Respond To The Following Discussion As A Board Of Directors ✓ Solved

Respond to the following discussion as a Board of Directors

Respond to the following discussion as a Board of Directors member: Board of Directors, I understand that we had a recent incident where our surgeon accidently left behind a tool of his in our patient's body during an operation. I am here today to explain what impact this will have on our financial statement. So there are essentially two options we have, either we must accrue for this possible expense as a liability on our financials, or we could simply create a disclosure footnote for the time being (the better suited option). I will now explain the three factors that will help us decide how we must account for this. First, if this incident happened before the financial statements date (during the current year fiscal reporting period), then that is one condition that must be met for the event to be accrued. The second is if this incident and the contingent loss and expenses can be reasonably estimated, and the third is how probable it is that the contingency will come to fruition and be a true realizable expense. If all these are satisfied, we must accrue for the liability based off the nature of the expense. If we have insurance for these types of matters, we can present it as an insurance type expense. If the patient and his family did not express they would be filing a lawsuit, we would not have to make a disclosure if those three accrual based criteria were not met, but since it seems probable that they would make such a claim eventually, to be safe and not misleading, we must at least make a disclosure on our financials. In that case, we must explain the nature of the contingency and attempt to provide an estimate or provide a number range of where the damage figures would lie, and perhaps we must contact our actuary for these estimates and ranges. Best, Romeo

Paper For Above Instructions

Executive Response Summary

Thank you, Romeo, for the clear summary. Based on authoritative accounting guidance, our response should balance faithful financial reporting with transparent disclosure to stakeholders. Under U.S. GAAP, accrual of a liability for contingencies is required when the event occurred before the balance sheet date, an amount can be reasonably estimated, and loss is probable (FASB ASC 450, 2020). If any of those criteria are not met, but the contingency remains reasonably possible or probable but not estimable, disclosure is required (FASB ASC 450, 2020; AICPA, 2015). Internationally, IAS 37 uses comparable criteria for provisions and contingent liabilities (IAS 37, 2019).

Application of Criteria to This Event

1. Timing: If the surgical instrument was retained prior to the financial statement date, the first criterion is satisfied and must be considered for accrual (FASB ASC 450, 2020). 2. Estimability: Reasonable estimation should include expected medical remediation costs, potential litigation damages, defense costs, and probable insurer recoveries. If management, with actuarial assistance, can develop a reliable estimate or range, accrual is required (CAS, 2018; HFMA, 2016). 3. Probability: “Probable” in accounting terms typically means likely to occur. Given the patient and family’s probable intention to file a claim and the known clinical harm of retained instruments, probability may be present (Studdert et al., 2006; The Joint Commission, 2017).

Recommendation: Accrue or Disclose?

Based on your description indicating the family is likely to claim and assuming the incident occurred before the reporting date, we should move toward recording an accrual if a reasonable estimate can be developed. If estimation remains too uncertain, the minimum required action is a robust disclosure footnote describing the nature of the event, the potential financial exposure (a best estimate or a range if attainable), insurance coverage, and management’s view on likelihood (FASB ASC 450, 2020; AICPA, 2015). This approach prevents misleading financial statements and aligns with professional standards (IAS 37, 2019).

Practical Steps for Compliance and Governance

1. Convene cross-functional team: legal counsel, finance, risk management, clinical leadership, and an actuary should collaborate immediately to evaluate facts, estimate exposure, and determine insurance applicability (CAS, 2018; HFMA, 2016). 2. Document facts and timing: ascertain when the instrument was retained relative to the fiscal cutoff to determine accounting period applicability. 3. Obtain insurer position: confirm coverage limits, deductible, and subrogation expectations to determine net exposure. 4. Produce disclosure language: if not accruing, prepare a precise footnote describing the event, current status, potential range of loss (if available), and the uncertainty surrounding any estimate (FASB ASC 450, 2020). 5. Remediation and control improvements: disclose remediation steps and planned control enhancements (e.g., surgical counts, WHO checklist adherence) to address operational risk and reputational exposure (WHO, 2008; AHRQ, 2014).

Board-Level Considerations

The board should be briefed on both the accounting treatment and enterprise risk implications. Materiality, the potential for adverse publicity, regulatory reporting obligations, and possible impacts on reserves and covenants must be considered. Where an accrual is recorded, present the net amount after probable insurer recoveries and disclose the gross exposure and insurer terms (Kieso et al., 2020; HFMA, 2016). If only disclosure is made, ensure the note is specific enough to allow users to understand the exposure and uncertainties (FASB ASC 450, 2020).

Concluding Recommendation

Immediate action: assemble the cross-functional team, retain an actuary to produce a defensible estimate or range, and request a legal assessment of claim probability. If the actuary and legal team conclude a loss is probable and estimable, record an accrual consistent with ASC 450 and disclose insurer expectations. If the loss is probable but not reasonably estimable, prepare a comprehensive disclosure footnote now and update promptly when better information is available. Transparent, timely disclosure coupled with remediation and controls reporting will protect stakeholders and demonstrate sound governance (AICPA, 2015; The Joint Commission, 2017).

References

• Financial Accounting Standards Board. (2020). FASB Accounting Standards Codification Topic 450: Contingencies. Norwalk, CT: FASB.
• International Accounting Standards Board. (2019). IAS 37—Provisions, Contingent Liabilities and Contingent Assets. London: IFRS Foundation.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (17th ed.). Hoboken, NJ: Wiley.
• American Institute of Certified Public Accountants. (2015). Audit Guide: Litigation and Claims. AICPA.
• The Joint Commission. (2017). Retained Foreign Object. The Joint Commission Sentinel Event resources.
• World Health Organization. (2008). WHO Surgical Safety Checklist and Implementation Manual. Geneva: WHO.
• Agency for Healthcare Research and Quality. (2014). Preventing Retained Surgical Items Toolkit. AHRQ.
• Healthcare Financial Management Association. (2016). Accounting for Contingencies and Reserves in Healthcare Organizations. HFMA.
• Casualty Actuarial Society. (2018). Guidance on Estimating Loss Reserves and Ranges. CAS.
• Studdert, D. M., Mello, M. M., & Gawande, A. A. (2006). Claims, errors, and compensation payments in medical malpractice litigation. New England Journal of Medicine.