A firm auditing Northern Lakes Community Mental Health Authority (NLCMHA) told board members at a special meeting Tuesday it suspects financial fraud within the organization – a discovery that brought the assessment to an abrupt halt, as a forensic investigation into possible criminal activity will now take over. Three individuals so far are suspected of potentially fraudulent conduct. That was one of several grim updates for board members as assessing firm Rehmann outlined a series of concerns about NLCMHA’s finance and human resources departments.

Northern Michigan Regional Entity (NMRE) – which manages the Medicaid funding for behavioral health services in 21 counties and is currently overseeing NLCMHA – approved hiring Rehmann last fall to assess the organization. Rehmann’s Richard Carpenter said that through the firm’s early assessment and interactions with NLCMHA Interim CEO Brian Martinus, the firm “became aware of the potential – or the suspicion of potential – collusion between individuals within the finance department.” Collusion refers to when two or more individuals work together to hide something or engage in fraudulent activity. It’s especially damaging in finances, because it means the organization’s internal controls – the checks and balances that are supposed to prevent fraud – are overrun.

“A lot of internal controls, including those at Northern Lakes, assume that at least two people are putting eyes on transactions, typically a preparer and a reviewer and approver,” explained Carpenter. “In the presence of potential or suspected collusion, that information is no longer reliable. So that opens the door for us to question, is there inappropriate activity that has occurred during fiscal year 2023 or before?”

After realizing there was suspicious activity, Rehmann received approval from NMRE to halt the assessment and switch to a forensic investigation, Carpenter said. “A forensic investigation looks more at the details of specific transactions, including payroll transactions, invoice transactions, journal entries, and potentially billing transactions related to the organization to determine if internal controls were either overridden or documentation may have been fabricated to support transactions that maybe did not exist,” Carpenter said.

The forensic investigation will likely take a few months to complete, though that could go longer depending on what Rehmann finds, Carpenter said. Investigators will be looking into potential misappropriation of assets and fraudulent financial reporting, as well as “unintentional inappropriate financial reporting that may have occurred,” Carpenter said. A NLCMHA board member asked whether multiple employees were suspected of wrongdoing or if one employee might have been engaged in fraud while another just missed it or failed to do their job properly.

“We don’t have specific evidence,” Carpenter replied. “But yes, we have enough to suspect that it may have been intentional on (the part of) two people.” After further board questioning, Martinus disclosed that two individuals suspected of collusion are no longer employed at NLCMHA, while a third is on administrative leave. He did not name the individuals involved.

Noting that NLCMHA undergoes regular financial audits annually, board members questioned how those audits could have missed something was awry. Carpenter said that even the American Institute of Certified Public Accountants (AICPA) acknowledges that when collusion is present, a “financial statement audit may not be effective.” That’s because those audits rely partly on internal controls, which can be invalidated by collusion, and also because staff members colluding can fabricate certain documents requested by an auditor to make things look legitimate. “This is something that an audit firm would not necessarily know is occurring,” Carpenter said.

Rehmann will also be looking at contracts as part of the investigation, Carpenter said, confirming in response to board questions that the misuse of Medicaid dollars was a concern. “From my perspective, one of the greatest concerns is if we were to find that the allocation of administration costs were inappropriate to funding sources, there’s the potential that the NMRE has borne a Medicaid cost higher than it should have and other funding sources have not borne their fair share of that cost,” he said. “And so (that) therefore would result in a giveback of Medicaid funds to the NMRE, as a single example.”

Carpenter flagged other concerns in Rehmann’s financial assessment. He said certain policies and procedures were written intentionally to give the finance department “a lot of flexibility” to make judgment calls on certain activities, which opens itself to “inconsistent treatment for certain transactions.” On the flip side, he said, department heads and budget managers have too little discretion in their purchasing power and need more flexibility to operate more effectively. Carpenter also said some grants were not being efficiently utilized at NLCMHA. “The sense that we're starting to get on some grants is...get the money first and then figure out how to use the money second,” he said.

Rehmann’s Kerreen Conley gave an update to board members on the firm’s assessment of human resources. She said NLCMHA employees were “very cooperative” in sharing feedback, with Rehmann conducting 49 interviews and additionally hearing from 233 employees in an engagement survey. Their responses – which she called “very honest and brutal” – reflected an environment of “fear, retaliation, and a lack of trust,” particularly under past leadership, she said. Wage increases appear to have been awarded on a preferential and not equitable basis, Conley said, and access to performance reviews, exit interviews, and employee handbooks haven’t been available historically.

Conley said there were also issues with the organization’s hiring practices, as well as with its I-9 forms – documents that prove employees are authorized to work in the U.S. Conley recommended a “full I-9 audit” be completed, noting that organizations can incur penalties if those forms aren’t in proper order. She also suggested providing “mentorship and guidance” for the organization’s new HR manager. “Ultimately there's a lot to overcome from the past, but I think they're taking some strides,” Conley said of staff.

While board members asked several questions Tuesday, they did not extensively discuss the findings of Rehmann’s report. That discussion may follow at upcoming meetings, as Rehmann expects to provide a written report to NMRE and then the NLCMHA board in February on its human resources assessment, which will include recommended changes and improvements. The outcome of the forensic analysis will likely follow this spring or summer, depending on how long the investigation takes.