2019/20 audits uncover significant issues

In his report on the Department’s accounts to the House of Commons, comptroller and auditor general Gareth Davies (pictured) qualified his opinion on the DHSC’s core department and agencies’ statement of financial position.

The core department statement shows the financial position of the DHSC only, and not the wider departmental group, which was not qualified. The qualification of the core department statement relates to a misstatement of the carrying value of assets linked to loans to NHS provider bodies.

The auditor considers trusts’ financial position to be the most relevant indicator of ability to repay these loans. Trusts present an increased credit risk where their financial distress is indicated by negative net assets and, in some cases, the agreement of new repayment plans, he said. This convinced him that an impairment was needed to avoid a material misstatement, calculated to be £2.2bn after examining the net asset position of every trust to which the Department has issued loan finance.

The report acknowledges that the Department disagrees with this opinion, arguing that the subsequent repayment of the loans in September last year is evidence that the loans were not impaired at the balance sheet date. However, Mr Davies insists the repayment does not provide the evidence needed, and was only possible due to the issue of new public dividend capital (PDC) by the Department.

The auditor also notes that the Department has subsequently changed its policy on impairments on PDC. Now, PDC will be impaired where a provider’s net assets are lower than the PDC issued to it.

Mr Davies raised three other matters – the financial reporting and governance issues at University Hospitals of Leicester NHS Trust (UHL), the implications of ministerial direction on senior clinicians’ pensions, and special payments.

He said the situation at UHL was unprecedented to his knowledge, with a trust failing to comply with the health secretary’s direction to prepare true and fair accounts, and to maintain appropriate accounting records. He said local management override of controls to meet control totals was a significant risk for the audit of the Department group, and the issues at the trust were indicative of management override of control.

Responding to the NAO report, an NHS England spokesperson said: ‘The former chief executive and former chief financial officer of University Hospitals Leicester have both been referred to the Care Quality Commission under the fit and proper person process, and in the case of the ex-CFO to the accounting professional body too.’

A CQC spokesperson said: ‘We have received a referral under the fit and proper persons requirement which we are currently considering and are unable to disclose further details at this time.’

Deficits revised

In draft 2019/20 accounts UHL recognised prior period adjustments that increased previous deficits by £45m – this was revised down to £32m in August 2020, and is the position included in the NHS Improvement consolidated provider accounts for 2019/20.

The trust entered financial special measures in August and, working with its external auditor, it identified weakness in financial systems and control, governance and financial reporting – in particular the use of authorisation of journals in the accounting ledger. There was an unusually higher level of manual interventions in the accounting records, including over 270,000 manual journals.

The NAO added: ‘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 NAO report on the DHSC accounts said significant issues in the trust’s accounting records included non or inaccurate recognition of expenditure and payables; disagreement over the classification of a significant lease; and inappropriate recognition of income.

These weaknesses in the underlying accounting records led the trust’s board to decide in December that it could not certify the accounts as true and fair. Because of this, the auditor cannot issue a report. The trust is reviewing the accuracy of its accounting records, and intends to prepare revised 2019/20 accounts by March 2021.

Overall, Mr Davies concluded the issues at UHL are not material to the consolidated provider accounts or departmental group. The issues identified at UHL were not widespread. While some other instances indicative of management override were found in the audits of other trust accounts, which were linked to the incentives in the system, they were on a different scale, and had not impacted on audit opinions at local level.

Both CFO and chief executive have left the trust. Trust chairman Karamjit Singh said that though the audit report refers to the accounting judgements and manual intervention associated with the previous senior leadership regime, ‘the responsibility for exposing and addressing these issues sits with me and my board colleagues’.

‘The board were not prepared to adopt the accounts because they did not reflect a true and fair record despite the exhaustive efforts made by our external auditor,’ he said, adding the trust was determined to correct the position and install measures to ensure it would not be repeated.

Simon Lazarus, the trust’s new chief financial officer, 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. Further work is planned to enable the trust to file restated audited accounts for 2019/20 and audited accounts for 2020/21 by August 2021.

‘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.’

UHL said it has bolstered its senior finance team, and had appointed a new non-executive chair of the audit committee, together with two further associate non-executives with finance and governance experience.


See HFMA policy and technical manager Debbie Paterson's blog on the issues raised by the audit report.

The NHS England annual report and provider sector annual reports, including the consolidated provider accounts, were published alongside the Department of Health and Social Care report.