F0835

D

Failure of Administrative Oversight Allowed Payroll Mismanagement and Excessive PTO Cash-Outs

Union City, Tennessee Survey Completed on 01-20-2026

Penalty

No penalty information released

Summary

Administration failed to ensure appropriate checks and balances over the facility’s payroll system and checking account after payroll was brought back in-house. The governing body had appointed an appropriately licensed administrator who, per job description, was responsible for overall facility operations, instituting controls to ensure efficient and economical operation, limiting overtime, certifying payrolls, and ensuring timely deposits. However, the personnel plan and benefit structure implemented by the administrator was not approved by the governing body, and the facility relied on a manually maintained spreadsheet for tracking staff vacation, sick, holiday, and compensatory time. Staff could not independently verify their accrued time and had to rely on the social worker/bookkeeper to report balances.

When payroll was moved from an outsourced vendor back into the facility, three office staff members—the administrator, the social worker/bookkeeper, and the HR/bookkeeper—had access to payroll records, the bookkeeping system, and the facility’s checking account, and all three could sign checks without board approval. Review of W-2s and payroll stubs showed that, after payroll was brought in-house, these three employees received large increases in total compensation, including substantial cash-outs of vacation and holiday time and significant overtime payments. Timeclock records showed that for the two bookkeepers, most time entries were manually entered rather than recorded by actual punches, and both reported very high overtime hours despite interview statements from another RN/administrative assistant that these two did not work overtime. The benefit plan limited vacation cash-out to no more than three days per pay period, but payroll records and CPA analysis showed that the three employees cashed out holiday and vacation time far in excess of policy limits.

External CPA review of payroll and bank activity over a 19‑month period identified that the social worker/bookkeeper, HR/bookkeeper, and administrator collectively received $142,627.44 more in holiday and vacation cash-outs than allowed by facility policy, even under generous assumptions about maximum accruals. The bookkeeping system audit trail showed that the social worker/bookkeeper changed her own hourly rate and the administrator’s hourly rate upward during the audit period, then changed them back. Interviews with the board chairman, the current administrator, the RN administrative assistant, and the business office manager confirmed that the three office staff controlled which bills were paid, wrote and signed checks, and processed payroll without effective oversight or dual controls. The chairman reported that the three employees “took the money from the bank account,” which was funded by Medicare, Medicaid, private pay, and insurance revenues, and acknowledged that the facility was probably not administered as it should have been. The surveyor concluded that administration failed to provide oversight of payroll and staff with access to the checking account, resulting in financial mismanagement that had the potential to affect all residents whose care depended on those funds.

The facility’s own policies required the administrator to implement procedures and controls to meet budgetary projections, limit overtime, and ensure efficient operation, and the board of directors was to oversee administration with proposals directed to them for consideration. Nonetheless, the administrator relied on the payroll clerk’s spreadsheet for tracking compensated absences, did not verify her own pay or the pay of the two bookkeepers, and did not monitor overtime or cash-outs against policy limits. The auditors found no reliable compensated absences report to support the large cash-outs, and the administrator acknowledged that she trusted staff under her, did not review her check stubs, and did not check the bookkeepers’ time even though she knew they were not working overtime. The lack of segregation of duties, absence of independent verification of accrued time, and failure to require board approval or dual signatures for payroll-related disbursements allowed the three employees to manipulate payroll and cash-outs using funds derived from Medicare, Medicaid, private pay, and insurance payments for resident care.