Sarbanes-Oxley and the Healthcare Industry

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Applicability to Hospitals and Medical Organizations

[By Prof. Gregory O. Ginn; PhD, CPA, MBA, CMP™]

[By Prof. Hope Rachel Hetico; RN, MHA, CMP™]

Professor Hope HeticoIn response to scandals involving Enron Corporation and its auditor, Arthur Andersen, the U.S. Congress passed Public Law 107-204, whose short title is “The Sarbanes-Oxley Act of 2002.”  

At first blush, the Sarbanes-Oxley Act seems to have very little to do with hospitals, healthcare organizations or the medical industrial complex; however, upon closer inspection, several sections appear to be relevant to the hospital industry. 


Title III, section 302 is entitled “Corporate Responsibility for Financial Reports.”

This section requires that the principal officers and financial officers sign the financial report, certify that the report contains no false statements, and certify that the report is materially correct or face stiff penalties.

Healthcare leadership activities must include formal statements that: 1. The signing officers have reviewed financial reports; 2. Reports do not contain material untrue statements or omissions considered misleading; 3. Statements fairly present financial condition and results in all material respects; 4. Signing officers are responsible for internal controls and must report findings; 5. All deficiencies are in internal controls reports and information on fraud is included; and 6. Internal control changes that could negatively impact them are included. 

Internal Controls 

The Sarbanes-Oxley Act, Title III, section 302(a)(4)(A)–(D) indicates that the officers signing the financial reports are responsible for:

· Establishing and maintaining internal controls;

· Designing internal controls so material information is known to officers;

· Evaluating effectiveness of internal controls within 90 days; and

· Presenting conclusions about the effectiveness of internal controls.


Title IV of the Sarbanes-Oxley Act is entitled “Enhanced Financial Disclosures” and section 406 is entitled “Code of Ethics for Senior Financial Officers.” Section 406 calls for ethical handling of actual or apparent conflicts of interest, full disclosure in the financial reports, and compliance with government rules and regulations. 


Hospital cafeteria plans



Title IV, section 409 is entitled “Real Time Issuer Disclosures.” It requires disclosure to the public “on a rapid and current basis such additional information about material changes in the financial condition or operations of the issuer.

This may include trend and qualitative information and graphic presentations that are necessary or useful for the protection of investors and the public interest. Hospitals may be required to take stricter stances on disclosure by the attorney general of their respective states, if not directly by the Sarbanes-Oxley Act.

Accordingly, hospitals should do the following:

· Adopt a strict conflict of interest disclosure statement and policy;

· Develop an unambiguous definition of “conflict of interest”;

· Develop and use solid criteria for selecting new board members, and

· Treat prospective physician board members like all board members. 

Financial Implications of the Sarbanes-Oxley Act for Hospitals

On the one hand, the Sarbanes-Oxley Act creates a compliance burden for hospital executives.

On the other hand, there may be benefits that will accrue from the stricter burden of compliance. Stricter ethics may result in boards making decisions that are better for hospitals and worse for physicians. Better disclosure may ultimately cause less risk to investors and provide better access to capital. More astute boards may actually make better financial decisions.

And, stronger internal controls may well help to avoid embarrassing and costly financial failures in hospitals.


Sarbanes-Oxley imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation.

Healthcare organizations may not attempt to avoid these requirements by reincorporating their activities or transferring their activities outside of the United States.


The Sarbanes-Oxley Act is intended to safeguard the economy since the healthcare industry is such a large and integral part of it, and will invariably have an effect on all healthcare organizations.

And so, has your hospital or healthcare organization, analyzed its activities to comply with the Sarbanes-Oxley Act, and very possibly improve its financial performance?


Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact:


FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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7 Responses

  1. MY CUDOS,

    Did you know that most of the nation’s hospitals have been teaching their employees, for the past year, how to ferret out fraud and report it to the government under this new federal law?

    Starting Jan. 1, 2007, companies that did at least $5 million a year in Medicaid business have been educating all employees and officers on how to detect fraud, waste and abuse.

    Moreover, physicians and health care providers must tell employees that if they report fraud, they will be protected against retaliation and may be entitled to a share of money recovered by the government.

    Health care providers must also establish policies to make sure that their contractors investigate and report fraud, while the new requirement will also apply to many pharmacies, HMOs, home care agencies, suppliers of medical equipment, physician groups and drug manufacturers.

    And so, my “cudos” to Dr. Ginn, Ms. Hertico and the “Executive Post” for this alert.



    When discussing the Sarbanes-Oxley Act, it is worth noting that while all hospitals may not be affect by it – all nonprofit hospitals, clinic and healthcare organizations are exempt from corporate income taxes as well as state and local property taxes – wherever they are located.

    Ironically, this exemption is may be more valuable to health entities located in most affluent areas because target population income is higher and property values are worth more.

    As David A. Hyman and William M. Sage point out in the current issue of Health Affairs magazine:

    “All else being equal, a hospital that provides little charity care and is located in a “desirable” location (in terms of property values) will receive a much greater financial benefit when its income and property go untaxed than a hospital that provides lots of charity care and is located in an ‘undesirable’ location.”

    Thus, many suggest that current subsidies are ‘upside-down’ in that they are worth more to non-profit healthcare organizations that are likely to provide the least charity care.

    Of course, this irony is not addressed in the Sarbanes Oxley Act; at all!



  3. Defining “Non-Profit” In Ohio

    Did you know that Ohio Attorney General Marc Dann wants to better define what the state’s not-for-profit hospitals must do to keep their state property tax exemption?

    Among other things, the AG wants to see poor and uninsured patients pay no more than insurance companies pay for care. As part of the initiative, he plans to hire experts to study charity care issues and look at what other states are doing.

    He’s interested, for example, in a Minnesota accord under which hospitals agreed not to use abusive debt collection practices or charge uninsured patients more than insurance companies. He also plans to join Sen. Chuck Grassley (R-Iowa) who has been examining the issue of hospital charity care for years.

    This initiative comes as several Ohio communities have begun questioning the tax-exempt status of their local not-for-profit hospitals.

    For example, one community is challenging the tax exemption enjoyed by a Beachwood, OH facility run by the Cleveland Clinic, arguing that it provides no charity care or other community benefits.

    And so, is this a SAR-BOX matter akin to the “goose that killed the golden egg?”

    Please comment.


  4. More on Sarbox and Non-Profit Hospitals

    Did you know that a Massachusetts healthcare workers’ union is arguing that BOD members of non-profit Beth Israel Deaconess Medical Center should be required to follow Sarbox disclosure rules with its audits? The request springs out of a long-standing battle between the 1199 SEIU United Healthcare Workers East, which has been organizing at the Harvard-affiliated facility, according to a new report.

    The SEIU argues that nonprofit directors who observe Sarbox rules when sitting on public-company boards are required to do the same on Beth Israel’s board. Of course, that includes the six of Beth Israel’s members, who sit on such public firms as Staples, Brooks Automation and Charles River Laboratories.

    It seems that the SEIU believes Beth Israel has been commingling bad debt and charity care expenses in its 2005 and 2006 annual reports. Naturally, this would make it look less healthy than it is and give it more leverage against unionization.

    What a snarly situation … say it aint so, Beth Israel?


  5. On Sar-box and the US PATRIOT Acts,

    Social unrest typically prompts lawmakers to react to enacting laws that affect our society. The U.S. Patriot Act and Sarbanes-Oxley Act are two such laws passed during social unrest. Many question if these laws are necessary and overarching.

    A Brief Review of US Patriot Act and Sarbanes-Oxley Act

    “United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstructing Terrorism Act” (“USA PATRIOT ACT”), was sign by President George W. Bush on October 26, 2001. The Act was passed in the wake of September 11 attacks.

    The USA Patriot Act has ten titles that have broad and extensive powers. Title II and V are examples of the titles that give the government extensive reach. (Title II) is the ability to monitor communication continuously if they are related to terrorist activities, the search of premise with out court order. (Title V), the use of National Security Letters, which is a demand for release of information related to an individual, which is also allowed to be used against U.S. citizens with out their knowledge and it requires no judicial review.

    The July 2004 report from the DOJ stated several cases that were successful due to the US Patriot Act, for example; “The Luckawanna Six” were six Yemeni-American who traveled to Afghanistan in 2001 to receive training at an Al Queda – affiliated camp near Kandhar.; Enaam Arnaout, the Executive Director of Benevolence International Foundations, who pleaded guilty to racketeering charge, admitting that he deviated thousands of dollars to support Islamic militant groups in Bosnia and Chechnya; and Ltif Dumeisi, who was convicted by jury in January 2004 of illegally acting as an agent of the former government of Iraq.

    However, some critics of the US Patriot Act claim that the act was passed too quickly and it removed civil liberties from US Citizens such as the “Right to Privacy”, In addition, they claim the Act expands the executive branch and removes checks and balances from judicial review.

    The Act allows the government to seize records, including medical records and list of individuals of political organizations, without consent of the individual.

    Reform the Patriot Act. Org reported that the ACLU detail abuses of the US Patriot Act, in the report for example it discussed, Brandon Mayfield, who was wrongfully accused of the involvement in the Madrid bombing and Tariq Ramadan, whose visa was revoked to teach at the University of Norte Dame. However the extent of the abuse is yet unknown since the government can use the US Patriot Act and require the investigation to be kept secret.

    The Sarbanes-Oxley Act was passed on July 30, 2002. The act was passed in response to some major corporate accounting scandals like Enron and WorldCom. The Act contains eleven titles that provide new accountability and corporate standards required by public companies.

    Title III and IV are some examples on the impact of Sar-Box; Title III, mandates that cooperate executive to take financial responsibility for the accuracy and completeness of corporate records; and Title IV, describes enhanced reporting requirements for financial transactions, including off balance sheet transactions, pro-forma and stock transactions of corporate officers.

    The Institute of Internal Auditors indicated that the law has improved investors confidence with improvements of board, audit commitment and senior management engagement in reporting and improvement in financial controls. In addition, Glass Lewis and Co, March 2006 report showed 1295 restatements in financial earning in 2005, twice the amount in 2004.

    A report by Foley & Lardner LLP reported some concerns regarding companies that are willing to be listed in the US markets due to reporting regulations and stated and the cost of regulation have increased.

    In a commentary posted at Yale Law School by Jonathan Marcey and published in the Wall Street Journal, discusses the concerns regarding Sar-Box and its effect on capital markets in the US. It also stated a study commissioned by New York Senator Charles Schumer and New York City Mayor Michel Bloomberg urging some deregulations.

    In addition, Larry Rabstein, uses Sar-Box to illustrate three reasons why government regulations would not necessary help regulate. “First, the appropriate regulatory course is often unclear, given the uncertain cost and benefits of regulations. Second, even if the theoreticians can propose a regulatory solution that sees to work, political realities and the interplay of interest groups often intervene to prevent this solutions from being adopted. Third, even if markets have malfunctioned, markets actors often are better than politicians to correct them,”

    Furthermore, it is evident that enactments of these two laws have affected our society and our business. In my opinion, the US Patriot Act has clear violation of civil liberties and the Sar-Box has not deterred corporate fraud or abuse.

    Amaury S. Cifuentes; CFP®


  6. The SOX Win: How Financial Regulation Can Work

    The Sarbanes-Oxley law, also known as SOX, cleaned up corporate accounting. It provides hope for how the new financial regulatory law, Dodd-Frank, could work.
    Thanks for this post.



  7. 10th anniversary of Sarbanes Oxley is upon us

    We’ve been awash in anniversaries as of late–the second anniversary of the Flash Crash, the upcoming second anniversary of Dodd-Frank.

    But, the one that really sticks out is the tenth anniversary of the big daddy, Sarbanes-Oxley (Sarbox), which continues to make news.



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