Audit Commission managing director of health ANDY McKEON on how to become a foundation trust

Published: 11/11/2004, Volume II4, No. 5931 Page 31

Government policy is clear: all NHS trusts will be given the opportunity to become foundation trusts by 2008. But independent regulator Monitor has been equally clear: its hurdle will not be lowered. All applicants will have to demonstrate that they have the necessary qualities to enable them to become successful foundation trusts. But what are these qualities - and shouldn't all NHS bodies be striving to acquire them whatever their foundation trust ambitions?

How can my trust gain foundation status?

Monitor looks at three key requirements when it assesses applicant foundations: legal constitution, competent management and financial stability.

The latter is crucial and often determines the success of the application, as Monitor's feedback on the first-wave foundations reveals. So even the best-managed trusts - those with a three-star rating - may discover that their financial management is not up to scratch.

Monitor's financial assessment looks at short and long-term factors. Applicants are required to undergo an independent working capital assessment and a review of financial reporting procedures. A review of the five-year projection is also carried out, which is expected to get the support of non-executive directors, and to demonstrate a 'sustainable net income surplus in the medium-term'. All well-managed organisations should be able to demonstrate that this is the case.

Unsurprisingly, lessons learnt from the financial assessment have highlighted important lessons for all NHS bodies.

How is underlying financial performance measured?

Monitor examines how financial balance is achieved, looking beyond the figures in the annual accounts, and focuses on underlying performance.

The effects of factors such as non-recurring income, capital-to -revenue transfers and financial support are therefore removed.

While these adjustments may be necessary to the achievement of financial balance across the NHS as a whole, they can mask poor underlying financial management that can go unaddressed.

All NHS bodies need to understand their underlying financial performance and ensure that they are not relying on non-recurring sources of funds and other short-term fixes. An Audit Commission review of the 2003-04 accounts illustrates this.

Only 75 per cent of trusts broke even. If the financial support received by some trusts was removed from the equation, only 58 per cent of trusts would have achieved financial balance.

The number that achieved break-even through receipt of non-recurrent income and other means is not recorded.

Cost improvement programmes are also an indicator of the quality of an NHS body's financial management and affects financial stability in the future.

Auditors frequently report that cost improvement programmes are unrealistic and are unlikely to deliver what is required of them.

It is essential that all NHS bodies put in place systems to identify, monitor and deliver realistic and achievable cost improvements.

What about Treasury management?

The value of constructive non-executive input should not be underestimated, but the Audit Commission and Monitor share concerns about the financial awareness of nonexecutive directors. All NHS boards should contain a balanced mix of experience.

This month the commission is running a series of events aimed at improving non-executives' financial awareness, to encourage them to provide more challenge to NHS bodies and to highlight the financial management standards expected of their organisations (see web link below for details).

Of course the need for financial stability and excellent financial management does not stop once foundation trusts are created.

On gaining foundation status, Treasury management - including the management of cash - immediately takes on a very important role as the additional freedoms bestowed on foundation trusts comes at a price. As well as losing access to a system of receiving cash when needed, they do not receive financial support. So if they find themselves in financial trouble the solution has to be found internally. As in the recent case of Bradford Teaching Hospitals trust, Monitor can send in advisers if significant deficits appear. If the problem cannot be remedied, a trust may lose foundation status.

What does payment by results mean for you?

Foundation trusts have been leading the way in the introduction of payment by results.When making their five-year forecasts, they have had to make an assessment of the likely impact of the national tariff and a number of underlying assumptions.

It is not a coincidence that most new foundations were able to demonstrate to Monitor that they had below-average costs.

This means - all other things being equal - that a surplus will be achieved.

However, it is not only applicant trusts that need to understand the long-term impact of payment by results. All NHS bodies should undertake this assessment if they have not already done so, by making the equivalent of the required fiveyear forecast.

Equally, foundation trusts, unlike other NHS bodies, can appoint their own auditor.

Their audit code must be consistent with the Audit Commission's code of audit practice, covering the audit of financial statements, and the requirement that the auditor must be satisfied that the trust has made proper arrangements for securing economy, efficiency and effectiveness.

All NHS bodies should now compare their current situation with the standard expected of the best. Trusts have some serious work to do in the years ahead if they are to realise government ambitions.

Further information

Audit commission events diary www. audit-commission. gov. uk/ newsandevents/eventswhere_us . asp? title=Where_you_can_see_us