NHS Tayside financial governance arrangements: independent review

NHS Tayside's financial reporting and governance arrangements

Scope of our work: Our work considered NHS Tayside’s financial governance arrangements, in particular considering the clarity of reporting of the ongoing financial position to the Finance and Resources Committee and the NHS Board in 2013/14.

Linked to financial governance, we have considered the work of internal audit in relation to the Board’s financial management arrangements and how internal audit reports were reported, and the how the implementation of the agreed internal audit actions were monitored.

In addition, we considered the revised controls established by Management relating to the historic deferred expenditure position and how this balance had been assessed and is now supported by financial plans, alongside tighter controls to reduce the risk of the situation with eHealth funds occurring in the future.

All NHS Boards are set a revenue resource limit ( RRL) by the SGHSCD at the start of the year. The RRL is not income it is an operating expenditure target set by SGHSCD and represents an amount which the NHS Board can spend up to, but should not exceed, in order to meet the statutory target of financial break-even at year end.

During the course of any financial year, NHS Tayside, along with all other NHS Boards, will receive a number of financial allocations from SGHSCD in addition to the baseline RRL set at the start of the financial year. These additional RRL allocations typically have certain health policy priorities/outcomes attached to them for the NHS Board to deliver.

Depending on when in the financial year the additional RRL is received it can be difficult to incur the expenditure to match the allocation in-year and therefore the expenditure may not be incurred. Where this happens the expenditure is deferred to the following year, with the associated expenditure being built into the financial plan for therefore recognising the Board's planned commitment to incur the expenditure.

Historically NHS Tayside's financial plan has factored in assumptions over the level of deferred spend. In effect earmarked commitments are being used as a form of internal financial flexibility, with the deferred commitments requiring to be funded from allocations made in the following year.

The practice of deferring expenditure relating to SGHSCD allocations has been a recurring feature of the NHS Tayside budget setting process. It is acknowledged in the NHS Tayside Assurance and Advisory Group Staging Report June 2017 that without this approach to deferred expenditure and other non-recurring savings, NHS Tayside would have required additional financial support from SGHSCD.

NHS Tayside's financial strategy did include year on year planned reductions in the levels of deferred expenditure. However, whilst there was a reduction between 2012/13 and 2017/18, the level of reduction was consistently behind the plan established by NHS Tayside.

The table below shows the impact over time that the built up deferred expenditure balances have had on NHS Tayside's underlying financial position (excluding any adjustments for the eHealth monies NHS Tayside were holding).

Table 1: Underlying financial performance:

	Deferred Expenditure balance* (£ million)	Original plan* (£ million)	Brokerage in year*** (£ million)	Surplus / (deficit) against RRL (£ million)
31 March 2012	27.2	24.7	nil	0.2
31 March 2013	26.6	24.5	2.25	0.274
31 March 2014	25.6	23.5	2.85	Nil
31 March 2015	25.2	22.5	14.2	0.058
31 March 2016	25.7	22.5	5.0	0.145
31 March 2017	22.5	23.5	13.2	0.1
31 March 2018	15.676	16.5	12.1**	Nil

*Source: NHS Tayside Finance and Resources Committee papers 2012 – 2018

**Unaudited forecast

***Brokerage received in year

Our key findings

• From our review of the papers submitted to the Finance and Resources Committee during 2013/14 and up until the end of 2016/17 this financial management approach to "deferred expenditure" is not as open and transparent as it could have been.
• Up until the recent exercise to analyse what the deferred expenditure balance is made up of, it was not clear exactly what RRL allocation was deferred, and what the future expenditure commitment was and whether this committee reflected a national NHS priority or a local NHS Tayside priority.
• The Finance and Resource Committee papers make reference to deferred expenditure. However, what is not in the papers is what this balance is made up of and therefore the ability to scrutinise or consider whether this is genuine deferred expenditure due to a legitimate timing difference or that the balance is being used to manage the delivery of the financial targets in-year.
• When deferred expenditure has an associated risk attached to it, the risk around the high balance is flagged as being SGHSCD may reduce allocations towards the year- end limiting NHS Tayside's ability to defer spend into future years. Taking a step back, the actual risk is more likely to be that financially they would be unable to deliver the savings needed in year to achieve financial balance and they were carrying forward balances which meant they started the new financial year automatically significantly overspent with no clear savings plans.
• Based on our review of the monthly monitoring returns to the SGHSCD it is difficult to see the deferred expenditure balance reflected. Deferred expenditure is reflected in the narrative within the monthly returns but there is not an outline of what this is (same as the finding related to the internal NHS Tayside finance reporting) and it is in the narrative not the number tables.
• Based on our review we note that NHS Tayside consistently reported to the Finance and Resources Committee (and these minutes were reported to the NHS Board) and within SGHSCD returns that they would achieve in-year financial break-even. Over time the areas of where the Board were overspending did change but it appeared that Management maintained an optimistic attitude that the financial position would be achieved.
• We understand from speaking to the NHS Tayside Finance team that historically expenditure was always lower in the last three months of the financial year, and the forecasts assumed this would happen. If expenditure forecasts are inaccurately forecasted in the last 3 months of the year the Board would have limited options to recover that position. This may be the reason RRL allocations were continually deferred to mitigate/minimise this risk but as the individuals are no longer working for NHS Tayside we are unable to explore this.
• From our review of the Finance papers, in particular those in 2013/14 we noticed some large movements between budget and forecast expenditure, and the overspends in places differ from months to month making it difficult to track what has actually happened between months.
• The overall quality of the finance papers presented to the Finance and Resource Committee up until 2015/16 were poor. Often updates appeared to be verbal and from reading the papers that were presented we note: they were lengthy, confusing and hard to follow, particularly if you were of a non-finance background; they throughout the year presented a positive position even when certain aspects of the Board's activities were overspending, and the treatment of deferred expenditure, in particular that this was planned to achieve financial forecasts is not articulated or visible.
• "On Board – A guide for Board Members of public bodies in Scotland" In section 3.7 sets out the role of Board committee. This sets out "It is very important, however, that it is not merely the minutes of Board Committees that are reported to the Board. The Board cannot be expected to understand the issues dealt with by the Board Committee from the minutes alone". The NHS Tayside Board received the Annual Financial Statements, the Finance and Resources Committee minutes and an annual report from the Chair of the Finance and Resources Committee. Although performance papers were presented to the Board these were operational performance, and we note that the Board did not see the finance papers. Without seeing the finance papers and only the minutes it would be difficult for the NHS Tayside Board to understand the Board's financial position and the means in which the financial position was being managed.
• Throughout 2013/14 there appears to be inconsistent financial performance information being reported to the Finance and Resources Committee, the Endowment Board of Trustees and within SGHSCD. Effectively the position reported to the Committee and SGHSCD appears to be overly optimistic and did not fully reflect management's assessment of the underlying financial position.

Financial management and the role of Internal Audit

Over the period 2012/13 to 2017/18 Internal Audit undertook certain internal audit reviews related to NHS Tayside's financial management arrangements and did identify to management and the Audit Committee areas of risk and recommendations. In particular we would note:

• Financial Planning issued in November 2013 was categorised as "satisfactory" with only minor control weaknesses. The report highlighted the following risk "The NHS Tayside Strategic Financial Plan contains £25.5 million for 2013/14 from non-recurring funds from deferred spend". The report outlines two risks to NHS Tayside in this approach – SGHSCD may reclaim the money and/or the SGHSCD may require NHS Tayside to spend the money more quickly reducing the ability to carry forward in future years resulting in an immediate cash shortfall. The report notes that this risk is not accurately reflected in DATIX (the system used to record operational and strategic risks). This report was reported to the Audit Committee but we cannot evidence of how this action was implemented by management and the Audit Committee updated on the implementation of the action.
• An Interim internal audit report was produced in 2015/16 around financial planning. This report highlights "The draft financial framework 2016/17 to 2020/21 shows that committed earmarks will be used to offset overspends and unidentified savings meaning that NHS Tayside is spending less on these areas than specifically allocated by the Scottish Government". The report cross references to the previous Action in November 2013 as still being relevant. In three years it appears the action was still outstanding.
• In 2016/17 a follow up of financial planning and management was issued in March 2017. This report raises the same concerns reflected in the previous two reports.

Based on our review of the NHS Tayside Audit Committee arrangements we would highlight the following findings:

• There was a lack of a robust mechanism for following up on management's implementation of agreed internal audit recommendations. Internal audit follow up reports were limited, presented by management (based on the cover paper) and did not demonstrate how the action being closed had been independently validated and legitimately actioned.
• The quality of the management response to internal audit recommendations was variable and often just stated "agreed". It was therefore difficult to determine what action management were taking, and the follow up was also difficult.
• Typically internal audit reports were lengthy although there have been improvements over the time period we reviewed. This in our view would make it difficult for Committee members to easy identify the key areas of internal audit concern, and therefore the priority for them to focus on. The internal audit assessment over the grading of the report was based on the review's objectives which meant a number of differing grading's as opposed to one overall grading.
• Cover papers for internal audit reports were in the name of the Assistant Director of Finance. This may have given the impression internal audit reported to the Assistant Director of Finance rather than as an independent source of assurance

NHS Tayside External Audit Reports

Auditors of public bodies across Scotland are required to conduct their audits in accordance with Audit Scotland's Code of Practice (the Code) and International Standards of Auditing ( ISAs).

The relevant Audit Scotland Code of Practice covering the period of our review were issued in May 2011 and updated in May 2016.

The Code provides a framework for public audit in Scotland and the principles which auditors should adopt in carrying out their work. It sets out requirements of auditors in relation to the audit of the financial statements as well as wider responsibilities of auditors of public sector bodies, including financial management and governance arrangements.

The Code of Audit Practice in 2011 sets out that "Auditors should have regard to audited bodies': financial performance in the period under audit; compliance with any statutory financial requirements and financial targets; ability to meet known or contingent statutory and other financial obligations; responses to developments which may have an impact on their financial position; and, financial plans for future periods."

Based on our review of the NHS Tayside External Audit reports we note commentary across these wider scope areas. As relevant to the scope of our review we highlight:

• In each year the NHS Tayside external auditor comments on NHS Tayside's overall governance arrangements focused on the NHS Tayside code of corporate governance. In 2012/13 the report provides an overview of each of the NHS Tayside standing committees although we note this did not include the Finance and Resources Committee.
• In 2012 the External Audit Report concludes: "We have assessed the Board's overall governance arrangements including a review of Board and Key Committee structures and minutes, financial reporting to the Board, and risk management. We consider that appropriate arrangements and reporting are in place".
• On an annual basis the External Auditor concludes that the systems of internal control are appropriate and the governance arrangements in place are appropriate
• Commentary is included in the reports on NHS Tayside's financial management arrangements and future financial sustainability. There is no reference in 2012/13 to the large deferred expenditure balance of £27 million, although certain financial pressures are noted. In 2013/14 financial pressures are identified but there is no specific action identified for management in the action plan, and this is not specifically related to deferred expenditure.
• There is no explicit mention on the quality of the financial information reported to the NHS Tayside Finance and Resources Committee.
• The 2014/15 report includes a specific recommendation related to financial sustainability within the Action plan, and management have reflected a response.

In addition to the NHS Tayside External Audit Reports, we note that NHS Tayside has been subject to a number of Section 22 Reports by the Auditor General for Scotland and the future financial sustainability of NHS Tayside well documented.

Current position on deferred expenditure

Following on from the eHealth report the Strategic Director of Finance and the NHS Tayside Finance team have gained an understanding of what the total deferred expenditure balance consists of as at 31 March 2018.

This is split out, linked to the associated health priorities whether these are national priorities or those determined locally and understood how the expenditure will be incurred in 2018/19.

Plans are now in place to substantially reduce the balance, and this is now fully transparent in the NHS Tayside finance reports and savings plans. Based on what we have reviewed we are satisfied that the future controls and reporting address the risks previously highlighted.

In addition there have been improvements made to the finance papers. These are shorter, easier to understand and do include deferred expenditure analysis.

The Finance and Resources Committee is now a Finance and Performance Committee which better links the financial performance of NHS Tayside to operational delivery, performance and NHS Tayside workforce.

Update on eHealth Controls

Management have implemented a range of controls and revised processes to address the issues identified in our e-Health funding review.

The revised arrangements are in the process of being implemented and therefore we are unable to provide an opinion on the operating effectiveness of these controls.

However, we consider the design of these controls to be sufficiently robust to address the issues identified. In particular, revised controls include:

• A revised financial reporting format which builds in RRL reporting
• Segregation of duties within the Finance team
• An understanding of the deferred expenditure balance to ensure no other areas similar to eHealth are within that balance

Recommendations

Based on our work on financial management and governance we make the following recommendations:

NHS Tayside

1. Committee cover papers should only include the author of the paper and the author should be appropriate to the subject matter being considered, and approved by them. It may be helpful to clearly state on the cover paper the assurances the paper and Management are providing to non-executives and on what rationale and how this relates to the strategic objectives of the NHS Board.

2. The revised financial reporting adopted going forward is easier to read and understand particularly for those of a non-financial background. Management should continue to review this, focused on clearly articulating the financial performance and reflecting an honest assessment of the associated risks of delivery. The newly constituted finance and Performance Committee will allow finance to be more effectively linked to operational performance.

3. To continue the role out of ownership and accountability for managing budgets to budget holders and supporting them in monitoring the position. In particular, the analysis of the "deferred expenditure" and the NHS Board's planned actions to clearly commit the associated expenditure in 2018/19 will support the reduction of this balance and it is now more clearly reported and understood.

4. Finance should undertake a review of how in particular it forecasts ahead the likely financial position and how robust this is, and is there a consistent approach so month on month information is comparable and that the Board members can take confidence in the forecasting. Accurate forecasting will ensure sound financial decisions are taken and potential areas of overspending captured earlier in the year.

5. A more robust recommendation tracker should be introduced for internal audit and external audit recommendations. All recommendations should be captured, progress against the recommendation agreed implementation date reported and action evidenced to close off actions once complete. This will be a key responsibility for the Audit Committee, in particular following up on why recommendations have not been implemented and overseeing their delivery.

6. There is an opportunity to further review and refresh the internal audit reporting style and overall assurance ratings applied in NHS Tayside to ensure that key messages and prioritisation of action is clear, and the reports are easy to understand and that the more significant messages are not lost in narrative. This will also support the Audit Committee in discharging their role in respect of governance and scrutiny.

Scottish Government Health and Social Care Directorate

1. There is an opportunity to review the RRL process, in particular the timing of allocations during the year and whether allocations that do arise during the year relating to specific health outcomes/priorities could be notified from the outset of the year as this could give greater clarity to NHS Board's over the absolute expenditure limit they need to manage to in-year. We note that following the eHealth report SGHSCD have brought allocations forward to a September deadline and plan to improve narrative on allocations. These revised procedures will be reviewed by Scottish Government Internal Audit IN June 2018

2. Where RRL allocations are received in-year, particularly in the latter half of the year, SGHSCD should consider how they would prefer NHS Boards to record this, where expenditure does not occur within the same financial year, in particular how this is reported to the NHS Board but also SGHSCD for monitoring purposes. This could lead to greater clarity in respective NHS Board's medium term financial plans on the reliance on non-recurring means to achieve financial sustainability.

3. Currently if an NHS Board is failing to manage expenditure in year to the limit set by SGHSCD ( RRL) brokerage is provided. An alternative would be to not provide brokerage, this would result in the NHS Board recording a deficit in the financial statements, and would increase the transparency when reading the accounts of the underlying financial position of the NHS Board, whilst still managing the NHS in Scotland within the budget determined.