Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:
• Shady Oaks Centre, a private treatment centre
• Gardens Nursing Home Ltd., a private nursing home
• Total Laser Care Limited (TLCL), a private clinic that specializes in the laser treatment of skin defects.
Year end for all HCHG entities is June 30.
During the financial year 2011, HCHG released its own line of treatment supplies, such as orthotics, weights, and other equipment, which are sold by direct marketing by a sales team employed by the centre. The sales team receives a base salary and a bonus component, which is based on the dollar value of sales it generates. You recognize that the team's main motivation is to maximize its bonuses.
On April 1, 2011, Gardens Nursing Home Ltd. switched from its "home-grown" patient revenue system to HCHG's equivalent system. HCHG is confident that its "off-the-shelf" enterprise system would perform all of the functions that Gardens Nursing Home's homegrown system performed.
Gardens Nursing Home's home-grown patient revenue system comprised the following:
1. Billing system-a system that produced the invoice to charge the patient for services provided, such as accommodation, medications, and medical services. This software included a complex formula to calculate the patient bill allowing for government subsidies, pensioner benefits, and benefits from private medical insurance benefit plans.
2. Patient database-a master file that contained personal details about the patient as well as the period of stay, services provided, and the patient's medical insurance details.
3. Rates database-a master file that showed all accommodation billing rates, rebate discounts, and government assistance benefits.
At the request of the board, the group's internal audit unit was involved throughout the entire conversion process. The objective of its engagement, as the board stated, was to "make sure that the conversion worked without any problems."
Required
Discuss the implications of the sales bonus system for the control environment within HCHG. What special factors would management have to consider?