BIRMINGHAM AND SOLIHULL MENTAL HEALTH NHS FOUNDATION TRUST. COUNCIL OF GOVERNORS TO BE HELD ON 10 th MARCH 2016

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1 BIRMINGHAM AND SOLIHULL MENTAL HEALTH NHS FOUNDATION TRUST Item 9 COUNCIL OF GOVERNORS TO BE HELD ON 10 th MARCH 2016 EXTERNAL AUDIT PROGESS REPORT Strategic or Regulatory Requirement to which the paper reports: To achieve long term financial sustainability. ACTION: The Audit Committee is asked to note the report. Executive Summary The report details the progress of external audit at this time. REPORT AUTHOR: Mark Jones, PWC BOARD SPONSOR: Sukhbinder Singh Heer, Non-Executive Director APPENDIX: 1. External Audit Report PREVIOUSLY DISCUSSED: N/A Page 1 of 1

2 Birmingham and Solihull Mental Health NHS Foundation Trust February 2016 Update report

3 Contents The purpose of this report /16 audit progress and plan update... 1 Appendix A: Sector developments and publications... 7 Page 1

4 The purpose of this report We originally presented our draft 2015/16 Audit Plan to the Trust s Audit Committee at its meeting on 18 November We presented an updated version of the draft 2015/16 Audit Plan to the Audit Committee at its meeting on 20 January 2016 to reflect the discussions at the November 2015 meeting. The updated version of the draft 2015/16 Audit Plan was approved at the January 2016 meeting of the Audit Committee. The purpose of this report is to: provide an update on external audit activity in the period since we presented our last Progress Report, which we presented to the Audit Committee at its meeting on 20 January 2016, and prior to the commencement of our audit of the 2015/16 financial statements, which is planned to start on 25 April In practice, the majority of new information included in this report has arisen from work undertaken during our interim audit that took place in February 2016; and bring any relevant matter to the attention of members of the Trust s Audit Committee. 2015/16 audit progress and Audit Plan update We continue to work closely with management and Internal Audit on a no surprises basis, to address any audit risks identified during the audit to date and reduce the potential for duplication of audit testing. Our Audit Plan sets out the risks that we identified as part of our planning process, together with the targeted work that we intend to perform in order to address the identified risks. We report back on any changes to our assessment of audit risks and on the work that we undertake in response to the risks identified throughout the audit (see section below). Update on the risks included in the 2015/16 Audit Plan Management override of control Risk ISA (UK&I) 240 requires that we plan our audit work to consider the risk of fraud, which is presumed to be a significant risk in any audit. This includes consideration of the risk that management may override controls in order to manipulate the financial statements. Update We reviewed Internal Audit s work on the Trust s key financial systems during January One of the objectives of this review was to consider if Internal Audit have identified any control weaknesses which would enable management to override controls or have identified any instances where management have overriden controls in practice. Based upon our review of the work performed by Internal Audit, we have not identified any instances where management have overridden controls in practice. We discussed some of the likely key areas of accounting judgement for the 2015/16 accounts with the Trust s Finance Team as part of an audit planning meeting held on 5 January As part of our audit we will continue to discuss and review accounting estimates for bias and evaluate whether circumstances producing any bias represent a risk of material misstatement due to fraud. As in prior years, as part of our final audit procedures, we are planning to utilise the expertise of our Risk Assurance team by extracting data from the general ledger and using a number of key metrics to allow us to identify transactions that require further audit attention and to target our work on journals to the areas that potentially carry greater risk. As a result of this work, we will also be able to share with the Trust s Finance Team some key statistics about how the Trust processes journals. At our final audit visit we will also: evaluate the business rationale underlying significant transactions; test exceptional and unusual items highlighted by the Trust s bank account (and other reconciliations); and perform unpredictable procedures. Page 1

5 Income/expenditure recognition Risk Under ISA (UK&I) 240 there is a (rebuttable) presumption that there are risks of fraud in revenue recognition. We extend this presumption to the recognition of expenditure in the NHS. In the current economic climate the Trust is subject to significant pressure to reduce its cost base. The opportunities to perpetrate fraud, which the ISA considers are usually present in relation to revenue, are more likely to present themselves through manipulation of expenditure in the public sector. There is a risk that the Trust could adopt accounting policies or treat income and expenditure transactions in such a way as to lead to material misstatement in the reported revenue position. Revenue recognition is a particular risk due to changing contracting arrangements. Update In its Finance Report for the 10 months to the end of January 2016, the Group was reporting a deficit of 0.94 million. By the year end, the Group anticipates that it will generate an indicative outturn deficit of 0.21 million, which is below the revised forecast outturn deficit of 0.6 million. We have evaluated relevant revenue and expenditure controls relying on the work performed by Internal Audit where possible. We have reviewed your significant income contracts and contract variations during the year, up to the date of our interim audit, to identify the different types of revenue streams so that we focus on the areas of greatest risk. We have also sample tested income and expenditure transactions, including revenue and maintenance accounts and capital additions and disposals. No audit issues have been noted to date. At the final audit we will: evaluate and test the accounting policies for income and expenditure recognition to ensure that they are consistent with the requirements of the NHS FT Annual Reporting Manual (ARM); review intra NHS confirmations of balances and any disputed amounts to consider any implications on the financial statements; and perform detailed testing of revenue and expenditure transactions, including deferred revenue and provisions, focussing on the areas we consider to be of greatest risk. Estates valuations and impairments Risk Property, plant and equipment (PPE) represents the largest balance in the Trust s statement of financial position. The Trust measures its properties at fair value, which involves a range of assumptions and the use of external valuation expertise. ISAs (UK&I) 500 and 540 require us, respectively, to undertake certain procedures on the use of external expert valuers and processes and assumptions underlying fair value estimates. Specific areas of audit risk regarding any valuation of land and buildings include: the accuracy and completeness of detailed information on assets; whether the Trust s assumptions underlying the classification of properties are appropriate; and the valuer s methodology, assumptions and underlying data, and our access to these. Work was undertaken by the Trust during 2014/15 to review the accumulated prepayment relating to PFI lifecycle costs for the North and South PFI schemes, to assess whether lifecycle costs had been incurred in line with the providers schedule of planned works; this resulted in 2.3 million of the prepayment being written off during 2014/15. Page 2

6 Information was available from the PFI provider with respect to the work completed in relation to lifecycle costs on the North PFI scheme; this was assessed by the Trust s Estates team and resulted in 0.5 million of the prepayment being written off. However, for the South PFI scheme, the Trust was unable to quantify the value of work undertaken in relation to lifecycle costs from the provider s information and therefore all of the 1.8 million prepayment that had accumulated for lifecycle costs was written off. Update The District Valuer is scheduled to perform a valuation of the Trust s estate and the output will be reflected in the year-end financial statements. The planned audit approach we included in our draft Audit Plan has not changed and we will utilise our internal valuations team to carry out a review of the assumptions that the District Valuer has used in arriving at the valuation of the Group s estate. At the final audit we will: consider and validate a sample of the Trust s material valuations and the input data on which each valuation is based; review the assumptions and the estimates used in the valuation performed by the valuer; review the Trust s consideration of the period from the date of the valuation to the year-end and undertake our own assessment of this; check to ensure the valuation information has been correctly input into the Fixed Asset Register and recorded appropriately in the accounts; consult with our own internal valuation specialists as appropriate to support our work; examine the PFI models, the assumptions which have been used and the accounting entries which have been made in the financial statements; and review the deferred assets relating to PFI lifecycle costs at 31 March 2016 against available information from the PFI providers for the North and South schemes to confirm the appropriateness of the recognition of deferred assets at 31 March 2016 and any release for the value of work completed in the year. Savings plans Risk The Trust achieved 6.8 million of its 10.5 million savings target in 2014/15. The Trust is now under significant pressure to deliver the million savings planned for 2015/16. It was reported to the December 2015 meeting of the Trust Board that the Trust, as at the end of month 8, had achieved 5.4 million recurrent savings and 5.2 million non-recurrent savings (equating to 71% of the million savings required for the year) and was forecasting savings delivery of million for the year (equating to 83% of the million savings required for the year). The balance of undelivered savings, and those delivered non-recurrently, will carry forward to 2016/17. The Trust s previous performance in delivering planned savings, together with the need to deliver a significantly larger savings target in 2015/16, inevitably makes this an area of significant risk for the Trust. Effective clinical engagement will continue to be critical to the success of these plans, both in terms of achieving savings targets and ensuring there is not an unplanned adverse impact on the safety and quality of your services. There are also risks in relation to financial reporting, namely that the pressure to report particular financial results may override best practice. Page 3

7 Update We continue to review the Trust s budgetary position and monthly monitoring reports. We note that it was reported to the February 2016 meeting of the Trust Board that the Trust, as at the end of month 10, had delivered 11.1 million of savings ( 5.5 million recurrent savings and 5.6 million nonrecurrent savings), equating to 74% of the million savings required for the year, and was forecasting savings delivery of 11.5 million for the year. The balance of undelivered savings of 3.6 million and the 5.6 million delivered non-recurrently, will carry forward to 2016/17. At the final audit we will: focus on how well the Trust aligns its cost base to changes in its income profile, and how it ensures that value for money is secured in the delivery of services; review the Trust s savings target and its performance against delivering it over the course of the financial year; consider the accounting implications of your savings plans. In particular, we will consider the impact of the efficiency challenge on the recognition of income and expenditure; and consider the implications of the savings target delivery performance and outturn position on the Trust s overall financial health. Quality Report Risk The Trust is required to produce its Quality Report in the format prescribed by Monitor and to the same timescale as the accounts production process. In 2013/14, we issued a qualified limited assurance report in respect of the mandated performance indicators for Care Programme Approach (CPA) 7 day follow up and Crisis Resolution Home Treatment (CRHT) Gate-kept admissions; we also identified errors in our testing on the local indicator for violent assaults on staff. This led us to include the Quality Report as a significant risk in our 2014/15 Audit Plan. Significant improvements were made by the Trust in 2014/15, including the Trust using our checklist in the preparation of the Quality Report to ensure the content of the Quality Report was in accordance with the content requirements specified by Monitor and the FT ARM, which resulted in fewer amendments being made to the initial draft of the Quality Report than was the case in 2013/14. Our testing of the mandated performance indicators for CPA 7 day follow up and CRHT Gate-kept admissions identified no errors that impacted on the reported performance in 2014/15 and we were pleased to issue an unqualified limited assurance report in respect of both mandated indicators. However, we did identify errors in our testing on the local indicator, which for 2014/15 was the number of teams that did not achieve 80% in the Care Programme Approach completion figure. These errors could have impacted on our limited assurance report, had we been required to report on this particular indicator. Due to the nature of our work on the Quality Report being dependent on the data quality and manual entry of patient records for the chosen indicators, there is always a risk in relation to this area of work. However, because of the improvements made in 2014/15 we do not regard this as a significant risk for 2015/16. Update At the time of writing this Progress Report the guidance on the production of the 2015/16 Quality Report is still being finalised. We will provide you with a further update once Monitor has released the requirements for Quality Reporting in 2015/16 and the guidance for our assurance work over the Quality Report. Once this guidance has been released we will meet with the Trust to agree the Quality Report timetable and to discuss the audit implications of the guidance and agree the indicators for testing. Page 4

8 As we did last year, we have agreed with the Trust escalation procedures f0r raising any significant issues should they arise during our work on the Quality Report and/or the indicators on which we will be required to report. Audit of the Financial Statements Meetings with the Trust We have continued to meet with members of the Finance Team to update our understanding of controls and processes as well as performing some early substantive work during our interim audit conducted in February No issues have been identified during the course of our work to date and our proposed approach to the specific audit risks continues to be appropriate. Control environment and interim audit We have planned our 2015/16 audit on the basis that the Trust has, on the whole, an effective financial control environment. This view is supported by the results of the work undertaken during the previous year by ourselves and by Internal Audit, and more recent work where we updated our understanding of the control environment. We have identified no weaknesses in internal control that we wish to report arising from our work completed to date over and above the recommendations already raised by Internal Audit as a result of their work. As part of our annual audit cycle we completed our interim audit during February During the audit we performed the following: understood and evaluated key financial controls; validated key controls, principally through placing reliance upon the work of internal audit; reviewed significant contracts; and performed early substantive testing on contract income, revenue expenditure, capital expenditure and payroll. We identified no issues to report through the procedures performed. Control activities and reliance on the work of Internal Audit Following our review of the work of Internal Audit we are pleased to report that we are able to place the planned level of reliance on their work relating to the main financial systems and operational areas where we have identified audit risks as part of our audit planning. Internal Audit have reported their findings to you as part of their Progress Reports throughout the year. Where issues have been raised by Internal Audit, we have considered their impact on our audit approach. None of the issues raised by Internal Audit to date require a change to our planned audit approach. We would like to take this opportunity to thank Internal Audit for their assistance to date. IT General Controls We have planned to undertake our annual review and evaluation of the Trust s general computer environment during the week commencing 14 March This is a key part of our audit, the aim of this work is to establish if we can place reliance on the Trust s computer environment in advance of our final audit. The main objectives of our review will be to ensure that: access to the network, general ledger and Electronic Staff Record (ESR) application controls are approved and secure; program changes are appropriately controlled; and network failure is minimised. Page 5

9 Related parties Auditing standards require us to plan and conduct our audit so that we obtain sufficient appropriate evidence about whether related party relationships and transactions have been appropriately identified, recognised and disclosed in the financial statements. To do this effectively, we have written to the Trust asking to be provided with complete lists of related parties for both the Trust and Summerhill Supplies Limited. Engagement letters We are currently in the process of refreshing our Engagement Letters for the audits of the Trust and Summerhill Supplies Limited. Page 6

10 Appendix A: Sector developments and publications Sector developments Spending review In the Spending Review and Autumn Statement, the Government announced that NHS England will receive 10 billion more a year in real terms by This will fund integrated health and social care, removing the council tax cap for councils that invest more in social care and providing joined up services between social care providers and hospitals. In addition, the funding aims to realise: 800,000 more operations and treatments; 5.5 million more outpatient appointments; 2 million more diagnostic tests; and access to GP services in the evenings and at the weekend, and 7-day access to hospital services by It is hoped this will ease pressure on acute health services, which have faced increased patient demand following cuts to care services from local authorities, although winter pressures are still expected to be challenging. Overall, this is seen as a good settlement for the NHS, however given that funds are required to address additional pension costs and provider deficits, the focus remains on reform and driving increased productivity in order to find 22bn efficiency savings by 2020/21. Read more at: Off payroll engagements Following the Autumn Statement, the tax spot light is on engagements with workers outside of payroll. This is in addition to the HMT assurance rules. It has been announced that consideration is being given to placing the PAYE burden on the end user i.e. the CCG/NHS organisation even where a worker is engaged through a Personal Service Company. The Government has also agreed to move forward with seventeen of the Office of Tax Simplifications around employment status, as well as considering a further six. The clear message is that HMRC will be investing resource into this area. An HFMA briefing is available at: National Minimum Wage and National Living Wage The National Minimum Wage increased in October and for the over 25s the new National Living wage kicks in from April NHS organisations will pay those new rates. So why might this be a concern (aside from the additional cost)? We are already seeing some organisations in the private sector have "technical" breaches. When found, HMRC will pursue any underpayments and issue penalty notices of up to 200% of the underpayment as well as name and shame them. One of the failures seen in the NHS is where employees have to make a "payment" towards the use of a NHS benefit in kind. Examples include: Page 7

11 salary sacrifice arrangements and an employee no longer having adequate pay from which all or some of the salary sacrifice reduction can be made; an employee having to reimburse private usage of a NHS provided mobile phone/ipad; and private use contributions for NHS provided cars. There is currently a National Minimum Wage amnesty which means employers can declare any noncompliance and not face naming and shaming. We can help employers through that process. That amnesty will finish very soon. Recent publications 1. PwC Weathering the storm: time for brave Trusts to do brave things During the past five years, commentators and politicians have forecast an 'oncoming storm' that would see the finances of NHS providers deteriorate. It is now clear that the storm has arrived and with no sign of the broader financial cloud facing the NHS passing, it is time for Trusts to face the challenge head on if they are to contribute to the delivery of safe and sustainable health services. The publication can be accessed at: 2. ICO Data security incident trends The Information Commissioner s Office (ICO) noted a 13% rise in the number of data security incident cases in the health sector compared to the previous quarter. While this follows a previous downward trend, the continued prevalence indicates this remains a key area of risk given the sensitivity of data handled by the NHS. Commonly occurring incident types noted in the health sector are: loss and theft of paperwork; data being ed, posted or faxed to an incorrect recipient; failure to redact data; insecure web-pages (including hacking); insecure disposal of paperwork; and loss/theft of an unencrypted device. The latest details on trends are available at: 3. Monitor & TDA Supporting the role of the chief operating officer Monitor and the NHS Trust Development Authority (TDA) surveyed chief operating officers (COOs) in the NHS to find out more about the characteristics of COOs, the challenges they face and what support is beneficial. The report is available at: 4. HFMA & CIPFA Better care fund six months on The Healthcare Financial Management Association (HFMA) has issued the results of a joint survey by the HFMA and the Chartered Institute of Public Finance and Accountancy (CIPFA) of CCGs and local authorities. Some difficulties were reported with setting up the fund but there is evidence of positive joint working emerging. Accounting for the BCF and year-end arrangements remain a concern. The results of the survey are available at: Page 8

12 5. HFMA & CIPFA Glossary for NHS and local authority finance and governance The HFMA and CIPFA have jointly published a glossary for the health and local government sectors which could be a useful reference for audit committee members. It also includes some useful background into funding flows in both sectors and how the different organisations fit together. The publication can be accessed at: Page 9

13 This document has been prepared only for Birmingham and Solihull Mental Health NHS Foundation Trust and solely for the purpose and on the terms agreed with Birmingham and Solihull Mental Health NHS Foundation Trust. We accept no liability (including for negligence) to anyone else in connection with this document, and it may not be provided to anyone else. If you receive a request under freedom of information legislation to disclose any information we provided to you, you will consult with us promptly before any disclosure PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Page 10