Problem Solution: Carenetwest Corporation

Problem Solution: CareNetWest Corporation

DH. Daily

University of Phoenix

MBA 560 - Enterprise Risk

September 19, 2006

Abstract

In response to increased concern and awareness of corporate governance, conflicts of

interest and financial reporting, the Sarbanes-Oxley Act (SOX) was signed into law on July 30, 2002 by President Bush. The provisions of SOX affect the operation of public companies in several aspects, including corporate governance, financial disclosure, executive activities and responsibilities, and auditor independence. The most difficult part of Sarbanes-Oxley is Section 404, which is responsible for the greatest portion of compliance. Top executives are now held more accountable for the organization's compliance which means being aware of weaknesses and taking actions to mitigate those weaknesses. CareNetWest is a Medical Services corporation managing 80 hospitals in the western United States. Due to rapid growth and an emphasis on making the company bigger and increasing revenues, the organization has overlooked the diligent management of risk as pertaining to SOX and JCAHO. Tad the CEO and Chairman must undertake a crash course in preparing to meet these important regulatory requirements in a very short time-frame. With the help of his outside accounting firm, Tad is learning that his organization will need to make some major revisions in its structure to ensure compliance both in the short-term and in the long-term.

Problem Solution: CareNetWest Corporation

In today's post Enron business environment, it is imperative that upper management and boards of directors make informed and ethical decisions geared toward compliance with Sarbanes Oxley (SOX). Compliance is more than just how the information is reported, but the way the organization is structured to provide oversight and governance.

CareNetWest Companies, Inc. is currently in a crisis created by CEO, Tad Smith who chose to form a non-traditional management structure with a lack of aggressive and comprehensive control management. The resignation of Jane Michaels, Chief Risk Officer began an awakening for Tad and the apparent discovery of Sarbanes Oxley Section 404. Jane Michaels was the only executive in Tad's organization that had prior knowledge and expertise in SOX. The lack of Tad's knowledge is a strong indication he is unaware of the underlying benefits of the law, which is fraud prevention. Time is of essence for the organization to become compliant.

Situation Background (Step 1)

In Scenario 2, (University of Phoenix), Tad Smith the Chairman of the Board and CEO of CareNetWest finds he may have overlooked paying attention to important governance, reporting, and regulatory compliance issues. His Chief Risk Officer has just resigned, citing insufficient expertise and infrastructure to manage non-financial, financial regulatory and corporate governance issues. After talking to his CFO who is more of an investment banker than financial controller, his General Counsel, and outside accounting firm, Tad realizes that CareNetWest falls short of meeting the regulatory reporting requirements. Two very important compliance issues are on the near horizon and CareNetWest must pass the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) review, and SOX section 404 compliance. "Section 404 creates an ongoing requirement for management and, over time, should cause companies to continue to monitor and strengthen their internal control over financial reporting" Deloitte, p.1, (2004). Time is running out and he does not have to right people or systems in place to get the job done.

Issue Identification

The issues to that are critical to CareNetWest at this point in time, are passing the JCAHO review, and the SOX 404. Because CareNetWest is in the Healthcare business, it must comply with various state and federal medical regulations. The most important from a financial standpoint is the JCAHO. CareNetWest must pass the JCAHO review to maintain eligibility for Medicare and Medicaid money, which is a major source of revenue for the firm.

The SOX 404 issue involves financial Controls and corporate governance.

Section 404, in conjunction with the related SEC rules and Auditing Standard No. 2 established by the Public Company Accounting Oversight Board (PCAOB), 1 requires management of a public company and the company's independent auditor to issue two new reports at the end of every fiscal year. These reports must be included in the company's annual report filed with the Securities and Exchange Commission (SEC).

* Management must report annually on the effectiveness of the company's internal control over financial reporting.

* In conjunction with the audit of the company's financial statements, the company's

independent auditor must issue a report on internal control over financial reporting,

which includes both an opinion on management's assessment and an opinion on the

effectiveness of the company's internal control over financial reporting. (Deloitte, p.5, 2004)

The governance issues will require CareNetWest to rethink its organizational structure. Several required positions are currently vacant and Tad is currently in violation by filling both the Chair and CEO positions. CareNetWest will need to address areas of material weakness in corporate governance.

An ineffective control environment, which refers to the overall control consciousness of the organization. Ineffective oversight by the audit committee of the company's external financial reporting and internal control over financial reporting. An ineffective internal audit function or risk assessment function at a company where such a function is critical for effective monitoring or risk assessment, such as a large or highly complex company. (Deloitte, p.17, 2004)

Governance Issues appear to be a major weakness for CareNetWest, due to vacant Board positions on the Audit Committee, Governance Committee, and Compensation committee, "Fear of litigation is also making it harder to attract qualified board members--certainly an unintended consequence of all the effort to improve board effectiveness"