UCI fertility specialists under fire for allegedly misusing human embryos also pocketed tens of thousands of dollars in cash payments in violation of university agreements, submitted false insurance claims and charged UCI for work done while employees were at other clinics, according to outside auditors hired by the university.

In a confidential report obtained by The Orange County Register, the auditors also allege that doctors at the Center for Reproductive Health failed over a two-year period to report as much as $967,000 in funds that the University of California, Irvine, may have been entitled to share.

The audit, dated April 7 and conducted by the national accounting firm of KPMG Peat Marwick, provides the first evidence of alleged fiscal wrongdoing at the internationally renowned clinic, which is at the heart of the largest controversy in UCI history.

Dr. Ricardo H. Asch and his partners, Drs. Jose P. Balmaceda and Sergio C. Stone, have denied any wrongdoing. They have been placed on paid administrative leave from the university, and are at the center of at least seven internal, state and federal investigations.

Asch's attorney, Ronald G. Brower, said Saturday that he had not received the audit and could not comment on it.

Patrick Moore, Balmaceda's lawyer, disputed the audit's findings and blasted the report and another one conducted by a clinical panel as biased and based on incomplete or erroneous information.

"I was appalled at the lack of evidence and the lack of any analytical substance to each report," Moore said.

Stone's lawyer, Karen L. Taillon, also refuted both reports, accusing UCI officials of being "more concerned about the university's image than about truth and fairness."

"I would describe it as the Salem witch trial without the match," she said. "I think they're looking for the match, but it's just not there."

Among the latest allegations are that Asch and Stone kept at least $167,000 in cash payments, including $12,000 taken home by Asch in a single day.

The allegations arise from "whistle-blower" complaints lodged in 1994 by former clinic employees and UCI administrators. Three of them have since been paid a total of nearly $850,000 in confidential settlements by UCI, which has refused to release details of the agreements or the circumstances that led to them.

According to the audit report, however, Peat Marwick last October began an investigation of nearly a dozen specific allegations and found evidence to sustain four of them:

Asch and Stone failed to report cash income, and the clinic failed to make required payments to UCI Medical Center.

Asch and Balmaceda submitted false insurance claims.

The clinic required employees to work at non-UCI facilities, but charged the university for their time.

Asch, Stone and Balmaceda operated a nonlicensed operating room at the UCI clinic.

The Register reported in May that two women's eggs were taken in 1991 and transferred as embryos without their consent to other patients, who subsequently had children. The doctors also allegedly conducted unauthorized research on humans.

Since it opened in 1990, the clinic has drawn patients from around the world willing to spend tens of thousands of dollars for a chance at having a child.

Many paid for their procedures in cash, but according to at least four former employees, those payments were not recorded as income on logs known as "day sheets."

Instead, they were recorded as "adjustments" rather than payments, an accounting device that auditors say enabled the doctors to reduce the amount of their reportable income to the university and keep the difference.

"At the end of each day, Dr. Asch or Dr. Stone was given an envelope of cash, which they would sign for," the audit report states. "Each month the physicians split the cash amongst themselves."

Asch was given as much as $12,000 in a single day, according to one worker, who estimated that the annual cash income was as much as $300,000 per year - $50,000 to $60,000 per "series" of fertility treatments offered four or five times annually.

The doctors acknowleged taking the cash payments, saying they began doing it in 1992 when an internal audit revealed concerns about the security of money kept on the premises, the report stated.

But they denied any involvement with improper accounting practices.

"The physicians claimed to have no knowledge of how the cash payments were reported in the financial records of the practice," the report stated.

Moore said doctors began taking the cash home after a break-in at the office. All of the money was accounted for, he said.

"The cash was documented," he said. "The reason that the doctors started to take cash home at night in the first place was that $4,600 had been stolen from the office while under the care of the university. The policy of accounting for the cash and taking the cash home was so that no university employee would touch it."

When auditors checked day sheets provided by the whistle-blowers for January 1992 to December 1993, they determined that about $167,000 was collected in cash and given to the doctors.

"According to the physicians, the cash, which was taken home by the physicians - primarily Dr. Asch and Dr. Stone - was not necessarily deposited in the CRH bank accounts since it was split amongst the physicians personally," the audit report states.

Two bank accounts were maintained by the clinic. Funds were deposited into a Wells Fargo account and then transferred to an interest-bearing Shearson Lehman account, from which disbursements were made.

From January 1992 to August 1994, $5.4 million was deposited in the first account - but only $4.6 million was reported as income to UCI, according to the auditors.

They said the apparent $800,000 discrepancy might have included funds the university was not entitled to under an agreement that obligated the doctors to pay UCI about 11 percent of their professional fees.

But when investigators asked for help in sorting out the discrepancy, auditors said the doctors refused.

"We requested information from the physicians to determine the amount of collections which were not professional fee income; however, we did not receive that data," the report states.

UCI Executive Vice Chancellor Stanley H. Golub said Saturday that university officials had not determined how much is owed by the doctors.

"It's a minimum of $270,000 and could be as high as - we don't know how much because of the lack of information that they provide. That they must provide."

He described the clinic as "absolutely not a typical practice" because of its cash trade. The university instituted accounting controls in 1994 that stopped cash payments to the doctors.

Auditors said they also believe the doctors received unspecified income from other clinics - in San Diego, Las Vegas, Italy and Mexico - that should have been reported to UCI but was not.

Although their agreement with UCI states that the assessment applies to "all professional fee income, wherever earned," the doctors dispute that such income is reportable.

Moore, Balmaceda's lawyer, said the university was paid its fair share. He said he had not done his own audit of Peat Marwick's numbers, but if there was a discrepancy it could be attributed to money not subject to the university's assessments.

Moore also criticized the university for using Peat Marwick, which conducts other audits on UCI's behalf. And he said the auditors were influenced by university officials, who provided assistance.

"It'a very slipshod audit," he said.

During their investigation, auditors interviewed 31 people, including Asch, Balmaceda, Stone and at least three whistle-blowers who made allegations against them.

They also reviewed about 60 patient medical charts from the fertility clinic and the medical center, as well as billing records and documents provided by the UCI internal audit department.

"Our investigation was hampered by the lack of availability of records related to the Center for Reproductive Health," the report states. "The physicians claimed these records pertained to their private practices and did not provide us access until we made extensive, repeated and detailed requests."

The doctors refused to provide 46 billing files for patients, instead handing over sketchier records known as ledger cards, according to the report.

Despite assurances from a ranking medical center official that efforts had been made to rectify earlier problems with insurance billings, Peat Marwick auditors said they discovered otherwise.

When auditors examined records, they found most insurance billings reflected "cyst aspirations" rather than egg removals - even in some cases where patient charts listed the number of eggs removed.

Egg removals generally are not covered by insurance, but cyst removals are.

The practice of mislabeling the procedure on insurance billings had surfaced during an internal audit completed in January 1993.

An internal UCI audit completed in 1993 also noted instances of false insurance claims, including cases where the billings did not match the procedures documented in patient charts, the report stated.

"Dr. Asch admitted to having falsified the diagnosis in two instances in 1991 (which we reviewed) to obtain insurance benefits for a patient," the report states.

"We were told by Deputy Executive Director Herb Spiwak that efforts were made to correct the accuracy of billings after the 1992 internal audit and that removal of eggs were not to be billed as 'aspiration of ovarian cyst.' "

The audit noted that the issue "is a gray area within the industry" since removing an egg is medically the same as aspiration of a cyst.

"However, it is clearly inappropriate if an entirely different procedure is done," the report stated.

While they were unable to determine the extent of the false claims, auditors and a clinical panel investigating other allegations were told by medical staff that it was the accepted practice.

"Dr. Steven Barker, the chief of anesthesiology, reported to the clinical panel that 'on many occasions' anesthesiologists were instructed by Dr. Asch to write false diagnoses, e.g. substituting 'aspiration of ovarian cyst' for another procedure," the report states.

An operating-room nurse corroborated Barker's account, telling auditors that medical codes for in-vitro fertilization were "never" used, and that "all insurance billings reflect cyst removals."

Auditors also found instances of underbilling patients for egg removals. The underbilling, in which patients paid only $606 for a procedure that should have cost five times that much, did not represent false insurance claims but did reflect "a disregard for accuracy in the diagnosis, which could result in false insurance claims."

Moore said there was "absolutely no foundation" for allegations that doctors filed false claims. If such claims were filed, he said, it was the fault of university employees responsible for completing the paperwork.

Auditors said they also found evidence of falsified time-keeping.

Whistle-blowers told auditors they were required to work at locations other than UCI Medical Center, which paid their wages.

"The employees were instructed where to report by the physicians," auditors said. "According to the biologist, she was instructed to 'clock in' at UCIMC and told that the arrangement was 'worked out' with UCIMC."

Most of the the sharing of UCI employees' time involved work done at the center's Saddleback Memorial Hospital clinic, which is run by Balmaceda. UCI employees are not authorized to work there on the university's time, according to the report.

Some Saddleback employees also worked at UCI, but the reverse was more common, auditors said.

While other UCI employees spent a morning week or so at Saddleback, it was the biologists who were most often told to do it, the report states.

"In general, if a series was done at another location the biologist worked at that other location while still on the UCI Medical Center payroll. We were informed that the biologist worked principally at Saddleback for approximately three months prior to her resignation from UCIMC."

Auditors said they were unable to determine the "dollar impact" on the medical center.

When Asch and Balmaceda joined Stone at UCI in 1990, the university agreed to provide them with office space and everything else they needed - including an operating room.

Hundreds of procedures have been performed there each year, generating $3 million in "technical component" fees for the medical center.

But auditors said the operating room had one major flaw: it was unlicensed.

Medical center management did not believe a state license was required for the operating room, because surgical clinics in facilities owned or leased by physicians are excepted.

"However, surgical space in a hospital does not meet this exception and requires a separate license," auditors said.

Register staff writer James V. Grimaldi contributed to this report.