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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