Audit of financial statements: issues for the attention of the Audit Committee Cardiff and Vale NHS Trust

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1 Audit February 2010 Author: Auditor General for Wales Ref: 182A2010 Audit of financial statements: issues for the attention of the Audit Committee Cardiff and Vale NHS Trust

2 The Auditor General for Wales is currently awaiting the outcome of two outstanding issues in the Trust s financial statements prior to providing an opinion. There are also some other issues to bring to your attention. Contents Summary 4 The impact of the review of asset lives needs to be properly reflected in the accounts in line with International Financial Reporting Standards A material adjustment may be required in respect of an Assembly Government credit note provision depending on final confirmation of funding The Trust experienced significant cashflow difficulties in the period ending 30 September 2009, and the UHB s cash position is deteriorating We did not identify any material internal control weaknesses which would impact on the opinion, however Internal Audit reported some systems weaknesses which require management action Appendices Final Letter of Representation 9 Summary of corrections to draft financial statements Page 2 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

3 Status of this report This document has been prepared for the internal use of Cardiff and Vale University Health Board as part of work performed in accordance with statutory functions, the Code of Audit and Inspection Practice and the Statement of Responsibilities issued by the Auditor General for Wales. No responsibility is taken by the Wales Audit Office (the Auditor General and her staff) in relation to any member, director, officer or other employee in their individual capacity, or to any third party. In the event of receiving a request for information to which this document may be relevant, attention is drawn to the Code of Practice issued under section 45 of the Freedom of Information Act The section 45 Code sets out the practice in the handling of requests that is expected of public authorities, including consultation with relevant third parties. In relation to this document, the Auditor General for Wales (and, where applicable, her appointed auditor) is a relevant third party. Any enquiries regarding disclosure or re-use of this document should be sent to the Wales Audit Office at infoofficer@wao.gov.uk. Page 3 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

4 Summary 1. The Auditor General for Wales (Auditor General) is responsible for providing an opinion on whether the accounts of the former Cardiff and Vale NHS Trust (the Trust) are true and fair. We received the draft financial statements for the six month period ended 30 September 2009 on 04 December 2009 and have now substantially completed our audit work. We are reporting to you the most significant issues arising which we believe you should consider prior to the Board approving the financial statements. We have already discussed these issues with the Director of Finance. 2. We do not try to obtain absolute assurance that the financial statements are true and fair, but adopt the concept of materiality. In planning and conducting the audit, we seek to identify material misstatements in your financial statements, that is, those that might result in a reader of the accounts being misled. 3. The quantitative levels at which we judge such misstatements to be material are million for income and expenditure items and working capital balances, and million for other balances. Whether an item is judged material can also be affected by certain qualitative issues such as legal and regulatory requirements and political sensitivity. 4. As required by auditing standards we report to you any issues we have identified with regard to: your accounting practices and financial reporting; material internal control weaknesses; matters of significant governance interest; and any other relevant matters arising from our audit. 5. We also set out in the detailed report any misstatements we identified in the financial statements which remain uncorrected and request that you make these corrections. If you decide not to correct these misstatements, we ask that you provide us with the reasons for non-correction. We can confirm that at this stage there are no unadjusted misstatements in the financial statements. 6. The issues that we wish to draw to your attention in these areas are summarised below and discussed further in the detailed report: the impact of the review of asset lives needs to be properly reflected in the accounts in line with International Financial Reporting Standards; a material adjustment may be required in respect of an Assembly Government credit note provision depending on final confirmation of funding; the Trust experienced significant cash flow difficulties in the period ending 30 September 2009, and the UHB s cash position is deteriorating; and we did not identify any material internal control weakness which would impact on the opinion, however Internal Audit reported some systems weaknesses which require management action. Page 4 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

5 7. The Auditor General is currently awaiting the outcome of the issues relating to the review of asset lives and a credit note provision prior to providing an opinion on the financial statements. 8. Appendix 2 sets out the corrections that have been made to the financial statements as a result of our audit and at the request of the Assembly Government. Page 5 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

6 Detailed Report The impact of the review of asset lives needs to be properly reflected in the accounts in line with International Financial Reporting Standards 9. During , the Trust commissioned a firm of chartered surveyors to review the remaining lives previously allocated to its buildings by the District Valuer. The result of this asset exercise resulted in the majority of the Trust s buildings being allocated increased useful lives. The impact of the review was to reduce the in-year buildings depreciation charge by million. 10. There were a number of accounting and operational issues arising from this initiative (unique at the time in NHS Wales) which needed to be considered going forward, and which were agreed with the Trust as part of our accounts audit. As part of our audit of the six month accounts in we have identified that: there is a need to formally confirm that the approach still fully complies with appropriate accounting standards (the initiative was initially undertaken in under extant Financial Reporting Standards which have been replaced in by International Financial Reporting Standards); the standard accounting policies notes in the financial statements need to be reviewed and amended as appropriate (with the agreement of the Assembly Government) to reflect the initiative; and there is a need to ensure that the repairs and maintenance regime which underpins the initiative is sufficient and is being delivered. 11. The issues arising from the initiative are being considered further at an all Wales level and in conjunction with the Audit Commission and Audit Scotland. For this reason the Auditor General is unable to provide her opinion on the Trust s accounts until the issues have been resolved. A material adjustment may be required in respect of an Assembly Government credit note provision depending on final confirmation of funding 12. The draft accounts presented for audit reflected an Income Statement retained deficit of 4.72 million. Subsequent to our audit, a number of adjustments and presentational amendments were made to the accounts as set out in Appendix 2. The overall impact of the adjustments resulted in the retained deficit reducing to 4.64 million. 13. There is one issue outstanding which requires resolution before the Auditor General can provide her opinion. This relates to a 5 million credit note provision with the Assembly Government in respect of income accrued for the impact of IFRS conversion and other technical adjustments. Page 6 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

7 14. This provision is not in our view allowable under Assembly Government guidance and should be removed. The UHB is awaiting a final agreed income figure from the Assembly Government which should resolve the issue. This will involve the accounts reflecting the actual agreed income figure, or the removal of the credit note provision. This may have a significant impact on the resource out-turn which could move from a retained deficit to a retained surplus. The Trust experienced significant cash flow difficulties in the period ending 30 September 2009, and the UHB s cash position is deteriorating 15. During the year, the Trust s monitoring returns highlighted serious cash flow problems for the Trust and the wider Cardiff Health Community. The situation was being sustained by drawing down LTA advances from host LHBs. As at 30 September 2009, the Trust required cash advances from its host LHB s of 15 million to maintain liquidity. 16. The Trust (and now the UHB) has properly indicated that this position is not sustainable, and the UHB has recently submitted a report to the Assembly Government setting out the background to the problems and requesting a recurring cash injection during of 20 million. 17. The report also identifies that the UHB is forecasting a year end resource deficit out-turn which compounds its cash shortage problems, with a predicted cash deficit in March 2010 of circa 25 million. This has resulted in a request for an additional non-recurrent cash loan of circa 5 million to manage the projected inyear deficit. 18. We note that the cash flow problem is reflected in the failure to meet the public policy payment target during (the six month accounts report achievement of 60 per cent against the target of 95 per cent). Our work also identified examples of delayed payments attributable to cash shortages. In particular we found a payment of million due to Cardiff University which was authorised for payment in May 2009 but which was not paid until December The UHB s liquidity issue is clearly of concern, and we will continue to monitor developments as part of our audit of the full year accounts. We did not identify any material internal control weaknesses which would impact on the opinion, however Internal Audit reported some systems weaknesses which require management action 20. A material weakness in internal control is defined by ISA 260 as...a deficiency in design or operation which could adversely affect the entity s ability to record, process, summarise and report financial and other relevant data so as to result in a material misstatement in the financial statements. Page 7 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

8 21. We did not identify any material internal control weakness which would impact on the opinion, however, Internal Audit reported some systems weaknesses which require ongoing management action from the UHB. 22. The Internal Audit assurance statement for the six months ended 30 September 2010 states that The systems of internal control operating within the Trust, covered by the plan, are in general adequate. There were however a number of reports issued during the year that identified specific areas where the level of control was inadequate, and areas of non-compliance with existing controls. Management action plans have been developed to strengthen the control weaknesses identified in these reports. 23. We will continue to monitor progress in these areas as part of our work in Page 8 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

9 Appendices Appendix 1 Letter of Representation The Auditor General for Wales Wales Audit Office 24 Cathedral Road Cardiff CF11 9LJ 25 February 2010 Representations regarding the six month financial statements This Letter of Representation is provided in connection with your audit of the financial statements of Cardiff and Vale NHS Trust (the Trust) for the period ended 30 September 2009 for the purpose of expressing an opinion as to whether: the financial statements give a true and fair view of the financial position of the Trust as at 30 September 2009 and of the result of its operations and its cash flows for the period then ended in accordance with the Financial Reporting Manual and any other directions issued by the Treasury/Welsh Assembly Government; in all material respects the income and expenditure have been applied to the purposes intended and the transactions conform to the authorities which govern them; the statements have been properly prepared in accordance with applicable guidance; and the Statement on Internal Control is compliant with applicable guidance and consistent with our knowledge and understanding of the Trust arrangements. I acknowledge as Chief Executive and Accounting Officer my responsibility for preparing the financial statements in accordance with the above framework. In preparing the financial statements, I was required to: observe the accounts direction issued by the Welsh Assembly Government, including the relevant accounting and disclosure requirements and apply appropriate accounting policies on a consistent basis; make judgements and estimates on a reasonable basis; state whether applicable accounting standards have been followed and disclosed and explain any material departures from them; and prepare them on a going concern basis on the presumption that the Trust will continue in operation through its successor organisation, Cardiff and Vale University Health Board. Page 9 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

10 Appendices Representations made by management Specific representations Attached to this letter is a report that details the major judgements and estimates used in preparing the final accounting figures. All these judgements and estimates relate to the six month accounting period. Overall representations All the transactions undertaken by the Trust have been properly reflected and recorded in the accounting records. The financial statements are compliant with the requirements of International Financial Reporting Standards. There are no pooled budget projects arising from any partnership agreements entered into under Section 33 of the NHS (Wales) Act 2006, associates, joint ventures or joint arrangements other than those disclosed in the accounting statements and associated notes. The financial statements and/or the notes to the accounts disclose any: violations or possible violations of laws, regulations or the Manual for Accounts whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency; and other material factors that would influence the readers view of the statements. The Trust has complied with all aspects of contractual agreements that would require adjustment to, or disclosure in, the financial statements. The financial statements are free of material misstatements, including omissions. All books of account and supporting documentation and all minutes of meetings of the Board and its committees have been made available to you. The Trust has no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements. The measurement methods, including the related assumptions, used in determining fair values are appropriate and have been applied consistently. Disclosures relating to fair values are complete and appropriate. There are no uncorrected financial statements or misstatements. I acknowledge as Chief Executive and Accountable Officer my responsibility for ensuring the regularity of any expenditure incurred by Trust. I confirm that I have considered the regularity of all expenditure incurred and that I am not aware of any actual or potential noncompliance with regulations. Assets General All assets included in the Statement of Financial Position were in existence at the period end date, owned by the Trust, and free from any lien, encumbrance or charge, except as disclosed in the accounts. The Statement of Financial Position includes all tangible assets owned by the Trust. Page 10 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

11 Appendices Property, plant, equipment and intangible assets All assets over the capitalisation threshold are capitalised. In the case of equipment this would involve individual items costing at least 5,000 or a group of items which cost at least 250 individually, at least 5,000 as a group and are functionally inter-dependent. In addition, such grouped items must have broadly simultaneous disposal dates and are under single managerial control. With regards to buildings, the Trust defines its building assets to be the building improvements in totality made to any specific site. The individual blocks and buildings contained on a site are treated as major components of the same asset since they are functionally inter-dependent and in all likelihood would be disposed of at broadly simultaneous dates. This approach is in line with RICS Guidance Note 3. Subsequent expenditure is capitalised where a major new component is constructed, replaced or where existing components are subjected to a major overhaul. Expenditure to replace nonsignificant asset components is not capitalised as individual items are so insignificant to the overall cost of the asset that they are in effect maintenance in nature. Where a major component (as defined above) to a building asset is replaced then this is de-recognised from the Trust s Accounts in accordance with IAS 16. Depreciation is calculated to reduce the net book amount of each asset to its estimated residual value by the end of its estimated useful life in the Trust operations. The Trust allocates different asset lives to each of the major components of its building assets as defined above. It does not allocate separate lives to components within individual blocks since IAS 16 states that this should only be done where individually these components were significant to the overall value of the asset. In the case of a multi-million pound hospital site, then clearly this is not the case. The Trust is therefore content that its depreciation policy is fully compliant with IAS 16. The Trust s depreciation policy is underpinned by the need to have a robust maintenance regime in place. To this end the Trust has in place annual budgets of 7.2 million to provide for the maintenance of its estate. The Trust considers this adequate to ensure that it s buildings will be able to remain operational for the life allocated by its appointed Chartered Surveyors. The Trust s property, plant and equipment (excluding investment technology assets) are revalued yearly with annual indexation. Other non-current assets and current assets On realisation in the ordinary course of the Trust s operations, other non-current assets and current assets in the balance sheet are expected to produce at least the amounts at which they are stated. Adequate provision, where allowable, has been made against all amounts owing to the Trust which are known, or may be expected, to be irrecoverable. There are no formal or informal compensating balance arrangements with any of our cash and investment accounts. Page 11 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

12 Appendices Liabilities General All liabilities, both actual and contingent, have been recorded and disclosed as appropriate, as well as all guarantees that we have given to third parties. There is no pending litigation which may result in significant loss to the Trust, and which has not been disclosed in the Statement of Accounts, either as current or contingent liabilities. All obligations under finance leases or hire purchase contracts have been disclosed in the accounts. All unfunded benefits have been considered in the compilation of the IAS 19 figures included in the financial statements. Results Except as disclosed in the accounts, the results for the period were not materially affected by transactions of a sort not usually undertaken by the Trust, or by circumstances of an exceptional or non-recurring nature. Internal control We acknowledge our responsibility for the design and implementation of internal control to prevent and detect error. There have been no: irregularities involving management who have significant roles in the system of internal accounting control; irregularities involving other employees that could have a material effect on the financial statements; and communications from regulatory agencies concerning non-compliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements. Events after the reporting period Except as disclosed, there have been no material changes since the period end date affecting liabilities and commitments, and no events or transactions have occurred which, though properly excluded from the financial statements, are of such importance that they should have been brought to the notice of the auditor. Representations made by those charged with governance We acknowledge that the representations made by management, above, have been discussed with us. We acknowledge our responsibility for the fair presentation of the financial statements in accordance with the applicable Financial Reporting Framework. Page 12 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

13 Appendices We acknowledge our collective responsibility for the preparation of the financial statements, which were approved by the Board on 25 February We have disclosed to you all known or possible non-compliance with laws and regulations whose effects should have been considered when preparing the financial statements. There are no other material transactions with related parties (as defined by IAS 24 and the Manual for Accounts), other than those recorded and disclosed in the financial statements. We acknowledge our responsibility for the design and implementation of internal control to prevent and detect fraud, and have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. We have disclosed to you our knowledge of any allegations of fraud, or suspected fraud, affecting the financial statements communicated to the Trust by employees, former employees, regulators or others. There have been no reports sent to the Directorate of Counter Fraud Services in accordance with Paragraph 6 (1) of the relevant directions regarding counter fraud measures of which we have not made you aware. We have disclosed to you our knowledge of fraud or suspected fraud affecting the Trust involving: those charged with governance; employees who have significant roles in internal control; or others where the fraud could have a material effect on the financial statements. We confirm, to the best of our knowledge and belief, that the above representations are made on the basis of enquiries of management and staff with relevant knowledge and experience (and, where appropriate, of inspection of supporting documentation) sufficient to satisfy ourselves that we can properly make each of the above representations to you. Jan Williams, OBE David Francis Chief Executive Officer as Chair of Cardiff and Vale Accountable Officer University Health Board Date: 25 February 2010 Date: 25 February 2010 Page 13 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

14 Appendices Appendix 2 Summary of corrections to draft financial statements 1) Income Statement The Retained Deficit has improved overall by 0.082m in respect of the following: The Deficit has improved by million in respect of the release of a provision held against amounts owed by Abertawe Bro Morgannwg (ABM) NHS Trust which while seeming prudent at the time has subsequently proved not to be required. (Adjustment requested by Wales Audit Office) The Deficit has worsened by million in respect of additional depreciation required to be charged on Whitchurch Hospital as a result of The District Valuer s (DV) Revaluation of the Trusts Estate as at 1 April (Adjustment requested by Assembly Government) In addition, there has been a re-analysis between revenue from patient care activities and operating expenses in respect of income due from HCW which was previously provided for; but has proved to be uncollectible. As a result both income and expenditure have been reduced by million. (Wales Audit Office) 2) Statement of Financial Position The amount held in respect of property, plant and Equipment has increased by million million of this increase being in respect of the revaluation of the Whitchurch site referred to in paragraph one above. This has been netted down by the need to re-profile indexation on equipment evenly between the first and last six months of 2009/10. This has had the effect of reducing the carrying value of equipment by million. Both adjustments arise from guidance issued by WAG after the draft accounts had been prepared. (Wales Audit Office and Assembly Government) The Amount due re current trade and other receivables has increased by million. This reflects three adjustments: the release of the provision of million re amounts owed by ABM Trust referred to in paragraph one above; (Wales Audit Office) the inclusion of a debtor of million re amounts owed by WAG resulting from the increased accelerated depreciation charges incurred at the Whitchurch site as a result of the DV s 1 April 2009 revaluation; and (Assembly Government) a reduction of million in the figure owed by the Welsh Risk Pool in respect of a clinical negligence claim, where the provision held in respect of one case was overstated. (Wales Audit Office) Page 14 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

15 Appendices The total of provisions held at 30 September 2009 has reduced by million in respect of the over provision re the clinical negligence case referred to in the sentence above. There has also been a re-analysis of the total clinical negligence liability between the current and non-current elements. This has seen the current element increase by million with a corresponding reduction to the non-current element. (Wales Audit Office) The above adjustments have the following effect on taxpayers equity: the Revaluation Reserve has increased by million; Retained Earnings has worsened by million; and the Donation Reserve has decreased by million. In addition, since the draft accounts were prepared, the Assembly Government has altered the format of this statement to include a line for non-current trade and other receivables. The LHB has therefore split out its trade and other receivables to comply with this disclosure requirement, moving million from current trade and other receivables to non-current. (Assembly Government) 3) Cash Flow Statement The following changes have been made to this statement: as outlined in paragraph one, the operating surplus has increased by million; as outlined in paragraph two, trade receivables have increased by million; as outlined in paragraph two, provisions have decreased by million; and as a result of the revaluation of Whitchurch, depreciation has increased by million. (Wales Audit Office) 4) Accounting Policy Notes Note 1.7 (Property Plant and Equipment). Additional wording has been included to better reflect the Trust s Accounting policies with regard to non-current assets. (Wales Audit Office) Note 1.30 (Key Estimates of Uncertainty). The figures in paragraphs one and two have been amended to reflect the adjustments made to the NHS credit note provision and the provision for clinical negligence claims. (Trust) 5) Note 2 Revenue from patient care The income figure has been reduced by million to reflect the net effect of a reduction in income due from Health Commission Wales (HCW) and an increase in the income due from WAG to cover the increase in acceleration depreciation charges arising from the revaluation of the Whitchurch site. (Assembly Government and Wales Audit Office) 6) Note 4.1 Operating Expenses In total, operating expenses have reduced by million. This comprises a reduction in losses, special payments and irrecoverable debts expenditure of million in respect to credit note provisions held in respect of ABM NHS Trust and HCW which are now able to be released. At the same time there has been an increase in depreciation charged of million resulting from Page 15 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

16 Appendices the revaluation of the Whitchurch site. (Assembly Government and Wales Audit Office) 7) Note 4.2 Losses, Special Payments and Irrecoverable Debts The adjustments are as follows: Clinical Negligence expenditure has been reduced by million due to the overstating of the provision as described in paragraph two above; income received by the Welsh Risk Pool has also been reduced by million re the same clinical negligence case; and irrecoverable debts expenditure has reduced by million due to the release of the credit note provisions with ABM and HCW referred to in paragraph six above. (Assembly Government and Wales Audit Office) 8) Note 12 Property, Plant and Equipment As referred to in paragraph two above, the value of property, plant and equipment has increased by million as a result of revaluing the Whitchurch site and reprofiling annual indexation. (Wales Audit Office and Assembly Government) 9) Note 16 Capital Commitments This figure was understated by million due to the original figure being incorrectly reduced by a payment found not to have been made until October. (Wales Audit Office) 10) Note 20.1 Trade and Other Receivables As referred to in paragraph two above, the amount due re current trade and other receivables has increased by million. This reflects three adjustments: (Wales Audit Office) the release of the provision of million re amounts owed by ABM Trust; the inclusion of a debtor of million re amounts owed by WAG resulting from the increased accelerated depreciation charges incurred at the Whitchurch site; and a reduction of million in the figure owed by the Welsh Risk Pool in respect of a clinical negligence claim, where the provision held in respect of one case was overstated. 11) Note 26 Provisions As referred to in paragraph two above, the total provisions held at 30 September 2009 have reduced by million in respect of the over provision re a clinical negligence case. There has also been a re-analysis of the total clinical negligence liability between the current and non-current elements. This has seen the current element increase by million with a corresponding reduction to the non-current element. (Wales Audit Office) 12) Note 31 Financial Instruments The amount disclosed as Financial Assets has increased by million as a result of two corrections: firstly, as per paragraph 10 above the amount due re current trade and other receivables has increased by million; and (Wales Audit Office) secondly, the balance in the draft accounts as owed by the Welsh Risk Pool has been added into Financial Assets ( million) as the Assembly Government has subsequently confirmed that the Trust s relationship with the WRP is contractual not statutory. (Assembly Government) Page 16 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

17 Appendices 13) Note 35 - Related Party Transactions The following have been adjusted: receipts from HCW revised down 1 million re adjustment described in paragraph five; and receipts and amounts due from WAG have been increased by million as per paragraph 10 above. (Wales Audit Office) 14) Note 36 - Intra Government Balances The following have been actioned: HCW Debtors (due less than one year) reduced million; WAG Debtors (due less than one year) increased million; credit note provision increased million (re HCW & ABM); and Bodies External to Government Debtors reduced million (re Welsh Risk Pool). (Assembly Government and Wales Audit Office) Page 17 of 18 Cardiff and Vale NHS Trust - / Audit of financial statements: issues for the attention of the Audit Committee

18 Wales Audit Office 24 Cathedral Road Cardiff CF11 9LJ Tel: Fax: Textphone: Website:

19 Audit February 2010 Author: Auditor General Ref: 149A2010 Audit of Financial Statements: Issues for the Attention of the Audit Committee Cardiff Local Health Board

20 The Auditor General intends to issue an unqualified certificate and report on the financial statements, although there are some issues to report to you prior to their approval. The unqualified opinion includes an emphasis of matter note to reflect uncertainties surrounding continuing healthcare claims. Contents Summary 4 Detailed Report There are significant uncertainties relating to the potential costs of CHC claims 6 The arrangements for managing CHC claims need to be strengthened 6 Assessment procedures need to be improved and better co-ordinated 6 Additional resources are needed to address the backlog of claims 7 Appendices Final Letter of Representation 8 Summary of corrections to the draft financial statements 13 The certificate and report of the Auditor General to the National Assembly 14 Page 2 of 18 Cardiff Local Health Board Audit of Financial Statements: Issues for the Attention of the Audit Committee

21 Status of this report This document has been prepared for the internal use of Cardiff and Vale University Local Health Board as part of work performed in accordance with statutory functions, the Code of Audit and Inspection Practice and the Statement of Responsibilities issued by the Auditor General for Wales. No responsibility is taken by the Wales Audit Office (the Auditor General and his staff) in relation to any member, director, officer or other employee in their individual capacity, or to any third party. In the event of receiving a request for information to which this document may be relevant, attention is drawn to the Code of Practice issued under section 45 of the Freedom of Information Act The section 45 Code sets out the practice in the handling of requests that is expected of public authorities, including consultation with relevant third parties. In relation to this document, the Auditor General for Wales (and, where applicable, his appointed auditor) is a relevant third party. Any enquiries regarding disclosure or re-use of this document should be sent to the Wales Audit Office at infoofficer@wao.gov.uk. Page 3 of 18 Cardiff Local Health Board Audit of Financial Statements: Issues for the Attention of the Audit Committee

22 Summary 1. The Auditor General is responsible for providing an opinion on whether the financial statements of the former Cardiff Local Health Board (the LHB) are true and fair. We received the draft financial statements for the six-month period ended 30 September 2009 on 4 December 2009 and have now substantially completed our audit work. We are reporting to you the significant issues arising which we believe you should consider prior to approving the financial statements. We have already discussed these issues with the Director of Finance. 2. We do not try to obtain absolute assurance that the financial statements are true and fair, but adopt the concept of materiality. In planning and conducting the audit, we seek to identify material misstatements in your financial statements, that is, those that might mislead a reader of the accounts. 3. The quantitative levels at which we judge misstatements to be material are 2.2 million for income and expenditure items and working capital balances, and 0.19 million for other balances. Certain qualitative issues such as legal and regulatory requirements and political sensitivity can also be judged material. 4. As required by auditing standards, we report to you any issues we have identified with regard to: your accounting practices and financial reporting; material internal control weaknesses; matters of significant governance interest; and other relevant matters arising from our audit. 5. We are also required to set out in the detailed report, any uncorrected misstatements and request that you make these corrections. If you decide not to correct these misstatements, we ask that you provide us with the reasons for non-correction. There are no uncorrected misstatements that we need to bring to your attention. 6. The key issues arising from our audit that we wish to draw to your attention are the significant uncertainties relating to the costs of Continuing Healthcare (CHC) claims and the need to strengthen the arrangements for managing claims. Specifically: assessment procedures need to be improved and better co-ordinated; and additional resources are needed to address the backlog of claims. 7. Further details of this issue are set out in the detailed report. 8. It is the Auditor General s intention to issue an unqualified certificate and report on the financial statements after you have provided us with the Letter of Representation as set out in Appendix 1. Page 4 of 18 Cardiff Local Health Board Audit of Financial Statements: Issues for the Attention of the Audit Committee

23 9. Although the opinion is unqualified, we have included an emphasis of matter note in the opinion to draw attention to uncertainties surrounding ongoing CHC cases. The LHB s financial statements (Note 24) refer to this matter, and the proposed opinion is in Appendix Appendix 2 sets out the corrections that have already been made to the financial statements arising from our audit. Page 5 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

24 Detailed Report There are significant uncertainties relating to the potential costs of CHC claims 11. Liabilities for CHC costs continue to be a significant financial issue for the LHB. The December 2009 deadline for reclaiming pre 1 April 2003 care costs has resulted in a large increase in the number of claims registered, regarding both pre and post 1 April 2003 costs. 12. The LHB is responsible for post 1 April 2003 costs, and whilst the financial statements include the appropriate disclosures relating to provisions and contingent liabilities in this area, there are significant uncertainties in relation to recent claims which have not yet been assessed. At this stage, there is insufficient information to make a judgement on the likely success or otherwise of these claims; however, they may result in significant additional costs to the LHB. 13. Whilst my audit opinion is unqualified in this respect, because the uncertainties relating to these amounts are significant, I have included an emphasis of matter note under my audit opinion which draws the reader s attention to these uncertainties. The LHB should ensure that the recently received claims are assessed as soon as possible to reduce the uncertainties which pertain to them. The arrangements for managing CHC claims need to be strengthened Assessment procedures need to be improved and better co-ordinated 14. For accounting purposes, the LHB estimates the financial liability for those cases it has assessed have a greater than 50 per cent chance of being settled. As part of producing this estimate the LHB considers the likelihood of settlement for each case. This includes LHB staff considering the complexity of the patient s underlying health conditions from the available evidence and making a judgement about whether the case is more likely than not to meet CHC criteria when the case is assessed in full. The accounting estimate is not based on a full assessment of the case information but on professional knowledge of the LHB staff. This process differs from the full CHC assessment which is based on the LHB reviewing detailed case information such as medical records and multi disciplinary team assessments which it uses to categorise the case into one of three categories, two of which are eligible for CHC. Page 6 of 18 Cardiff Local Health Board Audit of Financial Statements: Issues for the Attention of the Audit Committee

25 Detailed Report 15. We reviewed the LHB s assessment of potential liabilities for CHC cases and noted that: The estimates for accounting purposes do not always make a clear link between how the complexities of the case relate to the probability of the cases being settled. There was not always documented evidence that the LHB s Nursing Assessor had been involved in producing or reviewing the assessments made for accounting purposes. 16. Internal procedures should be reviewed to ensure that all key staff agree which cases have, in their professional opinion, a greater than 50 per cent chance of being settled and are therefore included in the accounts as a provision. A key part of the process is the need to retain sufficient evidence to support the clinical and accounting elements of these assessments so that there is a clear trail to the cases provided for in the accounts. Additional resources are needed address the backlog of claims 17. We identified that over 370 claims have been received since 30 September These are in addition to the claims already under review. 18. We understand that of the 370 claims, around 120 relate to the period post April 2003 (either in whole or in part) which means that the LHB s successor body (Cardiff and Vale University Health Board (UHB)) will meet any liability for claims assessed as meeting the criteria. 19. At present, the new UHB has two staff working on these former LHB cases although not on a full-time basis. We understand that, at the current completion rates, it will take approximately three to four years to complete the review of the cases. 20. We believe that the LHB needs to clear the backlog of claims within a much shorter period. To do this, the UHB will need to allocate additional staff to help complete the exercise sooner than is possible under current arrangements. Page 7 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

26 Appendices Appendix 1 Final Letter of Representation [To be printed on the Cardiff LHB letterhead] The Auditor General for Wales Wales Audit Office 24 Cathedral Road Cardiff CF11 9LJ 25 February 2010 Representations regarding the six month financial statements This Letter of Representation is provided in connection with your audit of the financial statements of Cardiff LHB for the period ended 30 September 2009 for the purpose of expressing an opinion as to whether: the financial statements give a true and fair view of the financial position of Cardiff LHB as at 30 September 2009 and of the result of its operations and its cash flows for the period then ended in accordance with the Financial Reporting Manual and any other directions issued by the Treasury/Welsh Assembly Government; in all material respects the income and expenditure have been applied to the purposes intended and the transactions conform to the authorities which govern them; the statements have been properly prepared in accordance with applicable guidance; and the Statement on Internal Control is compliant with applicable guidance and consistent with our knowledge and understanding of the Cardiff LHB s arrangements. I acknowledge as Chief Executive and Accounting Officer my responsibility for preparing the financial statements in accordance with the above framework. In preparing the financial statements, I was required to: observe the accounts direction issued by the Welsh Assembly Government, including the relevant accounting and disclosure requirements and apply appropriate accounting policies on a consistent basis; make judgements and estimates on a reasonable basis; state whether applicable accounting standards have been followed and disclosed and explain any material departures from them; and Page 8 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

27 Appendices prepare them on a going concern basis on the presumption that the Cardiff Local Health Board will continue its operations through its successor organisation, Cardiff and Vale University Health Board. Representations made by management Where required, the LHB has obtained consent from Welsh Ministers to enter into contracts over 75,000 / 1,000,000. The LHB has collected appropriate evidence and applied relevant accounting standards in assessing the extent of all assets and liabilities. Liabilities for continuing care costs continue to be a significant financial issue for the LHB. The December 2009 deadline for reclaiming pre 1 April 2003 care costs has resulted in a large increase in the number of claims registered, regarding both pre and post 1 April 2003 costs. Cardiff LHB is responsible for post 1 April 2003 costs. The financial statements include a provision for all probable payments that can be reliably estimated where information to support claims has been collected. Where claims have been received but for which the LHB does currently not hold any reliable information these have been disclosed as contingent liabilities. Overall representations All the transactions undertaken by Cardiff LHB have been properly reflected and recorded in the accounting records. The financial statements are compliant with the requirements of International Financial Reporting Standards. There are no pooled budget projects arising from any partnership agreements entered into under Section 33 of the NHS (Wales) Act 2006, associates, joint ventures or joint arrangements other than those disclosed in the accounting statements and associated notes. The financial statements and/or the notes to the accounts disclose any: violations or possible violations of laws, regulations or the Manual for Accounts whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency; and other material factors that would influence the readers view of the statements. Cardiff LHB has complied with all aspects of contractual agreements that would require adjustment to, or disclosure in, the financial statements. The financial statements are free of material misstatements, including omissions. All books of account and supporting documentation and all minutes of meetings of the Board and its committees have been made available to you. Cardiff LHB has no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements. Page 9 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

28 Appendices The measurement methods, including the related assumptions, used in determining fair values are appropriate and have been applied consistently. Disclosures relating to fair values are complete and appropriate. There are no uncorrected financial statements or misstatements. I acknowledge as Chief Executive and Accountable Officer my responsibility for ensuring the regularity of any expenditure incurred by Cardiff LHB. I confirm that I have considered the regularity of all expenditure incurred and that I am not aware of any actual or potential noncompliance with regulations. Assets General All assets included in the Statement of Financial Position were in existence at the period end date, owned by the Cardiff LHB, and free from any lien, encumbrance or charge, except as disclosed in the accounts. The Statement of Financial Position includes all tangible assets owned by Cardiff LHB. Property, plant, equipment and intangible assets All assets over 5,000 are capitalised. Revaluations are performed with sufficient regularity to ensure that carrying amounts are not materially different from those that would be determined at the end of the reporting period. Indexation is applied as directed by the Welsh Assembly Government. Depreciation is calculated to reduce the net book amount of each asset to its estimated residual value by the end of its estimated useful life in Cardiff LHB s operations. Other non-current assets and current assets On realisation in the ordinary course of Cardiff LHB s operations other non-current assets and current assets in the balance sheet are expected to produce at least the amounts at which they are stated. Adequate provision, where allowable, has been made against all amounts owing to Cardiff LHB which are known, or may be expected, to be irrecoverable. There are no formal or informal compensating balance arrangements with any of our cash and investment accounts. Liabilities General All liabilities, both actual and contingent, have been recorded and disclosed as appropriate, as well as all guarantees that we have given to third parties. There is no pending litigation which may result in significant loss to Cardiff LHB, and which has not been disclosed in the Statement of Accounts, either as current or contingent liabilities. Page 10 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

29 Appendices All obligations under finance leases or hire purchase contracts have been disclosed in the accounts. All unfunded benefits (such as discretionary added years) have been considered in the compilation of the IAS19 figures included in the financial statements. Results Except as disclosed in the accounts, the results for the period were not materially affected by transactions of a sort not usually undertaken by Cardiff LHB, or by circumstances of an exceptional or non-recurring nature. Internal control We acknowledge our responsibility for the design and implementation of internal control to prevent and detect error. There have been no: irregularities involving management who have significant roles in the system of internal accounting control; irregularities involving other employees that could have a material effect on the financial statements; and communications from regulatory agencies concerning non-compliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements. Events after the reporting period Except as disclosed, there have been no material changes since the period end date affecting liabilities and commitments, and no events or transactions have occurred which, though properly excluded from the financial statements, are of such importance that they should have been brought to the notice of the auditor. Representations made by those charged with governance We acknowledge that the representations made by management, above, have been discussed with us. We acknowledge our responsibility for the fair presentation of the financial statements in accordance with the applicable Financial Reporting Framework. We acknowledge our collective responsibility for the preparation of the financial statements, which were approved by the Board on 25 February We have disclosed to you all known or possible non-compliance with laws and regulations whose effects should have been considered when preparing the financial statements. There are no other material transactions with related parties (as defined by IAS 24 and the Manual for Accounts), other than those recorded and disclosed in the financial statements. Page 11 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

30 Appendices We acknowledge our responsibility for the design and implementation of internal control to prevent and detect fraud, and have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. We have disclosed to you our knowledge of any allegations of fraud, or suspected fraud, affecting the financial statements communicated to Cardiff LHB by employees, former employees, regulators or others. There have been no reports sent to the Directorate of Counter Fraud Services in accordance with Paragraph 6 (1) of the relevant directions regarding counter fraud measures of which we have not made you aware. We have disclosed to you our knowledge of fraud or suspected fraud affecting Cardiff LHB involving: those charged with governance; employees who have significant roles in internal control; or others where the fraud could have a material effect on the financial statements. We confirm, to the best of our knowledge and belief, that the above representations are made on the basis of enquiries of management and staff with relevant knowledge and experience (and, where appropriate, of inspection of supporting documentation) sufficient to satisfy ourselves that we can properly make each of the above representations to you. Jan Williams, OBE David Francis Chief Executive Officer as Chair of Cardiff and Vale Accountable Officer University Health Board Date: 25 February 2010 Date: 25 February 2010 Page 12 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

31 Appendices Appendix 2 Summary of corrections to the draft financial statements Nature of correction Provisions reduced by 340,000 GMS expenditure reduced by 150,000 Reallocation of 5,000 from establishment expenses to transport costs Correction to fair value disclosures to financial assets and liabilities GMS expenditure reduced by 500,000 GMS costs reduced by 118,000 Creditors of 528,000 reanalysed from NHS creditors to other creditors Secondary care expenditure reduced by 440,000 Additional narrative on CHC claims in the contingent liability note Additional narrative on post-balance sheet events Statement on Internal Control Reason for correction The provision no longer meets the accounting standard due to more up-to-date information becoming available on the underlying cases. The expenditure estimate for the Quality and Outcome framework was overstated. To show leased car costs more appropriately. The two notes included different figures for the same item Note 14 amended to zero. The accounts included costs relating to a full year of GMS premises costs and not the proportion due for this six month set of accounts. Only one month of the Scriptswitch license fee related to the period of account the LHB needed to show the remainder as a prepayment. The amounts related to monies due from outside the NHS. The estimated underperformance against Cardiff and Vale Trust LTA was lower than anticipated. To meet accounting requirements. To meet accounting requirements. Additional wording to meet Manual for Accounts requirements. Page 13 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

32 Appendices Appendix 3 The certificate and report of the Auditor General to the National Assembly The certificate and report of the Auditor General to the National Assembly I certify that I have audited the financial statements of the LHB for the six months ended 30 September 2009 under Section 61 of the Public Audit (Wales) Act These comprise the Operating Cost Statement, the Statement of Financial Position, the Cash Flow Statement and Statement of Changes in Taxpayers Equity and the related notes. These financial statements have been prepared under the accounting policies set out within them. Respective responsibilities of directors, the Chief Executive and the auditor The directors and the Chief Executive are responsible for preparing the financial statements in accordance with Paragraph 3 of Schedule 9 to the National Health Service (Wales) Act 2006 and Welsh Ministers directions made there under and for ensuring the regularity of financial transactions. These responsibilities are set out in the Statements of Directors and Chief Executive s Responsibilities. My responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, and with International Standards on Auditing (UK and Ireland). I report my opinion to you as to whether the financial statements give a true and fair view and have been properly prepared in accordance with Paragraph 3 of Schedule 9 of the National Health Service (Wales) Act 2006 and Welsh Ministers directions made there under. I also report whether in all material respects the expenditure and income have been applied to the purposes intended by the National Assembly and the financial transactions conform to the authorities which govern them. In addition, I report to you if in my opinion, the LHB has not kept proper accounting records, if I have not received all the information and explanations I require for my audit, or if information specified by HM Treasury or Welsh Ministers regarding remuneration and other transactions is not disclosed. I review whether the Statement on Internal Control reflects the LHB s compliance with HM Treasury s and Welsh Ministers guidance and report if it does not. I am not required to consider whether this statement covers all risks and controls, or to form an opinion on the effectiveness of the LHB s corporate governance procedures or its risk and control procedures. Page 14 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

33 Appendices Basis of audit opinions I conducted my audit in accordance with the Public Audit Wales Act 2004 and International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. My audit includes examination, on a test basis, of evidence relevant to the amounts, disclosures and regularity of financial transactions included in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors and the Chief Executive in the preparation of the financial statements, and of whether the accounting policies are most appropriate to the LHB s circumstances, and are consistently applied and adequately disclosed. I planned and performed my audit so as to obtain all the information and explanations which I considered necessary in order to provide me with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error and that in all material respects, the expenditure and income have been applied to the purposes intended by the National Assembly and the financial transactions conform to the authorities which govern them. In forming my opinion, I also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In my opinion: the financial statements give a true and fair view in accordance with the National Health Service (Wales) Act 2006 and directions made there under by Welsh Ministers of the state of affairs of the LHB as at 30 September 2009 and of its net operating costs, recognised gains and losses, and cash flows for the six months then ended; and the financial statements have been properly prepared in accordance with the National Health Service (Wales) Act 2006 and directions made there under by Welsh Ministers. In forming my opinion, I have considered the disclosure made in Note 24 concerning the additional liabilities that may arise from continuing healthcare claims. Whilst the LHB has provided me with sufficient, appropriate evidence to enable me to satisfy myself as to whether IAS 37 Provisions, Contingent Liabilities and Contingent Assets would require recognition of a provision, I consider that the uncertainties relating to these amounts are significant, and that once additional assessments of these claims have been undertaken, they may result in significant additional costs to the LHB. My opinion is not qualified in this respect. Opinion on regularity In my opinion, in all material respects, the expenditure and income have been applied to the purposes intended by the National Assembly and the financial transactions conform to the authorities which govern them. Report I have no observations to make on these financial statements. Page 15 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

34 Appendices My conclusion on the LHB s arrangements for securing economy, efficiency and effectiveness in its use of resources for the period ended 30 September 2009 will be reported separately in my published Audit Letter for the six-month period. Gillian Body Auditor General for Wales xx March 2010 Wales Audit Office 24 Cathedral Road Cardiff CF11 9LJ Page 16 of 18 Cardiff Local Health Board - Audit of Financial Statements: Issues for the Attention of the Audit Committee

35

36 Wales Audit Office 24 Cathedral Road Cardiff CF11 9LJ Tel: Fax: Textphone: Website:

37 Audit 2009/2010 March 2010 Author: Grant Thornton UK LLP (on behalf of the Auditor General) Ref: Ref: 176A2010 Audit of Financial Statements: issues arising for the attention of the Audit Committee Vale of Glamorgan Local Health Board