Annual Audit Letter Year ending 31 March 2018 NHS Shropshire CCG 27 June 2018
Contents Section Page 1. Executive Summary 3 2. Audit of the Accounts 5 3. Value for Money arrangements 9 Appendices A Reports issued and fees Your key Grant Thornton team members are: Mark Stocks Partner T: 0121 232 5347 E: mark.c.stocks@uk.gt.com Lorraine Noak Manager T: 0121 232 5407 E: Lorraine.noak@uk.gt.com David Rowley Executive T: 0121 232 5225 E: david.m.rowley@uk.gt.com 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 2
Executive Summary Purpose Our Annual Audit Letter (Letter) summarises the key findings arising from the work that we have carried out at NHS Shropshire Clinical Commissioning Group (the CCG) for the year ended 31 March 2018. This Letter is intended to provide a commentary on the results of our work to the CCG and external stakeholders, and to highlight issues that we wish to draw to the attention of the public. In preparing this Letter, we have followed the National Audit Office (NAO)'s Code of Audit Practice and Auditor Guidance Note (AGN) 07 'Auditor Reporting'. We reported the detailed findings from our audit work to the CCG's Audit Committee as those charged with governance in our Audit Findings Report on 24 May 2018. Respective responsibilities We have carried out our audit in accordance with the NAO's Code of Audit Practice, which reflects the requirements of the Local Audit and Accountability Act 2014 (the Act). Our key responsibilities are to: give an opinion on the CCG's financial statements and regularity assertion (section two) assess the CCG's arrangements for securing economy, efficiency and effectiveness in its use of resources (the value for money conclusion) (section three). In our audit of the CCG's financial statements, we comply with International Standards on Auditing (UK) (ISAs) and other guidance issued by the NAO. Our work Materiality We determined materiality for the audit of the CCG's accounts to be 6,790,000, which is 1.5% of the CCG's gross revenue expenditure. Financial Statements opinion We gave an unqualified opinion on the CCG's financial statements on 25 May 2018. As well as an opinion on the financial statements, we are required to give a regularity opinion on whether expenditure has been incurred 'as intended by Parliament'. Failure to meet statutory financial targets automatically results in a qualified regularity opinion. Based on our review of the CCG's expenditure we highlighted the following issues which gave rise to a qualified regularity opinion: NHS Group consolidation template (WGA) comprehensive net expenditure was 27.1 million more than the amount specified in Directions the expenditure on revenue administration exceeded the allocation by 1.7 million. We also reported on the consistency of the accounts consolidation template provided to NHS England with the audited financial statements. We concluded that these were consistent. Use of statutory powers We referred a matter to the Secretary of State, as required by section 30 of the Act, because the CCG breached its Revenue Resource Limit (RRL) for the year ending 31 March 2018 and exceeded its administration allocation. We also made a referral on the basis that we have reason to believe that the CCG will also breach its RRL in 2019. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 3
Executive Summary Value for Money arrangements We were not satisfied that the CCG put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources because of weaknesses in the following: failure to meet the statutory financial target in 17/18 the significant current and future cumulative deficit significant concerns in relation to the CCG s ability to deliver its Financial Recovery Plans, including the increase in its savings programme the lack of substantive finance staff, poor internal financial controls, and lack of budget holder engagement. We reflected this in our audit report to the members of the Governing Body on 24 May 2018. Certificate We certify that we have completed the audit of the accounts of NHS Shropshire CCG in accordance with the requirements of the Local Audit and Accountability Act 2014 and the Code of Audit Practice. Working with the CCG During the year we have delivered a number of successful outcomes with you: An efficient audit we delivered an efficient audit with you in May, delivering the accounts 6 days before the deadline, releasing your finance team for other work. Understanding your operational health through the value for money conclusion we provided you with a detailed assessment of the issues effecting your operational effectiveness. We highlighted the need to ensure a stable financial function is retained in order for planning and execution to be delivered using reliable and accurate financial information. Sharing our insight we provided regular audit committee updates covering best practice. We also shared our thought leadership reports Supporting development we hosted workshops and training events which your NEDs and staff attended.. We would like to record our appreciation for the assistance and co-operation provided to us during our audit by the CCG's. Grant Thornton UK LLP June 2018 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 4
Audit of the Accounts Our audit approach Materiality In our audit of the CCG's financial statements, we use the concept of materiality to determine the nature, timing and extent of our work, and in evaluating the results of our work. We define materiality as the size of the misstatement in the financial statements that would lead a reasonably knowledgeable person to change or influence their economic decisions. We determined materiality for the audit of the CCG's accounts to be 6,790,000, which is 1.5% of the CCG's gross revenue expenditure. We used this benchmark as, in our view, users of the CCG's financial statements are most interested in where the CCG has spent its allocation in the year. We also set a lower level of specific materiality for senior officer remuneration ( 100k) and disclosure of CETV ( 250k) in the remuneration report. We set a lower threshold of 250,000, above which we reported errors to the Audit Committee in our Audit Findings Report. The scope of our audit Our audit involves obtaining enough evidence about the amounts and disclosures in the financial statements to give sufficient assurance that they are free from material misstatement, whether caused by fraud or error. This includes assessing whether: the accounting policies are appropriate, have been consistently applied and are adequately disclosed; the significant accounting estimates made by management are reasonable; and the overall presentation of the financial statements gives a true and fair view. We also read the remainder of the Annual Report to check it is consistent with our understanding of the CCG and with the accounts included in the Annual Report on which we gave our opinion. We carry out our audit in accordance with ISAs (UK) and the NAO Code of Audit Practice. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach was based on a thorough understanding of the CCG's business and is risk based. We identified key risks and set out overleaf the work we performed in response to these risks and the results of this work. Key messages The key messages arising from our audit of the CCGs financial statements are: we gave an unqualified opinion on the CCG's financial statements on 25 May 2018. we issued a qualified regularity opinion as: comprehensive net expenditure was 27.1 million more than the amount specified in Directions the expenditure on revenue administration exceeded the allocation by 1.7 million we issued a report to the Secretary of State under Section 30 of the Local Audit and Accountability Act 2014 due to the CCG s failure to meet its Revenue Resource Limit and exceeding its administration allocation A number of other issues came to our attention during the audit. We have summarised these below the issues we identified in the 2016/17 accounts have been resolved during the year. This has resulted in a charge to expenditure of 900k during 2017/18. While this is not material we draw this to your attention due to the significance of the adjustment most of the VfM issues identified in 2016/17 have been resolved during the year. In particular, the Accountable Officer and Chief Finance Officer have provided clear leadership in resolving a number of issues. However, we consider that weaknesses remain in the finance function due to a lack of substantive positions. This has led to some weakness in controls around financial forecasting we have again raised issues with regard to the accrual of CHC expenditure and the review and write off of uncollectible debt. We also note that the agreement of debtor and creditor balances with NHS bodies was not undertaken as per requirements and resulted in differences in reported financial positions. we requested additional disclosures with regard to Going Concern within the financial statements. We did this on the basis that: the CCG incurred a 27.1 million financial deficit in delivering its services in 2017/18 management anticipates that it may take a number of years before the CCG s income equals or exceeds its expenditure. The CCG will therefore require further support to pay its expenses in 2018/19 and 2019/20. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 5
Audit of the Accounts Significant Audit Risks These are the significant risks which had the greatest impact on our overall strategy and where we focused more of our work. Risks identified in our audit plan How we responded to the risk Findings and conclusions Operating expenses purchase of secondary healthcare A significant percentage of the CCG s expenditure is on contracts for healthcare with NHS providers and non-nhs providers, such as operations and hospital care. This expenditure is recognised when the activity has been performed, with accruals raised at the year-end for completed activity for which an invoice has not been issued. We identified the accuracy and occurrence of contract variations as a risk requiring special audit consideration. Management override of internal controls Under ISA (UK) 240 there is a non-rebuttable presumed risk that the risk of management over-ride of controls is present in all entities. The CCG faces pressure to meet external targets, and this could potentially place management under undue pressure in terms of how they report performance. We identified management override of controls as a risk requiring special audit consideration. As part of our audit work we have: Gained an understanding of the financial reporting processes used for the purchase of secondary healthcare and evaluated the design of the associated controls Substantively tested secondary healthcare costs. As part of our audit work we completed; A review of accounting estimates, judgements and decisions made by management Testing of journal entries; and Review of unusual significant transactions The review of agreement of balances identified a number of mismatches with other NHS bodies that exceeded our 250k triviality level. These mismatches could have been minimised by undertaking the required negotiation with partner bodies. All mismatches greater that 300k were reported as part of the Whole Government Account return Our audit work did not identify any issues in respect of management override of controls. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 6
Audit of the Accounts Other Audit Risks Identified Risks identified in our audit plan How we responded to the risk Findings and conclusions Going Concern As auditors, we are required to obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern assumption in the preparation and presentation of the financial statements and to conclude whether there is a material uncertainty about the entity's ability to continue as a going concern (ISA (UK) 570). Completeness of Continuing Healthcare Costs This issue was identified in the 2016/17 Audit Findings Report. In particular those accruals relating to Continuing Healthcare Costs (CHC). We have followed up the recommendation made to enhance procedures for monitoring outstanding reviews of CHC cases to ensure that liabilities are not understated. As part of our work we have Discussed the financial standing of the CCG with officers Reviewed managements assessment of going concern assumptions and supporting information, such as 2018/19 and 2019/20 budgets and cash flow forecasts and associated sensitivity analysis Evaluated the completeness and accuracy of disclosures on material uncertainties with regard to going concern in the financial statements. As part of our work we have Gained an understanding of the process for recording Continuing Healthcare Costs and evaluated the procedures Substantively tested accruals including: the completeness of cases recorded reviewed any outstanding backlog of CHC cases the financial estimation of outstanding cases within the accrual. reviewed the collectability of outstanding shared care payments From the work we have undertaken, whilst we acknowledge the challenges within the current financial position and future financial forecasts we have not identified a material uncertainty in relation to going concern We did request additional disclosures with regard to Going Concern within the financial statements. We did this on the basis that: the CCG incurred a 27.1 million financial deficit in delivering its services in 2017/18 management anticipates that it may take a number of years before the CCG s income equals or exceeds its expenditure. The CCG will therefore require further support to pay its expenses in 2018/19 and 2019/20.. Work undertaken identified an improvement to the year end position of outstanding cases awaiting assessment for CHC. However we did identify issues with the frequency with which invoices are provided by supplier organisations meaning that there is a large quantity of estimated items within the population. This is reflected in the significant year on year increase in payables. We also noted that receivables in relation to shared care, with Shropshire Council, are still outstanding after more than 6 months. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 7
Audit of the Accounts Audit opinion We gave an unqualified opinion on the CCG's financial statements on 25 May 2018, in advance of the national deadline. As well as an opinion on the financial statements, we are required to give a regularity opinion on whether expenditure has been incurred 'as intended by Parliament'. Failure to meet statutory financial targets automatically results in a qualified regularity opinion. Our review of the CCG's expenditure highlighted the following issues which gave rise to a qualified regularity opinion. Expenditure exceeded Income for the financial period Comprehensive net expenditure was 21.7 million more than the amount specified in Directions The expenditure on revenue administration exceeded the allocation by 1.7mllion Annual Report, including the Governance Statement We are also required to review the CCG's Annual Report and the Governance Statement included within the Annual Report. It provided these on a timely basis with the draft accounts with supporting evidence Certificate of closure of the audit We are also required to certify that we have completed the audit of the accounts of NHS Shropshire CCG in accordance with the requirements of the Local Audit and Accountability Act 2014 and the Code of Audit Practice. Preparation of the accounts The CCG presented us with draft accounts in accordance with the national deadline, and provided a good set of working papers to support them. The finance team responded promptly and efficiently to our queries during the course of the audit. Issues arising from the audit of the accounts We reported the key issues from our audit to the CCG's Audit and Governance Committee on 24 May 2018. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 8
Value for Money arrangements Background We carried out our review in accordance with the NAO Code of Audit Practice, following the guidance issued by the NAO in November 2017 which specified the criterion for auditors to evaluate: In all significant respects, the audited body takes properly informed decisions and deploys resources to achieve planned and sustainable outcomes for taxpayers and local people. Overall Value for Money conclusion Because of the significance of the matters we identified in our work, we were not satisfied that the CCG put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2018. Key findings Our first step in carrying out our work was to perform a risk assessment and identify the key risks where we concentrated our work. The key risks we identified and the work we performed are set out overleaf. As part of our Audit Findings report agreed with the CCG in May 2018, we agreed recommendations to address our findings. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 9
Value for Money arrangements Key Value for Money Risks Risks identified in our audit plan How we responded to the risk Findings and conclusions Informed decision making The CCG has insourced the provision of finance services that was previously provided by Midlands & Lancashire CSU. As at December 2017 the finance team is not yet fully staffed with substantive post holders and, following the increase in the unmitigated risk by 5m in month 7, there may be issues with regard to in year financial monitoring and reporting. In year financial reporting and the capacity of the finance team is therefore considered to be a significant risk. As part of our work we found: The lack of substantive finance staff, poor internal financial controls, and lack of budget holder engagement had resulted in unreliable financial reporting to the Governing Body during the year. It has also impacted on the strategic planning of the organisation. As a result the CCG reported a 27m overspend against the revenue resource limit of 19.4m. The CCG has therefore overspent against its RRL and control total by 7.6m. It s cumulative deficit is 59.7m. The CCG has put in plans to address these issues. However, we note that it has made similar plans previously. If it is to be successful in gaining control of its finances the CCGs financial plan will need to become the responsibility of the whole organisation and not just the finance team. Conclusion We do not consider that the CCG had arrangements in place to deliver against this significant risk in 2017/18 Progress since 1 April 2018 Since the completion of the 2017/18 audit the CCG has put in place a detailed action plan which includes transitioning to a new structure for a strengthened finance team with clearly defined roles and responsibilities. Policies and Procedures have been refreshed across the CCG, and plans are in place to enhance the associated support of the different budget area by the finance team, including those areas that have proved challenging 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 10
Value for Money arrangements Key Value for Money Risks Risks identified in our audit plan How we responded to the risk Findings and conclusions Working with partners and other third parties The CCG is involved with other commissioners and providers within the local health economy in the Future Fit program which aims to deliver a plausible, workable framework for delivery of healthcare in the area in future. At the moment there is significant doubt around the ability of the CCG and its partner organisations to deliver this structure and this is therefore considered a significant risk As part of or work we found: The joint committee had agreed a preferred option, for the emergency care site to be based at Shrewsbury. NHSE had subjected the plans to rigorous assurance to test its readiness for public consultation. There have been many iterations of the plan throughout the year at NHSE request. On the 28 March 2018 Department for Health and Social Care announced that the Shropshire, Telford and Wrekin STP would receive circa 300m for the funding of the Future Fit programme to assist with the future configuration of the local hospitals. This announcement cleared the way for NHSE to provide its final, formal approval for the CCGs to launch the Future Fit consultation. It is expected that the consultation will launch in May 2018 and is expected to last 14 weeks. The provision of capital funding has paved the way for the public consultation to now take place. The final version of the proposal has now been sanctioned. We are therefore satisfied that the CCG has made appropriate arrangements to deliver the Future Fit programme and to work with partners We note that public consultation may not result in agreement, and that the health economy remains challenged in terms of both service delivery and finance. The CCG will need to continue to work with its partners if it is to secure an appropriate outcome from the consultation and address these service and financial issue Conclusion We concluded that the risk was sufficiently mitigated and the CCG has proper arrangements for working with partners and other third parties. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 11
Value for Money arrangements Key Value for Money Risks Risks identified in our audit plan How we responded to the risk Findings and conclusions Sustainable resource deployment At month 5 the CCG was forecasting an overall financial position that would meet the prescribed control total of 19.4m deficit with a cumulative financial position of 52m. However at Month 7 they were predicting an unmitigated risk of a further 5m. This is a significant overshoot of the entity s Revenue Resource Limit and agreed control total. There is also an overspend on the running costs element of the allocation of 500k. A section 30 referral was made last year and will be repeated in 2017/18. The financial position is considered a significant risk. As part of or work we found: The CCG reported a 27m overspend against the Revenue Resource Limit of 19.4m. The CCG therefore overspent against its RRL and control total by 7.6m. It s cumulative deficit is 59.7m. The lack of robust forecasting against budget led to the governing body not being aware of financial strains until very late in the financial year. Both month 10 and 11 reported further adverse variances of 4.7m & 2.8m. The 2017/18 exit deficit of 27.0m will be added to the historic brought forward of 32.6m and therefore the CCG will enter 2018/19 with a historic debt of 59.7m. The 2018/19 budget was approved by the Governing Body on the 9 May 2018. The 2018/19 CCG plan meets planning requirements including achievement of the control total set for the organisation of a 13.3m deficit. However this could significantly increase its cumulative deficit position. If the 2018/19 total is achieved there could be the opportunity for Sustainability Funding to keep the deficit consistent. We also note that the control total is challenging. QIPP plans for 2018/19 now total 20.53m with 2.97m unidentified savings at the time the plan was signed off. (14.5% of the total target). Conclusion We did not consider that the CCG had arrangements in place to deliver against this significant risk in 2017/18. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 12
A. Reports issued and fees We confirm below our final reports issued and fees charged for the audit. There were no non audit services undertaken and therefore no fees are reportable for non audit services. Reports issued Report Date issued Audit Plan 31 January 2018 Audit Findings Report 24 May 2018 Annual Audit Letter 27 June 2018 Fees Planned Actual fees 2016/17 fees Statutory audit 41,800 46,800 52,500 Total fees 41,800 46,800 Issues that were brought to our attention during the Value for Money Initial Assessment raised concerns and highlighted a risk in relation to management reporting and forecasting. In particular issues around the completeness of CHC accruals. We have undertaken detailed work around coding and outturn as part of our audit cycle which has incurred an additional cost of 5k. 2018 Grant Thornton UK LLP NHS Shropshire CCG Annual Audit Letter June 2018 13
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