Prepare Dentistar Case Problem 1, however, only prepare a flowchart of the subscriber termination refund process. Your submission is to be prepared using software that can be used to create flowcharts such as Microsoft Excel, Microsoft Visio, Lucid Charts, and then uploaded as a .pdf file. please add more details in flowchart.
Microsoft Word - 97-05a.doc AICPA Case Development Program Case No. 97-05: Dentistar, Inc. 1 _________________________________________________________________________________________ Copyright 1998 by the American Institute of Certified Public Accountants (AICPA). Cases developed and distributed under the AICPA Professor/Practitioner Case Development Program are intended for use in higher education for instructional purposes only, and are not for application in practice. Permission is granted to photocopy any case(s) for classroom teaching purposes only. All other rights are reserved. The AICPA neither approves nor endorses this case or any solution provided herein or subsequently developed. DENTISTAR, INC. Alan T. Lord, Associate Professor Bowling Green State University, Bowling Green, Ohio Robert J. Winiarski, Senior Consultant Arthur Andersen, Detroit, Michigan GENERAL BACKGROUND Dentistar, Inc. (“Dentistar”) was formed in 1985 to provide dental and orthodontic services to members of prepaid dental plans throughout the country. The core of the business grew out of the steel industry in the Pittsburgh area and spread through the surrounding region in support of major customers. Growth of the company, through acquisitions of similar organizations in the western, southern, and eastern portions of the United States, has been rapid (see Exhibit A). Dentistar employs approximately 400 individuals and maintains four primary locations. The combined corporate Headquarters and Central Region offices are located in Pittsburgh, Pennsylvania, while three additional regional offices are located in Los Angeles (West Region), Atlanta (South Region), and Boston (East Region). The bulk of the sales and marketing, management information systems, claims processing, finance, and accounting functions are maintained at Headquarters. The Regional office houses a sales and marketing force to recruit new subscribers and providers in the region, a member services team to respond to the requests and complaints of subscribers, and a small management team to oversee regional operations. An organization chart for the West Region is documented in Exhibit B. The geographic expansion of Dentistar resulted in operations in 29 states. The customers of the company are made up of three constituencies: the patients (subscribers), the dentists (providers), and groups (employers) contracting for the services. Dentistar provides services for approximately 250,000 families, which represents approximately 850,000 family members. The expansion of the company has enlarged the employer base such that the five largest industries served by Dentistar are the steel industry, the auto industry, public school districts, hospitals, and unions. The company’s primary product is the prepaid dental plan that is typically funded by a fixed monthly fee from the group purchaser (employer) in combination with employee contributions or a co-payment arrangement. While there is a wide variation in product offerings driven by customer requirements and regional practices, the basic Dentistar plan reimburses 50 to 100% of the subscribers’ dental costs, depending on the nature of the procedure performed. Dentistar has arrangements with over 15,000 providers nationwide. These dentists are paid a fixed monthly fee to provide primary care for Dentistar plan members that select their office for their dental AICPA Case Development Program Case No. 97-05: Dentistar, Inc. 2 services. Dentists are provided a list of Dentistar subscribers (patients) who are authorized to receive treatment through their office. AICPA Case Development Program Case No. 97-05: Dentistar, Inc. 3 DENTISTAR TASK ONE - INTERNAL CONTROL ANALYSIS Most accounting functions are performed at the corporate level in Pittsburgh. All payroll and cash receipts are processed at corporate; regional management has no involvement in the accounting for these transaction. Similarly, corporate accounting personnel process nearly all cash disbursements through the accounts payable function of Dentistar’s general ledger system. All monthly payments to dentists and the majority of routine regional operating expenses are recorded in Pittsburgh. While normal operating expenses are processed at corporate, each of the regions maintains the ability for the management of the region to issue manually written checks for operating expenses when there is insufficient time to have the normal accounts payable system issue checks from the home office. Corporate management does not specify policies or guidelines for the use of manual checks by regional management, and each region varies in the volume and nature of manual disbursements processed. Although the management of each region is responsible for drafting manual checks, the home office makes all deposits into the accounts. Corporate accounting personnel receive all bank statements directly from the banks and are responsible for reconciling the bank accounts for the regions and for insuring that there are adequate funds in the accounts to cover all checks that a region issues. The management of the regions does not have the information required to determine the cash balance in any of the checking accounts. The check forms used by each region contain two parts: the check that is detached and mailed to the payee, and a check stub that the region prepares as a record of the disbursement. Because the check stub is part of the same page of paper as the check itself, all information on the check must be rewritten onto the check stub to provide a record of support for the cash disbursement. In addition to the date, payee, and amount, the reason for issuing the check or the nature of the payment is noted on the check stub by regional management. Monthly, check stubs are mailed to the corporate office to facilitate the reconciliation of the bank accounts and to provide information to properly record the expenditures in Dentistar’s accounting records. The general ledger and all accounting records are maintained at the home office. Thus, the home office uses the stubs to account for the cash disbursements for the regions and to predict future cash needs to determine the necessary deposits to replenish the checking accounts. Until recently, Dentistar’s system of cash management had been operating reasonably well. However, during the last few months there have been several overdrafts in the operating bank account maintained at the West Region. Dentistar’s management has requested its newly hired internal audit manager, Sheila Tate, to examine the issue and determine the nature and source of the overdrafts. Through discussions with corporate management, Sheila learns that the volume of manual checks processed by the West Region is greater than that of the other three regions. West Region management issues manual checks each month for two types of transactions: subscriber termination refunds and expedited payments of operating expenditures. Subscriber Termination Refunds Refunds for the unused portion of their premium payments are issued to subscribers upon their request for termination from the plan. All refunds are processed at the regional office. Subscribers request a refund by either telephoning a regional member services representative or by sending a letter to the regional offices. The member services representative that handles a telephone request for termination documents various subscriber information, including the subscriber’s name, address, social security number, and the appropriate plan and provider number on a Refund Request form (see Exhibit C). Refund Request forms are forwarded to Tom Swindler, West Region Finance Coordinator, for payment. Written requests are received in the mail by the West Region’s executive assistant, Chris Martin, and forwarded directly to Tom Swindler for payment. Based upon the written termination request letter received directly from the subscriber or the Refund Request form prepared by member services, Tom Swindler prepares a Request for Payment Adjustment AICPA Case Development Program Case No. 97-05: Dentistar, Inc. 4 (see Exhibit D). The primary purpose of this form is to document the calculation of the amount of refund due the subscriber. Tom reviews the status of the subscriber’s policy and payment history on-line in Dentistar’s subscriber tracking system. Tom, as well as all West Region personnel, is limited in his ability to edit the subscriber tracking system. Within the subscriber tracking system, regional personnel can only edit subscriber addresses and initiate transfers of subscribers to different dentists. All other changes to the subscriber profile are processed at the Central Region Headquarters. Based upon the information in the subscriber tracking system, Tom calculates the amount of the refund and prepares the Request for Payment Adjustment. Tom Swindler forwards the Refund Request or subscriber letter and the Request for Payment Adjustment to Sally Trusts, West Region Director of Administration, for approval. After reviewing the forms to ensure all information has been properly documented thereon, Sally recalculates the amount of refund and approves the refund by signing the Request for Payment Adjustment. Sally does not review the information on line in the Dentistar subscriber tracking system to ensure that the data has been input on the forms correctly. Sally returns the supporting documentation and the approved refund to Tom Swindler. Tom Swindler prepares a manual check from the approved refund package and runs the check through a check signing machine, which affixes