Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 100-119)

NATIONAL HEALTH SERVICE AND DEPARTMENT OF HEALTH

16 OCTOBER 2006

  Q100  Greg Clark: Fiddling the figures, making inappropriate adjustments—how would you describe it? What is another word for that?

  Mr Douglas: What the auditors referred to was changes between draft accounts and final audited statements. Auditors will make judgments about a set of financial statements, in the same way that management will make judgments about a set of financial statements. Sometimes those judgments will differ. I could not say in the case of all the 125 bodies that the organisation had deliberately manipulated or falsified. They had made a different judgment from the auditor. That happens in the audit process.

  Q101  Greg Clark: They made a different judgment from the auditor?

  Mr Douglas: Yes.

  Q102  Greg Clark: Mostly when the auditor expresses a judgment on a company's set of accounts one tends to go with that judgment. One does not say, "Well he says one thing and he says the other." The fact that you can say that about the NHS's accounts when one in five—

  Mr Douglas: I disagree. When someone produces a set of draft accounts there may be issues where the board has a different judgment from the auditor. That will happen in commercial company accounts in the same way as it will happen in these accounts. I am sure that the NAO would have a number of cases where, during the process of audit, accounts change. That is not an unusual circumstance in any sector.

  Q103  Greg Clark: We are not talking about movements of sums, but of specific inappropriate adjustments that have been made. The financial management here is rather perplexing. It concerns me that these practices are going on in the current buoyant times. The level of grip and detailed competence makes me worried about the future.

  Chairman: Can we for the sake of this debate set the parameters of the argument? We are having this discussion today about 2004-05, where we are talking about 615 bodies, with 27% in deficit. Do you accept that? A briefing from the NAO tells me that the figures for 2005-06—the current financial year—are worse: there are 599 bodies of which 32% are in deficit. Do you recognise that?

  Mr Nicholson: Yes, I recognise that.

  Q104  Chairman: So of the bodies we are talking about today, 27%. are in deficit and that figure is rising to 32%? What will be the position for this year? Can you give me a guarantee that things will get better?

  Mr Nicholson: Yes, we expect organisations that currently have a deficit either to be in balance or to have a smaller deficit than they had last year, and that the number of organisations with deficits should go down and that we should be in balance.

  Q105  Chairman: The number should go down?

  Mr Nicholson: Yes.

  Q106  Chairman: Could the NAO help me on this? There seems to be a slight difference.

  Sir John Bourn: We shall audit the current financial year—2006-07—during the course of 2007 and we will be able to see the extent to which Mr Nicholson's claims that fewer bodies—

  Q107  Chairman: You are not able to comment on that yet?

  Sir John Bourn: No, because we are only part way through the financial year.

  Q108  Chairman: But we assume that we can accept in general terms his argument that although the situation was deteriorating in 2004-05 to 2005-06, we hope that in 2006-07 it will be better?

  Sir John Bourn: That is the challenge for Mr Nicholson.

  Mr Nicholson: That is what we are trying to do at the moment.

  Q109  Chairman: And you are confident that you can meet that challenge?

  Mr Nicholson: Yes.

  Mr Bacon: Mr Douglas, I think that your answers to Mr Clark just now were misleading and deliberately so. Would you turn to page 52? You will see that case study 6 on Scarborough North-East Yorkshire NHS Trust states: "In November 2004, the Director of Finance reported to the Board that whilst the forecast year-end position was break-even, divisional overspends were expected to total £6.8 million by the end of the year. These overspends were expected to be partly offset by additional income, but during 2004-05 the Trust also considered a number of further measures to break even. These included a number of accounting adjustments. Before the accounts were prepared, the appointed auditor provided guidance that the proposed adjustments would not comply with accounting standards as set out in the NHS Trust Manual for Accounts.  The Director of Finance chose to disregard the auditor's view and prepared a balanced set of accounts... Despite the existence of clear rules on large adjustments related to purchases made in previous years, the Trust hoped it could reduce in-year spending by reclassifying previously purchased medical instruments as stock and fixed assets. The accounts also contained examples of incorrect accounting treatment and inadequate checking procedures leading to significant errors. In the Public Interest Report, the auditor reported that a number of adjustments employed by the Trust were a device to achieve financial balance, rather than improve the accuracy of the accounts, and did not comply with accounting standards." That is correct, is it not?

  Mr Douglas: In that case, that was fundamentally wrong. The Director of Finance should not choose to disregard the auditors.

  Q110  Mr Bacon: What happened to the director of finance in that case?

  Mr Douglas: I would have to check. I do not know.

  Q111  Mr Bacon: Mr Nicholson, do you know?

  Mr Nicholson: I think I know.

  Q112  Mr Bacon: Was he disciplined?

  Mr Nicholson: Both the Chief Executive and the Director of Finance were suspended subject to an investigation, which is just about to report.

  Q113  Mr Bacon: Can we have a note on that? We once took a report from Sir John on the suspensions of clinical staff, and sometimes suspensions in the NHS go on for several years. But you think this is nearly over, do you?

  Mr Nicholson: Not in my experience of finance directors and chief executives. They seldom go on long.

  Q114  Mr Bacon: Is he still suspended?

  Mr Nicholson: Yes.

  Q115  Mr Bacon: And when will he not be suspended?

  Mr Nicholson: I have not seen the report, and I do not know what has happened. I just know that it is about—

  Q116  Mr Bacon: I would like to know the result of it, and include it in our evidence, because that case study is an example of a more widespread tendency—the 125 bodies to which Mr Clark referred. Basically, it is people manipulating the figures to get the desired result, is it not?[8]

  Mr Douglas: I do not believe that that was the case in those 125 organisations. In this case, that was wrong. Someone should take the auditor's advice; they should not disregard it.

  Q117  Mr Bacon: Do you think that the NHS accounting manual and standards should be complied with.

  Mr Douglas: Yes, absolutely.

  Q118  Mr Bacon: Paragraph 5.37 refers to the review that the Secretary of State has asked the Audit Commission to undertake of the NHS financial and accounting regime. One of the things that the Audit Commission concluded was that "resource accounting and budgeting... is incompatible with the NHS trusts' financial regime and should not be applied to those organisations." Do you accept that finding?

  Mr Nicholson: We are considering the report, and we have not finalised those deliberations.

  Q119  Mr Bacon: What is your view? They are saying that resource accounting and budgeting are incompatible. It is a strong statement.

  Mr Nicholson: I can perfectly understand from a trust's perspective why that might be the case. If you have the size of deficit that some organisations have, it makes running a trust extraordinarily difficult. However, there is no such thing as a free lunch: if we allow the flexibility to be moved away from individual trusts, the NHS as a whole somewhere else will have to pick up the responsibility for it. There is no technical answer for the NHS as a whole; of course, there may very well be one for individual trusts.


8   Note by witness: The Chief Executive and Director of Finance of Scarborough and North East Yorkshire NHS Trust are currently suspended. A report looking into the Trust's governance arrangements has now been concluded and, as a result of the report, it has been decided to take disciplinary action. Back


 
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