Solent NHS Trust Shadow Historical Due Diligence Paper for Trust Board June 2011 Summary This paper sets out the programme for shadow due diligence in July. Board members are asked to note the timetable, and the data requirements that will feed the process. The shadow process will be coordinated by Kelly Bains. Information is also given about the formal stages due next year. The quality governance peer review is being led by Judy Hillier. 1. Overview Historical Due Diligence (HDD) is part of the FT authorisation process undertaken by a firm of independent accountants commissioned to review the trusts Business plan assumptions (IBP) Financial reporting procedures Performance of the NHST over last 2 years (one year in our case) Professional opinion on the Board statements required for Monitor on working capital, financial reporting procedures and financial projections. also included Income assumptions, cost assumptions, key drivers of forecast income, capital expenditure, financial risks, cash forecasts, board capability on the business plan Corporate Governance, high level controls, risk management, management reporting framework, financial controls and reporting, audit arrangements, IT arrangements, adoptions of IFRS, performance against standards and targets and action plans for improvements As can be seen, it is a wide ranging analysis of the trusts capability. 2. Stages There are 3 stages Stage 1: Approximately four months prior to Secretary of State review this would be March/ April 2012 although we have requested it earlier Stage 2: Prior to Secretary of State support this would be June/July 2012 Stage 3: At Monitor s stage of the applications process i.e. post Secretary of State support Nov 2012 3. Shadow It is good practice to undertake shadow HDD to prepare for Stage 1 (detail in Appendix 2)
We have requested the SHA undertakes shadow HDD at an early stage to inform the organisation of any weaknesses that can be corrected to ensure a well governed and viable business. The SHA had added to the shadow HDD some elements of the board diagnostic that is generally undertaken at the start of the FT pipeline We are also adding to this review 1. The quality governance framework through peer review 2. Preparation for Board certification, memorandum and statements* * As part of authorisation, and for ongoing compliance, the Board will provide a range of statements and memorandum as to the adequacy of working capital, financial reporting procedures, business plan financial assumptions, clinical quality, service performance, risk management processes and board roles, structures, capacity and capability. We will organise to brief the board on this and prepare for shadow self certification from August. 4. Timings For shadow HDD to be valuable, the Trust needs to have the Board in place, an IBP at a reasonable stage of development, and have quality, risk and corporate governance processes and reports up to standard. For a new organisation there will be much to be improved on and so it seems sensible to have shadow HDD at least 6-8 months before Stage1 The plan is to undertake shadow HDD and quality peer review with the SHA in July 2011. HDD timetable Week Action By When -1 Data/Information required 27 June 1 Desk top review 4 July 2 Additional data requirements 2:1 Interviews with Board members Attend Board Seminar (7July) Board Observation (11 July) 6 Follow up outstanding issues Audit Committee Observation Attendance at Board to give verbal feedback (8 August) Draft report 11 July 8 August 7 Trust conducts factual accuracy check 15 August 8 Final report 22 August 10 Agree Action Plan 2 September The data required to support the shadow HDD is at appendix 1
Appendix 1 Initial data request in addition to the 26th June IBP and LTFM I&E Business planning and 5 year financial forecast Supporting strategies Supporting documents on commissioner support/qipp plans/commissioner requirements and strategies Service development business plans as signed off by trust Board (for service developments included in the IBP/LTFM) Supporting documents on changes in other income E&T, R&D, commercial, private patient etc Supporting documents on marginal cost work CIPs for the next 2 years underlying schemes, RAG rating, process of review, sign off, quality assessment etc. Supporting work on headcount changes by staff group and how this links to activity assumptions and efficiency drivers Changes in surplus/deficit and EBITDA bridges Capex 5 year forecast Supporting business cases (as agreed by trust Board) for major capex programmes Analysis to support the capex developments and other spend eg backlog maintenance, estate appropriateness analysis Funding sources Revaluation assumptions and impact on revaluation reserve, depcriation, PDC and PDC dividends Financial risk Trust BAF and risk register (See later) Audit Committee and Board papers (see later) Cash Trust s progress on securing a WC facility FRP s Corporate governance 12 months of trust Board papers and minutes (including flash reporting and KPIs). Reconciliation of reported finances to management accounts. 12 months audit committee minutes TOR of all Board sub-committees and membership SFI s/sign off processes Board criteria for appointment of members and how successful this has been. Board plans wrt guidance eg The Intelligent Board, FT code of Governance etc High level controls BAF SIC Cost controls ALE? Performance
Risk management Risk management strategy and process including risk register and how this translates to the BAF NHSLA standard and comments paper Governance arrangements over major capital schemes, PFI projects Financial controls and reporting Finance department resourcing, qualifications and experience. Changes planned for FT Key financial systems. Evidence of accuracy and reliability Treasury management systems and processes. Budget setting and monitoring process. Budget reforecasting process and frequency Controls over procurement Audit arrangements Annual audit letter Audit file review Internal audit supplier, programme, audits completed, acitions etc External audit supplier, programme, audits completed etc Summary of issue areas Counter fraud work and key findings IT arrangements Systems and control environment Technical support Disaster recovery/business continuity plans Approach to implementation of current IT projects Progress towards achieving level 2 information governance Standards and targets (Monitor and local) Board reporting on performance Internal reporting and submissions to commissioner/sha/dh to enable review of accuracy Method for forecasting future performance Assessment and management of risk against no achievement of standards and how this feeds into the risk register/baf etc. Meeting requests Observe a Board meeting. Observe at least an Audit committee meeting Internal audit External audit NED and Exec discussion Finance specific discussion including o Discussion covering o Nature of any outstanding litigation o Impact of environmental factors o Proposed changes to financial reporting arrangements for FT
Appendix 2 Content Stage 1 HDD 1. Executive Summary 1-2 page summary, of the key issues identified through the review (prioritising them high, medium, low importance with a RAG rating) covering: Business planning and five year financial forecasts: Key gaps in relation to the ability of the trust to explain and provide evidence for the drivers of its Business plan financial forecasts, issues identified through review of Monitor s batching checklist Financial reporting procedures: Action plans for improvement and assessment of timescale to implement The rating of importance referred to above is in the context of the firm s anticipated need to sign an FRP opinion within the timeframe of the trust s anticipated FT application, or in the case of the business plan assumptions, the firms understanding of the due diligence approach on financial projections undertaken by Monitor. 2. Business planning and five-year financial forecasts The independent accountants should examine and comment on the trust s ability to understand and explain the key forecast assumptions applied in arriving at the financial projections in the business plan. It is expected that the independent accountants will make use of their health system knowledge and the Monitor process to assist them in determining the key assumptions and the level of supporting analysis required. The independent accountants should review the information and analysis the trust can make available in support, including the Integrated Business Plan, and identify any information gaps that need to be addressed before the start of the Monitor stage. In addition, the Independent Accountants should consider the areas highlighted in Monitor s batching checklist when assessing the key risks for progressing to the Monitor phase. The areas that should be covered as a minimum are: 2.1 Income assumptions Comment on the extent of analysis of commissioners requirements and strategies and the link to the financial projections Comment on the extent of analysis of competitors or potential competitors to services and the link to financial projections and sensitivities. Comment on the extent of analysis of activity growth in the financial projections for example underlying demographic, 18 weeks impact, choice etc. (is the demand model based on the latest financial year, are there specific explanations for other key assumptions) Comment on the extent of analysis and clarity of assumptions made about potential service developments. For example to what extent are service developments supported by detailed business cases and agreement with commissioners.
Comment on the extent of analysis supporting any other material income amounts, (e.g. research and development funding and education and training. Comment whether there are any non-recurrent income streams (confirm these have been correctly modelled). Comment on the extent of analysis supporting income inflation assumptions. 2.2 Cost assumptions Comment on the clarity of assumptions made about marginal costs of additional activity and the extent of analysis supporting the assumptions. Comment on the extent of analysis of CIP for the next two years and the extent of quantified strategic analysis of the likely source of CIP in the years beyond that. Comment on any assumptions for income generation within the CIP. Comment on the extent of analysis to support trends in headcount by key category within the business plan. Comment how headcount changes are linked to activity assumptions and efficiency drivers e.g. length of stay reductions. Comment on the transparency of and clarity of rationale for any contingency built into the financial projections. Comment on the extent of analysis supporting cost inflation assumptions. 2.3 Key drivers of forecast income and EBITDA Using the analysis derived in 2.1 and 2.2 above provide overall commentary of the key drivers of projected income and changes to EBITDA margin performance 2.4 Capital expenditure Comment on the extent of analysis of major capital expenditure developments including those under PFI arrangements, (i.e. are they supported by detailed business cases) Comment on the extent of analysis of, and clarity of assumptions on capital expenditure outside of major developments, for example backlog maintenance, equipment replacement. Comment on funding assumptions supporting capital plans and to what extent funding arrangements have been secured. Comment on any revaluation assumptions and if applicable the appropriateness of accounting treatment through the I&E or revaluation reserve and comment on any implications on depreciation and Public Dividend Capital (PDC) dividends in the future. 2.5 Financial Risks Comment on the extent of analysis of downside risks and the clarity of the justification for a reasonable downside case. Comment on the extent of analysis supporting the mitigation strategy of the trust and the degree to which mitigations are under the direct control of the Trust. 2.6 Cash
Comment on the extent of analysis of future cash forecasts (e.g. working capital assumptions). Comment whether the trust has begun to secure a working capital facility. 2.7 Board From one to one meetings with NEDs and the Chair/CEO. Comment on the understanding of the overall Board of, (i) the Trust s business strategy; (ii) the key drivers of the business plan; (iii) the key risks to the delivery of the business plan (iv) mitigation strategy 3. Financial reporting procedures Commentary on the appropriateness of financial reporting procedures, systems and controls, both existing and proposed, in the context of a Foundation Trust. The section should cover: 3.1 Corporate Governance Comment on the procedures adopted by the board to ensure the effective management and control of the business. Consider whether there is appropriate division of responsibility amongst board members. Examine the board s criteria for appointment of its members and how successfully they have been met, taking into account previous and current directors experience. Describe key committees and focus on audit committee arrangements including experience of members and extent to which best practice guidance has been adopted. 3.2 High level controls Development of the Assurance Framework and Statement on Internal Control. Overview of controls over key cost categories (including major demand-led items). Controls assurance performance focussing on core standards of financial management, governance and risk management. 3.3 Risk Management Risk management arrangements including performance against NHSLA Risk Management Standards for Acute Trusts and Clinical Negligence Scheme for Trusts (CNST) risk management standards (covering general, maternity and mental health and learning disability if applicable). Consider the extent to which the risks of not achieving strategic objectives are assessed and how well management takes account of the full range of risks, including fraud and manipulation. Comment on the main risks which face the business, whether management are aware of the risks and if appropriate action has been taken to minimise these risks. Comment on governance arrangements over major capital projects and or PFI schemes (if applicable).
Through discussions with management, establish the nature of outstanding litigation (including in relation to product liability) notified or threatened, and assess its implications for the trust. Assess the significance of environmental factors (identified through discussions with management) and their likely future impact, both commercial and financial, and identify potential liabilities/impact on asset values. Assess, through discussions with management, whether there is exposure to potential natural disasters and consequential loss. 3.4 Management reporting framework Overview of information reported to the Board in year and at year end. Commentary on in year variances against plan in addition to year end variances. Review of proposed changes to the financial reporting arrangements on achieving FT status extent to which ratio performance, forward cash flow analysis, and key financial and operational risks will be included in board reporting. Review of current KPI and flash reporting (including timing) and improvements proposed on achieving Foundation Trust status to ensure timely identification of financial results. Review of accuracy of board reporting e.g. reconciliation of board reports to management accounts. Comment on board plans with respect to The Intelligent Board report and NHS Foundation Trust Code of Governance. 3.5 Financial controls and reporting Finance department resourcing and qualifications/experience. Summary of key financial accounting systems. Consider whether accounting systems are appropriate to the business and for its future requirements. Comment on evidence for the accuracy and reliability of accounting systems and as to whether the information available is relevant and timely. Ascertain whether the financial statements are reconciled to the management accounts. Analyse the treasury management systems and controls and consider whether these are adequate to control cash and treasury instruments and if they are appropriate to the business. Budget setting, budget monitoring, and forecasting including detail of frequency of re forecasting. Commentary on phasing and controls over procurement. Non-clinical risk management. 3.6 Audit arrangements Audit file review commentary on key audit issues. External audit arrangements and programme of activities. Internal audit arrangements including compliance with NHS Internal Audit standards.
Summary of controls issues arising from Internal Audit and External audit reviews (Summary of issues raised in SIC, Auditor s Line of Enquiry review (ALE review) and management letters from auditors). Counter-Fraud work and key findings. 3.7 IT Arrangements Consider whether the computer systems and control environment are adequate to meet the present and future needs of the business, (i.e. Chose and Book compliant, EPR. Comment on the adequacy of technical support for the continued development of systems and controls. Consider the existence of disaster recovery plans and the availability of back up facilities. Assess management s approach to the implementation of current IT projects, considering in particular, costs to date against budget and progress to date against planned timetable. Comment on proposed IT strategy, skills and consider potential cost savings/benefits and possible problem areas. Comment on progress to achieve level 2 performance against key requirements published through NHS Information Governance Toolkit. 3.8 Adoption of IFRS (required for all trusts included in this tender) Comment on whether the trust s plan for the adoption of IFRS in 2009/10 is robust and will allow the trust to meet NHSFT reporting requirements for IFRS. Comment on the trust s progress to date against its plan and whether progress is sufficient to allow the trust meet the above mentioned requirements. 3.9 Standards and targets For (a) standards and targets defined in Monitor s Compliance Framework and (b) targets and quality measures included in contract(s) with main PCT(s): Ascertain whether performance against targets is regularly reported at board level. Review accuracy of reporting e.g. use of correct definition of targets and consistency between internal reporting, board reporting and submissions to commissioners. Comment on how Board is assured in this area. Comment on whether the trust endeavours to forecast future performance. Review how the trust assesses risk of non-achievement against the targets and the effectiveness of links to risk management processes. 3.10 Action plan for improvements Based on the work above action plan of improvements required to allow a clean financial reporting procedures opinion to be given. Estimate time required to implement improvements 4. Preparation for Historical financial review
This phase of work is designed to give the finance director at the trust sufficient time to prepare the analysis required for the Stage 2 Historical Due Diligence report. The independent accountants should examine and comment on the evidence and analysis made available by the trust in relation to historic I&E performance, movements in the balance sheet and cash flow impacts. The independent accountants should identify any information gaps that need to be addressed before the start of the historical due diligence process. The Independent accountants are expected to interview the finance director with other relevant trust management to review the historic movements in I&E, balance sheet and cash flow. The independent accountants will provide the trust with a schedule of issues requiring further analysis and written explanation during the elapsed time between stage 1 and stage 2. Particular focus will be on the quality of understanding of the drivers of movements in historic normalised surplus/deficits for example in terms of volume impact, turnaround programme, cost pressure and PBR gain or loss. Focus should also be on balance sheet movements and accounting.