Audit report has potential impact on 2020/21 accounts

01 March 2021 Seamus Ward

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Gareth DaviesThe auditor qualified the Department’s core department and agencies statement of financial position for 2019/20. This does not include the financial position of the wider departmental group, which was not qualified.

The qualification is due to a misstatement – in the auditor’s view – of the value of loans from the Department to providers.

The NAO and the Commons Public Accounts Committee has raised concerns over loan repayment for a number of years.

NAO comptroller and auditor general Gareth Davies (pictured) said the trusts’ financial position is the most relevant indicator of their ability to repay the loans.

He argued that trusts became an increased credit risk where their financial distress presented as negative net assets or, in some cases, the agreement of new repayment plans.
An impairment was required to avoid a material misstatement of £2.2bn, which was calculated after examining the net asset position of every trust that had received loan finance from the Department.

The Department disagreed with the auditor’s position, insisting that the repayment of outstanding loans in September 2020 demonstrated the loans were not impaired.

However, in his report, Mr Davies notes that the repayment was only possible due to the issue of new public dividend capital (PDC) from the Department itself. It is unlikely that this will have an impact on 2020/21 as the loans have been repaid and PDC policy has changed – now, PDC will be impaired where a provider’s net assets are lower than the PDC issued to it.

Issues raised on regularity did not lead to a qualification, but could have an ongoing impact. First was the auditor’s view that ‘ministerial direction does not make regular what would otherwise be irregular’.

In the 2019/20 accounts, this related to senior clinicians’ pensions, though ministerial direction on Covid-19 spending will be examined closely in the 2020/21 accounts.

In 2019/20, doctors reduced hours, turning down overtime and even considering retirement due to pension tax rules that left them with large potential tax bills. A ministerial direction was made on pensions to ensure there were enough senior doctors over winter as the solution risked breaching Managing public money.

The auditor said, even with the direction, the payments were irregular, as they were a form of tax planning that will leave the Exchequer worse off. However, the regularity opinion was not qualified as the cost was not material, had been fully disclosed in the accounts, and the decision was made transparently.

A further ministerial direction was made at the end of March 2020 to meet the government promise that the NHS would receive the funding it needed to tackle Covid. This was not needed in 2019/20, but Mr Davies said the report on the 2020/21 accounts will focus on ‘new areas that exhibit new and significant risk’ – including NHS Test and Trace, the procurement and storing of personal protective equipment, and the Covid-19 vaccination roll-out. All NHS bodies should expect to justify new areas of spend and to discuss the governance arrangements with their auditors.

Mr Davies also highlighted financial reporting and governance issues at University Hospitals of Leicester NHS Trust (UHL), which he called ‘unprecedented’. The trust had failed to prepare true and fair accounts, and to maintain appropriate accounting records. Issues at the trust indicated management override of internal control, he said. There was an unusually high level of manual interventions in the accounting records, including over 270,000 manual journals.

Draft financial statements for 2019/20 included prior year adjustments of £46m, but the UHL auditor identified other issues, such as inaccurate recognition of expenditure and payables, disagreement on technical accounting adjustments, errors in the valuation of the estate, and inappropriate recognition of income.

‘The auditor also noted that adjustments appear to have been made in the 2018/19 financial statements at the request of UHL’s management to achieve a certain outcome rather than to represent accurately the economic reality of transactions into which UHL entered,’ the report added.

In previous reports, the NAO has raised concerns about local management overriding internal controls to meet control totals. Although there have been no control totals in 2020/21, auditors will be concerned about changes to financial governance arrangements made at pace as well as new financial systems put in place during the early days of the pandemic.

The UHL trust board has been unable to sign off the 2019/20 accounts, and hopes to produce a revised set by late spring. This will have a knock-on effect on its 2020/21 accounts – it will miss the June deadline but hopes to have completed them by 31 August. The trust’s chief financial officer and chief executive have now left the trust, with NHS England confirming they have referred both to the Care Quality Commission under the fit and proper person process, and in the case of the ex-CFO to the relevant accounting professional body.

The trust’s new CFO Simon Lazarus said: ‘Due to the scale and complexity of the task this work is still ongoing, but a huge amount of progress has already been made. I have also been able to strengthen the finance team and improve the financial governance processes of the trust with the support of the board.’

Trust chair Karamjit Singh said that the board took full responsibility.

‘The trust board takes this very seriously,’ he said. ‘And although the auditor general refers to the “accounting judgements and manual intervention associated with the previous senior leadership regime”, I am clear the responsibility for exposing and addressing these issues sits with me and my board colleagues.’