| I. PURPOSE
| | To establish the financial responsibility requirements and procedures for contractors that have a Legal Entity Agreement (LEA) with a current term with the County of Los Angeles Department of Mental Health (DMH/Department). -
Such financial requirements shall be consistent with the principles of County contracting set forth in the County's Orientation to Basic Principles of County Contracting collaboratively issued by the Auditor-Controller, County Counsel, Department of Human Resources, and Internal Services Department.
-
The DMH shall conduct annual reviews of LEA contractors' financial statements.
-
The results of the analysis are intended to inform DMH management about the financial solvency of each LEA contractor thereby:
-
Improving DMH's decision making process for current and future contracting; and -
Facilitating the identification of any contractors that may be experiencing financial difficulties. In this situation DMH will be better able to take timely action in assisting a contractor which because of its financial position may present unnecessary risk to either client care or to the County's public interest. To identify which types of contracts are waived in part or in whole from this Policy/Procedure and the reasons for the waiver.
This Policy is not applicable for a prospective contractor that does not have a contract with a current term with the DMH. Prospective contractors soliciting DMH for a contract are referred to DMH Policy 1002.01.
| | II. DEFINITIONS
| | Compiled Statements: A presentation, in the form of financial statements, of the representation of the owners or managers with no assurance made by the Certified Public Accountant (CPA). As a result, compiled financial statements are substantially less costly than audits or reviews.
Reviewed Statements: Statements that look just like those from an audit, but the independent accountant's report does not provide quite the level of assurance that an audit does. The report typically concludes that nothing came to the reviewer's attention to cause them to believe that the financial statements were not prepared in accordance with the Generally Accepted Accounting Principles (GAAP).
Audited Statements: May either be in a Securities and Exchange Commission Form 10-K or annual report. Only audited statements have an opinion of a CPA. -
Unqualified Opinion: When an auditor has expressed an opinion on the basis of an examination of the entity's financial records made in conformity with generally accepted auditing standards and when the financial statements fairly present the financial position, results of operations and changes in financial position in accordance with GAAP and include appropriate informative disclosures.
-
Qualified Opinion: When an auditor issues qualifications to the opinion. Usually "except for" (such as not accounting for certain things in accordance with GAAP) or "subject to" (such as litigation where outcome is not known). The auditor identifies the qualifications, reason, and impact on the statements.
-
Adverse Opinion: When the financial statements do not fairly present the entity's financial position and the unfairness is material enough so as not to elicit a qualified opinion.
-
Disclaimer of Opinion: No opinion at all due to lack of independence of the auditor, material uncertainties not under the entity's control, or no audit was performed. Liquidity Ratios: This refers to the ability of an entity to meet its short-term financial obligations when and as they fall due. There are two (2) liquidity ratios that apply to this process and they are as follows: -
Quick Ratio: Sometimes called Acid Test Ratio, is calculated by adding cash, short-term investments, and accounts receivable divided by current liabilities. Similar to Current Ratio, but is considered a more reliable indication of an entity's ability to meet its obligation.
-
Current Ratio: Total current assets divided by total current liabilities. The entity's financial position is stronger and more liquid as the current ratio increases. Profitability Ratio: Expense to Income Ratio - Total expenses before taxes minus non-cash expenses (i.e., depreciation, amortization, etc.), and other charges due to reserve/contingency transaction(s) divided by Gross Income. It measures the ability to generate income in excess of expenses. A lesser ratio indicates better financial operations for the entity.
Tangible Net Asset (Equity) Requirement: Total Assets, excluding goodwill, patents, copyrights, trade names, secret formulas, franchises, licensing, leasehold costs, and organizational costs (if any) minus total liabilities. An entity must have at least positive balance or more in net asset to pass the requirement; an agency with negative balance is considered weak.
| | III. POLICY
| | Nothing in this policy is intended to limit or restrict the ability of the DMH to conduct any reviews it deems appropriate during a contract period including, but not limited to, the financial viability assessments which are the subject of this Policy.
DMH shall perform an annual analysis of each contractor's financial statements to determine the financial viability status of the contractor. -
A contractor shall submit current compiled, reviewed, or audited financial statements annually. Under normal circumstances, "current' refers to the financial statements for the immediate preceding year. DMH will not accept financial statements for a fiscal year or year ending period that is more than 18 months prior to their submission to DMH. The economic size or revenue base of the contractor will dictate the format of the financial statement that must be submitted for evaluation. -
A contractor with annual revenues averaging up to $49,999 must submit compiled, reviewed, or audited financial statements. -
A contractor with annual revenues averaging from $50,000 - $499,999 must submit reviewed, or audited financial statements. -
A contractor with annual revenues over $500,000 must submit audited financial statements. Contractors, as identified in Non-Legal Entity Agreement Contractors - Full or Partial Waiver From Annual Re-evaluation Requirements, that do not have a LEA are required to submit the above mentioned financial statements only when renewing their contracts or merging/acquiring another entity, or may be exempt from submitting financial statements. This is because other conditions are applicable such as State Provider participation requirements, there is no or minimal risk to mental health clients in the event of default, another County Policy/Procedure is controlling, and/or the entity is another government or quasi-government entity. These Non-Legal Entity Agreement Contractors are paid only in arrears during the term of their agreement/contract/MOU with the DMH.
| | IV. PROCEDURES
| | | | V. AUTHORITY
| | DMH Administrative Directive
| | VI. ATTACHMENTS
| | | |
|
