11Financial Audit of Central Government and NHS Bodies in Wales 2007 Improvements Required Improvement Actions in Place Over accounts preparation Audited bodies must ensure that the quality of their annual accounts and financial information continues to improve, while still achieving the accelerated timescales required for their preparation. The Assembly Government's Resource Accounting Project Board has instigated a detailed project plan and monitoring process for the preparation and audit of the 2006/2007 accounts. This aims to allow sufficient time for detailed management review, which should assist in identifying omissions and disclosure errors within the financial statements prior to their submission for audit. Over management of expenditure on grants Where audited bodies provide grants to other organisations, the funds provided need to be closely controlled and monitored, in order to ensure that funds are used for the purposes intended. As a result, audited bodies need to ensure that their grant monitoring procedures are understood and adhered to by all parties involved. In March 2007, a Community of Practice for grant management was established within the Assembly Government. Its purpose is to enable a continuing exchange of ideas, and the effective dissemination of good practice throughout the organisation, and the wider public sector in Wales. The Assembly Government has also arranged training and workshops for grant claimants, supported by specialist staff from the Wales Audit Office, which were well attended during the year. The Assembly Government has asked the Accounting Officers of its relevant sponsored bodies to review the controls they have in place for the management of grants expenditure. Over management of assets Capital Investment accounts for a significant portion of Welsh public sector resources; the total net worth of assets held by public sector bodies in Wales is nearly £30 billion. Annual capital spending continues to rise year on year, with the Assembly Government planning further spending of some £1.7 billion for 2007/2008. In order to ensure the efficient utilisation of existing assets, and the effective targeting of future capital spending, the Assembly Government needs to embed effective asset management arrangements in its procedures, and ensure a consistent standard of asset management planning across its sponsored bodies. During the year the Assembly Government has made further progress in developing its asset management systems. This has included: producing revised asset management planning guidance for all departments and sponsored bodies; developing an overarching asset management plan for 2006/2007 covering the whole of the Welsh Public Sector; and requiring all Assembly Government departments to prepare comprehensive asset management plans in 2007/2008 which will underpin an expanded overarching plan. The Assembly Government recognises, however, that further challenges to be addressed will include: improving the consistency, comparability and timeliness of asset information across the Welsh public sector; fully integrating asset management plans with other corporate planning documents; and developing further the sharing of good asset management practice across the Welsh public sector. Figure 1: While improvements are required in some areas, there are a range of actions now being put in place by the Assembly Government and other bodies to address these Finance 2.qxp 20/06/2007 16:48 Page 11 This is trial version www.adultpdf.com 12 Financial Audit of Central Government and NHS Bodies in Wales 2007 NHS Bodies need to improve their medium term financial planning 2.7 In examining the NHS accounts each year, I have a statutory requirement to satisfy myself that individual bodies have made proper arrangements for securing economy, efficiency and effectiveness in their use of resources. This requirement is also reflected in my Code of Audit and Inspection Practice. 2.8 In carrying out this work on my behalf, auditors consider the extent to which each NHS body has in place appropriate corporate performance management and financial management arrangements to support their business objectives. These arrangements also represent part of an organisation's system of internal control, which is essential to its proper stewardship and governance of public funds. 2.9 The focus of audit work for the purposes of my annual conclusion is based on the evidence of the existence of the arrangements themselves. My separate value for money audit work considers where these arrangements or their operation could be improved. 2.10 In almost all cases, I was satisfied that audited bodies had in place the required arrangements to support the achievement of their requirement to secure economy, efficiency and effectiveness in their use of resources. I was able to identify, however, at some NHS bodies areas where further improvements in the range of arrangements in place could be secured, as shown in Figure 3. These areas are also of relevance to the Assembly Government's improvement agenda for public sector bodies in Wales, aspects of which I describe in Part 3. 2.11 I raised concerns in my 2006 report that NHS Bodies in Wales may have difficulty in meeting their statutory financial duties in future years 1 . I further observed that it was questionable whether there were effective links between the strategic direction of the NHS in Wales, the implementation of local plans to better direct resources in the medium-term to match service requirements and the annual Service and Financial Framework arrangements. 2.12 Each year, NHS bodies in Wales are required to achieve a breakeven financial position (NHS trusts), or to contain their expenditure within specified limits (Local Health Boards). I noted that a significant number of NHS bodies - seven NHS trusts and two Local Health Boards - failed to achieve the required financial duties in 2005/2006. The situation has worsened during 2006/2007, with additional bodies reporting a failure to meet their targets. I look therefore to the management of NHS bodies to ensure, where needed, that they have agreed achievable recovery plans in place. The implementation of these plans should also be supported by comprehensive and up-to-date medium term financial strategies. The corporate performance management and financial management arrangements assessed at the audited bodies include those relating to: Establishing objectives, determining policy and making decisions; Meeting needs of users and taxpayers; Complying with established policies; Managing operational and financial risks; Managing financial and other resources; Monitoring and reviewing performance; and Achievement of proper standards of conduct. Figure 2: Arrangements for securing economy, efficiency and effectiveness in the use of resources 1 Financial Audit of Central Government and NHS Bodies in Wales: 2006 - June 2006 Finance 2.qxp 20/06/2007 16:48 Page 12 This is trial version www.adultpdf.com 13Financial Audit of Central Government and NHS Bodies in Wales 2007 Audited Body Arrangements Areas where further improvement could be made Arrangements for monitoring and scrutiny of performance, to identify variances, against strategic objectives, standards and targets Monitoring and scrutiny arrangements should be in place, involving non-executive directors and senior officers, to provide a regular check on performance against strategic business objectives and give early warning of potential slippage against targets. Arrangements to manage significant business risks Risk management should be embedded within organisations' corporate business processes, including strategic and financial planning; policy making and review; performance management; and reporting to board members. This ensures that all such processes take full account of risks and opportunities relevant to their operation. Arrangements to evaluate and improve the value for money it achieves in its use of resources There should be in place agreed plans for improving organisational efficiency, including specific planned efficiency gains which are quantified, evidenced and monitored throughout the year. My review also highlighted the importance of having robust financial planning and financial management arrangements in place at a time of financial pressures Having in place a medium-term financial strategy that is soundly based and designed to deliver its strategic priorities Medium-term financial strategies should be in place and linked to a body's key strategic objectives, taking account of both local improvement and national priorities. They should model income and expenditure over a minimum of three years- taking account, as necessary, of different funding and expenditure scenarios- and be reviewed and updated at least annually. Financial strategies should also be agreed with partners and other stakeholders. Although NHS bodies are funded on an annual basis, this does not remove the need for formal medium term financial planning. The absence of such arrangements increases the possibility of risks and opportunities related to a body's finances and corporate objectives not being identified and managed appropriately. Arrangements to ensure that its spending matches its available resources Not all NHS bodies were able to meet their statutory breakeven duty. Where there is an underlying deficit, it is important that agreed recovery plans are in place to address it. However, for some audited bodies there was a failure to have plans in place that had been agreed within the relevant local health communities and with the Assembly Government. Figure 3: Arrangements in place for securing value for money are generally sound but some improvements can be made Finance 2.qxp 20/06/2007 16:48 Page 13 This is trial version www.adultpdf.com 14 Financial Audit of Central Government and NHS Bodies in Wales 2007 Bodies are continuing to improve their payment performance, but still need to work on some aspects 2.13 Audited bodies are required to disclose their payment performance within their annual financial statements. This is the percentage of creditor payments made within a specified 30 day period. The Assembly Government has set a target requiring all bodies to pay 95 per cent of their agreed invoices within this 30 day period. The managements of many audited bodies have reviewed their payment procedures, seeking ways in which to improve them. 2.14 The 2005/2006 results saw only a small number of bodies failing to achieve the target, with the majority of these falling short by a narrow margin. All 22 LHBs successfully achieved the 95 per cent target for the third successive year, and other bodies continue to show an overall trend of improvement in this area. This included the Assembly Government itself, which met the 95 per cent target this year after failing narrowly to do so last year. 2.15 An important factor in this improvement has been the issue by the Assembly Government’s Finance Department of revised guidance on the prompt paying of invoices. This document included examples of good practice which many bodies have been able to implement successfully. NHS trusts are also continuing to seek improvements to their payment performance. Trusts in North Wales, for example, are currently piloting a shared services project, which aims to implement the good practice demonstrated by the NHS Wales Business Service Centre which provides payment and other financial services to LHBs. Figure 4: The excellent payment performance of LHBs continues to set a benchmark for other bodies to follow Source: Wales Audit Office analysis Finance 2.qxp 20/06/2007 16:48 Page 14 This is trial version www.adultpdf.com 15Financial Audit of Central Government and NHS Bodies in Wales 2007 Bodies are improving their procurement procedures but need to make further use of Value Wales 2.16 Value Wales is one of the principal delivery arms of 'Making the Connections'. Working as a catalyst for improving public sector procurement systems, it has an objective to deliver £120 million per annum in procurement related efficiency savings by 2008. 2.17 During 2005/2006 Value Wales (Procurement) (VWP) reported realised savings of £19 million across the whole of the Welsh Public Sector, and identified further potential savings of £64 million as deliverable in 2006. For 2006/2007 a target of £30 million realised savings was set, however VWP were able to achieve these savings in only nine months, reporting savings of £32 million in December 2006. Figure 5 demonstrates the improved savings that VWP are providing year on year. 2.18 Identified savings continue to rise mainly because of the increasing collaborative purchasing of goods and services, including for example telecommunications, vehicle hire, and postal services. Savings of approximately £10 million were also identified following the implementation of an All Wales Recruitment web site, and a best practice guide for hiring agency staff. Figure 5: Value Wales (Procurement) are providing improved savings year on year Source: Wales Audit Office analysis Finance 2.qxp 20/06/2007 16:49 Page 15 This is trial version www.adultpdf.com 16 Financial Audit of Central Government and NHS Bodies in Wales 2007 2.19 Figure 6 provides examples of the work of VWP during 2006: Figure 6: Value Wales made further good progress in key areas during 2006 2.20 During 2005/2006 as part of my additional assurance work at AGSPBs, I reviewed the extent to which they were participating in the activities of Values Wales. Figure 7 outlines the areas my staff examined and the detailed findings. 2.21 Whilst I note that all AGSPBs are participating in the activities of Value Wales (Procurement) to some degree, I also look to the senior management of these bodies to ensure that their staff are taking full advantage of the services provided by Value Wales where these could help enhance further the effectiveness of their procurement arrangements. 2.22 NHS bodies have been making extensive use of collaborative contracts within their procurement procedures for a number of years, and already have several modern procurement systems in place. The NHS Wales Business Services Centre provides support services to LHBs in areas where During 2006 Value Wales: Awarded Collaborative Procurement contracts with a value of over £30 million. Further projects with values of over £380 million were already underway. Increased the number of professionally qualified public sector procurement staff to over 120. Continued to complete procurement fitness checks for public sector organisations. A total of 32 checks have now been completed across the public sector in Wales. Facilitated the use of e-auctions for £12 million of procurement expenditure, with a further £350 million in opportunities currently being developed. Continued to develop the usage of the Welsh Purchasing Card, with 51 organisations now participating in the programme. Value Wales Service Used By Potential for Improvements in Future Years Buy4Wales Website This enables purchasers to search for and view detailed supplier profiles, and access details of Value Wales collaborative purchase contracts. All Bodies Whilst all bodies had registered, the actual use made of the site varied greatly from organisation to organisation. Audited bodies need to become more actively involved with the services and activities offered by the Buy4Wales Website if the service is to be successful in improving savings across Wales Collaborative Purchase Schemes Public organisations act in-consortium to maximise the potential to achieve value for money in their purchasing. Such contracts now include, the Welsh Purchasing Card, vehicle hire, and IT contracts. Most Bodies To date, most bodies are only involved in one or two collaborative procurement projects. Audited bodies should continue to review the contracts offered by Value Wales in order to identify further potential savings. New contracts are negotiated on a regular basis, and I would expect further procurement savings to be made in this area in future years Procurement Fitness Checks These are designed to help organisations recognise their procurement strengths as well as identify areas for improvement. Most Bodies The remaining bodies were expected to be completed during 2007. Those bodies that have completed the Fitness Checks are currently considering the recommendations made. Figure 7: AGSPBs are engaging with Value Wales, but could do more to secure savings in procurement Finance 2.qxp 20/06/2007 16:49 Page 16 This is trial version www.adultpdf.com 17Financial Audit of Central Government and NHS Bodies in Wales 2007 there are benefits of scale such as human resources or finance. In addition individual NHS trusts often provide specialist services across the whole of the NHS in Wales. For example the Bro Morgannwg NHS Trust manages Welsh Health Supplies, a service which bulk purchases medical supplies and distributes them as required across the trusts. In the past five years this service has generated overall reported savings of around £20 million. 2.23 Whilst the NHS in Wales is already using sophisticated procurement models, it is currently working with Value Wales to determine whether procurement practices could be improved upon and whether current procurement contracts could be better provided by Value Wales. It is also providing its own best practice experiences where these could be of benefit to other organisations. Organisations must demonstrate that they have effective internal control arrangements for the preparation of European grant claims 2.24 The aim of the European Structural Funds is to reduce social and economic inequalities by providing grant aid funding for projects which have been approved under targeted programmes agreed between the European Commission and Member States. Funding from the Structural Funds is provided for defined periods, known as the 'programming periods'. There are three programming periods presently of interest. The current programming period began on 1 January 2007 and will run to 31 December 2013. The previous programming period began on 1 January 2000 and ran to 31 December 2006; this was preceded by a programme that covered the period 1 January 1994 to 31 December 1999. 2.25 In my corresponding report last year, l reported on progress made in respect of the closure of the 1994-1999 European Programmes. As the European Commission's nominated independent audit body for Wales, the Assembly Government's Head of Internal Audit had produced closure reports in respect of the 18 programmes that operated in Wales, qualifying all but one of his accompanying audit opinions. He was able to quantify specific problems with incurred expenditure totalling £476,110 and recommended that the European Commission should accept the closure of the programmes, after deducting this amount. The amount involved represented less than 0.2 per cent of the EU funds received for the 1994-1999 programming period 2.26 At the time of last year's report, the European Commission had accepted the Head of Internal Audit's recommendation in respect of seventeen of the programmes, and the relevant financial adjustment was made during the 2005/2006 financial year. The European Commission had yet, however, to complete its deliberations on the Industrial South Wales Programme, where it was considering the findings of its own audit as part of its Europe-wide closure exercise. The Assembly Government now anticipates that the financial adjustment for the final programme will be finalised by the European Commission during 2007/2008. Finance 2.qxp 20/06/2007 16:49 Page 17 This is trial version www.adultpdf.com 18 Financial Audit of Central Government and NHS Bodies in Wales 2007 2.27 The majority of the programmes of the 2000- 2006 programming period are not due to close until 2008, when the same closure and audit mechanisms will apply as for the 1994- 1999 programmes. The Wales European Funding Office and the Assembly Government's Internal Audit Services have participated in a UK working group to ensure the adoption of common standards and approaches in all relevant UK Departments and Administrations. 2.28 One programme from the 2000-2006 programming period - the Innovative Actions programme TASK - was closed in December 2005. The programme covered £2.2 million of expenditure, supported by £1.6 million of European Commission funding and the auditors reserved their opinion in respect of £115,000 of the expenditure. 2.29 During 2006/2007, the Assembly Government had in progress significant preparations for the 2007-2013 programming period, and my staff participated in a work stream that considered the mechanisms for audit certification of projects. 2.30 I will continue to monitor developments regarding the final closure of the 1994-1999 Programmes, and those in respect of the subsequent programmes, and will include a further update in my next year's report. 2.31 During the year to 31 December 2006, audited bodies submitted approximately 50 European grant claims to my staff for audit certification. Where my staff found concerns with the expenditure claimed they were required to raise observations on their audit certificates for the attention of the Welsh European Funding Office, part of the Assembly Government. 2.32 Overall, my staff found that the regularity of the expenditure claimed on individual European projects was satisfactory, and observations made were often minor in nature. More work is still required, however, by managers of European projects to ensure that they have effective internal control arrangements in place for the preparation of grant claims. For example, all grant claims need to be reconcilable to a spending body's financial ledgers and supported by a clear and comprehensive audit trail. 2.33 The Welsh European Funding Office is developing enhanced guidance for project managers together with other improvements in its management arrangements for projects, and I would expect these to result in further improvements in the financial controls put in place by EU grant recipient organisations. Finance 2.qxp 20/06/2007 16:49 Page 18 This is trial version www.adultpdf.com 19Financial Audit of Central Government and NHS Bodies in Wales 2007 Part 3 - Changes to corporate and constitutional structures mean that sound financial management and governance arrangements are vital if the Welsh Assembly Government is to deliver its objectives 3.1 In October 2004 the Assembly Government published 'Making the Connections - Delivering Better Services in Wales' a document which outlined in detail the government's vision for the future of public services in Wales. Its principal aims were to assist public services to become, more citizen-focused; more responsive to the needs of communities; more focused on equality and social justice; and more efficient and effective. 3.2 The document identified four main principles needed to achieve the Making the Connections agenda, outlined in Figure 8. Figure 8: Making the Connections identifies four main principles needed to improve Welsh Public Services 3.3 More recently, the review by Sir Jeremy Beecham - Beyond Boundaries - Review of Local Service Delivery - and the Assembly Government's response - Delivering Beyond Boundaries - have also confirmed the substance and overall relevance of this policy. 3.4 Audited bodies will need to ensure that their financial management and governance controls are in line with the requirements of the 'Making the Connections' agenda. Achievement of Value for Money is an important principle here, and I would encourage audited bodies to consider new initiatives to ensure that they are making the best possible use of the resources available to them. 3.5 As part of my work for 2007, I am conducting a review across the entire Welsh public sector to establish the extent to which public services are meeting the challenges of 'Making the Connections'. The review will examine issues around joint working such as objective and target setting, efficiency gains, performance measurement and validation, customer focus and leadership. Citizens at the Centre: services need to be more responsive to users, with people and communities involved in designing the way services are delivered; Equality and Social Justice: every person should have the opportunity to contribute and connect with the hardest to reach; Working together as the Welsh Public Service: there needs to be more co-ordination between service providers to deliver sustainable, quality and responsive services; and Value for Money: the need to make the most of available resources. Key Considerations in achieving Value for Money Is there a need to re-design or modernise the services provided? Can the organisation maintain its financial health whilst still attaining the required efficiency savings? Can improvements to procurement and estate management provide better value? Can information technology be used further to improve service efficiency? Could improved performance management and monitoring provide a mechanism to drive forward improvement? Finance 2.qxp 20/06/2007 16:49 Page 19 This is trial version www.adultpdf.com 20 Financial Audit of Central Government and NHS Bodies in Wales 2007 E-Purchases and E-Grant systems are providing the Welsh Assembly Government with improved financial information, but it can do more to realise the full benefits 3.6 Later this year, I intend to publish a report examining in detail the processes and controls implemented by the Assembly Government in managing the merger of four of its sponsored bodies into its structure, and the extent to which these bodies have now been successfully merged into the enlarged Assembly. 3.7 Following the merger of the four sponsored bodies into the Assembly Government it recognised the need for a redesigned corporate governance structure to effectively manage its newly enlarged organisation. 3.8 The Permanent Secretary, as Principal Accounting Officer, has delegated some of his functions and responsibilities to six new Sub-Accounting Officers. These senior officials are responsible for ensuring the regularity and propriety of the finances within their departments. The Director of Health and Social Services retains her existing role as the Accounting Officer for NHS Wales. 3.9 Sub-Accounting Officers each have a departmental corporate governance committee and a discrete business unit to assist them in the exercise of their accounting officer responsibilities. As with the Permanent Secretary's own Corporate Governance Committee, and in line with best practice, the Assembly Government's Internal Audit Service and the Wales Audit Office attend each of these committees. There is also an independent chair of each committee. This is either a senior Assembly Government official employed within a different department, or a member independent of the Assembly Government itself. 3.10 The Assembly Government recognised that robust financial management arrangements were needed to realise the benefits of the new structure, and to enable Sub-Accounting Officers to effectively manage the finances under their control. These include, for example, arrangements for the provision of accurate and timely management information. In developing these arrangements, the Assembly Government has taken steps to enhance its financial systems. These have included making an increased use of financial information prepared on a resource (or accruals) basis. The table below describes some of the benefits of the use of resource accounting. From 1 April 2006, four AGSPBs: the Welsh Development Agency, the Wales Tourist Board, the National Council for Education and Training for Wales, and the Qualifications, Curriculum and Assessment Authority for Wales, were merged into the Assembly Government. As at 3 May 2007, each Sub-Accounting Officer has responsibility for one of the following areas: Social Justice and Regeneration; Education, Lifelong Learning and Skills; Enterprise, Innovation and Networks; Environment, Planning and Countryside; Local Government and Culture; and Public Services and Performance. Finance 2.qxp 20/06/2007 16:49 Page 20 This is trial version www.adultpdf.com . follow Source: Wales Audit Office analysis Finance 2.qxp 20/06 /2007 16:48 Page 14 This is trial version www.adultpdf.com 1 5Financial Audit of Central Government and NHS Bodies in Wales 2007 Bodies are. use of resources 1 Financial Audit of Central Government and NHS Bodies in Wales: 2006 - June 2006 Finance 2.qxp 20/06 /2007 16:48 Page 12 This is trial version www.adultpdf.com 1 3Financial Audit. European Commission during 2007/ 2008. Finance 2.qxp 20/06 /2007 16:49 Page 17 This is trial version www.adultpdf.com 18 Financial Audit of Central Government and NHS Bodies in Wales 2007 2.27 The majority of the