Tillett are "disclosed in the financial statements." Furthermore, the matters not disclosed by C&L to the Audit Committee, including the reserve transfers, concealed the true seriousness of AHEW's "deteriorating financial condition." Indeed, the very reason the reserve transfers were made was to avoid the recognition of bad debt expense.In summary, C&L's decision to withhold disclosure of the reserve transfers from the Audit Committee is contrary to GAAS, and, therefore, Mr.
Case -cv-00684-DSC Document 143-9 Filed 07/11/2005 Page 1 of 50 Materiality Mr.Tillett asserts that my "opinions on materiality are based solely in relation to net income" which, Mr.Tillett asserts that C&L (a) "relied on their past experience with the Audit Committee; what they believed to be the Audit Committee's expectations; the sensitivity of the matter; and other business factors" and (b) "communicated more to the Audit Committee than [the Audit Committee] wanted."23 As support for his assertions, Mr.Tillett cites C&L7s management letters which, he states, "were provided to the Board of ~ r u s t e e s " ~ ~ C&L believed the Board of Trustees (the "Board") should be aware of and the issues facing AHERF."~~ and "indicat[ed] items that Although it appears that C&L7s communications required by SAS 61, Communications with Audit Committees, contained the customary "boilerplate" language, neither C&L7s management letters nor its required communications under SAS 6 1 contain disclosures of the million reserve transfers from the Graduate hospitals to the DVOG hospitals. Tillett's rationale as to why the " Million Reserve transfer..In such an environment, the common misuse of facts to manage earnings requires correction of errors or irregularities to be accounted for as prior period adjustments. Tillett asserts that "[mlany of the items that [I] allege to be errors simply involve changes in estimates that are necessary when evaluating patient accounts receivable of a healthcare entity."28 However, Mr.
Tillett fails to understand the conclusions set forth in my expert report that prior period adjustments are errors or irregularities attributable to the misuse of facts that existed at the balance sheet date or arose from improper application of accounting principles-as Accordingly, Mr.
not warrant communication to the audit committee" is that "C&L reasonably concluded.. 24 The Board of Trustees included members of the Audit Committee. Case -cv-00684-DSC Document 143-9 Filed 07/11/2005 Page 3 of 50 To the contrary, it is my view that the improper transfer of million of reserves between subsidiary entities lacked economic substance and was an intentional, material misstatement by AHEW's management of the separate operating results of AHEW's Obligated Groups.
transfers did not have a significant effect on the consolidated financial statements" and C&L "did not consider [the transfer] a material error or irregularity." (emphasis added) 20 Statement of Financial Accounting Concepts No. Therefore, as discussed previously, such transfer was an irregularity under SAS 53.
Tillett claims, "is inconsistent with the [relevant accounting] guidance [set forth in his report]."'6 (emphasis added) However, Mr.
Tillett has completely misstated the opinions set forth in my report, which included, among other things, the following conclusions regarding materiality: Mr.
Buettner's assessment of materiality based on "fund balance," apparently to the exclusion of other important evaluations, is errone~us.'~ Given the significance of operating results to the users of the financial statements of AHERF and its Obligated Groups and the nature of AHEW and its affiliates as essentially business organizations, neither GAAS nor C&L7s own guidance provided any reasonable basis for C&L to conclude that a balance sheet measure, such as net assets (fund balance), should be the primary determinant of materiality with respect to AHERF's financial statements.'* Although balance sheet elements, such as net unrestricted assets or total net assets, may be appropriate in measuring materiality in some circumstances, they certainly do not represent the only financial statement elements that might be relevant to the auditor's assessment of materiality or to the entity's financial statement users. Case -cv-00684-DSC Document 143-9 Filed 07/11/2005 Page 2 of 50 Finally, as noted in my expert report, GAAP indicates that the "omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item."20 In other words, the ultimate test of materiality is what users care about. Tillett asserts that I have applied the rollover method when considering the effects of my adjusting entries and am using a method inconsistent with that used by c&L."~' However, Mr.