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AICPA Case Development Program XXXXXXXXXXCase No. 97-05: Dentistar, Inc. 1
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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 su
ounding 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
a
angement. While there is a wide variation in product offerings driven by customer requirements and
egional practices, the basic Dentistar plan reimburses 50 to 100% of the subscribers’ dental costs,
depending on the nature of the procedure performed.
Dentistar has a
angements 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 XXXXXXXXXXCase 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.
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DENTISTAR TASK ONE - INTERNAL CONTROL ANALYSIS
Most accounting functions are performed at the corporate level in Pittsburgh. All payroll and cash
eceipts 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
egions 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
egional management. Monthly, check stubs are mailed to the corporate office to facilitate the
econciliation 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
y 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
eceived 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 XXXXXXXXXXCase 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
efund 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 co
ectly. 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