‘Desperate’ finance directors resorting to accounting ‘fiddles’ to keep trusts afloat

Although the deal between University Hospitals of Derby and Burton FT and its charity went ahead, the accounting treatment that gave rise to the financial boost was ultimately rejected by external auditors.

As previously revealed by HSJ, this meant the trust missed out on a huge bonus payment from national bodies, which would have been a reward for exceeding its financial target for the year.

A policy expert said the trust’s attempt was “understandable” given that it is operating in a system which encourages “fiddles and creative accounting”.

In a report to the trust board yesterday, director of finance and performance Kevin Downs said the transaction involved the trust selling long-term leases for its buildings to its charity, and then renting them back from the charity on shorter-term deals.

For the charity to afford the £210m premium payment for the long-term leases, it has taken out a loan financing facility with the trust. The charity’s rental income from the short-term leases then funds the interest payments on the loan, as well as its other activities.

Meanwhile, the “book value” of the assets on the trust’s balance sheet was around half the sale price. So the trust expected a £102m “profit on disposal”, thereby boosting performance against its financial control total by the same amount. Mr Downs said this had all been supported and agreed by NHS Improvement, the Charity Commission, the trust board and council of governors.

However, he wrote: “(The auditor) PwC felt that the transaction had not passed sufficient risks and rewards on the assets between the trust and the charity and that, in substance, the trust still controls the use of the assets.”

PwC said no profit on disposal should therefore be recognised.

Had the auditors agreed with the accounting treatment, the trust would have exceeded its control total by £78m, which would have made it eligible for its core “provider sustainability fund” payment of £14m, plus a bonus payment of £49m.

Asked if the trust and its charity would now reverse the transaction, given it had not had the desired benefit, a spokesman said: “We’re now working with our charity to agree next steps in relation to the leasehold.”

Sally Gainsbury, senior policy analyst at the Nuffield Trust, said: “Finance directors are understandably trying to maximise their income because times are so desperate.

“We’ve been getting on for a decade of austerity and this is the sort of measure that people are resorting to. No one is doing this for personal gain and they’ll be losing sleep over it.

“It’s all part of a system that encourages fiddles and creative accounting rather than a systemic fix of more funding for both capital and revenue. People are desperately trying to save their own orgs and services for patients.”

Multiple concerns have been raised in recent years about trusts being encouraged to pursue one-off accounting adjustments – often paying fees to external advisers in the process – which do nothing to improve the underlying financial health of the overall NHS.

Meg Hillier, Labour MP and chair of the Parliamentary public accounts committee, says these measures have helped mask the real financial position of the health service, which had helped the government “cover up the fact” that the money flowing into NHS trusts has been insufficient.

HSJ has also revealed concerns about trusts seeking to maximise the profit on disposal when carrying out asset sales to boost their reported financial performance and trigger PSF payments. A higher profit has no overall benefit to the NHS, but means a higher proportion of the disposal income is diverted into the revenue budget, as opposed to the already depleted capital budget.

Earlier this year, NHSI announced a change in the rules, which meant trusts could no longer do this from April 2019. The UHDB deal was completed before this deadline.

NHS regulators and the Department of Health and Social Care have always maintained that the accounting treatments which they have encouraged have been appropriate.