Sutton and Merton Primary Care Trust Annual Audit Letter 2006-07

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Sutton and Merton Primary Care Trust

Annual Audit Letter 2006-07
To the Directors of the Board

August 2007
BAKER TILLY UK AUDIT LLP

The purpose of this letter
1. The purpose of this annual audit letter is to summarise the key issues arising
from the work that we have carried out during the year. Whilst this letter is
addressed to the directors of the PCT, it is also intended to communicate the
significant issues we have identified, in an accessible style, to key external
stakeholders, including members of the public. The letter will be published on
the Audit Commission website at www.audit-commission.gov.uk and also on
the PCT’s website.

2. This letter has been prepared in the context of the Statement of
Responsibilities of Auditors and Audited Bodies issued by the Audit
Commission. This is available from www.audit-commission.gov.uk.

Responsibilities of the auditor and the PCT

3. We have been appointed as the PCT’s independent external auditors by the
Audit Commission, the body responsible for appointing auditors to local
public bodies in England, including PCTs.

4. As the PCT’s external auditors, we have a broad remit covering financial and
governance matters. We target our work on areas which involve significant
amounts of public money and on the basis of our assessment of the key risks
to the PCT achieving its objectives. It is the responsibility of the PCT to
ensure that proper arrangements are in place for the conduct of its business and
that public money is safeguarded and properly accounted for. We have
considered how the PCT is fulfilling these responsibilities.

The scope of our work

5. Our main responsibility as your appointed auditor is to plan and carry out an
audit that meets the requirements of the Audit Commission’s Code of Audit
Practice. Under the Code, we are required to review and report on:

• the PCT’s accounts; and
• whether the PCT has made proper arrangements for securing economy,
efficiency and effectiveness in its use of resources.

6. This letter summarises the significant issues arising from both these areas of
work. The letter contains two appendices:
Appendix A: a list of recommendations arising from our audit work in 2006-
07;
Appendix B: a list of all reports issued to the PCT in relation to the 2006/07
audit.

Sutton and Merton PCT
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BAKER TILLY UK AUDIT LLP

Key issues arising from the audit of the accounts

7. We gave an unqualified ‘true and fair view’ opinion on the PCT’s accounts on
3 July 2007, ahead of the deadline set by the Department of Health. Our
opinion confirms that the accounts give a true and fair view of the PCT’s
financial affairs and of the income and expenditure recorded by the Trust
during the year.

8. We issued a qualified ‘regularity’ opinion arising from the PCT’s non-
compliance with governing authorities as the PCT exceeded the revenue and
capital resource limits specified by the Secretary of State under section 230 (1)
of the National Health Service Act 2006 by £10,083,000 and £50,000
respectively.

9. Before we give our opinion on the accounts, we are required to report to the
PCT’s audit committee significant matters arising from the audit. A detailed
report was issued in June 2007 and only the key issues are summarised here.

Accounting issues

9. We received in advance of the deadline set by the Department of Health a set
of draft accounts, which was supported by very good quality working papers.
This reflected good performance on the part of the finance staff.

10. We did not identify any significant adjustments required to the accounts.

Financial standing

11. PCTs have a number of key statutory financial duties (summarised below),
two of which the PCT did not meet.

Target Performance Target met?
Keep within the revenue resource The PCT breached its RRL by No
limit (RRL) £10,083,000
To remain within notified cash Achieved. However, the PCT Yes
limits for the year. However, to needed to ‘borrow’ £10 million
achieve this, it had to ‘borrow’ from NHS London which is
£10m from NHS London. required to be repaid in the
future
Keep within the capital resource The Trust Breached its CRL by No
limit (CRL). £50,000
To recover full costs in relation to The PCT recovered full costs Yes
its provider functions in relation to its provider
functions

12. In 2005/06 the PCT breached its revenue resource limit by £6.7 million.
2006/07 was another difficult year for the PCT. Significant overspends on
Service Level Agreements (SLAs) with the PCT’s main acute providers

Sutton and Merton PCT
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BAKER TILLY UK AUDIT LLP

continued from 2005/06. The PCT took action to address these overspends and
in June 2006 entered the NHS’s Financial Turnaround Programme. A financial
recovery or turnaround plan was formulated and a Turnaround Director
appointed. The various work streams within the turnaround plan were
implemented during the second half of the financial year but many of these did
not take effect until towards the end of the financial year.

13. In addition to the above the PCT began to identify overspends in areas not
covered by the turnaround plan and was subject to a ‘top slice’ imposed by
NHS London of £13 million. The PCT was also required to repay the deficit
incurred in 2005/06 via a reduction in it RRL for 2006/07 of £6.7 million.

14. The projected outturn for the year was for an overspend of up to £13 million,
including the repayment of the 2005/06 deficit. A decision was made late in
the financial year by NHS London to return part of the top slice so that the
total amount was reduced to £10.5 million. The final outturn was an overspend
against its RRL of £10.1 million, £6.7 million of which relates to the
‘repayment’ of the 2005/06 deficit.

15. The PCT has set a balanced budget for 2007/08, which includes a contingency
of £5 million, and is currently projecting meeting the RRL for the year with a
significant surplus projected for 2008/09. The PCT acknowledges however
that there are significant financial risks to this projection.

Key issues arising from the review of the PCT’s use of resources

16. We are required to conclude whether we are satisfied that the PCT has put in
place proper arrangements for securing economy, efficiency and effectiveness
in its use of resources. This is known as the value for money conclusion.

17. We are also required to assess how well NHS organisations manage and use
their financial resources by providing scored judgements on the PCT’s
arrangements in five specific areas. This is known as the Auditor’s Local
Evaluation or ALE.

18. In addition, we carried out a review of the PCT’s arrangements to implement
Practice Based Commissioning (PBC). We are currently discussing a draft of
this report with PCT managers.

Value for money conclusion

19. On the basis of the work on the auditor’s local evaluation described in
paragraph 21 onwards we concluded that we were satisfied that the PCT had
put in place proper arrangements for securing economy, efficiency and
effectiveness in its use of resources – except that it failed to match spending to
available resources.

Sutton and Merton PCT
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BAKER TILLY UK AUDIT LLP

Auditor’s Local Evaluation

20. We assessed the PCT’s arrangements in five areas. Each area was scored on a
scale of one to four, with four being the best. A detailed report supporting our
assessment and highlighting areas for improvement will be issued to the PCT
in September 2007.

21. The PCT improved its performance against the ALE criteria in 2006-07
compared with the previous year.
22. The scoring rules for ALE do mean that because the PCT breached its revenue
and capital resource limits in 2006-07 it will score at level one for financial
standing and at level one overall.
23. The scores for 2006-07, with those for 2005-06 shown in brackets, were:

Area Score
Financial reporting 3 (1)
Financial management 2 (2)
Financial standing 1 (1)
Internal control 2 (2)
Value for money 2 (2)

24. A summary of the PCT’s performance under each of the five areas or themes
is set out below.
Financial reporting: the PCT produced very good draft accounts and scored
at level 3.
Financial management: The PCT was scored at level 2 as budget setting and
monitoring could not be said to be good given the PCT’s financial position.
There have been significant improvements to both budget setting procedures
for 2007/08 and to budget monitoring in the second half of the financial year,
but these arrangements could not be deemed to be embedded for the whole of
the year and therefore the PCT was scored at 2 in these areas. The PCT’s asset
management, a subset of the financial management theme, was also assessed
as part of the review of financial management. The PCT scored a 3 in this
area, compared to a score of 1 in the previous year. This was due in part to
better evidencing of arrangements but also in part due to improvements in the
PCT’s estate strategy.
Financial standing: the PCT scored at level one because it did not remain
within its resource limits in 2006-07.
Internal Control: The PCT has achieved a score of 2 in this area. Internal
control processes are generally adequately managed. A higher score would
require improvements in risk management arrangements (annual review of the
risk management strategy and annual risk management awareness training for
all Board members) and the functioning of the Audit Committee (meeting the
‘should do’ requirements of the NHS Audit Committee handbook.

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BAKER TILLY UK AUDIT LLP

Value for Money: The PCT achieved a score of 2 overall, the same as in the
previous year. However, some improvements were noted especially in terms
of objective setting. In order to improve the overall score the PCT needs to
address issues around data quality (specifically in terms of ensuring data
inputers receive regular training and procedures are documented) and overall
achievement of value for money, which is closely linked with the need to
achieve financial balance.

Closing remarks

30. We would like to take this opportunity to express our appreciation for the
assistance and co-operation provided during the course of the audit. Our aim is
to deliver a high standard of audit which makes a positive and practical
contribution which supports the PCT's own agenda. We recognise the value of
your co-operation and support.

Baker Tilly UK Audit LLP

Sutton and Merton PCT
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Appendix A
Recommendations from 2006-07 audit work

ALE

RECOMMENDATIONS AGREED ACTION RESPONSIBLE IMPLEMENTATION
OFFICER DEADLINE
Ensure the Audit Committee fulfils the ‘should do’ requirements set Agreed Director of To be agreed at
out in the NHS Audit Committee Handbook. Finance forthcoming
Audit Committee.
Ensure Data Quality procedures are documented fully and that users Agreed Director of 31st December
are regularly updated on DQ developments and provided with Considerable progress has already Finance 2007.
regular training. been made, although formal
documentation needs to be
improved.
Ensure regular risk management awareness training is provided for Agreed Chief Executive 31st December
Non Executive Directors and Senior Managers. Much of this work has already 2007.
been completed in seminar for a.
BAKER TILLY UK AUDIT LLP

Appendix B

Reports issued in relation to the 2006-07 audit

Report Date Issued
Audit plan April 2006
Report on the 2006-07 audit June 2007
Report on Practice Based Commissioning September 2007
Auditor’s local evaluation September 2007
Annual audit letter September 2007

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