Comment / Focus on value not internal audit cuts

Savings will be needed across all NHS expenditure, but cuts in internal audit may prove a false economy and lead to increased costs elsewhere.

The spending review confirmed the need to save £15bn-£20bn to fund future growth in demand, technological advances and cost pressures. This will require fundamental changes in the way care is delivered. Most finance staff will be inclined to lead by example and look to ‘trim’ their own budgets.

Many may be tempted to trim training and internal audit. But cutting either needs to be done with great care. I shall leave training budgets for others to debate and concentrate on internal audit – a core issue for the HFMA Governance and Audit Committee.

In a public body with an accountable officer subject to the requirements set out in the Treasury’s Managing public money publication*, internal audit has some key roles. It must undertake sufficient work to underpin the head of internal audit opinion. Key to this is the independent oversight and review of risk management and internal control systems.

There are two key questions for finance directors. Do I know this work is being performed effectively and at least cost? And are internal audit resources targeted towards key risks and controls and providing assurance on them?

The principle is always to make sure the essential work is done to an acceptable standard at least cost. The rest of internal audit should be judged on the basis of added value versus cost. You will need to ensure that, where possible, internal auditors have done enough work on financial systems for external auditors to rely on, or the scope of external auditors’ work and fees will increase. Internal audit in many cases provides a good value for money review service, especially when it services a large number of NHS clients and can develop standard approaches, identify common opportunities and share ideas across organisations.

Internal audit can also be used to focus other governance resources effectively. Clinical audit is a significant user of resources for most providers when clinical time is factored in. But there is often insufficient rigour in setting priorities and reviewing the value obtained against costs. Some organisations have used internal audit to manage the clinical audit programme to internal audit standards, which has generated better focus

The governance and regulatory framework with frequent inspections by regulatory bodies has led to the creation of an ‘over-engineered industry’ that seeks to provide sufficient volumes of evidence to demonstrate compliance. This is a significant and often unmeasured overhead in many organisations. Many internal audit services have the skills to rationalise governance and risk processes, so they deliver reductions in risk and improvements in quality with sufficient evidence to assure boards, executives and regulators and not just generate paper.

The right approach is to focus on maximising value from internal audit, not reducing cost. A focus on reducing cost often leads to rising costs through insufficient internal controls. Insufficient controls may increase the probability that risks become issues and organisations may miss their objectives or be forced to ‘crash’ spend to put things back on course.

As the NHS begins to implement the requirements of the white paper, the pace of transition will speed up, including a major realignment of systems, people and process. In such a setting, an agile and intelligent audit resource will be invaluable.

It is also possible accountability will be unclear as budgets shift, people move and accountable bodies merge or disappear. In this setting, audit committees, particularly in PCTs, have to hold the ring and will need effective internal audit to fulfil that role.

* www.hm-treasury.gov.uk/psr_mpm_index.htm