Annual audit letter. Year ended 31 March Bedford Hospital NHS Trust

Transcription

1 Year ended 31 March 2015 Bedford Hospital NHS Trust July 2015

2 The Board of Directors Bedford Hospital NHS Trust South Wing Kempston Road Bedford MK42 9DJ 21 July 2015 Ladies and Gentlemen We are pleased to present our Annual Audit Letter summarising the results of our audit for the year ended 31 March We look forward to presenting it to the Board of Directors of Bedford Hospital NHS Trust in July This is our final year as auditors of Bedford Hospital NHS Trust and we would like to thank management and staff for their assistance during the course of our audit work. Yours faithfully PricewaterhouseCoopers LLP Code of Audit Practice and Statement of Responsibilities of Auditors and of Audited Bodies In March 2014 the Audit Commission issued a revised version of the Statement of responsibilities of auditors and of audited bodies. It is available from the Chief Officer of each audited body. The purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities of auditors begin and end and what is to be expected of the audited body in certain areas. Our reports and management letters are prepared in the context of this Statement. Reports and letters prepared by appointed auditors and addressed to members or officers are prepared for the sole use of the audited body and no responsibility is taken by auditors to any member or officer in their individual capacity or to any third party. PricewaterhouseCoopers LLP, 10 Bricket Road, St Albans, Herts, AL1 3JX T: +44 (0) , F: +44 (0) , PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH.PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business.

3 Contents Introduction 1 Audit findings 3 Quality account 8 Financial standing and value for money conclusion 15 Appendix 22 Appendix 1 Final fees 23 Year ended 31 March 2015 PwC Contents

4 Introduction The purpose of this letter This letter provides the Board of Directors of Bedford Hospital NHS Trust ( the Trust ) with a high level summary of the results of our audit for the year ended 31 March 2015, in a form that is accessible for you and other interested stakeholders. We have already reported the detailed findings from our audit work to the Audit Committee in the following reports: Audit opinion on the financial statements for the year ended 31 March 2015, incorporating the value for money conclusion. Report to those charged with Governance (ISA (UK&I) 260). Limited assurance report on the Quality Account. We have included in these report our detailed audit findings, along with detailed recommendations for improvement. Scope of work We carried out our audit work in accordance with the Audit Commission s Code of Audit Practice (NHS), International Standards on Auditing (UK and Ireland) and other relevant guidance issued by the Audit Commission. You are responsible for preparing and publishing the Trust s financial statements, including the Annual Governance Statement. You are also responsible for putting in place proper arrangements to secure economy, efficiency and effectiveness in your use of the Trust s resources. As auditors we need to: form an opinion on the financial statements; review the Trust s Annual Governance Statement; form a conclusion on the arrangements that you have in place to secure economy, efficiency and effectiveness in your use of the Trust s resources; and carry out any other work specified by the Audit Commission, which this year comprised work on the Trust s Quality Account. We have carried out our audit work in line with our 2014/15 Audit Plan that we issued in March Audit summary We have completed all of our audit work and have issued an unqualified audit opinion on the financial statements. We have included an emphasis of matter in our opinion on the accounts, drawing the reader s attention to the Trust s disclosures within the Annual Report, Annual Governance Statement ( AGS ) and financial statements regarding the Trust s assessment of its going concern status, given the financial position of the Trust and its future deficit forecasts. More detail on the Year ended 31 March 2015 PwC 1

5 financial position and the background to this decision is given in our section on Audit Findings. We are required to conclude on the adequacy of the Trust s arrangements to secure economy, efficiency and effectiveness in its Use of Resources. To form this conclusion we are required to follow the Audit Commission s guidance. We have given a qualified conclusion on the Trust s Use of Resources for 2014/15 due to the financial position of the Trust. We were also required to issue a referral to the Secretary of State as a consequence of the Trust s failure to achieve its statutory cumulative break even duty. This referral was issued on 3 June This year the required work on the Quality Account was not conducted as part of our Audit Commission responsibilities. The Trust however contracted with us separately to undertake this. In our work to produce a limited assurance report on the Trust s Quality Account we have issued a qualified except for conclusion for the patient safety incidents resulting in severe harm or death indicator. This is the final year of the Audit Commission framework contract and therefore our final year as your external auditor. We thank the management and staff of the Trust for their co-operation and assistance during the course of our term of appointment. Year ended 31 March 2015 PwC 2

6 Audit findings Accounts We audited the Trust s accounts in line with approved Auditing Standards and issued an unqualified audit opinion on 3 June Our audit opinion, which was not modified, included an emphasis of matter, drawing the reader s attention to the disclosures regarding the Trust s ability to continue as a going concern. The Trust has developed plans for the continuity of its services, which is dependent on receiving external funding. These conditions, together with the other matters, are explained in note 1 of the accounts and the Annual Report. Further details of our going concern assessment have been included on page xx of this report. We also identified the following key accounting issues: Property, Plant and equipment a) Fixed asset accounting methodology In 2014/15 the Trust implemented a new Fixed Asset Register to replace the previous manual spreadsheet to assist in a more long term solution to fixed asset accounting. Work has been performed as part of the audit in the current year to verify the completeness and the accuracy of the migration of the fixed asset register. We did not identify any issues in this testing. Considerable work has been undertaken by the Trust s Capital Accountant in cleansing the data throughout the financial year. This entailed performing a range of procedures, predominantly aggregating assets capitalised individually into the relevant existing block assets. Our work has reconciled these blocks to the District Valuer s report issued in 2014/15 with no issues identified. PPE movements for additions and disposals were maintained external to the Fixed Asset Register during the year with a year-end upload to the register. Our PPE movements testing did not identify any capitalisation of expenditure, revaluation and impairment or disposal accounting treatment exceptions. However we noted that the new register, in line with DH summarisation schedules and accounts template, places restrictions on the Trust s ability to recognise intangible assets as under development. These must be classified as tangible assets per the system. Once the asset is completed, it is not possible to transfer the assets from tangibles to intangibles in the year of capitalisation. Our testing identified 1.9m of assets which are intangible by nature which were disclosed within tangible assets in the financial statements. The Trust adjusted for this in their final draft of the accounts. With the implementation of the asset register, the Trust has alleviated future concerns over data retention, however some accumulated historic issues still exist. As reported in previous audits, the Trust does not hold reliable records detailing historic transactions against assets, such as the amounts held in the revaluation reserve for the asset or previous impairments recognised in expenditure. For example, in the prior year a 907,000 impairment was posted to expenditure for Endsleigh House however there is no easily available record of this in the Trust s analysis of the revaluation reserve. Due to this, the Trust Year ended 31 March 2015 PwC 3

7 may not be able to identify easily in future when a revaluation/impairment should be recognised in reserves or income/expenditure. Given the upwards movements in valuations over time and that the current year revaluations have been recognised almost entirely in the revaluation reserve, we did not believe there is a risk of material misstatement in the current year accounts, however it was recommended that the Trust complete a historic exercise to rebuild their asset records and the make-up of the revaluation reserve. b) Valuations The Trust's land and buildings have been subject to valuation by the District Valuer (DV) as at 31 March The valuation has been undertaken in accordance with IFRS, HM Treasury guidance, International Valuation Standards and the RICS Valuation Standards. The valuation of each property is based on market value. For non-specialised properties this is an Existing Use Value (EUV) and for specialised properties this is Depreciated Replacement Cost (DRC) on a modern equivalent asset basis. Our review of the valuation exercise performed by the District Valuer in the current year has focussed on verifying the underlying base data and assessing the assumptions applied by the valuer in conjunction with our own valuations experts. We identified that one asset, Beeden House, had been valued as a finance lease. However, as raised in the previous year, this asset is specialised as it is used to provide acute medical services on the Trust s site. The District Valuer has recalculated the valuation for this property on a specialised basis, with the result being a net reduction in the value of 255,000> this was not adjusted in the final accounts on the grounds of immateriality. c) Physical verification and disposal of PPE We identified and reported in the prior year that the Trust s fixed asset register does not contain sufficient information to facilitate the physical verification of certain individual items of property, plant and equipment without the need to consult relevant departments. While some improvements have been made in this area, a control weakness remains in that it is not possible to trace all assets to/from the fixed asset register itself. Our review of the fixed asset register identified assets with a gross cost of 8.7 million which are fully depreciated as at the year end, which indicates they may be no longer in use by the Trust and should be removed from the fixed asset register. A control point has been highlighted to management in this regard. Maternity Deferred Income As part of the agreement of balances (AoB) exercise testing we noted a difference of 823,000 and 272,000 in accounts receivable and accounts payable respectively between the Trust and Bedfordshire CCG. The net impact of this is a 1.1 million overstatement in amounts due from the CCG in the Trust s records per the AoB exercise. Upon further investigation it was identified that the CCG had misreported in the AoB reports, and we received an updated mismatch report directly from the CCG which gave a revised difference of 1.0 million in the accounts payable balance, where the CCG has an additional 1.0m due from the Trust compared to the Trust s submission. This difference is due to a discrepancy of the Trust and CCG in the treatment of income relating to maternity pathways, whereby the CCG has reported the difference as being a prepayment due to maternity Year ended 31 March 2015 PwC 4

8 pathways not having been completed in the year. The Trust has accounted for the income on a receipts basis as part of the agreed block contract with the CCG for 2014/15. The Trust has accounted for the balance in this way as they reached a full and final settlement with Bedfordshire CCG in both 2013/14 and 2014/15 and a block contract was in operation for maternity care in both years. It is the Trust s belief that this block settlement therefore included this potential liability and hence no amount is due at the year end. This appears not to be the view of the CCG. The Trust is not currently recognising deferred income in respect of the partially completed maternity pathways. This is consistent with the 2013/14 year end treatment, however this was not detected as part of the AoB exercise due to the related prepayment having been miscoded by the CCG. We considered the year on year impact on revenue recognised in the Statement of Comprehensive Income, and agreed this as being a trivial value given that maternity patient rates and related income have not varied significantly year on year, therefore the amount released from deferred income had an opening balance been held would not be materially different from the deferral required at year end. This does however misstate the net assets, and as it is not material in 2013/14 if this liability were recognised the full 1m would have needed to be taken through the statement of comprehensive income in 2014/15. A SUM adjustment to create the 1 million deferred income as of 31 March 2015 remained unadjusted by the Trust and is included in the ISA260. The c 1 million difference was not adjusted for by the Trust and hence was reported as a potential misstatement in the accounts. This matter needs to be resolved between the parties in 2015/16. This therefore creates a potential exposure for the Trust s results in FY16. Payroll controls In previous years the audit approach we applied to give comfort over the payroll related balances involved testing of controls surrounding the starters, leavers and pay/staff details amendments processes. As part of our interim audit we performed this testing however issues were identified in both our original and extended sample of leavers, where overpayments had been made to three of our 45 sampled leavers. Given the exception rate we were not able to place reliance on this control, and subsequently revised our audit approach to a fully substantive test of details. This was a more in depth test and therefore more labour intensive than our standard approach. A significant control deficiency has been raised with management relating to the control failure leading to this change in our audit approach. This was reported to those charged with governance at the March 2015 Audit Committee meeting as part of our Audit Plan. We also identified a number of other control deficiencies in the payroll process that related to a number of factors: underpayments to staff members who have been paid at the incorrect rate for a number of years; no reconciliation had taken place between the payroll provider data and the general ledger [although this was subsequently done at the year end and we understand is now being performed monthly]; and Year ended 31 March 2015 PwC 5

9 accruals and provisions needed to be created for potential noncompliance with contractual agreements. During the audit, management produced a year end reconciliation of the payroll provider data to the general ledger and agreed to continue to do so on a regular basis. Our work on accruals and provisions did not indicate material misstatement in this area although it highlighted that the need for such liabilities at year end is a wider payroll control weakness. Stock controls The Trust employed an external stock counter to complete the year end stock take of theatre stores. PwC attended this count and performed a sample of test counts with no issues identified. As part of our year end stock testing procedures we attempted to perform a reconciliation from our test counts to the detailed listings reflected in the year end stock balance held on the statement of financial position, however of the sixty items tested discrepancies were identified in three items where the total we counted did not agree to the detailed listing. Upon further investigation it was identified that this was due to manual adjustments which were made to the pre-populated count sheets not having been recognised in the final stock listings. A control point has been raised to management regarding this. Our audit procedures confirmed that this issue is limited to only the manual adjustments and did not give rise to a misstatement above the de-minimus posting level of 164,000. Provision for locum staff The Trust introduced a provision in respect of potential liabilities due related to previously employed locum staff of 248,000. The Trust has performed an exercise in the year to identify potential liabilities relating to payments to previously employed locums. The Trust identified 29 locums potentially impacted, and has contacted each of these to confirm that they have paid met the applicable criteria employment at the Trust. The Trust has received responses for 18 of these to date, with no issues identified. The provision held relates to the full potential liability for the 11 remaining locums. We believe, based on the lack of historic issues in this area and that there have been no obligating events, that this provision does not meet the definition of a liability under the Manual for Accounts. We reported a judgemental uncorrected misstatement within the ISA260 report to reverse this provision, which was not adjusted by the Trust. Lease record maintenance Per our lease review and testing, it was identified through discussion with management that there was no formal management of leases. Leases were instead effectively recognised based on the Trust's review of transactions in year. For example, we identified a lease in excluded from the operating lease disclosure. A control deficiency has been raised with management in respect of this. Related Parties During our audit planning we requested that management provide our team with a complete listing of related parties. There was a significant delay in the receipt of this listing and upon review we identified that this listing was incomplete, with three identified entities controlled by Directors at the Trust Year ended 31 March 2015 PwC 6

10 excluded. We have confirmed with management that no transactions were undertaken with these parties during the year. In the absence of a complete listing, management cannot fully assess for the required disclosures per IAS 24 Related Party Disclosures. A significant control deficiency has been raised with management relating to this. Donated assets Through our review of expenditure codes we identified capital items totalling 213,000 which related to donated assets received by the Trust. An adjustment had been posted to recognise these items within PPE, however due to the accounting treatment applied by the Trust the related income and expenditure balances were overstated by 213,000. An adjustment has been implemented within the financial statements to reduce both income and expenditure by this amount. The net impact of this adjustment on the deficit for the year was nil. Classification of invoice accruals Through review of accounts payable and accruals we identified that the Trust was holding an accrual for invoices which were received by the Trust pre year end, but due to not having been sent on to the Finance team before the year end close were not posted to accounts payable. Given the nature of these balances, in that the invoices were received pre year end, these should have been classified as accounts payable rather than accruals. An adjustment was implemented within the financial statements to reclassify the total value of these accruals, 2,135,993, to accounts payable. Internal control recommendations Our ISA260 report to the Audit Committee included a summary of the control recommendations identified through completion of our audit procedures. We identified three control deficiencies which are considered to be significant: Payroll leavers controls; Lack of segregation of duties in manual journals preparation and approval; and Identification of related parties. Annual Governance Statement The aim of the Annual Governance Statement is to give a sense of how successfully the Trust has coped with the challenges it faces and of how vulnerable the organisation s performance is or might be, drawing on evidence on governance, risk management and controls. We reviewed the Annual Governance Statement to see whether it complied with relevant guidance and whether it was misleading or inconsistent with what we know about the Trust. We found no areas of concern to report in this context. Year ended 31 March 2015 PwC 7

11 Quality account Background NHS trusts are required, under the Health Act 2009, to prepare and publish a Quality Account each year. The Quality Account has to be prepared in accordance with the legal requirements in the Health Act 2009 and the National Health Service (Quality Accounts) Regulations 2010 (as amended by the National Health Service (Quality Accounts) Amendment Regulations 2011 and the National Health Service (Quality Accounts) Amendment Regulations 2012) ( the Regulations ). As your auditors, we have been engaged to undertake work on your Quality Account under NHS England s detailed guidance, NHS Quality Accounts Auditor Guidance 2014/15 ( the Guidance ), which was published in March Scope of our work We are required by the Guidance to review the content of the 2014/15 Quality Account and two performance indicators. The results of this work are reported in a limited assurance report. This report is a formal, public document that requires us to conclude whether anything has come to our attention that would lead us to believe that: the Quality Account is not prepared in all material respects in line with the information requirements prescribed in the Schedule referred to in Section four of the Regulations ( the Schedule ); the Quality Account is not consistent in all material respects with the sources specified in the Guidance; and the specified indicators in the Quality Account identified as having been the subject of limited assurance in the Quality Account have not been prepared in all material respects in accordance with Section 10c of the NHS (Quality Accounts) Amendment Regulations 2012 and the six dimensions of data quality set out in the Guidance. A limited assurance engagement is less in scope than a reasonable assurance engagement (such as the external audit of accounts). The nature, timing and extent of procedures for gathering sufficient appropriate evidence are deliberately limited compared to a reasonable assurance engagement. Content of the Quality Account We are required to issue a limited assurance report in relation to the content of your Quality Account. This involves: Reading the Quality Account and concluding whether it is consistent with the requirements of the Regulations and considering the implications for our report if we become aware of any material omissions; and Reading other information contained in the Quality Account and considering whether it is materially inconsistent with the source documents specified by NHS England in the Guidance. Year ended 31 March 2015 PwC 8

12 Performance indicators We are required to issue a limited assurance report in respect of two out of the four indicators specified by NHS England. The indicators for the year ended 31 March 2015 subject to limited assurance (the specified indicators ); consist of the following national priority indicators as mandated by NHS England: Specified Indicators Rate of clostridium difficile infections Percentage of reported patient safety incidents resulting in severe harm or death Specified indicators criteria Pages of the Quality Account Pages of the Quality Account Our procedures included: obtaining an understanding of the design and operation of the controls in place in relation to the collation and reporting of the specified indicators, including controls over third party information (if applicable) and performing walkthroughs to confirm our understanding; based on our understanding, assessing the risks that the performance against the specified indicators may be materially misstated and determining the nature, timing and extent of further procedures; making enquiries of relevant management, personnel and, where relevant, third parties; considering significant judgements made by the management in preparation of the specified indicators; and performing limited testing, on a selective basis of evidence supporting the specified indicators, and assessing the related disclosures. This work was carried out in June 2015 and was reported to you on 25 June Content of the quality report No issues have come to our attention that lead us to believe that the Quality Account has not been prepared in accordance with the Regulations. Consistency of the quality report No issues have come to our attention that lead us to believe that the Quality Account is not consistent with the other information sources defined by NHS England. Limited Assurance Report As a result of our work, we are able to provide an unqualified limited assurance report in respect of the content of the Quality Account. Year ended 31 March 2015 PwC 9

13 Specified indicators Our findings relating to the specified indicators are summarised as follows: Performance indicators included in our limited assurance report Findings Rate of clostridium difficile infections Two issues identified; none impact on our limited assurance opinion. Percentage of reported patient safety incidents resulting in severe harm or death Three issues identified; one impact on our limited assurance opinion. Detailed findings Percentage of patient safety incidents that result in severe harm or death Reported performance for period April September 2014: 0.32% resulting in severe harm 0.50% resulting in death 2014/15 Actual performance for period April September 2014: 6 incidents resulting in severe harm (0.26%) 15 incidents resulting in death (0.65%) Criteria identified: We confirmed the Trust uses the following criteria for measuring the indicator for inclusion in the Quality Account: The indicator is expressed as a percentage of patient safety incidents reported to the National Reporting and Learning Service (NRLS) that have resulted in severe harm or death; A patient safety incident is defined as any unintended or unexpected incident(s) that could or did lead to harm for one of more person(s) receiving NHS funded healthcare ; and The degree of harm for patient safety incidents is defined as follows: severe the patient has been permanently harmed as a result of the incident; and death the incident has resulted in the death of the patient. Year ended 31 March 2015 PwC 10

14 Issues identified through work performed No Issue Impact 1. Our testing has confirmed that data for We qualified our limited patient safety incidents reported by the assurance report in Trust in the Quality Report is consistent respect of this matter. with the data reported nationally on NRLS. However, during our reconciliation of patient safety incidents ( PSI ) data between the Trust s internal reporting system Datix and NRLS, we have identified that the Trust has underreported to NRLS on serious harm and death incidents during the year ended 31 March The Trust reports to NRLS on incidents still under investigation, and we noted there were four cases where the level of harm changed upon completion of the investigation, but NRLS had not been notified of the change of harm assessment. Two of the four incidents were initially rated as minor harm, one as moderate and one as severe harm. In addition, we have identified one incident resulting in death, which was not reported to NRLS at all. As soon as we reported this matter to the Trust it took action to fully investigate the matter and rectify the recording of the assessments on NRLS. The correct position was then disclosed by the Trust in the final Quality Report by way of additional narative. 2. Our testing of sample of 30 incidents has We have raised a also identified: recommendation in our detailed report to Four incidents were reported to management on the NRLS as moderate, but should have Quality Account in this been classified as minor harm based respect. on the underlying evidence. One incident was reported to NRLS as moderate, but it should have been classified as no harm based on the underlying evidence. One incident was reported to NRLS as severe harm, but upon completion of investigation it was classified as death (as noted in Issue 1 above). Year ended 31 March 2015 PwC 11

15 Issues identified through work performed No Issue Impact Those differences had no impact on the overall calculation of the percentage of the severe harm and death indicator. 3. During our testing we have noted issues We have raised a with timeliness of the incident recommendation in our investigations performed by the Trust: detailed report to management on the One severe harm incident was Quality Account in this reported to NRLS 105 days after the respect. incident took place. This was also after the deadline of 28th November 2014 set by the NRLS for incidents occurring in the period between April and September Investigation on two incidents (both Minor Harm) had not started until May 2015, although the incident occurred in December 2014 and March Both incidents were reported to NRLS in May NRLS guidance sates that incidents should be reported within 26 days of the incident occurring. Conclusion Our substantive testing of the indicator identified three issues, one of which impact on our limited assurance report resulting in a modified report in respect of this indicator. Year ended 31 March 2015 PwC 12

16 Rate of Clostridium Difficile infections Reported performance: 2014/15 Threshold: /15 Actual: 14 Criteria identified: We confirmed the Trust uses the following criteria for measuring the indicator for inclusion in the Quality Account: The indicator is expressed as the rate of Clostridium Difficile ( C-Diff ) per 100,000 bed days for patients; Infections relate to patients aged two year old or more; A positive laboratory test result for C-Diff recognised as a case according to the Trust's diagnostic algorithm; Positive results on the same patient more than 28 days apart are reported as separate episodes, irrespective of the number of specimens taken in the intervening period, or where they were taken; and The Trust is deemed responsible. This is defined as a case where the sample was taken on the fourth day or later of an admission to that trust (where the day of admission is day one). Issues identified through work performed No Issue Impact on limited assurance report 1. Testing of the draft figures identified that No impact on our draft number of the C-Diff cases (12) was limited assurance used for the calculation, instead of the report. actual 14 cases. This has been discussed with the Trust and amended in subsequent version of the Quality Report. 2. During our testing, we have identified two No impact on our cases where differences were noted during limited assurance review of underlying evidence: report. Due to manual data entry error, one sample had incurred date entered on the Microbiology system, using the date of the result instead of the date of the when sample taken. This sample was correctly identified as hospital-acquired C-Diff case, and correctly included in the indicator calculation. Year ended 31 March 2015 PwC 13

17 Issues identified through work performed No Issue Impact on limited assurance report Due to manual data entry error, one sample was coded as positive when actually the culture was only a carrier. However, this was a community-acquired C-Diff case, and therefore already correctly excluded from the indicator calculation. Neither of the two differences had any impact on the calculation of the indicator. Overall conclusion Our substantive testing of the indicator identified two issues. None impact on our limited assurance report resulting in an unmodified report in respect of this indicator. Limited Assurance Report As a result of our work, our limited assurance report in respect of the mandated specified indicators is qualified as follows: We have issued a qualified except for conclusion for the patient safety incidents resulting in severe harm or death indicator. Year ended 31 March 2015 PwC 14

18 Financial standing and value for money conclusion Our value for money conclusion and going concern assessment We carried out sufficient, relevant work in line with the Audit Commission s guidance, so that we could conclude on whether you had in place, for the year ended 31 March 2015, proper arrangements to secure economy, efficiency and effectiveness in your use of the Trust s resources. In line with Audit Commission requirements, our conclusion was based on two criteria: The organisation has proper arrangements in place for securing financial resilience; and The organisation has proper arrangements for challenging how it secures economy, efficiency and effectiveness. To reach our conclusion, we carried out a programme of work that was based on our risk assessment. We qualified our value for money conclusion because we found the following matters during our work that which we judged to be significant: In considering the Trust s arrangements for securing financial resilience, we identified that the Trust is forecasting to make an in year deficit for at least the next five years and does not have sufficient cash to meet its expense commitments without receiving significant levels of external funding. During 2014/15 the Trust breached its statutory duty under the National Health Service act 2006 to remain in a cumulative break even position, and has no current plans in place to return to a cumulative break even position. In addition it does not have plans to achieve positive net cash flow outturns and a sustainable net cash position in the long term. We also included an emphasis of matter within our financial statements audit opinion drawing the reader s attention to the Trust s disclosures within the Annual Report, Annual Governance Statement ( AGS ) and financial statements regarding the Trust s assessment of its going concern status, given the financial position of the Trust and its future deficit forecasts, and of its reliance on external cash support. In reaching our conclusions we considered the following factors: The Statutory Break Even Duty for NHS Trusts An NHS trust s Board is accountable for financial control and for ensuring that the NHS trust meets its statutory duty to break-even. Paragraph 2(1) of Schedule 5 to the National Health Service Act 2006 states that Each NHS trust must ensure that its revenue is not less than sufficient, taking one financial Year ended 31 March 2015 PwC 15

19 year with another, to meet outgoings properly chargeable to revenue account. This is known as the break-even duty. NHS trusts normally plan to meet this duty by achieving a balanced position on their Statement of Comprehensive Income each year. The Trust s financial performance has declined in the last three years The Trust first incurred a deficit in 2010/11 which marked the start of the statutory break-even period. This was followed by a two year period of small surpluses before deficits began from 2013/14. In 2014/15, the Trust originally planned a deficit of 6.8million, compared to an adjusted deficit (excluding impairments) of 8.7 million in 2013/14. The outturn achieved however was an adjusted deficit of 19.8million. An increase in the level of financial challenge is being reported across the NHS as a whole this year, due in part to increasing operational challenges including increased demand for services and capacity constraints. Figure 1 demonstrates that the Trust have suffered greater financial difficulties since 2013/14. Figure 1 Trust financial performance since Year (25,000) (20,000) (15,000) (10,000) (5,000) 0 5,000 10,000 15, s Breakeven cumulative position Retained surplus/(deficit) for the year Break even in year position Through our value for money work we have established that the Trust s financial performance and deterioration this year can be principally attributed to: 9.6million of penalties incurred with the Trust s main commissioner, Bedfordshire CCG: 1.3 million due to avoidable readmissions; 5.9 million due to marginal rate threshold; 0.2 million due to follow up outpatients above the New To Follow Up (NTFU) threshold; 0.5 million due to 18-weeks referral to treatment breaches; 1.0 million other penalties, such as A&E performance, ambulance turnaround times and cancer waiting time breaches; 0.7 million underachievement on CQUIN to the end of quarter 3; 15% increase in non-elective services, for which only 7a % increase in income was received. This also subsequently reduced the Trust s ability to deliver further income generating elective services; Year ended 31 March 2015 PwC 16

20 Pay costs of 6.6million above plan. This was driven by increased demand for services and difficulties in recruiting qualified permanent staff, therefore increasing the use of temporary agency staff; and Non-pay costs of 1.2million above plan. This was driven by 2.6million of additional clinical supplies costs offset by reduction in spend on drugs, services from non-nhs healthcare providers and a review of the bad debt provision. The Trust was reliant on cash support from the Department of Health in 2014/15 to meet its liabilities as they fell due The Trust s cash position at year end was 1.2million (2013/14: 1.0million). To achieve this the Trust received 3million of additional funding (as a loan) from the Department of Health in March 2015 and additional Public Dividend Capital (PDC) of 17.7million, without which the Trust would not have been able to meet their commitments to pay creditors as they fell due. Net current liabilities at 31 march 2015 are 2.2 million, compared with 2.5 million in the prior year. The Trust has reported a cumulative net deficit (excluding PDC reserve) of 8.7 million (being 41.9 million retained earnings offset by 33.2 million revaluation reserve) in 2014/15, being the first year the Trust has breached its statutory duty to cumulatively break even. Cost Improvement Programmes did not achieve their targets The Trust achieved Cost Improvement Programme savings (CIPs) of 6.5 million versus the budgeted 8.1 million. All areas across the Trust failed to deliver on their targets, with the most notable shortfall being in Patients Flow, with nil achieved against a target of 843k. Our audit did not identify any significant weaknesses in financial management and reporting at the Trust. Indeed there is a considerable depth of understanding of the financial position and its problems within the Trust. Despite the Trust s financial difficulties it has continued to meet quality standards as evidenced by the Care Quality Commission s latest inspection report published in September The Trust s own inpatient survey published in May 2015 reported an overall experience score of 7.8 out of 10. This score is consistent with the other Trusts that took part in the survey. Current Trust forecasts show significant deficits for each of the next five years, with no plan for returning to cumulative or in year break even The Trust recognise the risk that its financial position will continue to deteriorate in future years and has developed a recovery plan to seek to mitigate the ongoing deficit whilst meeting with their regulator - the NHS Trust Development Authority (NTDA) - monthly. Progress on the plan has been made with an improved projected deficit of 16.2million for 2015/16 agreed with the NTDA. The Trust s long term financial model (LTFM) assumes services are to continue as they are in the next five years. This is shown graphically in figure 2 demonstrating that the cumulative deficit is forecast to increase rather than decrease over the next 5 years and beyond, although the rate of deficit growth will reduce. The Trust is likely to fail to break even for the foreseeable future. Year ended 31 March 2015 PwC 17

21 Figure 2 LTFM Forecast 000s 0 (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (70,000) (80,000) (90,000) LTFM Projected in year deficits (19,754) (16,200) (12,600) (12,100) (12,500) (12,100) Breakeven cumalative position (18,285) (34,485) (47,085) (59,185) (71,685) (83,785) Year LTFM Projected in year deficits Breakeven cumalative position The 2015/16 forecast includes a contingency of 3.6 million. This is to address the following risks to delivery of the plan: 2.7 million to cover potential penalties from commissioners (compared to 9.6 million penalties received in 2014/15); and 900k to cover potential CIPs under-delivery, based on past performance of the Trust delivering approximately 80% of its CIPs targets. The 2015/16 CIPs target is 7.9 million (4.2% total expenses). We understand the Trust has identified projects it believes will deliver the 7.9million target. The following risks have also been identified by the Trust in delivering the 2015/16 plan: General increase in demand for services, impacting for example escalation beds and related staffing requirements; Recruitment risk the Trust is currently focusing on increasing staffing numbers through overseas recruitment, therefore forecasting a decrease in agency spend. There is this a financial risk related to both recruitment and retention of staff; and The Trust s former Musculo Skeletal Contract has been awarded to a private contractor. This contract previously generated annual revenue of c. 10 million for the Trust. This work was previously done in part by the Trust, and may be sub-contracted to them in whole or part by the private contractor. The Trust has yet to sign any subcontract, however it continues to provide services on a non-contractual arrangement basis, meaning cash flow from this activity is not guaranteed or predictable. The cash flow forecast shows continuing reliance on external support The Director of Finance estimates the Trust will have a monthly cash shortage of c. 1.5 million. 4.5 million of additional funding has already been received in 2015/16, with the anticipation that the Trust will submit a request for an additional 4.5 million from the TDA in July Following the conclusion of the local health economy review detailed below on page 19 of this letter, the Trust will apply for longer term financing. The Trust believes they will be Year ended 31 March 2015 PwC 18

22 granted the additional funding given the TDA s approval of the 2015/16 plan which includes the funding gap. Cash flow forecasts, as taken from the 2015/16 plan and long term financial model, are: Cash position at end of period m 2014/15 actual / / / / These balances are taken from the Trust's LTFM and do not incorporate outside funding. The 2015/16 plan projects a year end closing cash position of 1 million including TDA funding. 2019/ The Trust has developed plans for the continuity of its services, which is dependent on receiving external funding. These conditions, together with the other matters, are explained in note 1 to the financial statements and in the annual report. The Trust has had indicators from Monitor, the NTDA and NHS England that it is not seen as financially viable in the long term therefore in order to achieve foundation trust status, the Trust will be required to merge or put forward an alternative service delivery model. It should be noted that there is further uncertainty beyond 2015/16 regarding the future structure for the Trust that would affect the Trust s long term financial model. There is an ongoing local area health economy review A large scale review of the Bedfordshire and Milton Keynes health economy was completed by McKinsey in 2014, where it was confirmed that the current area model was not sustainable. This report is publically available through the Bedfordshire CCG website ( The report included a number of solutions regarding how services could be merged to create a financially viable model. A subsequent review has been performed investigating these in detail. The finalised version of this report is not scheduled to be published until Summer Discussions are still being undertaken between the NTDA, Monitor and Department of Health regarding the preferred model. It is anticipated that once decided, this would potentially come into effect during the 2016/17 financial year. The NTDA has committed to financially support the Trust for at least the next 12 months. This has been confirmed to a letter of support from the NTDA Finance Business Director dated 14 May 2015 in which it states: Year ended 31 March 2015 PwC 19

23 I can confirm that it is reasonable for the Directors of Bedford Hospital NHS Trust to assume that the NHS Trust Development Authority will make sufficient cash financing available to the organisation over the next 12 month period such that the organisation is able to meet its current liabilities. On this basis I fully support your view that the NHS organisation accounts are prepared on a Going Concern basis. While this letter is not legally binding, it provides evidence to confirm the NTDA s intention to support the Trust in principle as at the 2014/15 year end. In addition, the Government has a statutory obligation to provide health services to the local population, therefore health services will continue in some form regardless of the outcome of the local health economy review. Under the NHS Manual for Accounts, a trust should only be considered to not be a going concern if there is a prospect of services ceasing altogether or transferring outside the NHS. In our opinion these conditions do not constitute a material uncertainty and it is appropriate to prepare the Trust s accounts on a going concern basis. We have included an emphasis of matter in our audit opinion, which is not modified, directing the reader s attention towards the Trust s disclosures on going concern within the Annual Report, Annual Governance Statement and financial statements. Key areas for Trust action We highlight to the Trust the following areas where the Trust should take action in in relation to their financial position: Further develop the Trust s relationship with the NTDA and DH in order to ensure a recovery plan is successfully developed to return the Trust to cumulative breakeven and meet their statutory duty; and Engage and establish relationships with other stakeholders in the local health economy (once review is published) to assist with this recovery plan. Reports in the public interest As part of our audit, we have a legal duty to consider: Whether anything coming to our attention is sufficiently important that we should issue a separate report on the matter for consideration by the Trust or so that the matter can be brought to public attention; and Whether the public interest in the matter is such that we need to issue a report immediately rather than at the end of the audit. We have considered our reporting responsibilities under Section 8 of the Audit Commission Act 1998 requiring auditors to report where they consider a matter is sufficiently important to be brought to the notice of the audited body or the public urgently. During the course of our audits over the past three years, we have undertaken a significant amount of work considering the Trust s financial position and its associated arrangements to secure financial resilience. In 2014/15 the Trust reported an adjusted deficit of 19.8 million against an original budget of 6.8 million leading to failure to meet their cumulative statutory break even target over a rolling five year period. This was a significant deterioration since the prior year when the Trust reported an adjusted deficit of 8.7 million against a forecast planned deficit of 3.6 million. Year ended 31 March 2015 PwC 20

24 We are aware that the Trust s position is well documented in the public domain through the Annual Report, Annual Governance Statement and financial statements, alongside the information regarding the local health economy review; we have also considered the Trust s long term financial plan through our value for money work and there are no actions planned that we believe need to be challenged or highlighted through an immediate referral under Section 8. We have extended our Annual Audit Letter in this area to further discharge our public reporting requirements. Referrals to the Secretary of State Section 19 of the Audit Commission Act 1998 states that auditors have a legal duty to report a matter to the Secretary of State where the Trust or one of its officers: is about to make, or has made, a decision which involves or would involve the Trust spending money unlawfully; or is about to take, or has taken, a course of action which, if pursued to its conclusion would be unlawful and likely to cause a loss or deficiency. Given the Trust has breached its statutory break even duty under Section 5 of the NHS Act 2006 during the year we are required to make a referral to the Secretary of State under s19. We issued this referral on 3 June Year ended 31 March 2015 PwC 21

25 Appendix Year ended 31 March 2015 PwC 22

26 Appendix 1 Final fees We reported our fee proposals in our audit plan. Our actual fees charged were as follows: 2014/ / /14 outturn fee proposal final outturn Scale fee 55,147 55,147 55,147 Additional work to 42,650** 42,650 36,464 respond to specific risks and overruns Quality accounts 14,600 11,200 10,000 Total audit fee 112, , ,611 **Subject to PSAA approval Year ended 31 March 2015 PwC 23

27 This document has been prepared only for Bedford Hospital NHS Trust and solely for the purpose and on the terms agreed with the 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 MW-UK