independent accounting firms to perform audits of various aspects of the PHA’s operations. It is now a matter of public record that the audits raised red flags regarding the PHA’s operations. Grant Thornton determined that certain transactions could “increase fraud risk” and highlighted other deficiencies that needed to be addressed.
Given this author’s relationship with HLB Galanis & Co. (HLB), we will refrain from referring directly to the reported findings and recommendations, although it should be noted that the HLB report was leaked and placed on the Internet. In the interest of full disclosure, this author states unequivocally that this leak originated neither from that firm nor any of its employees.
The UHY Bain report, perhaps the most critical of all or perhaps the one that most offended the PHA managing director, suggested a culture of slackness and corruption at the PHA. The Bain report also revealed that there was a $10 million difference between the physical count and the accounting records relative to Princess Margaret Hospital’s pharmaceutical inventory. That report also alerted the board to serious alleged abuses. It should also be noted that many of the findings by the external auditors were previously identified and reported to the board by the PHA’s Internal Audit Department, but that department has been systematically ignored by the managing director.
The external auditors’ findings were highlighted in a National Review article early in October 2014.
The managing director’s request
Shortly after the National Review exposé of the alleged abuses and a possible “culture of slackness and corruption at the PHA”, the managing director wrote to the minister of health on October 17, 2014 requesting the “minister’s intervention and the service of the auditor general to conduct an independent review of the UHY Bain report”.
The minister’s response
One month later, on November 13, 2014, Hyacinth Pratt, the permanent secretary in the Ministry of Health, responded to Brown, advising him that “I am to advise that the minister has instructed that an independent firm be engaged to conduct an independent review of the findings of the UHY Bain report. Kikivarakis & Co. (financial advisory and consulting services) is preferred”.
Glaring implications of the MD’s behavior
There are several serious issues with this picture. First, the managing director (MD) does not have the authority to supersede the board, which had already accepted the independent auditors’ reports. If the MD had a problem with the auditors’ findings, the board should have further engaged the relevant auditor(s) who performed the initial audit to clarify the reported findings as necessary.
Secondly, presumably the PHA board received the permanent secretary’s letter of November 13, 2014 from the MD recommending the audit of the Bain report by Kikivarakis and a request was made for the board’s approval to engage that firm for the stated purposes. At that point, the board should have emphatically and unequivocally refused to engage another firm of auditors to review the Bain report, having previously accepted the latter report.
Thirdly, the minister should have taken this golden opportunity to thwart the extensively overreaching authority of the MD.
The implications of the Kikivarakis appointment
Any intelligent person should be flabbergasted by the permanent secretary’s statement to the managing director that “Kikivarakis & Co. (financial advisory and consulting services) is preferred”. Was this appointment satisfactory to the MD because he felt that Kikivarakis & Co. would go easier on him or even contradict the Bain report? What then? If that were the case, would the minister then commission yet a third auditor in order to see which of the two firms was correct, a best “two out of three” approach? What nonsense and stupidity! And the most unfortunate thing about all of this, apart from Brown demonstrating who’s really in charge at the PHA, is that it is the taxpayers who will bear the cost of this second audit.
No one would question the professional competence of Kikivarakis & Co. However, this appointment presents several problems for the PHA in particular and the government in general.
First, the Kikivarakis appointment undermines the PHA board’s authority. If the MD can callously ignore the reports that the board accepted, it leaves many to wonder who is really in charge at the PHA: the board or the MD. The general sense at the PHA is that the MD is a law unto himself and that he has “friends in high places” who will listen to him and not to the board. The permanent secretary’s letter of November 13, 2014 certainly seems to corroborate that.
Secondly, the government is fond of talking about best practices, but in this case has refused to engage in such. In the case of both for-profit and non-profit entities, no board would simply ignore the findings and recommendations of its internal or external auditors to have such findings and recommendations reviewed by another auditor because the former’s reports were critical. Rather, a “real world” board would further engage the auditor that arrived at its findings and recommendations to gain a better understanding of both and to determine if it wished to adopt the recommendations or some variation of them.
Third, as is customarily done, with great pomp and pageantry, the government appoints a “commission” a “think tank”, or another working group with an impressive sounding name, and upon receipt of that group’s findings, often tables the report where it is allowed to gather dust and cobwebs.
This seems to have been the fate of the PHA independent auditors’ reports, because, although they were submitted in March 2014, it was not until the National Review exposé in October 2014 that the MD sought to address the report findings. Fourth, the Kikivarakis appointment represents an egregious and perverse insult and affront to Bain, a highly qualified forensic accountant with whom this author has worked for many years and one who has repeatedly demonstrated exceptional professionalism and commitment to ferreting out fundamental weaknesses in organizational structures, practices and policies.
Conclusion
The government is presently actively considering the introduction of National Health Insurance (NHI). We can only assume that the PHA will be integrally involved with NHI, which presently receives in excess of $200 million, the largest subvention of the annual national budget. The preliminary indications are that NHI will cost anywhere from $363 million to $633 million.
We believe that it would be a mistake of gargantuan proportions to entrust the NHI structure and funds to the current management team at the PHA. As a starting point, and at the very least, the government should seek to address the deficiencies that were highlighted in the internal and independent auditors’ PHA reports. Unless the government does so, it will lack public confidence and credibility that the mismanagement that is experienced daily at the PHA will not continue with NHI.
We noted the words of the prime minister that “governments don’t do stupid things...” Well, the considered view by an overwhelming percentage of the intelligent Bahamian populace is that the appointment of another auditor to audit the work performed by UHY Bain & Associates at the PHA is indeed an extremely unnecessary and expensive exercise – and, yes, very stupid indeed.
• Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.
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