The Implementation of Internal Control in the Financial Services Expenditure in a Hospital Department: A Case Study

The Implementation of Internal Control in the Financial Services Expenditure in a Hospital Department: A Case Study

Ana Cristina Vaz Pires Morim (University of Aveiro, Portugal), Helena Inácio (University of Aveiro, Portugal) and Elisabete Vieira (University of Aveiro, Portugal)
DOI: 10.4018/978-1-7998-1385-9.ch011
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The interest on internal control (IC) is increasing in the last years, namely in the public administration, including the hospitals. It is an instrument of management, administration, and control for assuring the organization's objectives in reliable financial reporting, operational effectiveness and efficiency, and compliance of laws, regulations, and policies, involving the controls risks. Better IC should yield more reliable on internal data, which lead to better internal decision-making. It then mitigates the risk of fraud. This study analyzes existing procedures and controls in the expenditure department of a public hospital, considering the human, material, and technical resources available to the systematization of effective control practices and the identification of key IC vulnerabilities. Thus, the authors use interviews and documentary analysis between December 2014 and 2015, proposing actions to mitigate the procedures vulnerabilities and a structure for an IC manual as a tool to promote the legality and efficiency of the management of public funds, as well as to prevent fraud.
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Managers in public costing centers should be accountable for the activities they carry out to achieve a better management of public funds (Dragija, Vašiček, & Hladika, 2011), and the internal control (IC) is a good mean to do that.

The IC is perceived as a management tool, contributing to compliance with criteria of economy, efficiency, and effectiveness, safeguarding legality, and promoting the trust of management bodies in procedures and processes, attending as assurance of the quality, reliability and accountability of the information provided by the different institution's services.

In addition, the public sector has been a fraud and the IC is also a good tool to prevent and detect fraud in this sector (Kamaliah et al., 2018). Accordingly to Gottschalk (2018) public hospital fraud is an important part of the annual amount of fraud in United States of America.

In recent years, the health sector and particularly the hospital area have undergone changes at the management level, particularly based on the need to improve the efficiency and quality of services.

The opportunity of this study rests on a Hospital Center (HC) created in the scope of the Portuguese hospital park, with a view to improving health care delivery, ensuring quality and offering diversification, universal access, but also services efficiency. However, it is subject to new regulatory mandates and changes in organizational support (Decree-Law no. 30/2011, of March 2).

Decree-Law no. 244/2012, of November 9, amended the legislation that established the legal regime and approved the statutes of hospitals and hospital centers of a business nature integrated into the National Health Service. These rules were based on the Court of Auditors1 recommendations in the scope of the IC of the public entities health sector and considering the modifications introduced to the Statute of the Public Manager. Therefore, to achieve the management efficiency and effectiveness in public hospitals it is necessary to implement an adequate IC system.

The Financial Services (FS), within the HC under study, play a decisive role for the good institution management. Within these services, the expenditure department is fundamental to ensure an adequate use of public money but does not have a manual of IC procedures. Thus, based on the analysis of existing procedures and controls and taking into account available human, material, and technical resources, it is intended to systematize effective control practices and identify vulnerabilities in order to structure an IC manual for the expenditure department.

It is hoped that this tool will allow a better understanding of the processes, the discovery of new solutions, the increase of productivity and the capacity of sharing information and knowledge, both from the operational point of view and from the analytical and decision support process. Additionally is hoped that it will be a good fraud prevention tool.

To achieve the objective, it was used interviews and documentary analysis. It should be noted that the framework used may be applied to any public entities, after the necessary adaptations, so it is an instrument to promote the legality and efficiency of the management of public funds.

The paper is organized as follows. The introduction presents and justifies the choice of subject. In the background, it is presented the most relevant concepts for the study and a characterization of the health system and the public hospital sector in Portugal. Next, the methodology used to reach the objective is presented, followed by the presentation of the case study, characterizing the HC, as well as the description of the processes and procedures of the expenditure department that will be the object of this study. At this point, the results obtained are presented, which constitute the recommendations for IC improvement of the HC, as well as the structure of the respective IC manual. Finally, the conclusions, limitations, and proposals for future work are presented.

Key Terms in this Chapter

Public Sector: The part of the economic system that is controlled by national, state or provincial, and local governments, and provides several governmental services. In the majority of countries, this sector includes services such as infrastructures, waste management, water management, health care, security services, and accommodations for homeless people.

Internal Control: A process carried out by the administration, management or other members of the entity, aiming to provide a reasonable degree of confidence in the achievement of operational reporting and compliance objectives.

Accountability: The legal and reporting framework, organizational structure, strategy, procedures and actions to help ensure that the Supreme Audit Institutions: meet their legal obligations with regard to their audit mandate and required reporting within their budget; evaluate and follow up their own performance as well as the impact of their audit; report on the regularity and the efficiency of the use of public funds, including their own actions and activities and the use of their resources; head and personnel can be held responsible for their actions.

EPE Hospital: A public institution endowed with its own legal personality, administrative, financial and patrimonial autonomy and business nature. The EPE hospitals are subject to strict control over the strategic orientations of the MH and the Ministry of Finance at the operational level and economic performance.

Functional Analysis: Analysis of each of the functions in an organization. The functions represent the set of processes that apply an appeal from the organization. Each function is performed within an organization through a functional area, which can be achieved through more organizational units (sectors).

Case Study: A research method that involves a detailed examination of a subject of study (the case), considering its related contextual conditions. The case to be studied can be an organization, an action, or an event, existing in a specific time and place.

Segregation of Duties: A control measure consisting in the separation of potentially conflicting functions, namely the authorization, approval, execution, control, and accounting record, must be assigned to different persons or departments in order to prevent the occurrence or dissimulation of errors.

Expenditure Department: The institutional department that is responsible for the financial resources, which is fundamental to ensure an adequate use of public money, once it controls the process of money applications in assets as well as the respective liabilities, in order to maximize the financial resources efficiency.

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