The preparation and audit of the 2020/21 annual report and accounts is likely to be unlike any other. Here Emma Knowles, the Healthcare Financial Management Association’s director of policy and research, points to three core issues NHS bodies will need to consider when approving the annual report and accounts.
We thought that preparing the 2019/20 annual report and accounts in lockdown would be a unique experience and a ‘year like no other’. It turns out that 2020/21 is even more so.
In fact, the 2020/21 annual report and accounts are likely to be subject to more interest because it is the chance for NHS bodies to give their account of the year at the centre of the pandemic. As all annual reports and accounts include prior period comparatives, there will need to be narrative explanations of how and why the COVID-19 pandemic has had an impact.
For those charged with governance, the issues to consider when approving the annual report and accounts will be different – partly due to the impact of the pandemic on the financial regime but also due to changes to the audit approach that are not related to the pandemic. The issues will vary by NHS body but the issues that we think most NHS bodies will need to consider are stock/ inventory, judgements and estimates and going concern.
One the key changes this year has been the amount of stock (mostly personal protective equipment, PPE) and assets that have been purchased by the Department of Health and Social Care (DHSC) centrally. As the PPE and assets have been used to provide healthcare by NHS provider bodies, they need to be reflected in that NHS provider’s annual report and accounts. Information on the amount and value of the assets transferred from the DHSC to NHS providers is being provided centrally, but this needs to be agreed to each provider’s own records and discrepancies need to be fed back to the centre.
Auditors are required by auditing standards to attend stock takes where inventory levels are material. As the first lockdown started just days before the 2019/20 year end, auditors were unable to attend those stock takes or put in place alternative auditing procedures. For 29 provider bodies, this resulted in a qualified audit opinion due to limitation of scope.
In 2020/21, auditors have more experience of getting the evidence they need remotely, and NHS bodies have had longer to plan their year-end stock takes so, working together, limitations of scope may well be less of an issue (other than for those bodies affected last year as the limitation that applied to the closing balance for 2019/20 applies equally to the opening balance for 2020/21). However, boards should be sure that they understand the process by which management, as well as auditors, are getting comfort over the value of material inventory balances at the year end.
A change to auditing standards means that auditors will be asking more questions about the judgements and estimates management make during the preparation of the annual report and accounts. In particular, they will want to understand the controls that the organisation has in place when material judgements and estimates are being made. This will include considering the information that those charged with governance (usually the audit committee) are provided with and the questions that they ask of management.
For NHS bodies, management override of these controls is even more of a live issue following the Comptroller and Auditor General’s report on the DHSC’s annual report and accounts 2019/20 that highlighted that one NHS trust’s accounts could not be signed off due to the unprecedented level of manual adjustments made to the 2019/20 financial statements.
Finally, the financial position of NHS bodies has been a concern for some years now, and in the past this has often been reflected in the NHS body’s disclosures on going concern and the auditor drawing attention to this fundamental uncertainty in their audit report. For 2020/21, the going concern assessment focuses on the continuation of the services being provided by NHS bodies rather than the financial sustainability of the entity.
Instead, auditors will look at financial sustainability as part of their work on value for money – the findings of which will be reported to management, those charged with governance and the general public in the annual audit report (AAR). Auditors will be changing their focus to the arrangements that the NHS body has put in place which may mean that they want to talk to management outside of the finance function about their role in the financial governance of the organisation. They may also want to understand how those charged with governance assess the financial performance of the organisation and whether the finance function is fit for purpose.
All in all, the preparation and audit of the 2020/21 annual report and accounts is likely to be unlike any other. The HFMA has produced a range of reports to support those charged with governance with the 2020/21 year end which are linked to in this blog and can be found on the HFMA website: www.hfma.org.uk
Emma Knowles is director of policy and research at the Healthcare Financial Management Association. Follow the organisation on Twitter @HFMA_UK