NHS South Eastern Hampshire Clinical Commissioning Group · NHS South Eastern Hampshire Clinical...

Ernst & Young LLP

NHS South Eastern HampshireClinical Commissioning GroupAnnual Audit Letter for the year ended 31 March 2016

June 2016

Contents

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Contents

Executive Summary ................................................................................................................................................................................ 2

Purpose .................................................................................................................................................................................................. 6

Responsibilities....................................................................................................................................................................................... 8

Financial Statement Audit ..................................................................................................................................................................... 11

Value for Money .................................................................................................................................................................................... 15

Other Reporting Issues .......................................................................................................................................................................... 18

Focused on your future .......................................................................................................................................................................... 21

Appendix A Audit Fees ..................................................................................................................................................................... 25

In April 2015 Public Sector Audit Appointments Ltd (PSAA) issued ‘‘Statement of responsibilities of auditors and audited bodies 2015-16’. It is available from the Chief Executive ofeach audited body and via the PSAA website (www.psaa.co.uk)

The Statement of responsibilities serves as the formal terms of engagement between appointed auditors and audited bodies. It summarises where the different responsibilities ofauditors and audited bodies begin and end, and what is to be expected of the audited body in certain areas.The ‘Terms of Appointment from 1 April 2015’ issued by PSAA sets out additional requirements that auditors must comply with, over and above those set out in the National AuditOffice Code of Audit Practice (the Code) and statute, and covers matters of practice and procedure which are of a recurring nature.

This Annual Audit Letter is prepared in the context of the Statement of responsibilities. It is addressed to the Directors/Members of the audited body, and is prepared for their soleuse. We, as appointed auditor, take no responsibility to any third party.

Our Complaints Procedure – If at any time you would like to discuss with us how our service to you could be improved, or if you are dissatisfied with the service you are receiving, youmay take the issue up with your usual partner or director contact. If you prefer an alternative route, please contact Steve Varley, our Managing Partner, 1 More London Place, LondonSE1 2AF. We undertake to look into any complaint carefully and promptly and to do all we can to explain the position to you. Should you remain dissatisfied with any aspect of ourservice, you may of course take matters up with our professional institute. We can provide further information on how you may contact our professional institute.

Executive Summary

Annual Audit Letter for the year ended 31 March 2016 – NHS South Eastern Hampshire Clinical Commissioning Group

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Executive Summary

We are required to issue an annual audit letter to South Eastern Hampshire Clinical Commissioning Group following completion of our auditprocedures for the year ended 31 March 2016.

Below are the results and conclusions on the significant areas of the audit process.

Area of Work Conclusion

Opinion on the CCG’s:► Financial statements Unqualified – the financial statements give a true and fair view of the financial position of the

CCG as at 31 March 2016 and of its expenditure and income for the year then ended.

► Regularity of income and expenditure Qualified – The CCG achieved a £0.984 million deficit position for 2015/16 against a planned0.3% surplus. As the CCG did not meet its statutory duty to break-even we issued a qualifiedregularity opinion as we could not say that in all material respects the expenditure and incomereflected in the financial statements have been applied to the purposes intended byParliament and the financial transactions conform to the authorities which govern them. Wedid not identify any other issues with the regularity of income and expenditure.

► Parts of the remuneration and staff report tobe audited

We had no matters to report.

► Consistency of the Annual Report and otherinformation published with the financialstatements

Financial information in the Annual Report and published with the financial statements wasconsistent with the Annual Accounts.


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Reports by exception:► Consistency of Governance Statement The Governance Statement was consistent with our understanding of the CCG.

► Referrals to the Secretary of State and NHSEngland

We made a referral to the Secretary of State for the Department of Health and NHS Englandunder section 30 of the Local Audit and Accountability Act 2014. Further details can be foundin the ‘Other Reporting Issues’ section of this report.

► Public interest report We had no matters to report in the public interest.

► Value for money conclusion We had no matters to report.


Reporting to the CCG on its consolidationschedules

We concluded that the CCG’s consolidation schedules agreed, within a £250,000 tolerance, toyour audited financial statements except for one minor difference of £308,000 in theclassification of income in note 2 Other Operating Revenue.

Reporting to the National Audit Office (NAO) inline with group instructions

We had no matters to report.


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As a result of the above we have also:


Issued a report to those charged withgovernance of the CCG communicatingsignificant findings resulting from our audit.

Our audit results report was issued on 20 May 2016.

Issued a certificate that we have completed theaudit in accordance with the requirements of theLocal Audit and Accountability Act 2014 and theNational Audit Office’s 2015 Code of AuditPractice.

Our certificate was issued on 26 May 2016.

We would like to take this opportunity to thank the CCG staff for their assistance during the course of our work.

Kate Handy

Executive DirectorFor and on behalf of Ernst & Young LLP

Purpose


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Purpose

The Purpose of this LetterThe purpose of this annual audit letter is to communicate to Governing Body Members and external stakeholders, including members of the public,the key issues arising from our work, which we consider should be brought to the attention of the Clinical Commissioning Group (CCG).

We have already reported the detailed findings from our audit work in our 2015/16 audit results report to the 24 May 2016 Audit Committee,representing those charged with governance. We do not repeat those detailed findings in this letter. The matters reported here are the mostsignificant for the CCG.

Responsibilities


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Responsibilities

Responsibilities of the Appointed AuditorOur 2015/16 audit work has been undertaken in accordance with the Audit Plan that we issued on 19 February 2016 and is conducted inaccordance with the National Audit Office's 2015 Code of Audit Practice, International Standards on Auditing (UK and Ireland), and other guidanceissued by the National Audit Office.

As auditors we are responsible for:

Expressing an opinion:

► On the 2015/16 financial statements;

► On the regularity of expenditure and income;

► On the parts of the remuneration and staff report to be audited;

► On the consistency of other information published with the financial statements, including the annual report; and

► On whether the consolidation schedules are consistent with the CCG's financial statements for the relevant reporting period.

Reporting by exception:

► If the annual governance statement does not comply with relevant guidance or is not consistent with our understanding of the CCG;

► To the Secretary of State for Health and NHS England if we have concerns about the legality of transactions or decisions taken by theCCG;

► Any significant matters that are in the public interest;

► Forming a conclusion on the arrangements the CCG has in place to secure economy, efficiency and effectiveness in its use of resources;and

► Any significant issues or outstanding matters arising from our work which are relevant to the NAO as group auditor.


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Responsibilities of the CCGThe CCG is responsible for preparing and publishing its statement of accounts, annual report and annual governance statement. It is alsoresponsible for putting in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources.

Financial StatementAudit


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Financial Statement Audit

Key IssuesThe Annual Report and Accounts is an important tool for the CCG to show how it has used public money and how it can demonstrate its financialmanagement and financial health.

We audited the CCG’s Statement of Accounts in line with the National Audit Office’s 2015 Code of Audit Practice, International Standards onAuditing (UK and Ireland), and other guidance issued by the National Audit Office and issued an unqualified audit report on 26 May 2016.

Our detailed findings were reported to the 24 May 2016 Audit Committee meeting.

The key issues identified as part of our audit were as follows:

Significant Risk Conclusion

Better Care FundThe Better Care Fund is major policy initiative between localauthorities, clinical commissioning groups (CCGs) and NHSproviders with a primary aim of driving closer integration andimproving outcomes for patients, service users and carers. From 1April 2015 the Better Care Fund (BCF) has been set up as a pooledbudget between local government and NHS partners using powersavailable under pre-existing legislation. The partners use the pooledfund to jointly commission or deliver health and social care servicesat a local level.Local BCF arrangements may be complex and varied, involving anumber of different commissioning, governance and accountingarrangements that raise risks of misunderstanding, inconsistenciesand confusion between the partners. There are also structural,cultural and regulatory differences between local government andthe NHS, and it is important that these are understood andconsidered by all of the partners in the operation of the pool.

We wrote to and met with management to understand their proposedtreatment of the better care fund. We read the section 75 agreement andreviewed the proposed treatment in light of how the arrangements haveoperated in 2015/16 and related accounting guidance and standards. Wedid not identify any issues with the CCG’s treatment of the better care fundtransactions and disclosures.Our review highlighted the need for consistency in the note across the fiveHampshire CCGs who are partners in the Better Care Fund. It would havebeen good practice for the note to be agreed between these CCGs ahead ofsubmission of the accounts.


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Significant Risk Conclusion

Management override of controlsAs identified in ISA (UK and Ireland) 240, management is in aunique position to perpetrate fraud because of its ability tomanipulate accounting records directly or indirectly and preparefraudulent financial statements by overriding controls thatotherwise appear to be operating effectively. We identify andrespond to this fraud risk on every audit engagement.

We have not identified any material weaknesses in controls or evidence ofmanagement override.We have not identified any instances of inappropriate judgements beingapplied.

Revenue and expenditure recognitionUnder in ISA (UK and Ireland) 240 there is a presumed risk thatrevenue may be misstated due to improper recognition of revenue.In the public sector, this requirement is modified by Practice Note10, issued by the Financial Reporting Council, which states thatauditors should also consider the risk that material misstatementsmay occur by the manipulation of expenditure recognition.

Our testing has not revealed any material misstatements with respect torevenue and expenditure recognition.


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Other Key Findings Conclusion

Annual Report We reviewed the Annual Report and found a number of areas where the disclosure did notmeet the requirements of the Manual for Accounts. For example, the Annual Report did notinclude a Sustainability Report or detail how the CCG had met its legal duty in respect ofpatient and public involvement. Additionally, there were some minor inconsistencies andomissions. The CCG amended the Annual Report to address these issues.

Related Party Transactions note The related party transaction note (note 37) did not include delegated co-commissioningtransactions and the CCG amended the disclosure to include these.

Value for Money


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Value for Money

We are required to consider whether the CCG has put in place ‘proper arrangements’ to secure economy, efficiency and effectiveness on its use ofresources. This is known as our value for money conclusion.

Proper arrangements are defined by statutory guidance issued by the National Audit Office. They comprise your arrangements to:

· Take informed decisions;· Deploy resources in a sustainable manner; and· Work with partners and other third parties.

Proper arrangements forsecuring value for money

Informeddecision making

Working withpartners andthird parties

Sustainableresource

deployment


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Our audit did not identify any significant matters in relation to the CCG’s arrangements which required us to issue a ‘report by exception’. We didhowever identify the following areas to bring to your attention.

Key Findings

Sustainable resource deployment: Effective planning and management of financesWe identified a significant risk for our VFM conclusion work at the planning stage of the audit. The CCG was forecasting a deficit for 2015/16.This was against a planned 0.3% surplus. The aim in the medium term was to breakeven for 16/17 and return to a 1% surplus from 17/18onwards. The current year deficit raised questions over the effectiveness of the CCG’s financial plans and whether they support delivery ofsustainable services. We issued referrals to the Secretary of State for the Department of Health and NHS England under section 30 of the LocalAudit and Accountability Act 2014, as the CCG had forecast expenditure in excess of the amount specified by NHS England.Although the CCG moved from projecting a 0.3% surplus to achieving a deficit (£1 million), it is clear that the CCG understood the reasons for thedeficit and took prompt and robust action to address these issues. The actions taken were reasonable and made a demonstrable improvement inthe position in year moving the CCG from a forecast deficit position of £3.3m at month 6 to a final deficit position of £1 million. The CCG’scontract management and QIPP (Quality, Innovation, Productivity and Prevention) monitoring arrangements are now stronger and the CCG is in abetter position to repay the deficit and achieve a surplus for 16/17. However, the CCG’s financial plans remain challenging.

Other ReportingIssues


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Other Reporting Issues

Department of Health/NHS England Group InstructionsWe are only required to report to the NAO on an exception basis if there were significant issues or outstanding matters arising from our work.There were no such issues.

Annual Governance StatementWe are required to consider the completeness of disclosures in the CCG’s annual governance statement, identify any inconsistencies with the otherinformation of which we are aware from our work, and consider whether it complies with relevant guidance.

We completed this work and did not identify any areas of concern.

Breach of revenue resource limit and referral to Secretary of StateWe must report to the Secretary of State any matter where we believe a decision has led to, or would lead to, unlawful expenditure, or some actionhas been, or would be, unlawful and likely to cause a loss or deficiency.

The Department of Health set revenue resource limits for CCGs. CCGs are required to keep their spending within this limit. The CCG spent£1 million more than its limit for the year (£279.86 million). The main reasons for the breach were overperformance by the CCG’s main provider,Portsmouth Hospitals NHS Trust, overspending on continuing healthcare and under delivery of planned savings.

As spending in excess of the revenue resource limit is unlawful, we had to report to the Secretary of State on the breach. We fulfilled thisresponsibility by qualifying the regularity opinion and issuing a report to the Secretary of State and NHS England under Section 30 of the LocalAudit and Accountability Act 2014.

Report in the Public InterestWe have a duty under the Local Audit and Accountability Act 2014 to consider whether, in the public interest, to report on any matter that comesto our attention in the course of the audit in order for it to be considered by the CCG or brought to the attention of the public.

We did not identify any issues which required us to issue a report in the public interest.


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Control Themes and ObservationsAs part of our work, we obtained an understanding of internal control sufficient to plan our audit and determine the nature, timing and extent oftesting performed. Although our audit was not designed to express an opinion on the effectiveness of internal control, we are required tocommunicate to you significant deficiencies in internal control identified during our audit. We did not identify any deficiencies which requirereporting.

Focused on yourfuture


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Focused on your future

Area Issue Impact

NHS providerfinancialpressures

Draft 2015/16 financial statements show NHS providers overspentby a record £2.45 billion for the year. The scale of this overspendingis unprecedented. Despite additional funding and significant efforts toreduce deficits, record numbers of trusts overspent and the overalldeficit is likely to be three times higher than in 2014/15. Some 48trusts reported a deficit of more than £20 million, including 11 trustsreporting an individual deficit of more than £50 million.At the same time, performance against key targets is continuing todeteriorate and there are increasing concerns over the quality ofservices. Providers as a whole missed the Accident and Emergencywaiting target of seeing 95 percent of patients within four hours forthe final quarter of the year, and waiting lists for routine operationsreached 3.34 million.It is not yet clear whether trusts’ financial performance for the yearwill cause the Department of Health to exceed its spending limit for2015/16, a serious breach of parliamentary protocol. Whether or notthere is a breach, NHS trusts will start 2016/17 with a collectivedeficit of around £1 billion more than planned. Without change thereis the potential for the increasing financial pressure to impact furtheron levels of patient care.

The scale of the financial challenges faced by NHSproviders impacts all aspects of their operations. It istherefore a key driver of audit risk and impacts ourapproach.


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Area Issue Impact

Better CareFund

The Better Care Fund (BCF) is a series of pooled budgets betweenCCGs and local government bodies aiming to better integrate healthand social care, resulting in an improved experience and betterquality care for patients. 2016/17 will be the BCF’s second year ofexistence and many partners will be developing their plans forcollaborative working, including:► Reviewing care pathways to deliver improved patient outcomes

and genuine system wide efficiencies;► Revisiting governance arrangements after a year’s experience;► Working towards fully integrating commissioning;► Further honing arrangements for reporting financial and

non-financial information; and► Delivering fair risk share arrangements between partners.

Bodies will need to work together to a far greaterextent than ever before to ensure that sustainabilityand financial plans are viable, and successfullydelivered. Failure to do this could have wider adversefinancial and service delivery consequences across thewhole local area.As your external auditor we need to gain anunderstanding of your wider approach and plans, andthe impact of greater partnership working on yourgovernance, internal control and financial reporting.

SustainabilityandTransformationPlans

NHS England’s document, Delivering the Forward View: NHS planningguidance 2016/17-2020/21, published in December 2015, asks localhealth systems, including local government, voluntary andcommunity partners, to work together to secure transformationchange in healthcare planning and delivery.For this purpose England has been divided into 44 local healthsystems, made up of local councils, CCGs and NHS and otherproviders. Each health system needs to produce, by the end of June2016, a Sustainability and Transformation Plan covering the next fiveyears.The initial requirement is for CCGs and providers to controlexpenditure and stay within budget in 2016-17. Subsequently,spending and performance will need to be managed sustainably overthe following four years in order to access the availabletransformation funding. This is intended to fund changes to servicedelivery while maintaining and improving patient safety and qualityover the years 2017-21. Failure to deliver on targets agreed willresults in bodies being unable to access transformation funding,which will from now on be the only additional funds available.

Bodies will need to work together to a far greaterextent than ever before to ensure that sustainabilityand financial plans are viable, and successfullydelivered. Failure to do this could have wider adversefinancial and service delivery consequences across thewhole local area.As your external auditor we need to gain anunderstanding of your wider approach and plans, andthe impact of greater partnership working on yourgovernance, internal control and financial reporting.


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Area Issue Impact

Co-commissioning

Co-commissioning aims to support the development of integratedout-of-hospital services based around the needs of local people. It ispart of a wider strategy to join up care in and out of hospital and isintended to lead to a number of benefits for patients and the public.CCGs were invited to take on an increased role in the commissioningof GP services through three co-commissioning models:► Greater involvement – an invitation to CCGs to collaborate more

closely with their local NHS England teams in decisions aboutprimary care services.

► Joint commissioning – enables one or more CCGs to jointlycommission general practice services with NHS England through ajoint committee.

► Delegated commissioning – offers an opportunity for CCGs toassume full responsibility for the commissioning of generalpractice services.

Over half of CCGs are now operating under the delegated model. 63CCGs took on full delegation in 2015/16 and another 51 CCGs havetaken delegated arrangements from 1 April 2016. There will also bemore opportunities for CCGs without joint or delegated arrangementsto take up greater responsibility for the commissioning of generalpractice services in the future.

Adopting co-commissioning processes, and particularlyfully delegated arrangements, exposes CCGs to agreater risk of conflicts of interest, both real andperceived. It remains important for CCGs to strengthentheir arrangements in this area following the issue ofNHS England guidance and a subsequent audit ofarrangements against that guidance which identifiedsome weaknesses and inconsistencies in governancearrangements, training and processes to declare andrecord conflicts.Gaining assurance for fully delegated arrangements,where relevant expenditure is accounted for by CCGs,also posed some challenges for external auditors in2015/16. Specifically:► Systems and processes for fully delegated

arrangements are not all operated locally by CCGs.Gaining a full understanding of the system can bedifficult.

► CCGs rely on the work of service organisations toensure the accurate initiation, processing andrecording of co-commissioning transactions. Therehave been challenges in gaining timely andcomplete assurance over the work of serviceorganisations.

► In 2015/16 detailed transactions were recorded onthe ledger of NHS England rather than locally byindividual CCGs. It was therefore difficult to directlytest those transactions to gain assurance.

Changes to arrangements nationally in 2016/17should help to ensure that some of these issues areresolved. However, it remains important that CCGscontinue to engage with us on the changes made tolocal arrangements to fully inform our audit approach.

Audit Fees

Appendix A


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Appendix A Audit Fees

Our fee for 2015/16 is in line with the scale fee set by the PSAA and reported in our 20 May 2016 audit results report.

DescriptionFinal Fee 2015/16GBP

Scale fee variation 2015/16GBP

Scale Fee 2015/16GBP

Total Audit Fee – Code work £47,745 £1,395 £46,350

Non-audit work £0 £0 £0

The final fee includes £1,395 in respect of the referral to the Secretary of State for the Department of Health and NHS England under section 30of the Local Audit and Accountability Act 2014 which has been approved by the PSAA.

We confirm we have not undertaken any non-audit work outside of the PSAA’s requirements.

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