Audit lessons: time to focus on more than the bottom line

by Debbie Paterson

03 February 2021

This year’s audit report on the Department of Health and Social Care’s accounts covers five very different issues. Some of these are one-off in nature, but others could have an ongoing impact.

The publication of the Department of Health and Social Care (DHSC) annual accounts – and the consolidated provider and NHS England accounts – normally passes without significant comment. That is even more the case for the associated audit reports.

But this year was a little different with the National Audit Office’s Comptroller and Auditor General (C&AG) making the headlines – at least in the specialist press – with his report to the House of Commons.

Previously, the C&AG has published explanatory reports dealing with the financial position of the sector. In 2015/16, the DHSC nearly spent more than its voted resources – so the report focused on the unusual transactions in relation to national insurance and a super dividend from the Medical and Healthcare Products Regulatory Agency. It also highlighted local, one-off accounting adjustments that kept the DHSC’s spend within the vote and drew attention to the concerning position of the NHS provider sector.

In 2016/17 the continuing financial difficulties being experienced by the provider sector were again the main issue – with sustainability a key challenge ever since. This time, the report is very different in that it covers five very different issues.


First up is an accounting qualification. Perhaps what is most unusual here is that the DHSC and the C&AG have agreed to disagree. In my experience, usually the auditor’s view prevails because explaining an accounting qualification is not something any director of finance wants to do.

However, in this case, the issue relates to the valuation of the loans from the core department to NHS provider bodies, which means it is consolidated out of the group accounts. So, the qualification is confined to the core accounts and will not be an on-going issue because of the change to the lending regime made in the middle of last year.

Simply put, the C&AG believes the loans should have been impaired at the balance sheet date, because the providers’ financial positions meant that they wouldn’t be in a position to repay the loans. The DHSC points to the fact that the loans were repaid in September as an argument against impairment, although this was only possible because the DHSC issued new public dividend capital.

The question it raises in my mind is why this was not a qualification issue in previous years – the ability of some providers to repay working capital loans has been a concern for a while now and was part of the reason for the change in regime. No doubt, the Public Accounts Committee will want to discuss this, but it is unlikely to be an ongoing issue.

Other issues are likely to have an ongoing impact. They all relate to the regularity opinion – none result in a qualification, but they may well have consequences for future years. The regularity opinion is the auditor’s conclusion on whether they think that the expenditure incurred by an NHS body is in accordance with Parliament’s wishes.

Pension opinion

The first of these regularity issues is a ministerial direction on senior clinicians’ pensions. The scheme was announced at the end of 2019 to avoid the operational impact of the pension annual allowance tax arrangements, which were leading to significant tax charges for clinicians creating barriers to taking on additional hours. The C&AG has not qualified the regularity opinion on this issue – it is not material in value, it has been fully disclosed in the accounts and the decision was made openly and transparently. However, it is clear that a ministerial direction does not make an irregular transaction regular.

We will have to wait to see what conclusions will be reached in respect of the ministerial directions made during 2020/21 in response to Covid-19. On this note, the C&AG refers to the ministerial direction that was issued on 29 March that effectively made good on the government’s promise that the NHS would get what the NHS needed in response to the Covid-19 pandemic.

In the event, it was not needed in 2019/20 as the full impact of the pandemic lands in 2020/21 – the audit of that year will consider areas that ‘exhibit new and significant risk’. As we start the year-end process, this is not a surprise – this feels like a year-end like no other. Central guidance is being developed in relation to the financial regime that was put in place as the year unfolded. And local bodies are starting to think about how the ‘usual’ judgements, estimates and assumptions, as well as processes, have been affected by a year that has been anything but usual.

Another issue that may have further consequences in 2020/21 relates to special payments. It has come to light that there has not been a delegated approval limit for special payments from the Treasury to the DHSC. This seems to be an oversight in the delegated authority letter dated 2016 – the DHSC interpreted the letter as meaning it did not need to get Treasury approval for special payments unless they were novel, contentious or repercussive. But it actually means that there was no delegated limit and all special payments should have been approved by the Treasury. As a result, the Treasury is going to undertake a deep dive into special payments in 2021 to learn lessons.

The departmental delegated limit will be reset to £95,000 for 2020/21. In practical terms, this is likely to mean that more information on losses and special payments will be collected from local NHS bodies and that auditors of all NHS bodies will take an interest in these transactions. The timing of this finding may mean that in 2020/21, when Covid has meant that decisions have been made at pace and governance arrangements had to be flexible, we should not be surprised if irregular transactions are identified.

Trust focus

And finally, the issue that the C&AG refers to as ‘unprecedented’. Unprecedented in many ways, but firstly in that he makes reference to a named NHS trust body. Secondly, that University Hospitals Leicester NHS Trust (UHL) has been unable to certify its 2019/20 financial statements as true and fair and is still working on producing a set of accounts that the board and the local auditor are prepared to sign off. In my memory, individual NHS bodies’ accounts have been late and have caused problems for the consolidation but the deadline for laying the DHSC accounts before the Parliamentary summer recess has always been met.

There are a number of reasons why the accounts cannot be signed off. There is an unusual level of manual intervention in the accounting records (over 270,00 manual journals). However, the trust’s auditor also identified other issues with the accounting records including: non or inaccurate recognition of expenditure and payables; disagreement on technical accounting adjustments; errors in the valuation of the estate; and inappropriate recognition of income.

While reference in the group accounts to a single NHS body is unusual, as is the scale of the problem, the underlying problem is not. The C&AG has concluded that the reason for management’s decisions was to achieve a particular outcome. While it has not been spelt out in the DHSC’s report, my assumption is that this was to meet the control total set by NHS England and NHS Improvement. While the financial regime for local NHS bodies has changed substantially as a result of the pandemic, any system will include incentives that might result in unexpected consequences. The C&AG is clear that ‘no pressures imposed by a financial control framework explain or justify the type of conduct identified at UHL.’

But this is not a unique case – every few years an NHS body suddenly reports that its financial position is not as robust as was previously reported. Some of us still remember the shock of an NHS accountant being sent to prison for amending valuation reports. Or the stories of auditors finding invoices in desk drawers to be processed after the year end.

In more recent years, there have on occasion been disagreements between auditors and NHS bodies about the timings or substances of sales of assets, NHS bodies have stretched their payment days to the point that suppliers have started to refuse to trade with the NHS, others have made judgements about valuations and provisions that have been the subject of very lengthy debates with auditors and regulators.

As the NHS financial regime was reset to meet the demands of the pandemic, now seems to be the time to consider a future regime that looks at the financial position of each NHS body in the round rather than focusing on the bottom right-hand corner of the income statement. This means that financial performance needs to consider more than the surplus/deficit against plan, but also look at balance sheet metrics such as working capital balances, cash balances and creditor days.

In a system of double entry – if a transaction has an impact on the bottom line, it also has to have an entry somewhere else in the accounts. If that somewhere else, usually the balance sheet, is also under scrutiny, then there is less of an incentive to enter into transactions that improve the bottom line but do not actually change the financial position of the entity. Perhaps a new financial system should incentivise innovation, waste reduction and value, rather than focusing energy on reporting a particular metric.

Our members have been saying for some time now that the focus on the control total is unhelpful and the financial health of an organisation should be measured on a more rounded view of an organisation. Perhaps it is time to take note of this and change how NHS bodies report to the centre as well as to their own boards.