• NAO proposes changes to its code to make auditors provide commentary on governance, financial sustainability and efficiency
  • Admits this could raise costs for NHS bodies
  • Comes after criticism of “fiddles and creative accounting”

Proposals designed to make annual audits more insightful could increase costs for clinical commissioning groups and trusts, the National Audit Office has said.

The NAO is planning changes to the code auditors must follow when auditing public bodies, including NHS trusts and CCGs, which it says will “put a sharper focus on [whether they are achieving] value for money and an expectation of clearer and more timely reporting”, the watchdog said. 

The plans would require auditors to report on:

  • Financial sustainability – “How the body plans and manages its resources to ensure it can continue to deliver its services”;
  • Governance – “How the body ensures that it makes informed decisions and properly manages its risks and finances”; and
  • Improving economy, efficiency and effectiveness – “How the body uses information about its costs and performance to improve the way it manages and delivers its services.”

Auditing in the NHS has faced significant criticism recently. Major accounting scandals have gone undetected for years, while one policy expert described the system as encouraging  “fiddles and creative accounting”.

Meanwhile, in March, HSJ reported Treasury concerns about a contentious accounting measure used by dozens of NHS trusts, which followed “neither the letter nor the substance” of the rules.

In their audit reports for the 2018-19 financial year, 41 foundation trusts had a “material uncertainty” paragraph to draw attention to the going concern disclosure in those financial statements. These trusts comprise 29 per cent of the turnover of England’s FTs. Seventy-eight trusts had a reference to “material uncertainty in relation to [being a] going concern”.

The FT sector spent £11m on statutory audit in 2018-19, while NHS trusts spent £16m.

‘Binary’ conclusions and ‘boiler plate’ wording

The NAO stressed “a significant proportion of the work envisaged” under the proposals was already undertaken by local auditors, and reporting the above in a narrative form would be “more useful to the audited body and the wider public”.

Its document on the proposals for a new code for auditors said using a narrative form rather than the current “binary conclusion” would discourage “boiler plate” wording to describe issues when a qualified conclusion was issued. It pointed out the “boiler plate” approach was often ignored by “those charged with governance”.

However, it admitted the “possibility that changes made to the code will alter the amount of work auditors need to do, the resources and skills that firms need to deploy on the audit, and therefore potentially the fee required to fund this work”.

There was no estimate of what this cost might be, but the Healthcare Financial Management Association also said costs could go up.

Policy and research director Emma Knowles said: “We do have concerns about the potential impact of any extra work on audit fees, which would be an additional financial pressure on NHS resources.

“We are also aware that the 2018-19 accounts audit was challenging for both local government and NHS bodies, exposing a lack of audit capacity. We’ll be working with members to review the draft code and assess its impact on audit resources.

“The HFMA welcomes the proposed new audit approach to assessing and reporting on value for money and maximising the impact of local audit work. In the past we have had concerns that NHS organisations may not fully understand the auditor’s conclusion on the arrangements to secure value for money and the action they need to take as a result.”