by Jamie Walden
Posted 6/8/2009 12:00 am
Updated 11 months ago
A small business of about a dozen employees in North Little Rock has carved a niche in nursing home litigation by providing financial analyses for plaintiffs' attorneys.
Because some companies' structures are a convoluted web of shell companies and parent companies, mere mortals have a difficult time discerning how they are all connected.
CFO Network performs financial analyses of nursing home organizations that map out the structure of such companies, which helps attorneys build their case.
"We just basically help [attorneys] get a lay of the land of what entities are involved and how they're related financially, helping them understand how entities are in fact making money," said Allen Engstrom, managing partner of CFO Network.
CFO Network's financial analyses for law firms account for about 15 percent of its business, Engstrom said. The majority of CFO Network's business is providing an outsourcing option for small business that can't afford an accounting and financial advisory team.
A typical case, Engstrom said, would be a wrongful death suit against a nursing home.
The nursing home usually is a limited liability company that receives services from other LLCs that are all owned by the same people, Engstrom said.
"We go in and do analysis on all these other LLCs and figure out that money is going out the door for rent and janitorial services and administrative fees to these other LLCs. And we basically help attorneys and others kind of follow the money and figure out the true profitability, the global profitability of the other LLCs."
Engstrom said the service was different from forensic accounting because CFO Network doesn't delve into a company's books to detect improper accounting or fraud. Instead, CFO Network analyzes only entity relationships.
CFO Network stumbled on the idea a couple of years ago when a law firm sought its help with a financial analysis of a nursing home.
"And they were happy with it and continued using us and spread the word, ... and we've kind of built a little niche out of it," Engstrom said.
Chad Trammell, a partner at Nix Patterson & Roach LLP of Texarkana, said CFO Network's services are much more reasonably priced than having an expert witness perform the same function. He added that the information is often admissible in cases. And being able to outsource that work makes his time more productive, Trammell said.
Creating a Database
Countless hours spent acquiring hard copies of information on nursing homes and then wading through irrelevant data to find the right information led CFO Network to design a tool that streamlines the financial analysis process.
Last year, CFO Network acquired a sea of nursing home data from the U.S. government.
"We have purchased all the raw data from the federal government on every nursing home in America for the last 10 years and have created a database and developed a query engine that has allowed us to basically construct a financial statement [for any nursing home]," said Engstrom, who declined to reveal the purchase price.
The financial statements, Engstrom added, include all the financial information that nursing homes include in a cost report, which is a disclosure document nursing homes in Arkansas provide the Department of Human Services revealing the cost of caring for Medicaid patients.
However, CFO Network's report follows a more traditional financial statement format.
"And we can construct any particular nursing home's numbers and compare them to a peer group. And we can build the peer group based on a similar number of beds or similar revenue range or geography," Engstrom said.
The report helps a plaintiff's attorney spot fishy figures.
"If a nursing home has a real estate company that owns its real estate and is charging 250 percent above market rent, we can compare it to the peer group based on a similar number of beds," Engstrom said. "And we can spot that pretty easily, that their rent is way out of bounds. And so that can kind of point us and the attorneys to focus on that a little more."
Engstrom said CFO Network developed the idea through an effort to streamline its process to provide information more promptly to clients.
"We would get engaged on a case and we would have to go through the normal discovery process to get hard copies of the cost reports. And half the time we were just sitting around twiddling our thumbs when we really needed to do the analysis. And then the case would settle. And we would have gotten engaged and had resources standing by and weren't able to do any work on it," Engstrom said.
The crew at CFO Network discovered a way to acquire the information electronically. However, CFO Network associates still had to examine a great deal of data to elicit the pertinent bits of information.
"So we saw the need to develop a database so we could query the data in a way that would orient the data in more of a financial statement format," Engstrom said.
Now, if a client needs a financial analysis of a nursing home anywhere in the country, CFO Network can produce a detailed report in about an hour. A financial analysis of that report, however, takes about two days, Engstrom said.
CFO Network charges law firms a set fee that ranges from $1,450 to $1,900 plus an hourly fee that ranges from $125 to $300 per hour.
Though CFO Network hasn't explored taking the information to nursing homes, Engstrom said he foresees offering the information to them so that they can gauge how they fare compared with other nursing homes.
"We haven't really tapped this market, but we believe that this analysis capability would be useful for people on the operating side of the nursing homes to help them benchmark themselves against their peers, to help them run their businesses better and more efficiently."