25 Apr 2022


Impact of Medical Malpractice on Financial Statements

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Academic level: College

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This case fits within the realms of civil suit. Therefore, the first order of business as the comptroller of the hospital is to consider the extent of insurance cover available for such incidences to consider how the financial statements might be affected in the event of a civil suit. If the case is not dismissed on grounds of stature of limitations, there are two possible outcomes: settlement, or trial. Should the parties agree to a settlement, the hospital pays the agreed amount as settlement. However, if the case proceeds to trial, the court imposes a fine should the prosecution establish negligence on the part of the surgeon.

When hospital error causes harm to a patient, the hospital becomes liable for damages suffered by the patient, including medical bills, out-of-pocket expenses, nursing care, compensation for suffering, and lost wages. All these pose significant financial liability to the hospital, and are likely to be reflected on the financial statements. Managing this financial risk and possible losses presents an operational and financial nightmare to the accounting department of the hospital. The challenge could arise due to the complexity of risk management standards in place or the intricacy of promulgated accounting standards. 

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The Financial Accounting Standards Board (FASB) provides guidelines for accounting for medical errors and malpractice. For instance, the provision that claims obligations must not be accounted for net of insurance recovery has a direct impact on the financial statements of the hospital, as it allows time for insurance to kick in before the hospital admits liability for claims. FASB demands that an entity determines the extent of insurance coverage, the impact of the medical malpractice claim on the hospital financial statements depends on the assessment of the anticipated insurance recoveries. Arguably, accounting for a medical malpractice is a complex matter that can pose significant impact on the financial statements of an organization.

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StudyBounty. (2023, September 14). Impact of Medical Malpractice on Financial Statements.


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