News / Commission to ease requirements on financial standing assessment

The Audit Commission revealed its new approach in the key lines of enquiry (KLOEs) that will underpin ALE assessments for 2007/08. The financial standing assessment is one of three dominant themes in the ALE, in which a score of 1 results in an overall score of 1, which in turn translates into a weak use of resources assessment in the annual health check.

The financial standing assessment is particularly stringent. In response to earlier consultations on the ALE, the HFMA has raised concerns that rules surrounding financial standing fail to distinguish between organisations that remain in real financial difficulty and those hitting targets in an agreed recovery plan.

The new approach goes some way to meeting these concerns. To achieve a score of 2 on financial standing, trusts will still be required to break even in-year. But the Audit Commission is relaxing the requirement to achieve the statutory duty to break even as long as the trust has delivered a recovery plan for 2007/08 agreed by the strategic health authority (including loan repayments).

The change was trailed in the report on the ALE results for 2006/07, which recognized that some trusts were being badged as weak overall on use of resources, despite good scores in all themes other than financial standing. ‘[The new approach] recognises a number of trusts are performing quite well on an annual basis but have a legacy of financial problems,’ said commission managing director for health Andy McKeon.

Paul Dillon-Robinson, chair of the HFMA’s Corporate Governance and Audit committee, welcomed the proposed change to next year’s KLOEs. ‘We have pointed out before the demotivating effect of confining an organisation to a weak assessment on ALE or use of resources, despite hitting targets in an agreed recovery plan,’ he said. ‘This is a step in the right direction.’

The revision represents a change of direction from proposals in the commission’s summer consultation on the KLOEs for 2007/08, which had suggested a tolerance on in-year break-even and greater weight given to the break-even duty (which is measured over three or, exceptionally, five years).

Mr McKeon acknowledged the change of tack, claiming the revised approach was ‘fairer’ and meant that a number of trusts with significant legacy problems would not be ‘doomed’ to years of weak assessments, despite hitting recovery targets.

While the approach provides greater flexibility around the break-even duty, the requirement to break even in year to score a 2 on financial standing (and therefore receive a fair use of resources assessment) will not help all trusts in recovery. A trust on an agreed recovery plan that involves making an in-year deficit in 2007/08 will still be confined to a weak assessment, despite hitting recovery plan targets.