FINANCE, ECONOMICS AND MATERIALS MANAGEMENT IN HEALTH CARE

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Q.1. Dr. Anil Kumar and M/s Ajay Enterprises are planning to start a
joint venture paediatric 50 bedded hospital. What do you think are the
advantages of incorporation of the hospital?

Solution-

The advantages of incorporation of the hospital are

(a) To operate and maintain in hospital including out-patient facilities and an institution
or other facilities.

(b) To provide facilities and personnel for the treatment of sick and injured persons and
to ensure for such persons a high quality of medical and surgical care and treatment.

(c) To carry on education activities related to rendering care to the sick and injured and
to the promotion of health with a view to maintaining and improving the standard of
medical education and knowledge.

(d) To promote and carry on scientific and administrative research related to the care of
the sick and injured with a view particularly to finding means of prevention and
treatment of human illness and disability.

(e) To participate in any activity designed and carried on to promote the general health
of the community and to co-operate with other hospitals and health agencies in the care
and treatment of the sick and injured.

(f) Fix the fees and rates charged by the corporation for the nursing of, attendance upon,
supply of hospital care and treatment to, patients and for rendering of other services.

(g) Establish and support, or aid in the establishment and support of, associations,
institutions, funds, trusts, and conveniences, calculated to benefit employees or ex-
employees of the corporation or the dependants or connections of such persons, and
grant pensions and allowances and make payments towards insurance, or for any objects
like or similar to those foregoing.

(I) Utilize surpluses, as the board may decide, for the improvement of corporation
services and training.

(j) Establish such reserves as the board may decide, and invest them or other funds in
such securities, and in such manner as the board may think fit, and vary or realize any
such investments.

(k) Receive and accept such grants, devises, gifts and bequests as are made by or
received from the Government of Canada or the Government of Manitoba, or any
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municipality or other corporation or person, for the use and purposes of the hospital.
Operate any business or industry that may help to maintain its institutions or be of
service to patients or employees of the corporation and bargain and sell the products
thereof in accordance with the laws of the province and lease part of its premises to
others for such purposes and utilize any profit derived there from for the general
purposes of the corporation.

Q.2. Write short notes on the following:

a. The need for evaluation of internal controls

Solution- 1. Definition Of Internal Control

1.1. Internal Control comprises the plan and all the co-ordinate methods and measures
adopted within an organisation with the express objectives of:-

• Safeguarding the assets of the organisation ,

• Verifying the accuracy and reliability of its accounting data,
• Promoting operational efficiency,
• Fostering and encouraging adherence to the prescribed managerial policies.

2. Objectives and Relevance

2.1. In recent years, the relevance and objectives of Internal Accounting Controls,
have expanded far beyond the traditional ambit of protection against theft and fraud,
well into the areas of effectiveness, accountability and operational efficiency of the
organisation

2.2. Hence the need for evaluation of the system of internal control, while conducting
the audit of the accounts of Government organisations, whether the nature of their
operations is commercial or civil.

3. Increasing Awareness in the International Context

3.1. Viewed in the Indian context, the Government in consultation with the Institute of
Chartered Accountants of India issued the Manufacturing and Other Companies
(Auditors' Report) Order, 1975, (Order) for rationalisation of the requirements for such
evaluation. The revised Order considerably enhances the reporting responsibilities of the
Auditor while reporting upon the adequacy and reasonableness of the procedures as also
the financial health of the Company. It is significant to state in this context that the
Order is supplemental to the directions given by the Comptroller and Auditor General of
India (CAG) under the Companies Act, in respect of Government Companies with
regard to which matters specified in the Order would constitute an integral part of the
Auditor's Report submitted, and reply to the questionnaire issued by the CAG would
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continue to be submitted as hitherto. The Order applies to every Company engaged or

proposed to engage in one or more of the following activities:-

• Manufacturing, mining or processing.

• Supplying or rendering services.-
• Trading and
• The business of financing investments.

3.2 The National Audit Office of the United Kingdom, in collaboration with the
Overseas Development Administration, in its Manual entitled “A Guide to
Certification Audit" emphasises the evaluation of internal control procedures during
Systems Based Audit (SBA). In the United States of America, the introduction of the
Foreign Corrupt Practices Act of 1977 (FCPA) requires the corporate management to
maintain a system of internal accounting controls, sufficient to provide reasonable
assurances for the proper execution of transactions and effecting accountability. Thus,
the world over, the need for internal controls has received considerable impetus and
there has admittedly been a conscious and significant increase in the necessity for
ensuring the existence of effective internal controls.

3.3 A system of internal control recognises the basic principle that it should be as
difficult as is practical and feasible, for individuals to be dishonest or careless. Such a
premise is indeed not based on a cynical view of human nature in general, but rather on
the realistic assumption that there could be a few persons who would be dishonest or
careless if it is easy for them to be so. Further, apart from the prevention and detection
of fraud, internal controls should reflect the strength of the overall accounting
environment in an organisation as also the accuracy of its financial and operational
records.

4. Two Dimensions of Internal Control

4.1. The two dimensions of internal controls are

• Administrative controls, which include but are not limited to the plan of
organization and records that are concerned with the decision processes leading
to the Management's authorization of transactions.
• Accounting controls comprise the plan of organization , procedures and records
that are concerned with safeguarding of assets and the reliability of financial
records designed to provide reasonable assurance that the transactions are
recorded and executed in accordance with the general and /or specific
authorization of the Management, recording of transactions to ensure the
preparation of financial statements in conformity with the generally accepted
accounting principles and any other criteria applicable to such statements, proper
maintenance of accountable of assets, Management's authorization of access to
assets and accountability for the physical verification of assets

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4.2 From the above it is clear that in an audit engagement the distinction between the
two types of controls requires considerable dexterity as the two are very often inter-
related. Needless to say that the distinction should not be artificially made and
administrative controls generally have a nexus with the accounting controls even if the
linkage is indirect.

4.3 Scope of Review

4.3.1. Naturally therefore, the scope and objectives of the Statutory Auditor would
vary and depend upon both the size and structure of the entity as also the requirements
of the Management. Normally, however, the Statutory Auditor operates in one or more
of the following areas.

• Review of the Accounting Systems and the related internal controls. Thus while
the adequacy of the accounting systems is the responsibility of the Management,
the Statutory Auditor is usually assigned the specific responsibility for reviewing
the accounting systems and the related internal controls, as also monitoring their
operations.
• Review of financial and operating information including identification,
measurement, and classification and reporting such information specifically
enquiring into individual items including detailed testing of transactions,
procedures and balances.
• Examination of the economy, efficiency and effectiveness of operations
including non-financial controls.

4.3.2. Thus, before an evaluation is undertaken the auditor should determine:-

• The degree of reliance that can be placed on the various systems and procedures
in existence.
• The nature, extent and timing of substantive audit tests to be applied. In this
process due to factors including the limitations of time, the volume of
transactions and magnitude of operations the Auditor can conduct:-
• Selective Verification in areas where he finds that internal control is effective.
• Detailed or comprehensive verification of transactions in areas where the internal
control is weak.
• Internal control investigation and evaluation is most relevant in the context of

i. independent financial audits,

ii. Special systems study engagements.

5. Advantages of Internal Control Evaluation

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• Enables an Auditor to restrict his detailed examination in areas where internal

controls is satisfactory, and intensifying the scrutiny in areas where the controls
are weak.
• Resultantly, the time available to the auditor is more gainfully employed.
• Highlights areas of weakness in the operating systems, for suitable remedial
action to be taken by the Management.
• Facilitates acquisition of an in-depth knowledge and understanding of the
systems and procedures, actually in operation.
• Enables the Statutory Auditor in the determination of the degree of effectiveness
of Internal Audit in the audited organization.
• Enables Government Audit to review the comprehensiveness in specific terms,
of the evaluation conducted, both by the Internal Audit Wing as also by the
Statutory Auditor of the organization.

6. Inter-Relationship between Audit and Internal Controls

The Statement on Standard Auditing Practices (SAP) pertaining to the "Study and
Evaluation of the Accounting System and Related Internal Controls in connection with
an Audit", defines the inter-relationship between the Statutory Auditor and internal
control.

7. Distinction between Control Environment and Control Procedures

7.1. It would be necessary at this stage, to make a distinction between the concepts of
'control environment' and 'control procedures'. The control environment refers to the
overall attitude, awareness and actions of the Management regarding control and its role
and importance in the entity.

7.2. Factors reflected in the control environment include:-

• Management's philosophy and operating style.

• The organisational structure and methods of assigning authority and
responsibility.
• Management's control system (including internal audit functions)
• The functions of the Board of Directors, personnel policies, procedures and
external influences.

7.2.1. A strong control environment (e.g. one with tight budgetary controls and an
effective audit function) can significantly complement specific controls. However, this
by itself does not ensure the overall effectiveness of the system of internal control.
Hence arises the necessity for 'control procedures'.

7.3. Control Procedures

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7.3.1. Control procedures encompass policies and procedures established by the

Management, in order to provide for the attainment of certain objectives. These could
include the existence of systems for:-

• An effective system of reconciliation of Books of Accounts.

• Check of the arithmetical accuracy of the records.
• Controls over computer applications and environment.
• Maintenance of control accounts and Trial Balances.
• Approval and control of balances.
• Comparison of results of cash, security and inventory checks with accounting
records.
• Limiting direct physical access to assets and records.
• Comparison of budgetary estimates with actual estimates
• Physical verification of assets and a system of safeguarding the assets.
• Appropriate action taken with regard to any differences and discrepancies.
• Distribution and proper allocation of functional responsibilities.
• System of operation of accounting procedures for ascertainment of accurate of
accurate and reliable accounting data.
• Existence of an effective system for the efficient operation of the asset and a well
regulated system for safeguarding of assets.
• System of managerial review of the work allocated to various individuals in the
organisation.

8. EDP Environment -The New Dimension

8.1. The challenges faced by the Auditor are considerable in an environment where the
use of the computer in data processing operations is on the increase. Thus it is possible
that while in a manual system, incompatible functions such as the authority to initiate
and execute a transaction and the recording of the transaction , are assigned to different
departments or to different individuals within the accounting department, in a
computerised environment, these incompatible functions may be consolidated within the
EDP department. Therefore the need arises for alternative controls including:-

• Organisation controls with appropriate segregation of duties within the EDP

Department.
• Sound personnel practices with effective control over the quality of work.
• Standard operating procedures for ensuring high quality processing and limiting
the possibility of errors as also the unauthorised use of files, programs and
reports.
• Systems development and documentation controls.
•
b- Internal audit for hospitals-

GENERAL

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The nature of the entity must be understood. It may be a sole proprietorship a

partnership firm or a company. Auditor should make his audit programmed accordingly.

1. Auditor should study the minutes of the meetings of the board of directors. It
will provide information regarding the decisions made by the entity.
2. He should study the internal control system present in the entity. It should be
decided that whether reliance can be placed on it or not.

INCOME

1. The main source of income of hospital is receipts from patients. The receipts of
bills should be checked with the cashbook entries.
2. Other source of receipts may be grants from different parties. These should be
verified with their respective counterfoils and correspondence between the
parties.
3. Other receipts may be form rents, interest or dividends. These may be checked
with their respective vouchers.

PAYMENTS

1. All the purchase should be checked with their respective purchase invoices.

2. Other items of expenditure should be vouched with their respective supporting

papers.
3. Proper division between the capital and revenue expenditure should be made.

ASSETS AND LIABILITIES

1. Auditor should check the assets and liabilities appearing in the balance sheet on
the date of the balance sheet. It should be checked that they are shown at true
value. Proper depreciation should be provided on the assets.
2. Asset and liabilities should be actually physically verified by the auditor on the
balance sheet date if possible.
3. It should be checked that the balance sheet and profit and loss account have
been drawn according to the provisions of the act applicable to the business
entity.

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Q.3. Mata Devi Healthcare is a charitable Trust hospital. Bring out the
provisions for charitable trust hospitals under the Income Tax Act?
Solution-

A charitable trust is an irrevocable trust established for charitable purposes, and

is a more specific term than "charitable organization". Charitable trusts may be set up
inter vivo, during a donor's life, or as a part of a trust or will at death, as testamentary?

Charitable remainder trusts are irrevocable structures established by a donor to

provide an income stream to the income beneficiary, while the public charity or private
foundation receives the remainder value when the trust terminates. These "split interest"
trusts are defined in §664 of the Internal Revenue Code of 1986 as amended and are
normally tax-exempt. A section 664 trust makes its payments, either of a fixed amount
(charitable remainder annuity trust §664(d) (1) (D)) or a percentage of trust principal
(charitable remainder unit rust), to whomever the donor chooses to receive income.
Normally, the donor may claim a charitable income tax deduction, and may not have to
pay an immediate capital gains tax when the charitable remainder trust disposes of the
appreciated asset and purchases other property as it diversifies its portfolio of trust
property. At the end of the trust term, which may be based on either lives or a term of
years, the charity receives whatever amount is left in the trust. Charitable remainder unit
trusts (§664(d) (2) (D) - paying a fixed percentage) provide some flexibility in the
distribution of income, and may be helpful in retirement planning, while charitable
remainder annuity trusts paying a fixed dollar amount are more rigid and usually appeal
to much older donors unconcerned about inflation's impact on income distributions who
are using cash or marketable securities to fund the trust.

Charitable lead trusts make payments, either of a fixed amount (charitable lead
annuity trust) or a percentage of trust principal (charitable lead unit rust), to charity
during its term. At the end of the trust term, the remainder can either go back to the
donor or to heirs named by the donor. The donor may sometimes claim a charitable
income tax deduction or a gift/estate tax deduction for making a lead trust gift,
depending on the type of a charitable lead trust. Generally, a non-grantor lead trust does
not generate a current income tax deduction, but it eliminates the asset (or part of the
asset’s value) from the donor’s estate. If the trust has qualified under laws such as
Internal Revenue Code section 501(c), donations to the trust may be deductible to an
individual taxpayer or corporate donor.

Do charitable hospitals deserve tax benefits?

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Under the Public Trust Act, hospitals registered as trust hospitals are supposed to
provide free care to up to 20 per cent of their admissions, OPD and other services and
for this, they are exempted from the income tax. All these years, most of the charitable
trust hospitals taken the State for a royal ride by not complying with this provision of the
Act. The charity commissioner, to whom they are accountable, has also not audited the
functioning of these hospitals to find out whether the social benefit of free care for the
poor is being provided, in lieu of the tax benefits the hospitals get.

For octopi exemption, similar benefit clauses are there. If hospitals do not
honour the social commitment as per the Public Trust Act then, there is no reason for
them to get any tax benefits. In fact, the income tax authorities too need to review the
tax exemptions by conducting audit for the provision of free care. When the
Maharashtra government, sometime back, raised this question of 20 per cent free care
under pressure from NGO’s and activists, and demanded that the 20 per cent free care
could be referrals from government hospitals, the hospital lobby went to court and got a
stay order. With such an attitude on part of these ‘so called’ charitable hospitals, all tax
benefits should be withdrawn. Hence, the BMC was right in withdrawing the octopi tax
exemption given to the trust hospitals in the city.

The concessional patients are usually bureaucrats, politicians, acquaintances of

doctors and hospital staff or at the most, some rebate in charges is given to the members
of the community by whom the hospital was set up. Let us first have transparency about
concessions as per the law, which should be made public information, and then tax
concessions should be given. The trust hospitals are basically philanthropic
organisations. They work as ‘not for profit’ organisations and their main objective is, to
help the government in providing medical care to the public. They assist the
government, with the sole purpose of providing health care at minimal costs. The
hospitals are not provided with any funds or subsidies from the government, to enable
them to provide the care that is required for those in need.

Although the exemption on octopi provided only around 5 per cent relief on the
actual cost of the imported facilities, such exemptions, including the income tax
exemption, is well deserved by the trust hospitals. The surplus margins enjoyed by the
hospitals are too less, considering the high costs incurred on the high quality treatments
offered. The cost vs. price ratio is very high in the treatments offered, and any rise in the
cost would mean an increase in the price which will be paid by the patients, for the
treatment. The trust hospitals have come to the government’s rescue in ensuring the
provision of good health care to the people. It is unfair on the part of the government to
want to earn revenue out of the services offered by these hospitals. The exemptions
given by the government in income tax and the other taxes are passed on to the patients
in terms of reduced treatment costs.

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The Jeevandayi scheme, proposed by the government, includes providing free

treatment to patients referred to the trust hospitals from the government hospitals, with
the government paying about Rs 50,000 to the hospital for the treatment. It was strongly
opposed because, the patients who were referred came in cars with mobiles in their
hands and to add to it, the government blatantly refused to give the assured amount to
the hospitals. The percentage of people getting free treatment in the trust hospitals is
much more than the percentage required in the proposal and thus, the exemptions are
well deserved by the hospitals. Their withdrawal will affect the patients in terms of the
price paid by them for the services only. The free treatments will continue to be offered
to those in need, but the concession given may have to be reduced, if the exemptions are
withdrawn.

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