Comment / Audit reports provide key tool for audit committees

The annual report and accounts, including the annual governance statement, is a key document for every NHS organisation. It tells the story of activities undertaken and how well resources have been managed. Getting it right is really important – to inform the public, national reporting and local planning.

In the context of ongoing financial pressures and change in the NHS, strong financial and governance arrangements are particularly essential. This year is no exception, with the current pandemic requiring a clear understanding of governance, risk management and control.  

Non-executive directors and lay members have a crucial role here and are well placed to review and challenge the annual report, drawing on their knowledge of the organisation. To fulfil their responsibilities effectively, audit committees should make use of all sources of information available, including reports from management and auditors. And they should ensure they fully understand them so that they are in a position to scrutinise and challenge actions being taken to address issues.  

The production and review of the 2019/20 annual report and accounts will feel very different this year, although the requirements placed on finance staff, auditors and audit committees remain the same. In a recent HFMA podcast, Mark Stocks, head of public sector assurance at Grant Thornton, discusses the adjustments made to the audit of the 2019/20 annual accounts as a result of the pandemic, both relating to accounts and to the auditing process itself.

The deadline for audited annual reports has moved back to 25 June; there has been a moratorium on the introduction of IFRS16 for 2019/20; and there has been a particular focus on going concern and significant estimates in the accounts. On a practical level, this year’s audit is characterised by greater virtual working and meetings, and the possibility of less regular, informal contact.

Technology – such as secure file sharing and live streaming – provides important audit tools, particularly for areas such as asset verification and completeness of journals testing. With these changes in place, audit committees’ challenge role will be as important as ever.

Auditors are central to the audit committee’s work as they provide both assurance and valuable insight into the management arrangements within the organisation. Throughout the year internal and external audit provide a number of reports, which audit committee members can draw from.

The reports that the external auditor has to produce throughout the year are set out in the International Standards on Auditing (ISA). These include, at the completion of the audit, an audit report that includes an opinion on whether NHS bodies’ financial statements give a true and fair view of the financial position and a conclusion on whether they have the right arrangements in place to secure value for money. For clinical commissioning groups (CCGs), there is also a regularity opinion on whether income and expenditure are in line with what they are legally allowed to receive/spend.

If the auditor’s report contains a qualified opinion or conclusion, then it is a ‘non-standard’ report. A non-standard report from the external auditor is a public, independent warning sign that must be taken seriously and acted upon. And making sure action is taken is an important role of the audit committee in the stewardship of taxpayers’ funds.

In 2019, the National Audit Office highlighted an increase over recent years in the number of audit reports containing qualified conclusions on value for money arrangements and an increase in qualified CCG regularity opinions. Issues raised have largely related to weaknesses in financial management and financial sustainability. For 2019/20, there is also expected to be an increase in modified reports to reflect the impact of Covid-19 such as the inability of auditors to attend stock takes.

Audit committee members must ask themselves whether they are providing appropriate challenge on actions taken by the organisation to address the issues raised by auditors. To do this, they need to understand the audit risks and qualification and consider whether it is consistent with their understanding of the organisation. They should review current and proposed actions being taken to address the issues. And then they should follow up and challenge on an ongoing basis whether agreed actions are being undertaken and are sufficient.

The HFMA’s 2019 briefing paper – External audit reports: the role of the audit committee – helps audit committee members to understand the range of external audit reports and additional powers. With the 2020 Code of audit practice (the code) taking effect for NHS bodies from 2020/21, this paper remains applicable for the 2019/20 annual report and accounts.

The key change in the new code, which will apply to the 2020/21 audit, relates to the value for money (VFM) conclusion, with the expectation of clearer and more timely reporting. Rather than providing an overall binary conclusion about whether or not proper arrangements were in place during the previous financial year, the code requires auditors to issue a commentary on a number of set criteria.

New proposed commentaries on financial sustainability, governance and improving economy, efficiency and effectiveness, which will be tailored to local circumstances, should be easier to understand and help focus NHS organisations on the areas that need attention.

As audit committee meetings – albeit many virtual ones – take place this month, non-executive directors and lay members will need to use all the information available to them to confidently review the annual report and accounts. In doing so, they will be giving themselves the best chance of fulfilling their role to oversee strong financial and governance arrangements.