Project Gulf – 2. Notice to the Readers

This report has been prepared in accordance with our Letter of Engagement dated 27 September 2011 and an addendum to the Letter of Engagement dated 25 November 2011 (together referred to as the “LOE”), signed with Hogan Lovells US LLP and the American University of Beirut (AUB).

The work performed by us on this engagement and the time periods for review have been discussed and agreed with Mr. Mark Cliff on behalf of the Legal Counsel and are referred to in the respective sections. Further, post discussion with Mr. Cliff, procurement of capital equipment at AUBMC was excluded from the scope of this investigation.

This report is based on the information and evidence obtained through our field work up to 28 February 2012. Should additional information or documentation become available which impacts the findings in our report, we reserve the right to amend our findings and report accordingly.

2.1. Limitations

• The contents of this report are based on the information provided to KPMG by representatives of AUB through discussion and/or documents provided. Although, where appropriate, supporting evidence has been sought, we have not independently verified the sources of information unless stated otherwise in the report.
• Our work does not constitute an audit and the scope of our work is significantly different from that of an audit and cannot therefore be relied upon to provide the same level of assurance as an audit.
• We have relied on verbal representations made by various persons during the course of the engagement. Accordingly, certain information in this report may be hearsay and may not be accurate or reliable when identified as being alleged or of unknown reliability. We have identified the information that may be hearsay and indicated accordingly in the report.
• In accordance with its policies, KPMG advises that neither it nor any Partner or employee undertakes responsibility arising in anyway whatsoever, to any person other than our client with respect to the matter dealt with in this report, including any errors or omission therein, arising through negligence or otherwise, however caused.
• We have neither performed a comprehensive fraud risk review nor a review of the IT systems. Our observations, therefore, do not encompass the complete list of weaknesses / gaps that may currently exist across the select processes reviewed.
• We were provided with varying sets of data pertaining to inventory, billing, allowances and purchase orders at various points in time. Our observations are based on the relevant data sets mentioned in the respective sessions. We have not independently validated the completeness and accuracy of the data provided or reconciled the data sets with financial statements/trial balance. We also did not attempt to compare the data provided at various intervals to understand the variations amongst these data sets and the reasons thereof.
• We have not conducted market intelligence to identify if there was any potential collusion between vendors, patients and/or employees except for limited public domain searches in specific instances. Further, we have not conducted email reviews for any employees.
• We have not attempted to independently validate from FDA or other websites, if select sample drugs were patented and therefore sourced from a single vendor.
• We have not engaged the services of a Pharmacology expert to evaluate the existence and availability of alternative drugs in Lebanon. Further, we have not assessed the availability of alternative sources of supply with respect to medical supplies purchases.
• We were informed that transactions with ‘zero’ unit price need to be construed as F’OC drugs and our review with respect to FOC drugs was based on this assumption.
• Given the limitations in access to data, information and records, the results of our work with respect to review of transactions should be considered only as a guide to the key issues which exist across the select processes. Our report and comments should not be considered as a definitive pronouncement on any individual or AUB.

2.2. Restrictions

This report is privileged and confidential and neither intended for general circulation or publication; nor is it to be reproduced or used for any purpose without our prior written consent in each specific instance, in whole or in part, other than to assist with this specific matter. We disclaim all responsibility for any costs, damages, losses, liabilities, expenses incurred by anyone as a result of circulation, publication, reproduction or use of our reports contrary to the provisions in this paragraph.

Project Gulf – 1. Glossary

Acronym	Description
Allowance	Allowance is the loss suffered by AUBMC for patients covered by specific guarantors as contractual rates offered by these guarantors are less than AUBMC rates
AR	Accounts receivable
AS 400	An information technology platform on which billing, supply, inventory and pharmacy management application are developed and currently operated by AUBMC
AUB	American University of Beirut
AUBMC	American University of Beirut Medical Center
AUB Campus	American University of Beirut excluding AUBMC
BHF	Brave Heart Foundation
CCCL	Children Cancer of Lebanon
CFO	Chief Financial Officer
COO	Chief Operating Officer
Dr. Baba	Dr. Dania Baba, Chief Operating Officer, AUBMC
Dr. Hoballah	Dr. Jamal Hoballah, Chairman of Surgery, AUBMC
Dr. Tahir	Dr. Adnan Tahir, Medical Center  Director and Chief Medical Officer
Dr. Usta	Dr. Ulfat Usta, Chief Pharmacist, AUBMC
EMA	European Medicines Agency
FDA	United States Food and Drug Administration
FOC drugs	Drugs provided “Free of cost” by vendors
IA	Internal Audit
IT	Information Technology
ISS	International School Services
Legal Counsel	Hogan Lovells US LLP
LoE	Letter of Engagement (dated 27 September 2011 and addendum thereof dated 25 November 2011)
MIS	Management Information System
MOH	Ministry of Health
MMD	Material Management Department
Mr. Achkar	Mr. Johnny Achkar, AR Manager – AUBMC
Mr. Antoun	Mr. Samir Antoun, Billing Manager – AUBMC
Mr. Chartouni	Mr. Nabil Chartouni, erstwhile trustee of AUB
Mr. Cliff	Mr. Mark Cliff, Coordinator on behalf of the Committee
Mr. Fadi Moghaizel	Legal advisors to AUB
Mr. Kenny	Mr. Stephen Kenny, Vice President, Finance, AUB
Mr. Nasreddine	Mr. Fadi Nasreddine, Ex- Bid Administrator
Ms. Rashed	Ms. Anna Maria Abi Rashed, Director, Material Management Department
Mr. May	Mr. Peter May, Vice President, Legal Affairs, AUB
Mr. Uthman	Mr. Walid Uthman, CFO – AUBMC
Ms. Coudsy	Ms. Maya Coudsy, Controller – AUBMC
Ms. Ghannoum	Ms. Rania Ghannoum, Patient Access Manager – AUBMC
Ms. Mteirek	Ms. Rania Mteirek, Director – Purchasing, AUBMC
Ms. Ramadan	Ms. Hanan Itani Ramadan, Director of Purchasing, AUBMC Campus
NSSF	National Social Security Fund – Lebanon’s State Medical Insurer
Oracle platform	Oracle Enterprise Resource Planning System
PAO	Patient Access Officer
P&T committee	Pharmacy and Therapeutics Committee.  Authorized to approve drugs that can be used by AUBMC
PEC	Product Evaluation Committee. Authorized to approve medical supplies that can be used by AUBMC.
PO	Purchase Order
Public Prices	Prices of drugs in Lebanon as regulated by the MOH
The Board	AUB’s Board of Trustees
TR	Traveler Receipt
The Committee	Ad Hoc Review Committee
USD	United States Dollars

 

Project Gulf – 4. Executive Summary

Although our limited review did not highlight any identifiable instance of wrong doing in the area of procurement and billing, we observed several irregularities including bypassing of basic established processes and controls by the employees of AUBMC. These, along with the absence of certain other basic but critical controls, weak information technology systems and absence of documented policies and procedures contributed to a vulnerable control environment. Further, the absence of a robust management information system impacted the monitoring mechanism and management decision making, thereby limiting AUBMC’s ability to prevent and detect fraud. Therefore, we do not rule out the possibility of fraud by employees or vendors/patients either independently or in collusion with each other that could have resulted in a potential loss to AUBMC. On the basis of our limited review of data and documents and our discussions with AUB personnel, our key findings are summarized below.

4.1. Procurement
During our review, performed for the period 1 October 2008 to 30 September 2011, we noted issues such as end-users circumventing the procurement department for purchases, absence of documented policies and procedures, procurement without bidding, purchases agreed at prices higher than the bid submission and the absence of vendor due diligence.

The following is a summary of our key findings in the procurement function:

• Procurement of medical supplies particularly consignment items and non-catalogued items, was undertaken directly, at least in part, by end users circumventing the procurement department and therefore, was not subjected to a competitive bidding process. Due to limitations in the IT system to identify such purchases, it is difficult to determine whether the prices paid for these items were appropriate.
• For purchases of medical supplies aggregating to USD 17 million (comprising 66% of the sample of medical supplies analyzed), no bidding was conducted during the three year period and purchases had been made from a single source. Further, no bidding was conducted for the purchase of non-catalogued items. The total value of purchases of non-catalogued items could not be quantified in the absence of a unique identifier in the database. Procurement of medical supplies without competitive bidding increases the risk of procurement at inflated prices.
• We were informed that the bid administrator, Mr. Fadi Nasreddine, was terminated for soliciting kickbacks from vendors in November 2011. He handled all bids pertaining to procurement of drugs and medical supplies during his tenure as bid administrator and therefore the possibility of him having manipulated previous bids cannot be ruled out. Document limitations, such as the non-retention of envelopes, limit the ability to identify instances of bid manipulation.
• No FOC drugs were received against purchases of approximately USD 15 million comprising 27% of total drugs purchased during the three year period. A sample review of transactions highlighted that in 67 instances FOC drugs were either not ordered or ordered but not received.
• Purchase of certain medical supplies was done through the ISS despite the fact that ISS specializes in procurement of school materials and equipment. The contract which was entered into with ISS had been renewed annually for the past 10 years without any competitive bidding process. Further, we were informed that AUB did not perform any review of purchases made through ISS or of the bidding process followed by ISS, so long as these were within AUB’s budget, increasing the risk of purchases at inflated prices.
• Multiple anomalies were noted on review of the sample bid documents and related purchase documents. These include wrongful rejection of a bidder, the selection by end users of specific products without considering alternative products and non-adherence to bidding terms and conditions by vendors.
• No process was defined for conducting vendor due diligence, thereby exposing AUBMC to multiple risks including the risk of conflicting relationships, fictitious vendors etc. Also, the vendor master data was incomplete, which limits the possibility of identifying potential conflicting relationships.
• Other issues noted included the absence of documented policies and procedures, the exclusion of consignment and non-catalogued items from product evaluation, the failure to maintain a comprehensive list of evaluated drugs and an inadequate segregation of duties in drugs evaluation and purchases.

4.2. Billing
During our review, performed for the period 1 October 2009 to 30 June 2011, we noted risk of under-billing by means of providing bed upgrades or cancellation of charges in the bills but these issues could not be analyzed in detail due to the absence of an audit trail and inadequate documentation. Various other issues were also observed, such as inconsistent issuance of discounts, potential non-compliance with NSSF guidelines, discrepancies between inventory issued and their billing to patients and non-collection of payments from patients on a timely basis.

The following is a summary of our key findings in the billing function:

• Multiple issues were identified, which could have resulted in potential under-billing to patients. We were unable to analyze these issues in detail due to inadequate documentation and lack of an audit trail. Some of these issues are highlighted below.
• We noted 5,284 instances where patients had been upgraded to single bed rooms for which approximately 1,800 different justifications were recorded in the justification log.
• A number of bills that we reviewed had charges included in the bill that had been “voided” by the billing officer. No approvals were noted for such cancellations.
• Discounts of at least USD 249,665 were given to 47 patients based on an email sent by Mr. Uthman authorizing Ms. Ghannoum to provide discounts to NSSF patients who agree to be upgraded to 1st class category beds to overcome the shortage of double bed rooms. We were informed by Dr. Tahir that he had not seen this email and that any discount policy would have to be approved by the CFO, the Hospital Director, and the Dean.
• We noted instances where payments received from patients covered by NSSF, in excess of their share, were not refunded to patients. We were informed that this could potentially result in a violation of the NSSF regulations. We have not evaluated the legal implications of this practice.
• On comparison of the drugs and medical supplies issued as per the inventory system with amounts billed by the billing system, for the period 1 October 2008 to 30 June 2011, we noted discrepancies in at least 42% of the cases. The main reasons for these discrepancies were lack of clear guidelines for billing, inconsistent units of measurement and the recording of entries using incorrect codes, which increases the risk of under/over-billing to patients and misappropriation of inventory.
• Other issues noted were inadequate segregation of duties, non-collection of progressive payments on a timely basis, absence of mechanisms to shift patients to lower category beds post admission to ensure that they are in a bed consistent with their authorized class of treatment and risk of potential mis-utilization of the MOH insurance cover.

4.3. Information Technology Systems
Multiple applications are being used by AUBMC, which are not fully integrated and automated. Further, there are basic control lapses and weaknesses such as absence of adequate audit trail and inconsistencies in coding structures. These have adversely impacted the quality of management information system reporting and the ability to perform reconciliations.

Project Gulf – 3. Background, Objectives and Scope

3.1. Limitations
In March 2011, the Trusteeship Committee of the American University of Beirut (“AUB”) decided not to re-nominate Mr. Nabil Chartouni (“Mr. Chartouni”), who had been a member of AUB’s Board of Trustees (the Board) since May 2001, for re-election to the Board. Mr. Chartouni sent a detailed document to the Board containing a variety of allegations and making broad accusations of fraud and mismanagement. Mr. Chartouni, in this document dated 8 June 2011, alleged that his removal from the trusteeship was a deliberate attempt to keep him away from certain serious and systemic irregularities including mismanagement, corruption and malpractice within the University.

On June 24, 2011, the Board appointed a committee, which it called the Ad Hoc Review Committee (“the Committee”), to assess Mr. Chartouni’s allegations. The Committee retained Hogan Lovells US LLP as Legal Counsel and Mr. Mark Cliff to coordinate the work of the Committee and to assist Hogan Lovells US LLP (“the Legal Counsel”).
Amongst his various allegations, Mr. Chartouni specifically referred to procurement at AUB Medical Centre (“AUBMC”) as an area of concern. The Legal Counsel, on behalf of the Committee retained KPMG to conduct a limited investigation into the areas of concern pertaining to procurement at the AUBMC. Mr. Chartouni’s allegations with reference to procurement at AUBMC primarily included ineffective/overpriced purchases, clinicians negotiating with the vendors directly, free of cost drugs not being received from vendors, inadequate software/system controls, lack of adequately skilled procurement staff and insufficient internal audit review of the procurement process.

Subsequently, while not related to Mr. Chartouni’s allegations, and at the prompting of AUBMC’s management, the Legal Counsel retained KPMG to conduct a limited investigation into the billing function at AUBMC. Based on discussions with AUBMC management, we identified specific areas for review such as the upgrade of beds, billing to patients, calculation and recording of allowances, collection of dues from third party payers and patients, discounts to patients or payers, write-off of dues and the possibility of making manual adjustments in bills and allowances.

3.2. Objectives of engagement
The objectives of the engagement included assisting the Legal Counsel in advising the ad-hoc committee and AUB by:

• Conducting a limited investigation to determine if there was any identifiable wrongdoing in the field of purchasing and billing function at AUBMC;
• Determining the modus operandi and attempt to identify any personnel involved in such corrupt practices through investigation, within and outside AUB; and
• Preparation of reports and analysis in connection with the above investigation.

3.3. Scope of Review
The scope of review was limited to performing limited data analysis, review of sample transactions and discussions with AUBMC personnel. Considering the volume of data and the limited budget, we were requested to limit the period of our review for the purchase function from 1 October 2008 to 30 September 2011 and for the billing function from 1 October 2009 to 30 June 2011.