Feature / Time Trial

Closing of in-year and year-end accounts is not about meeting some arbitrary deadline but about improving the quality of financial reporting. The Audit Commission’s Andy McKeon explains the rationale and offers advice on meeting the new deadlines

The term ‘faster  close’ has been increasingly used during the last couple of years in relation to the public sector, and with NHS bodies in particular. Steadily it has worked its way up the list of most commonly used jargon.  As a term, it sounds pretty self-explanatory. But it does not actually communicate what bodies striving to close their in-year and year-end accounts more quickly are trying to achieve. 

Closing ledgers more efficiently, reporting to management more quickly following the period end and getting draft accounts to auditors earlier are not aims in themselves.  Faster close is only an achievement when it is the by-product of an improvement in the quality of financial reporting that meets the needs of stakeholders. 

Bodies that close their accounts faster during the year and at year-end do so because they have well-developed systems and controls in place. And, most importantly, they recognise the value that good in-year financial information adds to the way they manage their organisations.

The Audit Commission has highlighted in reports to the NHS and other public sector bodies the benefits of faster closing. This issue has risen up the agenda as the benefits of accelerating the closedown and reporting processes and the links to good financial management have become clear.

Spelling out the benefits

The commission’s World class financial management, which was published in

November 2005, states: ‘Timely reporting to stakeholders is a pre-condition of proper accountability… Speedier closedown at the end of the year also enables the lessons of the previous year to be quickly assimilated and ensures a firm basis for monitoring and planning in the following years.’

Faster close is about more efficient financial reporting arrangements that enable better governance.  Organisations that strive for faster close demonstrate that accountability to stakeholders is a priority for them.

The challenges

The deadline for the submission of draft and final audited financial monitoring accounts (FMAs) by NHS bodies has been brought forward for 2008/09 in order to promote better financial reporting.

The new timetable will also support the Department of Health in meeting its objective to lay its consolidated accounts before the parliamentary summer recess. Trusts and PCTs face a one-week advance on their draft accounts submission deadline, and seven working days on their final accounts.

The deadline for the submission of foundation trust draft accounts remains unchanged at 23 April, the deadline for the final audited accounts has however advanced by one week to 8 June 2009.

 NHS bodies have expressed concern at the earlier deadlines.  However, the experience of foundation trusts shows that meeting the deadlines is possible.  And in Australia, for example, the government collects audited financial information around six weeks after the year end and is working to reduce this to four weeks.

The latest results of the Auditors’ Local Evaluation (ALE), which was published by the Audit Commission in October 2008, show that the majority of NHS bodies are meeting minimum standards for financial reporting. There has been a marked improvement in the performance of NHS bodies year-on-year. Ninety-six per cent of NHS bodies met minimum standards, compared with 84% in 2006/07 (see figure 1, right). This improvement was achieved despite the advance in the timetable during 2006/07. 

These results imply that achieving the tighter timetable really shouldn’t be too difficult and for some it probably won’t be.

However, for the majority of organisations, achieving faster close for the 2008/09 accounts may be challenging, particularly because it comes during a very busy year for finance teams engaged in the transition to the international financial reporting standards (IFRS). 

Previous advances in the timetable may have been managed by finance teams working longer hours at the year-end and bringing in temporary staff to provide additional support. It is highly unlikely that these sorts of measures alone will enable bodies to meet the tighter timescales in 2008/09 and maintain the quality of their financial reporting.

One of the most commonly identified weaknesses at NHS bodies failing to achieve minimum standards under the ALE assessment was the high level of material or non-trivial errors in the accounts. Poor working papers and incomplete annual reports were  also particular problems (see page 43).

The commission undertook a review of reports issued to ‘those charged with governance’, known as ISA 260 reports, to identify common errors noted by auditors and to try and better understand the areas that cause difficulty during audit. Common errors related to the evidence for provisions and lack of support for accruals (see box, facing page)

In many cases the errors identified during the course of the auditor’s work should have been addressed before the draft accounts were submitted to the Department through internal review and challenge of the accounts.

The finance director and the non-executive directors have important roles to play in probing and questioning the draft accounts and they should ensure that a detailed review should be programmed in at all organisations prior to their submission.

Preparing for faster close

The Department is supporting bodies as they prepare to meet the advance in the timetable through the NHS faster closure implementation group. This is chaired by Janet Perry, the Department’s NHS financial controller, and is attended by other representatives from the Department, each of the strategic health authorities and the Audit Commission. 

Risks to the achievement of the timetable have been identified and each of the SHAs has been charged with taking forward these areas and identifying actions to address those risks. The 10 working groups have focused on areas such as improving working papers, identifying problems in the agreement of balances exercises and strengthening governance arrangements to help bodies better prepare for closedown and reduce delays. It is important that this learning is shared with all bodies.

The Department has recognised that achieving better in-year reporting by NHS bodies is key to ensuring a faster high quality close at year-end and have introduced a requirement for enhanced reporting at month nine, sometimes referred to as ‘month nine hard close’. 

It is important that PCTs and trusts recognise the purpose of this exercise, which is to encourage fully accrued in-year reporting covering both income and expenditure and the balance sheet. 

Identifying problems early

Organisations that engage in this exercise will have the opportunity to identify accounting issues and deal with them, preventing delays at the year-end.  Bodies that, as a matter of course, undertake this type of monthly reporting to support their management functions will be even better placed to meet the year-end reporting deadlines. 

One of the other key changes planned to help bodies to meet the tighter timetable is a relaxation in the requirement to agree intra-NHS income and expenditure at the year-end.  This change will however only be taken forward if trusts and PCTs can demonstrate that they have good arrangements in place for matching their income and expenditure during the year. 

In the event that NHS organisations cannot demonstrate a high level of consistency in the figures reported during the quarterly agreements of balances exercise, then they will still be required to agree figures at the year-end and the expected time saving from this planned change will be lost.  Lack of engagement and failure to agree figures at month nine would put the achievement of the timetable at risk.

Faster closing and achievement of the deadlines set by the Department in 2008/09 will be challenging for NHS bodies.  However these challenges are not insurmountable if bodies start to engage now within finance teams, with audit committees and with their auditors.

It is important that organisations understand that faster close is not an achievement in itself and do not lose sight of the fact that this will only be a success if it represents an improvement in the quality of financial reporting. 

FIG 1: FINANCIAL REPORTING SCORES 2007 AND 2008

Andy McKeon is managing director, health, at the Audit Commission