External Audit: Annual Audit Letter 2005-06 Shrewsbury and Telford Hospital NHS Trust 7 September 2006 INFRASTRUCTURE, GOVERNMENT AND HEALTHCARE AUDIT

External Audit: Annual Audit Letter 2005-06Shrewsbury and Telford Hospital NHS Trust

7 September 2006

INFRASTRUCTURE, GOVERNMENT AND HEALTHCARE

AUDIT

2© 2006 KPMG LLP, the U.K. member firm of KPMG International, a Swiss cooperative. All rights reserved. This

document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Page

Purpose of this letter 2

Key issues arising from use of resources work 3

Key issues arising from the audit of the accounts 7

Appendices

1. Key performance improvement themes2. Reports issued in relation to the 2005-06 audit3. Prior year Annual Audit Letter recommendations

Content

The contacts at KPMG in connection with this report are:

Will CarrPartner KPMG LLP (UK)

Tel: 0121 232 3308 [email protected]

Helen DempseySenior ManagerKPMG LLP (UK)

Tel: 0121 232 [email protected]

Simon StanyerAssistant ManagerKPMG LLP (UK)

Tel: 0121 232 [email protected]

This report is addressed to the Trust and has been prepared for the sole use of the Trust. We take no responsibility to any member of staff acting in their individual capacities, or to third parties. The Audit Commission has issued a document entitled Statement of Responsibilities of Auditors and Audited Bodies. This summarises where the responsibilities of auditors begin and end and what is expected from the audited body. We draw your attention to this document.External auditors do not act as a substitute for the audited body’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.If you have any concerns or are dissatisfied with any part of KPMG’s work, in the first instance you should contact Will Carr who is the appointed auditor to the Trust, telephone 0121 232 3308, email [email protected] who will try to resolve your complaint. If you are dissatisfied with your response please contact Trevor Rees on 0161 236 4000, email [email protected], who is the national contact partner for all of KPMG’s work with the Audit Commission After this, if you still dissatisfied with how your complaint has been handled you can access the Audit Commission’s complaints procedure. Put your complaint in writing to the Complaints Team, Nicholson House, Lime Kiln Close, Stoke Gifford, Bristol, BS34 8SU or by e mail to: [email protected]. Their telephone number is 020 7166 2349, textphone (minicom) 020 7630 0421.



Section OnePurpose of this letter

Purpose of this letter

The purpose of this Annual Audit Letter (the letter) is to summarise the key issues arising from the work that we have carried out during 2005-06 at Shrewsbury and Telford Hospital NHS Trust.

Although this letter is addressed to the directors of Shrewsbury and Telford Hospital NHS Trust (‘you’), it is also intended to communicate those key issues to key external stakeholders, including members of the public. The letter will be published on the Audit Commission website at www.audit-commission.gov.uk and on the Trust website at www.sath.nhs.uk.

Responsibilities of the auditor and the Trust

We have been appointed by the Audit Commission as your independent external auditor. The Audit Commission is the body responsible for appointing auditors to local public bodies in England, including NHS bodies.

The Audit Commission has issued a document entitled Statement of Responsibilities of Auditors and Audited Bodies which is available from www.audit-commission.gov.uk. This summarises where the responsibilities of auditors begin and end and what is expected from you as the audited body. External auditors do not act as a substitute for the audited body’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

The scope of our work

The statutory responsibilities and powers of appointed auditors are set out in the Audit Commission Act 1998. Our main responsibility is to carry out an audit that meets the requirements of the Audit Commission’s Code of Audit Practice (the Code). Under the Code we are required to review and report on:

• the use of resources - that is whether you have made proper arrangements for securing economy, efficiency and effectiveness (‘value for money’) in your use of resources

• the accounts – that is the financial statements and the Statement on Internal Control.

This letter summarises the significant issues arising from both these areas of work and highlights the key areas we think you should address to improve performance in Appendix 1. The issues summarised in this letter have previously been reported to you and a list of all reports issued to you in relation to the 2005-06 audit is provided in Appendix 2.



Section TwoKey issues arising from use of resources work

The main elements of our use of resources work are:

• Auditor’s Local Evaluation (ALE) - we are required to assess how well NHS bodies manage and use their financial resources by providing scored judgements on your arrangements in five specific areas.

• Acute Hospital Portfolio Phase 6 – the Acute Hospitals Portfolio work is undertaken by us on behalf of the Healthcare Commission and benchmarks the Trusts performance against its comparator group on a sample of clinical and non clinical areas.

• Value for money conclusion – in part based on the ALE assessment above, we are required to issue a conclusion on whether we are satisfied that you have put in place proper arrangements for securing economy, efficiency and effectiveness in your use of resources.

• Specific risk based work - within the 2005/06 audit plan we indicated that we would complete work in three of the Audit Commission Red Risk topics: Managing Resources for Improvement, Work force contracts and Information Management and Governance. We have agreed with the Trust that due to the work ongoing with the Turnaround Project, we will revisit the work plan for appropriateness following the outcome of the first phase of the Turnaround Project. We have completed a high level review of the systems and processes which the Trust has implemented during the past twelve months to address the ongoing financial challenges faced.

Financial Management risk review

Overview of 2005/06

The Trust made deficit of £12.1 million in the year ended 31 March 2006. This was after the receipt of £19.26 million financial support from Shropshire and Staffordshire Strategic Health Authority (the SHA). This financial support offset the resource reduction relating to prior year deficits. This means that the £12.1 million deficit was the actual in-year financial position for the Trust.

Following a challenging first six months in 2005/06, the Trust reported significant improvements in its financial position during the second half of the year. From April to September, the Trust’s “run rate”, i.e. the difference between income and expenditure, was a monthly deficit averaging £1.37 million. This resulted in a half year outturn position for the year of £8.2 million deficit. Significant improvements in the financial position in the second half of the year resulted in an average run rate of £656,000 deficit, resulting in an outturn for the second half of the year of £3.9 million deficit. This represents a significant improvement in the financial performance of the Trust.

The Trust’s forecast outturn for 2005/06, at October 2005, and level of historic deficit led to the Trust being identified for a Department of Health (DoH) review as one of the 63 most financially challenged organisations in the NHS. The independent analysis of the financial position completed in December 2005 rated the Trust as a category one turnaround organisation, meaning that urgent action was required and additional management resources were needed to support the financial recovery. The Trust appointed PricewaterhouseCoopers to provide financial turnaround support and to help develop a long term financial recovery plan.

2006/07 forecasts and budget setting process

The budget setting process for 2006/07 began early in 2006. Following the initial assessment of activity and income and expenditure budgets, the initial budget forecast a deficit of £8.1 million for 2006/07 should additional cost recovery actions not be undertaken. Following management challenge and consideration of outcomes of the turnaround work, the budget was revised and CIPs to the extent of £7.2 million were identified. At this point the forecast year end deficit remained £5 million.

This budget was rejected by the Strategic Health Authority in May 2006 and following further revisions of the potential CIPs, the Trust agreed financial support of £2.8 million with the SHA which enabled the Trust to produce a balanced budget which was approved by the Board on 23 May 2006.




The chart below outlines the movement from the initial income and expenditure gap identified in the initial budget setting process through to the balanced budget agreed for 2006/07 which includes the financial support of £2.8 million.

-20

-15

-10

-5

0

5

Initial I&E gap CIP Additionalincome

Financial support Activityreductions

Balanced budget2006/07

£m

Table 1 – Key breakeven budget assumptions Source: Trust annual budget exercise

The balanced plan is based upon the achievement of £9.4 million CIPs and as at August 2006 £2.2 million (23%) of these savings remained unidentified. The achievement of the total savings, which represent in excess of 4% of turnover, present a significant challenge at a time when the Trust is facing increased activity pressures and enhanced waiting times targets. The Trust therefore, needs rigorous processes to monitor delivery and provide assurances to the Board and its stakeholders.

In both our Annual Audit Letters and our Public Interest Report issued in July 2005, we highlighted concerns surrounding the robustness of budget setting and adequacy of budget monitoring processes both at Board and directorate level. As part of our 2005/06 audit we considered the adequacy of these processes against recognised best practice. Early findings and recommendations were made in our Interim Report which was presented to the March Audit Committee.

The PricewaterhouseCoopers turnaround support to the Trust to aid the delivery of the CIP development was undertaken during April and May 2006. Their findings are yet to be formally presented to the Trust. However, the Trust’s internal Turnaround Team, using the initial findings of PricewaterhouseCoopers, has been formulating a number of detailed project plans, for the delivery of the CIP. Each scheme has an identified purpose, objective and outcome measures to enable the level of success of the project to be monitored.

The plans formulated by the Turnaround Team to date, aim to deliver an element of the CIP, totalling £5.6 million through a number of specific projects. The Trust has commissioned Healthworks Ltd to provide additional project, performance and change management support to assist the delivery of these projects. The projects identified to date are split into three areas each with an Executive Director responsible for the delivery. The areas identified, the total to be delivered, and the Executive Director Responsible are detailed below:

•Capacity – Chief Operating Officer £1.8 million;

•Skill mix – Medical Director £0.7 million; and

•Non clinical – Director of Finance £3.1 million.




To monitor the delivery of the CIP, the Trust holds weekly delivery team meetings attended by the relevant project lead. These meetings are held primarily to share ideas and to update informally on progress to date. In addition, fortnightly Executive meetings are held where the progress to date is discussed along with the risks associated with each project. Finally the progress against the CIP targets are monitored at a monthly Turnaround Board, Chaired by the Chief Executive and attended by each of the Executive Directors, the Turnaround Project Manager, and a Non Executive Director. The Turnaround Board formally monitors the progress against plans, risks in delivery and updates against the bed reconfiguration plan. These arrangements are much stronger than those in place in prior years and meet many areas of good practice recommended by both private sector turnaround teams and the Audit Commission in its recent reviews of financial failings within NHS bodies.

The immediate challenge facing the Trust is the timescale for delivery of the CIP. A number of projects have already been identified as having a high risk of non-achievement in year and significant progress must be made against the delivery of the remaining project plans to ensure that outcomes are delivered on a timely basis during 2006/07. In addition to achieving the CIP, Trust budget holders have challenging operational budgets to meet in addition to CIPs.

As at 30 June 2006 (the latest figures available at the time of drafting this letter) the Trust had made an in year deficit of £1.4 million which was £636,000 (87%) greater than forecast. The Trust’s analysis suggests that this overspend is predominantly due to the non-achievement of budgeted CIPs rather than the operational overspends. However, at this point in time the Trust has been prudent in recognising over performance against contracts. Although there is only a minor income gain factored in at the end of June, the value of actual over performance is estimated at around £1 million. This income has not been included in the income budget although the costs have been recognised in the pay and non pay budgets. Should this income have been included, the deficit for the period would have been less than planned. The Trust needs to secure agreement for the payment of this and any subsequent over activity as soon as possible and factor this into its ongoing financial plans.

Despite the level of over activity the Trust must continue to focus on the delivery of the CIP. We have previously raised concerns about the late phasing of CIPs into Trust budgets. Although much improved, this continues to be a feature of the Trust budget with 32% of the £9.4 million CIP being planned for delivery in the final two months of the year. As highlighted, there has already been slippage in the delivery of planned CIPs which puts further pressure on the deliverability of the overall CIP programme. However, offsetting this, the Turnaround Team has identified a number of further savings projects for which plans are being developed.

Although the financial position remains precarious, the clarity of reporting the financial position is much improved and the establishment of the Finance Committee allows for more in-depth challenge by the Non Executive Directors of those managers responsible for the delivery of the Trust’s finances. Therefore the Trust should be better placed than in previous years to identify slippage against budgetary targets and more accurately forecast its end of year position.

The next step in financial recovery will be the achievement of a positive run rate and the delivery of the CIP.




Element of work Key findings

Auditors Local Evaluation

Our assessment of Shrewsbury and Telford Hospital NHS Trust against the five specified areas resulted in the following scores on a scale of one (inadequate) to four (excellent). This assessment covered the whole of the 2005/06 year and whilst we recognise the developments implemented by the new management team, these weren’t early enough to change our scores for 2005/06.

Area Score

Financial reporting 2

Financial management 1

Financial standing 1

Internal control 2

Value for money 1

The key areas requiring improvement to move up a score include:

• finalisation of a medium term financial strategy which delivers the Trust’s statutory duty;

• the implementation of an estates strategy;

• demonstration of proactive financial management through the delivery of the CIP; and

• enhanced use of benchmarking data to inform business planning and investment appraisal.

A detailed report on ALE will be presented to management in October 2006, with recommendations as to how scores can be improved. An action plan from this report will go to the December 2006 Audit Committee.

Acute Hospital Portfolio

The topics reviewed in 2005/06 were admissions management, medicines management and diagnostic services. Aspects of good practice were identified in all areas, although scope for improvement both in terms of cost effectiveness and turnaround times for diagnostic tests were identified. A detailed report including recommendations has been agreed with management has been provided to the Audit Committee and the Healthcare Commission.

Value for money conclusion

As a result of the ALE scores and the financial outturn for 2005/06 in accordance with Audit Commission requirements, we issued a qualified value for money conclusion for the 2005-06 year.

This means that we were not fully satisfied that you had put in place proper arrangements for securing economy, efficiency and effectiveness in your use of resources for the entire year because:

• The Trust had not put in place arrangements for monitoring and scrutiny of performance, to identify potential variances against strategic objectives, standards and targets, for taking action where necessary, and reporting to the board.

• The Trust had not put in place arrangements monitor the quality of its published performance information, and to report the results to board members.

• The Trust had not put in place arrangements to manage and improve value for money.

• The Trust had not put in place a medium-term financial strategy, budgets and a capital programme that are soundly based and designed to deliver its strategic priorities.

• The Trust had not put in place arrangements to ensure that its spending matches its available resources.

• The Trust had not put in place arrangements for managing performance against budgets.

• The Trust had not put in place arrangements for the management of its asset base.

Wherever we identified an area to improve performance as a result of this work, we communicated this to the Trust as a recommendation. A summary of the most important recommendations raised, along with the Trust management’s response, has been provided at Appendix 1.



Section ThreeKey issues arising from the audit of the accounts

Opinion

We issued an unqualified opinion on your accounts on 7 July 2006. This means that we believe the accounts give a true and fair view of the financial affairs of Shrewsbury and Telford Hospital NHS Trust and of the income and expenditure recorded by the Trust during the year.

Before we give our opinion on the accounts, we are required to report to your Audit Committee any significant matters arising from the audit. In reporting the outcome of the audit, in line with accounting standards, we report key issues to those charged with governance. We did this on 15 June 2006 and the key issues are summarised here.

Accounts production and adjustments to the accounts

We received a complete set of draft accounts by the deadline set by the Department of Health which were supported by good quality working papers.

We identified nine potential adjustments required to the accounts which had a £356,000 negative impact on the deficit. These were reported to the Audit Committee. The Committee agreed that these adjustments were not significant enough to require amendment and we confirmed they would not have an impact on our opinion on the accounts.

Financial Standing

NHS Trusts are given financial targets every year. One of these, the breakeven duty, is statutory, which means you must achieve it. The others are administrative, which means you should achieve them. Your performance against the targets in 2005-06 is outlined below.

.Target name What it means Your performance [/x]

In-year breakeven

Keeping expenditure payable for the year within the amount of income received for the year

x You reported a deficit of £12.1 million. This deficit was underpinned by £19.2 million of financial support to offset the impact of previous deficits.

Cumulative breakevenAs above, over a three year period. x You reported a cumulative

deficit of £31.4 million.

Capital Resource Limit

Keeping net capital expenditure within a limit set by the Strategic Health Authority

You remained within the CRL of £6.3 million by £1.5 million.

External Financing LimitKeeping the requirement for cash financing within a limit set by the Strategic Health Authority

You remained within the EFL of £14.2 million.

Better Payment Practice Code

Paying at least 95% of creditors within 30 days of receiving an invoice from them

x You reported paying 92% of non-NHS and 48% of NHS creditors within 30 days. This was due to a potential shortage of cash at the Trust year end.

As highlighted within the use of resources section , we remain concerned about the financial position going forward and the Trust’s ability to meet its statutory duties. This will remain a key focus of our audit work going forward.



AppendicesAppendix 1: Key recommendations

This appendix summarises the main recommendations that we have identified during the 2005-06 year, along with your response to them. The detail of the recommendations has been communicated to you during the year.

Performance Improvement Area Trust Management Response

Finance strategy, CIPs and cash management. (Interim Report)

In developing a finance strategy the Trust should consider the skills and resources required and the wider implications of the local health economy. In addition meetings conducted at directorate level need to be more effective at ensuring CIPs are delivered to enable financial targets to be met. The Trust must ensure that a robust cash flow is in place for the 2006/07 year aligned to its financial strategy and budget.

Agreed

The finance strategy will be developed whilst considering the skills and resources required. A cash flow is being developed for 2006/07 aligned to Trust budgets.

Charitable Funds (Interim Report)

To assist the Trust in complying with the SORP 2005 requirements the Trust should review the 2004/05 accounts and annual report to identify areas for improvement. This should include a review of the relevant approval documentation.

Agreed

The Trust will ensure that the 2005/06 accounts are SORP compliant.

ALE self assessment and action plan (Interim Report)

The Trust must develop its self-assessment process for ALE ensuring that weaknesses against KLOEs are identified and action plans developed.

Agreed

The Trust will ensure that the ALE self assessment is developed.

Annual accounts and working papers (Audit Memorandum)

A number of issues were identified during the year end audit specifically on fixed assets. The Trust must ensure that the capitalisation of attributable costs is consistent with the definitions contained within the NHS Capital Accounting Manual. In addition the final accounts working papers must contain a detailed analytical review.

Agreed

The necessary procedures have been put in place to ensure that all capitalised costs are attributable in accordance with the Capital Accounting Manual.

Acute Hospitals Portfolio – Admissions management

The Trust should review the average length of stay as part of the current efficiency savings review to investigate the potential for bed days to be released as a result of shorter lengths of stay. In addition, a review of current admissions practices should be undertaken to identify instances where patients are admitted before the day of surgery.

Agreed

The recommendations will be implemented.

Acute Hospitals Portfolio – Medicines management

The Trust should conduct an audit on a regular basis of the completion of discharge summaries, and results used to identify additional staff training requirements.

Agreed


Acute Hospitals Portfolio – Diagnostic services

A root and branch review of all routine endoscopy procedures and pathology laboratory turnaround times, should be undertaken to identify bottlenecks. In addition, a review of non-obstetric ultrasound waiting times should be reviewed as part of the overall monitoring of diagnostic services waiting times.

Agreed


10

© 2006 KPMG LLP, the U.K. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

AppendicesAppendix 2: Reports issued in relation to the 2005-06 audit

Report Date issued

Audit Plan 9 November 2005

Interim report and Auditor Local Evaluation (phase one) 15 March 2006

Audit Memorandum (to those charged with governance) 15 June 2006

Acute Hospital Portfolio Phase 6 10 August 2006

ALE Final Report To be issued September 2006

Annual Audit Letter 7 September 2006

ReportNumber of performance improvements noted

High Medium Low

Interim report and Auditor Local Evaluation (phase one) 4 2 0

Audit Memorandum 3 3 0

Acute Hospital Portfolio Phase 6 7 6 0

Total 14 11 0

11

© 2006 KPMG LLP, the U.K. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

AppendicesAppendix 3. Prior Year Annual Audit Letter recommendationsThis appendix summarises the progress made to implement the recommendations that we identified in our previous Annual Audit Letter. We have given each of our recommendations a risk rating . In summary:

Number Risk

Issue and recommendation Original Management

response

Officer and due date

Status at [date] 2006

1 High

Payment by Results

The Trust needs to ensure that its financial strategy adequately addresses the risks associated with the PbR agenda and draws together the Trust’s existing developments and direction of travel in a consistent and co-ordinated fashion. Specifically, this should:

• Raise the awareness of the implications and opportunities arising from PbR at an appropriately senior level. The Trust should consider identifying a PbR champion from outside finance to lead and support the raising of organisational awareness and a non-executive with PbR responsibility;

• Consider the internal reporting requirements under PbR for managers and divisional accountants, particularly that of income, and how this can be effectively resourced for the long-term;

• Develop a suite of key performance indicators for clinical coding, such as coding backlog, level of uncoded procedures, coding accuracy (measured through clinical audit) and speed of clinical coding. The Trust needs to ensure this scorecard of measures is appropriately monitored and reported.

New management has, in the first instance, raised awareness of PbR in Finance. With the appointment of a new Chair and full complement of Non-Executives in January 2006 it will be possible to identify key champion for PbR. A training programme is being developed.

January 2006

Roger Dunshea appointed Non Executive Champion. June 06 Board Seminar includes presentation on PbR.

Recent audits have been positive. New posts have been appointed to , which will allow coding supervisors to focus on this development. Coding “encode” software to be purchased to assist in this.

2 High

Performance management arrangements

The Trust should take the opportunity to asses existing performance management arrangements against the integrated governance framework to identify how performance management can be further developed. Specific attention should be given to the competency NHS framework which will be required to deliver sound financial performance whilst addressing the changing requirements of the patient focussed NHS.

The Trust is awaiting the publication of the Integrated Governance Framework which is due to be published in March 2006.

Under proposed management restructure performance management will report to the Finance Director.

March 2006

Quarterly Performance Management reviews to be reintroduced by CE.

Year

Number of recommendations that were:

Included in original report Implemented in year or

superseded Remain outstanding (re-iterated

below)

2004-05 4 2 2

Documents

External Audit: Annual Audit Letter 2005-06 Shrewsbury and Telford Hospital NHS Trust 7 September 2006 INFRASTRUCTURE, GOVERNMENT AND HEALTHCARE AUDIT