Technical / Remuneration reports face scrutiny in annual report and accounts audit

It is early days yet but, as expected, auditors are focusing on accruals and provisions, capitalisation of expenditure, cut-off of capital expenditure, valuation of non-current assets and the regularity of special payments.

One area that is perhaps coming in for more scrutiny than usual is the remuneration report. This is partly because of new guidance, but also due to the comptroller and auditor general’s qualification of the regularity opinion on NHS England’s group accounts for 2020/21.

NHS bodies have included a fair pay disclosure in their remuneration accounts for almost a decade now.

However, the requirements for companies to include pay ratios came into force from 2019 through an amendment to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The new requirement is to disclose the following.

• The percentage changes in the highest paid director’s:

• salary and allowances
• performance pay and bonuses payable.

• For employees of the entity taken as a whole, the average percentage changes from the previous financial year of:

• salary and allowances
• performance pay and bonuses payable.

• The ratio between the highest paid director’s remuneration and the pay and benefits of the employee on the 25th percentile and the 75th percentile of pay and benefits of the entity’s employees for the financial year.

The highest paid director’s salary should be consistent with the existing disclosures in the table of single total remuneration for senior managers. Employees’ pay and benefits should include remuneration paid to agency staff and other temporary employees, but should exclude consultancy staff.

Detailed guidance that provides more detail on the new calculation has been published as part of the guidance supporting the Financial reporting manual.

Although that guidance is written for the preparers of government departments’ remuneration reports, it provides useful background for NHS bodies.

Early feedback from auditors is that the new disclosures and calculation may need further work to ensure that they meet the new reporting requirements.

The other area where the guidance has changed is in relation to the disclosure of senior managers’ pension arrangements, where the individual has opted out the NHS pension scheme.

Some NHS bodies received qualified audit reports in 2020/21 because they could not disclose the pension information for senior managers who had opted out of the scheme before 1 April 2020. The guidance has been updated to avoid this issue occurring again.

FAQ 3 updates paragraph 3.155 of the Group accounting manual (GAM) to make it clear that where a senior manager has not been a member of the NHS pension scheme for the full financial year, then no disclosures relating to the NHS pension are required other than a simple narrative statement saying that they are not members of the scheme.

Where the NHS body has made contributions to other pension schemes, those should be disclosed in accordance with the GAM as part of that individual’s remuneration.

Finally, regulatory bodies and auditors will be looking more closely at exit packages, not only to ensure that they are properly disclosed, but also to determine whether they include any special severance payments.

Special severance payments are those that are above the contractual and legal requirement. They must be approved in advance of being agreed with the individual. Special severance payments that are not approved will be irregular and will therefore attract a qualified regularity report no matter the size of the payment.

Approved special severance payments must be disclosed in the losses and special payments note as well as the note on exit packages.

Debbie Paterson is HFMA policy and technical manager