Financial Audit of the John A. Burns School of Medicine of the University of Hawaii_part1 docx

Financial Audit of the John A.
Burns School of Medicine of the
University of Hawaii
A Report to the
Governor
and the
Legislature of
the State of
Hawaii
THE AUDITOR
STATE OF HAWAII
Report No. 03-02
May 2002
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Office of the Auditor
The missions of the Office of the Auditor are assigned by the Hawaii State Constitution
(Article VII, Section 10). The primary mission is to conduct post audits of the transactions,
accounts, programs, and performance of public agencies. A supplemental mission is to
conduct such other investigations and prepare such additional reports as may be directed by
the Legislature.
Under its assigned missions, the office conducts the following types of examinations:
1. Financial audits attest to the fairness of the financial statements of agencies. They
examine the adequacy of the financial records and accounting and internal controls, and
they determine the legality and propriety of expenditures.
2. Management audits, which are also referred to as performance audits, examine the
effectiveness of programs or the efficiency of agencies or both. These audits are also
called program audits, when they focus on whether programs are attaining the objectives
and results expected of them, and operations audits, when they examine how well
agencies are organized and managed and how efficiently they acquire and utilize
resources.

3. Sunset evaluations evaluate new professional and occupational licensing programs to
determine whether the programs should be terminated, continued, or modified. These
evaluations are conducted in accordance with criteria established by statute.
4. Sunrise analyses are similar to sunset evaluations, but they apply to proposed rather than
existing regulatory programs. Before a new professional and occupational licensing
program can be enacted, the statutes require that the measure be analyzed by the Office
of the Auditor as to its probable effects.
5. Health insurance analyses examine bills that propose to mandate certain health
insurance benefits. Such bills cannot be enacted unless they are referred to the Office of
the Auditor for an assessment of the social and financial impact of the proposed
measure.
6. Analyses of proposed special funds and existing trust and revolving funds determine if
proposals to establish these funds are existing funds meet legislative criteria.
7. Procurement compliance audits and other procurement-related monitoring assist the
Legislature in overseeing government procurement practices.
8. Fiscal accountability reports analyze expenditures by the state Department of Education
in various areas.
9. Special studies respond to requests from both houses of the Legislature. The studies
usually address specific problems for which the Legislature is seeking solutions.
Hawaii’s laws provide the Auditor with broad powers to examine all books, records, files,
papers, and documents and all financial affairs of every agency. The Auditor also has the
authority to summon persons to produce records and to question persons under oath.
However, the Office of the Auditor exercises no control function, and its authority is limited to
reviewing, evaluating, and reporting on its findings and recommendations to the Legislature and
the Governor.
THE AUDITOR
STATE OF HAWAII
Kekuanao‘a Building
465 S. King Street, Room 500
Honolulu, Hawaii 96813

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The Auditor State of Hawaii
OVERVIEW
Financial Audit of the John A. Burns School of Medicine of
the University of Hawaii
Report No. 03-02, February 2003
Summary
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The Office of the Auditor and the certified public accounting firm of Deloitte &
Touche LLP conducted a financial audit of the John A. Burns School of Medicine
of the University of Hawaii for the fiscal year July 1, 2001 to June 30, 2002. The
audit examined the financial records and transactions of the school; reviewed the
related systems of accounting and internal controls; and tested transactions,
systems, and procedures for compliance with laws and regulations.
We found deficiencies in the internal control practices of the school. The school’s
administration and management of its contracts with health care organizations that
provide training and medical services are deficient. The contracts require the
organizations to reimburse the school for salary, fringe benefit, and professional
malpractice insurance premium costs of faculty providing medical services for the
respective organizations while conducting training.
We found that all of the contracts, 28 during FY2001-02, were signed and executed
subsequent to the contract start date. School faculty provided services for at least
four months and approximately $2.3 million in expenses were incurred, before the
health care organizations could be billed. As a result, the school’s cash flow was
negatively impacted and interest that could have been earned on the amounts
outstanding was lost. Also, the performance of services in the absence of executed
contracts could expose the school to potential disagreements with the health care

organizations and legal risks.
We also found that the school does not complete final reconciliations of the
amounts due from the health care organizations in a timely manner. As of mid-
October 2002, the final reconciliations for FY2001-02 were not completed, and
bills that would cover the final month of service, as well as any necessary
adjustments, had not been sent out. Here also, the school’s cash flow was
negatively impacted as funds remained outstanding for about four months and any
potential interest income was lost.
Finally, we found that the school does not comply with University of Hawaii
policies and procedures regarding conflict of interest situations involving school
faculty. University faculty are encouraged to promote the state’s cultural and
economic development by utilizing their special abilities and skills in research,
teaching, or other areas over and above their university positions. However, limits
are placed on such outside employment to ensure that employment does not
interfere with the faculty’s primary obligation to the university.
University faculty are required to submit disclosure forms and outside employment
forms. We found that a significant portion of these forms were either not
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Report No. 03-02 February 2003
Marion M. Higa Office of the Auditor
State Auditor 465 South King Street, Room 500
State of Hawaii Honolulu, Hawaii 96813
(808) 587-0800
FAX (808) 587-0830
completed or were not submitted in a timely manner. We also found that the
policies and procedures were not enforced by school administrators. By not
enforcing the requirement for submitting disclosure forms and outside employment
forms, potential conflict of interest situations which interfere with an employee’s
obligation to the school may not be identified or adequately resolved. Employees

could spend too much time supplementing their income with outside activities at
the expense of their responsibilities to the school. Also, in cases where research
is funded by non-university sources, the sponsor may even sanction the university,
if appropriate, because of a conflict of interest.
We recommend that the school revise the way it handles contract negotiations with
health care organizations, and commence services only after contracts are finalized
and executed. The school should also review the process used to prepare the final
contract reconciliations and ensure that the final bills are sent out in a timely
manner.
We also recommend that the school enforce policies, procedures, and deadlines for
completion and submission of the annual disclosure forms and outside employment
forms.
The university agrees with our recommendations and responded that it has already
taken steps to implement some of our recommendations.
Recommendations
and Response
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Financial Audit of the John A.
Burns School of Medicine of the
University of Hawaii
Report No. 03-02
February 2003
A Report to the
Governor
and the
Legislature of
the State of
Hawaii
Conducted by

The Auditor
State of Hawaii
and
Deloitte & Touche
LLP
THE AUDITOR
STATE OF HAWAII
Submitted by
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Foreword
This is a report of the financial audit of the John A. Burns School of
Medicine of the University of Hawaii for the fiscal year July 1, 2001 to
June 30, 2002. The audit was conducted pursuant to Section 23-4,
Hawaii Revised Statutes, which requires the State Auditor to conduct
postaudits of all departments, offices, and agencies of the State and its
political subdivisions. The audit was conducted by the Office of the
Auditor and the certified public accounting firm of Deloitte & Touche
LLP.
We wish to express our appreciation for the cooperation and assistance
extended by officials and staff of the John A. Burns School of Medicine
of the University of Hawaii.
Marion M. Higa
State Auditor
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v
Table of Contents
Chapter 1 Introduction
Background 1

Organization of the John A. Burns School of
Medicine of the University of Hawaii 3
Other Entities Involved with the Medical School 3
Objectives of the Audit 5
Scope and Methodology 6
Chapter 2 Internal Control Deficiencies
Summary of Findings 7
The Administration and Management of Contracts
Are Deficient 7
Recommendations 10
The School Does Not Comply with University of
Hawaii Policies and Procedures Regarding
Conflict of Interest Situations 10
Recommendation 14
Chapter 3 Financial Audit
Summary of Findings 15
Independent Auditors' Report 15
Report on Compliance and on Internal Control Over
Financial Reporting Based on an Audit of Financial
Statements Performed in Accordance with
Government Auditing Standards 17
Description of Financial Statements 18
Notes to Financial Statements 18
Response of the Affected Agency 43
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vi
List of Exhibits
Exhibit 1.1 Organization Chart of the John A. Burns School
of Medicine of the University of Hawaii 4

Exhibit 3.1 Statement of Net Assets, June 30, 2002 37
Exhibit 3.2 Statement of Revenues, Expenses, and Changes in
Net Assets, For the Year Ended June 30, 2002 39
Exhibit 3.3 Statement of Cash Flows, For the Year Ended
June 30, 2002 41
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1
Chapter 1: Introduction
Chapter 1
Introduction
This is a report of our financial audit of the John A. Burns School of
Medicine of the University of Hawaii. The audit was conducted by the
Office of the Auditor and the independent certified public accounting
firm of Deloitte & Touche LLP. The audit was undertaken pursuant to
Section 23-4, Hawaii Revised Statutes (HRS), which requires the State
Auditor to conduct postaudits of the transactions, accounts, programs,
and performance of all departments, offices, and agencies of the State of
Hawaii (State) and its political subdivisions.
The John A. Burns School of Medicine (school) is part of the University
of Hawaii’s College of Health Sciences and Social Welfare. The
University of Hawaii (university) is a statewide system of postsecondary
education, comprised of two four-year campuses and one upper-division
campus, seven community colleges, research institutes, experimental
stations, and a cooperative working arrangement with the federally
supported East-West Center. The university was established by the state
Constitution.
The School of Medicine was established in 1965 as a two-year program
of basic medical sciences, and enrolled its first students in 1967. It
became a four-year degree-granting program in 1973. Since then, nearly

1,600 individuals have received their M.D. degrees from the school, and
approximately 60 percent of practicing physicians in the state are
graduates of the M.D. program or one of its residency programs. The
school also offers advanced degrees in public health and basic sciences.
The school’s original purpose was to provide a previously unavailable
opportunity for a medical education to residents of Hawaii and other
Pacific nations. Currently, the school’s primary focus is to teach and
train students to become quality physicians, biomedical scientists, and
allied health workers to improve health care in Hawaii and the Pacific
region.
Two unique features of the school’s programs include its problem-based
learning curriculum and community-based medicine program.
Traditional education systems emphasize teacher-directed learning,
passive student participation, and memorization of large quantities of
information. In a problem-based learning approach, students are self-
directed and responsible for their own learning. According to the school,
students are trained to think critically and evaluate new information and
Background
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Chapter 1: Introduction
research data. They are also required to apply their new knowledge to
current problems and situations. The school further states that instead of
merely listening in crowded, impersonal lecture halls, students discuss
health-related issues with a faculty member in small group settings.
The school also uses a community-based medicine program. It does not
own a university teaching hospital, but bases its clinical instruction in
affiliated community hospitals and clinics. According to the school, this
approach has many benefits: it is more economical, students are placed

into the real world of day-to-day clinical activity from the start of their
medical training, and it involves extensive participation of community
physicians and other health professionals in the training of future
physicians. The first two years of medical school activities take place in
community health sites and the Biomedical Sciences Building on the
campus of the University of Hawaii at Manoa. The second two years of
instruction consist primarily of advanced clinical instruction and take
place in affiliated community hospitals and clinics.
Effective July 1, 1998, the University of Hawaii autonomy bill – Act
115, Session Laws of Hawaii (SLH) 1998 – paved the way for university
autonomy in matters involving its internal structure, management, and
operations. In November 2000, voters granted the university
constitutional autonomy to allow the university’s Board of Regents
greater freedom in governing its internal matters. Accordingly, the
university is now exempt from certain Hawaii Revised Statutes that
regulate other state agencies.
The school’s mission is to educate students to become outstanding
physicians, scientists, and other health care professionals; and to conduct
research in areas of specific interest to the region and community.
Due to the lack of its own teaching hospital, the school maintains
affiliations, both formal and informal, with the following community
hospitals and medical facilities for medical student and resident training:
Kapiolani Medical Center for Women and Children, Kapiolani Medical
Center at Pali Momi, St. Francis Medical Center, St. Francis Medical
Center-West, The Queen’s Medical Center, Tripler Army Medical
Center, Straub Clinic and Hospital, Kuakini Medical Center, Shriners’
Hospital, Kaiser Medical Center, Wahiawa General Hospital, Waianae
Coast Comprehensive Health Center, Kalihi-Palama Health Center,
Rehabilitation Hospital of the Pacific, Leahi Hospital, U.S. Veteran
Affairs Outpatient Clinic, and the Hawaii State Hospital.

Autonomy
Mission
Hospital affiliations
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