grant thornton uk - nhs governance review 2012: delivering good governance

N H S G O V E R N A N C E R E V I E W 2 0 1 2

Delivering good governance Preparing for turbulent times

Welcome

The NHS is facing turbulent times. Public demand for its services is increasing, along with raised expectations over the quality of care. At the same time, the service is having to cope with financial pressures and a need to demonstrate long-term sustainability while coping with major systemic changes. In this context, NHS bodies need to have robust governance arrangements to help manage their way through the myriad of complex, and sometimes competing, challenges facing them.

We have produced this report to support NHS bodies in improving their governance arrangements. This year we are reporting a baseline position and over the coming years we will be tracking and reporting on trends, contributing to the good governance debate and encouraging the sharing of best practice from within and outside of the sector.

NHS governance is a wide agenda and much has been written before. Our approach is to come at it through the annual report, as we see this as the primary window through which NHS bodies demonstrate their attitude to governance to the tax-paying public. Our findings are drawn from our review of over 100 trust and foundation trust 2010/11 annual reports (referred to as ‘trusts’ and ‘FTs’ in this report). However, our findings are applicable to other existing and emerging bodies commissioning or providing publicly funded healthcare services.

In many NHS bodies there are well developed governance arrangements that support strong performance. Over the last few years, financial governance has advanced more than clinical governance and this imbalance needs to be addressed, particularly in response to the Francis report. We found that many trusts and FTs are under-representing the totality of their governance arrangements in the annual report.

Our key messages are: that there needs to be an improvement in the compliance, clarity, quality and accessibility of annual reports; and that underlying financial and clinical governance arrangements need to be strengthened in some areas. In the main, FTs are doing better than trusts and it is important that trusts raise the bar in preparation for an all-FT NHS provider landscape.

We are now in the 10th year of our equivalent report in the large corporate (FTSE 350) sector. Over this period, we have positively influenced the development of annual reporting and have seen a steady improvement from non-compliance to, in some cases, standard-setting public reporting. The banking crisis shows there is still much to do, but at the same time, we have observed real improvements in the underlying governance processes, for example the increasing non-executive influence on boards. Our ambition is to help facilitate a similar trend of improvement in the NHS.

Paul Hughes Director Grant Thornton Governance Institute

NHS GOVERNANCE REVIEW 2012 1

Contents

Executive summary 2

Introduction 4

The annual report 6

- The annual report

- The business review

- Going concern

- Integrated reporting

Boards and committees 13

- Boards

- Board evaluation

- Gender diversity

- Nomination committee

- The Bribery Act 2010

NEDs and governors 20

- NEDs

- The chair

- Governors

Risk and performance 28

- Principal risks

- Key performance indicators

- Better and prompt payments

Internal controls 34

- Review of effectiveness

- The annual governance statement

Audit and assurance 38

- Audit committees

- Clinical audit

- Internal audit

- External audit

Appendix A: The corporate influence 46

Appendix B: Further developments in narrative reporting 48

About us 49

2 NHS GOVERNANCE REVIEW 2012

Executive summary

Annual reports • Trust and FT financial statements and quality

reports contain large volumes of information designed to meet regulatory standards that can be difficult to interpret for non-specialist readers.

• Annual reports are often compiled to ‘tick the box’ of regulatory requirements, rather than tell a complete story ‘through the eyes of management’.

• FTs are better at explaining the future development of their business and their performance is closer to the quality displayed in annual reports by the FTSE 350.

• The directors’ assessment of going concern will require greater focus as the impact of the 2012/13 operating framework comes into play.

Boards and committees • 65% of trust and 13% of FT annual reports fail to

adequately explain their model of board operation. There is a lack of transparency on the overall board governance arrangements that leaves readers of the annual report uninformed and therefore uncertain as to whether these arrangements really are effective.

• 90% of trusts and 27% of FTs gave no information on board/committee attendance throughout the year. We are therefore left unsure whether a sufficient breadth of committee members were given the opportunity to contribute or challenge board reports.

• Trusts and FTs should improve the effectiveness and transparency of their arrangements for board evaluation. 79% of trusts and 34% of FTs gave no information about how they review their own effectiveness, let alone obtain an independent view of their performance.

• With women holding over a third of posts, they have a strong foothold in NHS boards, showing the way to their corporate cousins and contributing to a more diverse and balanced board than seen in the large corporate sector.

• Only 13% of trusts and 2% of FTs make gifts, hospitality and entertainment disclosures in their annual reports. Trusts and FTs should be demonstrating more publicly their adherence to ethical standards and the requirements of the Bribery Act.


Risk and performance• Trusts and FTs need to improve their principal risk

reporting in the annual report. 23% of trusts and 10% of FTs fail to describe the risk management process, while 45% of trusts and 13% of FTs make no mention of the principal risks.

• The use of key performance indicators (KPIs), to help the reader understand how a trust or FT manages and measures the relative success of its strategy, is missing from 39% of FT and 55% of trust annual reports.

• 57% of trusts and only 15% of FTs confirm that they have signed up to the prompt payments code.

Internal controls• A better description of the internal control

system and the annual review of its effectiveness is required in FT and, particularly, trust annual reports. Currently 77% of FTs and only 58% of trusts do this.

Audit and assurance• Annual reports for 95% of FTs and 99% of FTSE 350

companies include a good discription of the work of the audit committe. Only 37% of trusts, however, provide this level of coverage.

• The latest revision of the NHS Audit Committee Handbook encourages audit committees to get involved in driving the more effective use of clinical audit in improving governance.

• An effective internal audit function serves as the eyes and ears of the audit committee, providing an objective assurance programme that gives the audit committee comfort that good governance is in place. However, with only 43% of trusts and 71% of FTs referring to an effectiveness review, there is room for improvement.

• A substantial number of trusts (89%) and FTs (74%) fail to confirm that the external auditor’s objectivity and independence is maintained when, on average, the value of non-audit fees is equivalent to 13% of a trust’s, and 51% of a FT’s, audit fee.

NEDs and governors• NEDs do not comprise the majority of board

members for 41% of FT boards and 33% of trust boards.

• Trusts and FTs need to describe better who sits on key committees and how they review the effectiveness of individual board members.

• Half of FTs provide only ‘boilerplate’ descriptions of the role of governors, reflecting a residual lack of clarity from FTs around how to maximise the effectiveness of their governor input.


The annual report is the primary window through which any organisation showcases its attitude to governance. If a trust or FT fails to take this opportunity in such a public document, it is reasonable for stakeholders to conclude that this reflects the underlying culture of governance within the organisation.

Outcomes of effective governance

• Ensuring:- the strategic plan is achieved- that financial health is achieved- accountability and regulatory compliance- quality in service provision.

• Effectively assessing risk/supporting innovation.

• Enhancing organisation reputation/competitiveness.

• Providing confidence in organisational governance.

• Constructively supporting/challenging the boards.

The need for good governanceThe pace of structural change and underlying financial pressures facing the NHS, along with increased public scrutiny and the ‘patient choice’ agenda, mean that strong governance arrangements are essential. As trusts move towards an all FT market, whose governance requirements closely mirror the private sector, the importance of corporate governance will grow.

In the private sector, since Sir Adrian Cadbury first put governance in the spotlight in the early 1990s, an evolving stream of guidance has kept governance centre stage (see Appendix A). The regulatory response to the banking crisis incorporated higher regulatory controls set by the Financial Reporting Council. Similarly, the widely reported failings in quality and patient safety at some FTs and trusts have raised the importance of governance in the NHS.

Against this backdrop, it is important that trusts and FTs have:• the cultural behaviour to deliver strong governance

• processes in place to support governance – the assurance framework, board structures, NEDs and governors

• arrangements for actively engaging with a wide group of stakeholders to engender their trust and respect.

Governance information flowsTrusts and FTs already have frequent communications with regulators and public groups of stakeholders. In the main, communications with regulators provide comprehensive information on finance, governance and clinical quality as required, but this information does not readily flow to public stakeholders. Meanwhile, we found that trusts and FTs are highly effective at communicating with smaller groups of public stakeholders, actively engaging with patients, the public, members/governors, staff and commissioners on specific chosen issues.

Albeit frequent, the nature of these information flows means that a comprehensive view of governance and accountability is not seen until the trust produces its annual report.

The results of our review indicate that many trusts and FTs do not meet the minimum reporting standards expected in an annual report.

Some reports appear to have been compiled to ‘tick the box’ of regulatory requirements, with segments written by different departments, rather than telling a single and cohesive story.

Introduction


Methodology

This report is based on a review of the publicly available 2010/11 annual reports of over 100 trusts and FTs. Our sample is geographically dispersed and includes acute, specialist and mental health trusts.

Where we have carried out analysis of the quality of the disclosures, these have been graded as follows: ‘none’ = data is missing; ‘some’ = a minimum requirement has been met; ‘more’ = above adequate disclosure.

Where the requirements are comparable, trust and FT performance has been compared to that of the UK’s FTSE 350, as published in Grant Thornton’s ‘Corporate Governance Review: A changing climate’ report (November 2011).

We have taken account of the requirements for NHS annual reports, as set out in either the Department of Health’s Manual for Accounts (for trusts) or Monitor’s Annual Reporting Manual (for FTs). However, these requirements form only a part of wider governance requirements and we have used both NHS specific and acknowledged best practice guidance from other sectors to formulate our views.

Too much, therefore, of what would be described as ‘good governance’ – for example, detail around the effectiveness of the internal control system and KPIs – is not in the public domain, or is not being brought together in a convenient location, to give a full and balanced view of a trust’s or FT’s management and performance over the year. As the need for governance increases, it is essential that the annual report becomes a clear window into the governance of the trust or FT.

The annual reportTrusts and FTs communicate directly and frequently with stakeholders, but the commercial sector’s approach to the annual report provides a useful benchmark for the NHS, particularly with the transition to an all FT market. Our findings show that FTSE 350 companies are better at communicating their governance and accountability arrangements to a wide group of stakeholders in the single document of the annual report.

If trusts and FTs were to improve the quality of the annual report, it would demonstrate adherence to the spirit of good governance to a much wider set of stakeholders than at present. This would both improve accountability to the wider tax-paying public, as well as demonstrate robustness of management arrangements to regulators, banks and other institutions.

Purpose of this reviewLooking through the window of the annual report, our review is intended to identify both good practice and areas for improvement in NHS governance.

However, while the drivers of good governance come from internal arrangements, not the annual report itself, we strongly contend that, as governance rises on the agenda, creating a comprehensive, uncluttered and readable document will enhance transparency and accountability.

Next year, we will be able to track performance trends and comment on the NHS’s direction of travel. Our hope is that over time, trusts and FTs can better demonstrate their existing commitment to public accountability.


Writing the annual report should not be seen as a segmented exercise, yet too often this is the case and many simply tack the financial statements and quality report on to the annual report, rather than integrate them into the description of the trust’s activities during the year.

The annual report should draw out the key messages from the quality report and financial statements, properly cross referenced, in the main body of the report.

Quality not quantity is the key to a good annual report. It should be free from ‘boilerplate’ text and over-use of regulatory disclosures that are of interest only to a small set of stakeholders.

Trust and FT financial statements and quality reports contain large volumes of information designed to meet regulatory standards that can be difficult to interpret for non-specialist readers.

Trusts are not required to include the full quality report or full financial statements, and many do not; an average annual report consists of 59 pages compared to 151 for a FT.

The annual report

FTs Trusts

Average number of pages 151 59

Longest 240 123

Shortest 60 21

Annual reports that include the full accounts 92% 14%

Annual reports that include summary accounts 8% 86%

Annual reports that include the Quality Report 88% 24%

Chapter 7 of Monitor’s NHS Foundation Trust Annual Reporting Manual, requires trusts to include the full financial statements and quality report in their annual report.

Trusts

NHS bodies are required to publish, as a single document, an annual report and accounts. The minimum requirements of this document are to include: • the annual report

• a statement of the accounting officer’s responsibilities

• a Statement on Internal Control

• the primary financial statements and notes

• the audit opinion.

FTs

The annual report of FTs must, as a minimum, include:• a directors’ report including a

management commentary

• a remuneration report

• the disclosures set out in the NHS Foundation Trust Code of Governance

• a quality report

• results of a staff survey

• regulatory ratings

• other disclosures in the public interest

• a statement of the accounting officer’s responsibilities

• a Statement on Internal Control/an Annual Governance Statement.

Both trusts and FTs are also required to follow specific provisions of the 2006 Companies Act.

Trust and FT financial statements and quality reports contain large volumes of information designed to meet regulatory standards that can be difficult to interpret for non-specialist readers.

The annual report


What makes a good annual report?

A good annual report is cohesive and through the eyes of management. It should avoid jargon, use plain English and avoid ‘boilerplate’ text. It should tell a consistent and balanced story of performance that highlights the items that really matter, cutting out clutter and unnecessary information.

A good annual report reflects on the significant changes since the previous period, then focuses on the current year, before turning the reader’s attention to the next year. It should be clear on the risks that keep the board awake at night, using consistent, clear and understandable risk reporting and key performance indicators.

The challenge for trusts and FTs is to produce an annual report that meets regulatory requirements, but provides a concise description of the business model, strategic direction and risks. Trusts and FTs need to produce an annual report that clearly shows they understand the key drivers of their business and the information that is of most use to stakeholders.

Are trust annual reports better because they are shorter? This depends on the definition of ‘better’. If this is measured by completeness of mandated disclosures or best practice in governance, the answer, based on the findings of our research, is ‘no’.

To maximise its value to users, the reporting framework needs to identify ways to avoid ‘boilerplate’ disclosures and to encourage trusts and FTs to make more meaningful disclosures about their businesses, while removing unnecessary and immaterial disclosures from annual reports.

In order to reduce ‘clutter’ in annual reports it is imperative to change the behaviour of all those involved in the process. This includes auditors and regulators. Trusts and FTs should conduct their work in the spirit of clearer communication.

Throughout this report, comparison is made to the large corporate sector, where annual reporting has been subject to greater external scrutiny in past years, accounting for generally better scoring than trusts and FTs. However, it should be noted that:• the average length of a large corporate’s

annual report is 135 pages, which is still too long

• large corporates took, on average, five to six years from where the NHS is now to reach their current levels of compliance.

There are positive attributes in trust and FT reports. However, we look for trusts and FTs to raise the bar on annual reports, starting earlier and investing sufficient time to not only meet all regulatory requirements but also to produce a good quality, user-friendly document. It should be possible to do this without increasing the size of the annual report.

This is the challenge that we are laying down for trusts and FTs for 2011/12 and beyond and we will review progress in our subsequent annual reviews.


TO WHAT DEGREE DOES THE BOARD DEmONSTRATE THE STEPS TAkEN TO uNDERSTAND THE VIEWS OF mAjOR STAkEHOLDERS (PATIENTS, STAFF, GOVERNORS, COmmISSIONERS, REGuLATORS) IN THE NHS?

The board should state in the annual report the steps they have taken to ensure that members of the board, and in particular the non-executive directors develop an understanding of the views of major shareholders about their company.

Combined Code, D.1.2

A statement should also be included which sets out the steps that the members of the board, in particular the non-executive directors, have taken to understand the views of governors and members.

NHS Foundation Trust Annual Reporting manual, Paragraph 7.56

The OFR [Operating and Financial Review] shall include information about significant relationships with stakeholders which are likely, directly or indirectly, to influence the performance of the NHS body. For example, relationships with patients, suppliers, employees and contractors.

Department of Health manual for Accounts 2010/11 Chapter 2, Paragraph 2.21

NONE

FTSE 350

FTs

Trusts

SOmE

FTSE 350

FTs

Trusts

mORE

FTSE 350

FTs

Trusts

7% 71%22%

7% 53%41%

0% 38%62%

THE EFFECTIVENESS OF GOVERNANCE COmmuNICATIONS

TRuSTS AND FTs

FTSE 350

Frequency of communication

Number of recipients

Direct communication

The annual general meeting

The annual report

H

H

L

L


Ten key principles and questions for trust and FT boards when reviewing the 2011/12 annual report

Principles Questions

1 The annual report and accounts need to comply with relevant law and accounting standards and give complete and accurate accounting information.

• Dotheannualreportandaccountscomplywithrelevantlawand accounting standards?

• Istheinformationcompleteandaccurate?• Aretheaccountingpoliciesclear,relevantandcomplete?

2 The front-end narrative should be consistent with the accounts. That narrative should explain significant points in the accounts and there should be no surprises hidden in the accounts.

• Dotheannualreportandaccountspresentaconsistentmessage?

• Isthedescriptionofthetrust’sbusinessandhowitismanaged in the narrative reporting consistent with segment disclosures in the financial statements?

3 The business review should give a clear and balanced account including explaining the trust’s business model and the salient features of the trust’s financial position and performance, good and bad.

• Doesthebusinessreviewreflectabalanceofboththegood and not so good?

4 The business review should describe the principal risks and uncertainties faced by the trust. The risks and uncertainties described should genuinely be the principal ones that concern the board. The reader should be able to understand why they are important and the links to accounting judgements and estimates should be clear.

• Doesthebusinessreviewexplaintheprinciplerisksandhow they are managed?

• Arethenarrativedisclosuresconsistentwiththeaccountingrisks and uncertainties, where appropriate?

5 If the trust has referred to key performance indicators in the business review, these need to be reconciled clearly to main heading figures in the accounts and any adjustments need to be explained clearly, together with the reasons why they have been made.

• Dokeyperformanceindicatorsreconciletothefinancialstatements?

6 Important messages need to be highlighted and supported with relevant context and not be obscured by immaterial detail. Effective cross-referencing needs to be provided and repetition avoided.

• Isthereportingofmaterialtransactionsintheperiodclearand transparent and have appropriate accounting policies been developed?

• Haveaccountingpoliciesforirrelevantandimmaterialitemsbeen removed?

• Havewecuttheclutter?

7 The language used needs to be precise and explain complex issues clearly. Jargon and ‘boilerplate’ should be avoided.

• Isthelanguageclear?• Aredisclosuresspecifictothebusiness’operationsand

risks?

8 Items in the annual report and accounts should be reported at an appropriate level of aggregation to convey the essential messages and avoid unnecessary detail. Tables of reconciliations need to be supported by, and consistent with, the accompanying narrative.

• Havewesummarisedappropriately?

9 Significant changes from the prior period in policy or presentation need to be explained properly.

• Haveweexplainedthechangesand,whereappropriate,are the revised accounting policies clear?

10 The spirit as well as the letter of accounting standards needs to be followed and appropriate disclosures provided to give a true and fair view.

• Aretheaccountstrueandfair?


The business review

TO WHAT ExTENT DO ORGANISATIONS DESCRIBE THEIR BuSINESS AND THE ExTERNAL ENVIRONmENT IN WHICH THEy OPERATE?

FTSE 350 FTs Trusts

None 0% 14% 15%

Some 12% 33% 70%

more 88% 53% 15%

The business review sets the tone of the annual report and should be the source of the readers’ main understanding of what the trust or FT does, how it does it and the key factors that could impact the achievement of its operational and strategic goals.

Trusts and FTs set out in their annual report a reasonable description of their business model and the external environment in which they operate. However, they could provide a more complete picture to ‘set the scene’ and

clearly explain the complexities and breadth of services they provide.

FTs are better at explaining the future development of their business in a way that is closer to the quality displayed in annual reports by the FTSE 350.

Trusts and FTs often exclude information on the wider NHS, the organisation and its principal activities, perhaps because these are assumed to be obvious. This, however, creates contextual gaps in explaining

performance for the year and future projections.

The business review should address only those risks and uncertainties that are key to the trust or FT. It should explain why the risks and uncertainties are key, the current circumstances that give rise to the threat and the steps taken to mitigate their impact.

The business review must … include the main trends and factors likely to affect the future development, performance and position of the company’s business.

Companies Act 2006, s417; 5a

TO WHAT ExTENT DO ORGANISATIONS DESCRIBE THE LIkELy FuTuRE DEVELOPmENT OF THEIR BuSINESS?

FTSE 350 FTs Trusts

None 0% 2% 17%

Some 57% 50% 54%

more 43% 48% 29%

FTs are better at explaining the future development of their business in a way that is closer to the quality displayed in annual reports by the FTSE 350.

The annual report

The business review must contain:

(a) a fair review of the company’s business, and

(b) a description of the principal risks and uncertainties facing the company.

Companies Act 2006, S417;3


The NHS foundation trust should include a statement on whether or not the financial statements have been prepared on a going concern basis and the reasons for this decision, with supporting assumptions or qualifications as necessary.

NHS Foundation Trust Annual Reporting manual, Chapter 7, Paragraph 7.21

Going concern

The directors’ assessment of going concern will require greater focus as the impact of the 2012/13 operating framework comes into play.

International Financial Reporting Standards require directors to assess and satisfy themselves that it is appropriate to prepare the financial statements on a going concern basis.

There can be no automatic presumption that a FT is a going concern (see our FT 2011 briefing paper). FTs must undertake a robust review to satisfy the board on the appropriateness of the going concern assertion.

The Department of Health’s Manual for Accounts adapts the requirements

of IAS 1: “for non-trading entities, the anticipated continuation of the provision of a service in the future, as evidenced by inclusion of financial provision for that service in published documents, is normally sufficient evidence of going concern”. Therefore, trusts are, to a greater degree, relieved of the going concern reporting requirements.

The financial pressures facing trusts should still be described in the accounts and annual report. 21% of trusts are

TO WHAT ExTENT DOES THE TRuST DESCRIBE ITS ASSERTION AS A GOING CONCERN? The directors’ assessment of

going concern

Directors should plan their assessment of going concern as early as practicable including deciding on the processes, procedures, information, analyses and board papers that will be needed. These plans should also address the evidence to be obtained, including identifying any potential remedial actions that may need to be addressed, to support their conclusion prior to their approval of financial statements.

The board should request that the going concern assessment is documented in sufficient detail to explain the basis of management’s conclusion with respect to going concern. In addition, the directors should be invited to review and approve the documented assessment at the board meeting at which it is expected to approve the financial statements.

already taking a robust approach to going concern by assessing the position more formally than merely relying on the above presumption. In doing so, these trusts are demonstrating responsiveness to the challenging and uncertain financial outlook and are already adopting the good practice principles that will be required when they achieve FT status.

FTs Trusts

None 12% 79%

Some 76% 18%

more 12% 3%


Integrated reporting

The IIRC’s proposed international integrated reporting framework may well have been written with large corporates in mind, but the guiding principles and required content are equally applicable to the public sector and may well form the basis of future guidance.

Our research shows there is scope to improve the annual report as a whole, specifically the business review, to satisfy the diverse group of NHS stakeholders. There is a clear argument that the structural changes and financial uncertainty facing the NHS require trusts and FTs to retain and improve stakeholder confidence, and integrated reporting could form a key part of the solution.

The benefits of organisations adopting integrated reporting are real and measurable

• Greater clarity about relationships and commitments: a sustainable strategy with multi-stakeholder perspective demonstrates thoughtful, conscientious leadership.

• Better decisions: developing clarity about, and basing decisions upon, the relationships between financial and non-financial information, together driving sustainability into the business strategy and creating value for the organisation and its stakeholders.

• Higher level of engagement with all stakeholders: integrated reporting and engaging stakeholders through internet communications challenges all participants to listen to and consider all perspectives.

• Lower reputational risk: assessing reputation and reality across stakeholder groups helps the organisation identify areas that are at risk.

The International Integrated Reporting Committee (IIRC) has launched a two year pilot programme with the objective of developing a new approach to reporting. It will build on the foundations of financial, management commentary, governance and remuneration, and sustainability reporting in a way that reflects their interdependence.

The annual report

The IIRC defines integrated reporting as a way to bring together “material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates and sustains value”. An integrated report includes:• an organisational overview and

business model

• the operating context, including risks and opportunities

• strategic objectives and strategies to achieve those objectives

• an outline of governance and remuneration arrangements

• performance measures and outcomes

• future outlook.

The content required above promotes consistency and comparability. However, it is the guiding principles that generate the value in an integrated report, including:• strategic focus

• connectivity of information

• future orientation

• responsiveness and stakeholder inclusiveness

• conciseness, reliability and materiality.


Boards and committees

65% of trust and 13% of FT annual reports fail to adequately explain their model of board operation. There is a lack of transparency on the overall board governance arrangements that leaves readers of the annual report uninformed and therefore uncertain whether these arrangements really are effective.

The annual reports reviewed could more effectively describe the role of the trust or FT and the overarching governance structures that help deliver its strategy. Of those that did make a disclosure, there was a focus on the financial and ‘business’ aspects. This means that some of the core principles of clinical governance are left out. Few would dispute that treating patients is the main business driver of a trust and therefore deserves some focus of attention for effective governance arrangements.

FTs compare reasonably well against the FTSE 350, driven by the similar reporting standards adopted by Monitor. The annual reporting requirements for trusts are less aligned to the corporate sector, but there is no reason why certain elements should not be adopted and used as good practice. For example, board and committee structures and attendance records could be used to provide some confidence in a trust’s overall governance arrangements.

All FTs and trusts need to be careful, however, that the annual report does not become a tick-box exercise to satisfy the regulatory requirements. They should ensure the purpose of the annual report remains true to its principles as an outward facing document that explains the performance for the year and that the regulatory requirements fit around those needs.

65%

TO WHAT ExTENT DOES THE ANNuAL REPORT DESCRIBE HOW THE BOARD OPERATES AND HOW ITS DuTIES ARE DISCHARGED EFFECTIVELy?

FTSE 350 FTs Trusts

None 0% 13% 65%

Some 47% 51% 30%

more 53% 36% 5%

The annual report should include the composition of the management board (including advisory and non-executive members) having authority or responsibility for directing or controlling the major activities of the entity during the year.

Department of Health manual for Accounts 2010/11, Paragraph 2.9

The annual report should include the number of meetings of the board of directors and those committees and individual attendance by directors.


The annual report should include a statement of how the board of directors and the board of governors operate, including a high-level statement of which types of decisions are to be taken by each of the boards and which decisions are to be delegated to the executive management by the board of directors.

The NHS Foundation Trust Code of Governance


Boards

IN WHAT PROPORTION OF REPORTS IS THE NumBER OF mEETINGS OF THE BOARD AND COmmITTEES AND OVERALL ATTENDANCE DISCLOSED?

100%

10%Trusts

73%

90% of trusts and 27% of FTs gave no information on board/committee attendance throughout the year. We are therefore left unsure whether a sufficient breadth of committee members were given the opportunity to contribute or challenge board reports.

Among those who do disclose attendance levels, the number of meetings of board sub-committees covering quality, risk and, to a lesser degree, finance and performance is fairly consistent at both trusts and FTs.

In 2011, the Institute of Chartered Secretaries and Administrators (ICSA) produced a research report on board papers and agendas, which commented on a gap between the theory and reality of governance in the NHS. This report was critical of the lack of board time spent on strategy and a focus on matters ‘to note’ rather than ‘for decision’.

Where boards are meeting eleven times a year, for half a day or more, ICSA raised the question as to whether boards are truly focusing on strategic or operational issues. Trusts and FTs need to consider whether delegated authority limits have been set correctly and whether the board needs to meet more often to ensure appropriate decisions are made.

Regardless of the number of meetings, trusts and FTs need to articulate better how existing board structures provide the breadth of consideration needed to support the achievement of strategy.


FTSE 350

FTs


Average number of meetings

Board meetings

Audit committee

Quality committee

(or equivalent)

Risk committee (or equivalent)

Finance & performance committee

(or equivalent)

FTs 11.5 5.4 5.8 6.1 6.1

Trusts 10.4 5.2 4.0 6.5 10.0

FTSE 350 8.7 4.4

FTs and trusts that failed to provide any disclosure on key meetings

Board meetings

Audit committee

Quality committee

(or equivalent)

Risk committee (or equivalent)

Finance & performance committee

(or equivalent)

FTs 0% 5% 65% 68% 57%

Trusts 61% 78% 100% 93% 98%

The effective board

• Clear strategy aligned to capabilities.

• Vigorous implementation of strategy.

• Key performance drivers monitored.

• Effective risk management.

• Sharp focus on views of key stakeholders.

• Diverse in make-up.

• Healthy, constructive tension.

• Regular evaluation of board performance.

“Public board meetings alone are not a guarantee of transparency and boards need to ensure that there is a wide range of ways for the public to access information about the way in which public resources are deployed. These include clear, informative, jargon-free annual reports.”

The Healthy NHS Board, NHS Leadership Council


The lack of detail on collective and individual performance evaluation is surprisingly high. Best practice alone suggests boards should undertake some form of annual evaluation of their effectiveness.

The performance of the collective board and its constituent parts is a clear measure of the overall organisation’s success. Therefore, it is important that trust and FT boards have the right balance and access to skills, to ensure effective decision making.

Of those trusts and FTs that did disclose their arrangements, very few discussed how these evaluations added

Board evaluation

The report should include a summary of how performance evaluation of the board of directors, its committees and its directors has been conducted.


Explanation of methods used to assess whether performance conditions were met and why those methods were chosen

Department of Health manual for Accounts 2010/11, Paragraph 2.5

Trusts and FTs should improve the effectiveness and transparency of their arrangements for board evaluation. 79% of trusts and 34% of FTs gave no information about how they review their own effectiveness, let alone obtain an independent view of their performance.

“The Board as a whole should develop a framework for formally reviewing the effectiveness of its business management and the work of its committees. This will, in part, be through annual reporting mechanisms, but it is often useful for the Board to step back from these mechanisms and take an overview of the added value which it brings to the organisation.”

Governing the NHS: a guide for boards, Department of Health and the Appointments Commission

HOW muCH ExPLANATION IS THERE OF HOW THE BOARD, COmmITTEES AND INDIVIDuAL DIRECTORS ARE ANNuALLy FORmALLy EVALuATED FOR THEIR PERFORmANCE?

FTSE 350 FTs Trusts

None 2% 34% 79%

Some 61% 42% 21%

more 37% 24% 0%

value and even less claimed to have used an independent facilitator to evaluate the board’s effectiveness.

Our research shows that trusts and FTs can improve the transparency of their arrangements for collective and individual performance appraisal.We would therefore suggest that:

• the accountability of the board for success is made clear in the annual report

• the performance evaluation process for individuals is set out clearly and included with, or cross referenced to, the remuneration report

• the role of the remuneration committee is clearly explained

• the annual report clearly explains how the board measures its own effectiveness, using an external facilitator if necessary.

The most enlightened may choose to share the findings and resulting actions. However, even in the FTSE 350, such openness and confidence is now only just starting to appear.



Gender diversity

With women holding over a third of posts, they have a strong foothold in NHS boards, showing the way to their corporate cousins and contributing to a more diverse and balanced board.

The Financial Reporting Council considers that diversity, in all its aspects, serves an important purpose in connection with board effectiveness. Its potential benefits lie in widening the perspectives on business issues brought to bear on decision-making, avoiding too great a similarity of attitude and helping companies understand their customers and workforces.

With women holding only 9.8% of posts with voting rights, FTSE 350 companies have a long way to go

PROPORTION OF FEmALE CHAIRS

34%

FTs

14%

Trusts

PROPORTION OF THE VOTING BOARD THAT ARE FEmALE

35%

FTs

34%

Trusts

“An effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature. Diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors, and breaking down a tendency towards ‘group think’.”

FRC Guidance on Board Effectiveness

to match the diversity shown in the NHS where women hold over 34% of these posts. FTs and trusts also have a much larger number of female chairs.

The scarcity of women on the UK’s largest corporate boards has been the focus of considerable debate and the target for the FTSE is to reach 25% by 2015.

We will collect and report on a broader range of diversity measures in next year’s review.

AVERAGE NumBER OF FEmALE NON-ExECuTIVESAVERAGE NumBER OF FEmALE ExECuTIVES

2.7Trusts

2.5 FTs

1.5 Trusts

1.8 FTs


Nomination committee

IS THERE A DESCRIPTION OF THE WORk OF THE NOmINATION COmmITTEE, INCLuDING THE PROCESS IT HAS uSED IN RELATION TO BOARD APPOINTmENTS?

There is a fairly broad distribution on the quality of disclosures on nomination committees, although a significant proportion of FTs (14%) provide no detail at all.

The National Health Service Act 2006 sets out how appointments to the board of directors are made: • The council of governors appoints or removes the chair

and non-executive directors.

• The non-executive directors appoint or remove the chair.

• A nomination committee consisting of the chair, chief executive and non-executive directors appoints or removes the executive directors.

• The appointment of the chief executive requires the approval of the council of governors.

The nomination committee is responsible for board appointments and ensuring there is an appropriate balance of skills, experience, knowledge and independence.

NONE

3%

SOmE

60%

mORE

37%

FTSE 350


Questions for the board to consider:

• Has the composition of the board been considered and are changes necessary to the existing board membership?

• Is a review of executive remuneration policies and service contracts required?

• Thenamesofthechairandmembersofthenominationscommittee should be disclosed.

• Thenumberofmeetingsandindividualattendancebydirectorsat each should also be disclosed.

• Adescriptionoftheworkofthenominationscommittee,including the process it has used in relation to board appointments.

NHS Foundation Trust Annual Reporting manual, Paragraphs 7.68 – 7.70

Trusts are not required to make this disclosure.

NONE

14%

SOmE

52%

mORE

34%

FTs

There should be a formal, rigorous and transparent procedure for the appointment of directors, which is subject to scrutiny by the nomination committee. In considering appointments to the board, the nomination committee should:• take into account the FT’s recruitment and selection policy

• consider the balance of skills, knowledge and experience already in place

• participate in the recruitment process, including interviews.


2%FTs

13%Trusts

The Bribery Act 2010

DOES THE TRuST DISCLOSE THE VALuE OF GIFTS, HOSPITALITy AND ENTERTAINmENT RECEIVED By ITS STAFF/SENIOR mANAGEmENT?

Corruption risk through involvement in large scale procurement and tendering needs careful management. With the emphasis on localism and out-sourced service provision new relationships are continually being forged between NHS organisations and a range of third and private sector organisations.

In our experience, management and oversight of gifts and hospitality is an area that the NHS could improve upon. The first conviction under the Bribery Act in November 2011, where a public sector employee was jailed for six years after admitting he received a £500 bribe, serves as a reminder for NHS bodies to review their arrangements.

While there is no requirement for trusts and FTs to make a disclosure in the annual report, gifts and hospitality for public officials is a hot topic, particularly in the light of the Bribery Act. In this context, it was noticeable that no FT or and trust set out in its annual report their policy for gifts and hospitality and only a very small number declared the value of gifts, hospitality and entertainment received by senior staff and clinicians. FTs and trusts could better demonstrate through the annual report their adherence to the strong ethical standards expected of public sector employees.

Only 13% of trusts and 2% of FTs make gifts, hospitality and entertainment disclosures in their annual reports. Trusts and FTs should demonstrate more publicly their adherence to ethical standards and the requirements of the Bribery Act.

Considerations

• It takes longer than is anticipated to respond to the Bribery Act and organisations should therefore start to respond now.

• If the trust has never performed a corruption risk assessment it may require external help to understand the unique risks involved.

• Policies and procedures should be introduced, revised or aligned to mitigate the risks identified.

• Training of staff most exposed to corruption risk is essential.

• Finally, keep a record of all you do in responding to the Act.

Questions for the board

• Has the board prepared a strategy for responding to the Bribery Act?

• Is there one individual within the trust responsible for implementing the requirements of the Act, investigating reports of possible corruption?

• Have we performed a Corruption Risk Assessment (CRA)?

• Are policies and procedures for our anti-bribery strategy aligned to the CRA?

• Do our policies and procedures fully address facilitation payments, gifts, entertainment, corporate hospitality and charitable donations on a global basis?

• Do we clearly and regularly communicate the trust’s strategy and policies on anti-bribery and corruption to all staff, including clinicians and contractors?

• Is there an anti-corruption training programme for the board, all managers and staff?

• Do we have an effective compliance monitoring programme, which provides the requisite assurance?


The National Health Service and Community Care Act of 1990 introduced the requirement for every trust to have non-executive directors.

Since the Higgs Report in 2003 it has been a requirement, and in practice since 2006, that the number of Non-Executive Directors (NEDs) in FTSE 350 companies has generally exceeded the number of Executive Directors (EDs). Currently, the average FTSE 350 board has 5.3 NEDs and three EDs; a clear non-executive majority.

The absence of such a NED bias potentially weakens the independent input and challenge that they bring.

In addition, trusts and FTs routinely fail to explain the respective roles of voting and non-voting directors. On average there are between one and two further non-voting EDs on the board who can still influence debate.

The balance of power in many trusts and FTs does not favour NEDs. Trusts and FTs should examine the make-up of their boards to ensure an appropriate balance and that the impact and implications are properly reflected in their governance arrangements and the annual report.

Although the requirement differs slightly for trusts and FTs, with at least half the board needing to be comprised of NEDs, 41% of FTs and 33% of trusts go no further than half. In some trusts and FTs, NEDs are in the minority.

NEDs and governors

Board composition

Average numbers on the board

Average NEDs Average voting executive directors

Average non-voting executive directors

Chair

FTs 13.0 5.5 5.3 1.2 1.0

Trusts 13.2 5.1 5.3 1.8 1.0

AT LEAST HALF OF THE BOARD (ExCLuDING THE CHAIR) IS COmPRISED OF INDEPENDENT NON-ExECuTIVE DIRECTORS

80% FTSE 350

67% Trusts

59% FTs

NEDs do not comprise the majority of board members for 41% of FT boards and 33% of trust boards.

Except for smaller companies at least half of the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent.

Combined Code, A.3.2

At least half the board of directors, excluding the chairman, should comprise non-executive directors determined by the board to be independent.


In most NHS organisations, governance is the responsibility of a unitary board, with at least half the board, excluding the chair, made up of independent NEDs.

The Healthy NHS Board

NEDs


“A non-executive director is expected to bring his or her experience and an external viewpoint in order to assist and, where necessary, challenge the board of a company, making sure that board decisions are balanced and not dominated by a single, or small group of, executive directors. The non-executive director is expected to be independent of mind and rigorous in his or her analysis.”

The Institute of Chartered Accountants of Scotland

The board should identify in the annual report each non-executive director it considers to be independent.

Combined Code, A.3.1 and NHS Foundation Trust Annual Reporting manual, Paragraph 7.57

HOW WELL DO TRuSTS AND FTs DESCRIBE THE CONSIDERATION OF INDEPENDENCE OF ITS NEDs?

While the importance of NED independence is understood as a concept, too many trusts (55%) and FTs (30%) fail to state that NEDs (remunerated by the trust) are independent. This, combined with, in many cases, the NEDs not being in the majority may result in them not being effective in their independent challenge role.

It is essential, therefore, that trusts and FTs clearly explain the independence of NEDs, the balance and composition of the board, and how they can continue to operate effectively.

NONE

30%

SOmE

43%

mORE

27%

FTs

NONE

55%SOmE

33%

mORE

12%

Trusts


NEDs and governors

NEDs need to be well informed about the trust or FT and the external environment in which it operates, with a strong command of relevant issues. A NED should insist on a comprehensive, formal and tailored induction. An effective induction need not be restricted to the boardroom and should include visiting wards and meeting clinicians and managers. Once in a post, effective NEDs should continually seek to develop and refresh their knowledge and skills to ensure that their contribution to the board remains informed and relevant.

An element of the role of the NED is to understand the views of major stakeholders both directly and through the chair and the senior independent director.

The effective NED:

• upholds the highest ethical standards of integrity and probity

• supports executives in their leadership of the business while monitoring their conduct

• questions intelligently, debates constructively, challenges rigorously and decides dispassionately

• listens sensitively to the views of others, inside and outside the board

• gains the trust and respect of other board members

• promotes the highest standards of corporate governance.

“Non-executive directors are appointed by the NHS Appointments Commission on behalf of the local community. They therefore have a responsibility to ensure the Board acts in the best interests of the public and is fully accountable to the public for the services provided by the organisation and the public funds it uses.”

Governing the NHS: a guide for NHS trusts – Department of Health and the Appointments Commission

The role of the NED

Strategy• Constructively challenging and helping develop

proposals on strategy.

Performance• Scrutinising management performance in meeting

agreed goals and objectives.

• Monitoring the reporting of performance.

Risk• Satisfying themselves on the integrity of financial

information and that financial controls and systems of risk management are robust and defensible.

People• Responsibility for determining appropriate levels of

remuneration of executive directors.

• Appointing, and where necessary removing, executive directors and succession planning.


36%FTs

Greater accountability around terms and conditions is required, with only 36% of FTs and 14% of trusts making such information readily available.

Given the challenges facing the NHS, FTs and trusts need to demonstrate, and stakeholders need to know, that NEDs are playing a strong role in holding the board to account and ensuring that the best use is being made of taxpayers’ money.

The terms and conditions of appointment of non-executive directors should be made available for inspection.

Combined Code, A.4.4 and The NHS Foundation Trust Code of Governance

IS IT DISCLOSED THAT THE TERmS AND CONDITIONS OF APPOINTmENT OF NON-ExECuTIVE DIRECTORS ARE AVAILABLE FOR INSPECTION?

64%FTSE 350

14%Trusts

The council of governors is responsible for setting the remuneration of non-executive directors and the chairman.

NHS Foundation Trust Code of Governance

Stakeholders, whether they are the council of governors, commissioners or taxpayers, should be assured that a FT’s remuneration policy is linked to public accountability and sustainability. Of our sample, 77% of FTs state that the board confirmed the remuneration of their non-executives. (The Secretary of State for Health is responsible for setting the levels payable to chairs and NEDs of trusts.)

The remuneration committee is responsible for setting executive pay. It should protect the public interest when setting remuneration and have due regard to performance metrics that are fair, transparent and linked to the overall performance and strategy of the trust.

There is a clear increase in remuneration for NEDs and chairs on conversion to FT status, reflective of the increased responsibilities for, and expectations of, the postholders. However, NHS NED remuneration is still significantly below that of the FTSE 350 equivalents.

Good practice points

• Explain the value your NEDs bring, don’t just list their experience.

• Clearly describe how NEDs maintain their independence.

• If less than half the board comprise NEDs, acknowledge this as a risk and explain how this will be managed.

• Explain how NEDs hold the board to account, what committees they attend and how often.

• Explain the relationship between NEDs and the council of governors.

• Clearly show how executives’ performance is appraised.

Average annual salary Trust FT

Non-executive director £7,120 £11,803

Chair £22,935 £40,324

IS IT STATED THAT THE BOARD (OF GOVERNORS) SET THE REmuNERATION FOR THE NON-ExECuTIVE DIRECTORS?

94%FTSE 350

77%FTs


Trusts and FTs usually set out in their annual reports details about their chair, chief executive and directors. However, this is often little more than an ‘identity parade’, and 25% of FTs and 34% of trusts failed to clarify the members and chairs of the nomination and remuneration committees.

Trusts and FTs need to describe better who sits on key committees and perform an effectiveness review of their arrangements for the appraisal of individual board members.

Led by the senior independent director, the non-executive directors should meet without the chairman present at least annually to appraise the chairman’s performance.

Combined Code, A.1.3 and the NHS Foundation Trust Code of Governance

An explanation of methods used to assess whether performance conditions were met and why those methods were chosen.


DO THE GOVERNORS (NON-ExECuTIVE DIRECTORS IN A COmPANy) mEET WITHOuT THE CHAIR AT LEAST ANNuALLy TO APPRAISE THE CHAIR’S PERFORmANCE?

OF THOSE FTs THAT DO APPRAISE THE CHAIR’S PERFORmANCE, HOW muCH DETAIL IS PROVIDED ON THE PROCESS?

DOES THE REPORT IDENTIFy THE CHAIR, THE DEPuTy CHAIR (WHERE THERE IS ONE), CHIEF ExECuTIVE, SENIOR INDEPENDENT DIRECTOR, mEmBERS AND CHAIRS OF THE NOmINATION, AuDIT AND REmuNERATION COmmITTEES?

FTSE 350 FTs Trusts

98% 75%

66%

80%FTSE 350

43%FTs

NEDs and governors

NONE

60%

SOmE

30%

mORE

10%

FTs

• Thename(s)oftheperson(s)occupyingthepositionofchair,deputy chair (where there is one) and senior independent director during the year, the date of their appointment and how long the appointment is for.

• Thename(s)oftheperson(s)occupyingthepositionofchiefexecutive and the composition of the board of directors during the year.

• Thenamesofthenon-executivedirectorswhichtheboardconsiders to be independent, with reasons where necessary.


• ThenamesoftheChairmanandChiefExecutive.

• Thecompositionofthemanagementboard(includingadvisoryand non-executive members) having authority or responsibility for directing or controlling the major activities of the entity during the year.


* Not applicable to trusts

* A trust chair is appraised by the SHA chair. See page 25.

The chair


The chair is responsible for board effectiveness and their leadership is a key indicator of good governance. In some trusts and FTs the chair appraises all board directors, which is good practice. However, the role of the chair, and their relationship with the board and non-executives, is often poorly described in annual reports.

This role influences strategy and management and therefore its performance, and how this is measured, is an indicator of a FT or trust’s success. A trust chair is appraised by the SHA’s chair, although 2% of trusts performed their own internal appraisal. We would like to see this extended further, with trusts taking greater accountability over their future and individual performance, particularly in preparation for the abolition of SHAs from 2013.

NON-ExECuTIVE DIRECTORS (OR GOVERNORS) mEET WITHOuT THE CHIEF ExECuTIVE AT LEAST ANNuALLy TO APPRAISE THE CHIEF ExECuTIVE’S PERFORmANCE

The chair’s statement should:

• state the governance objectives and focus of the board for the coming year

• emphasise the importance of governance to the health sector and state their personal responsibility for the smooth running of the board

• discuss board evaluation outcomes and resultant actions, such as long-term succession planning or increased training

• set out what they see as the key features of governance.

The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted.

Combined Code, A.6.1

OF THOSE THAT DO APPRAISE THE CHIEF ExECuTIVE’S PERFORmANCE, HOW muCH DETAIL IS PROVIDED IN THE ANNuAL REPORT ON THE PROCESS?

FTs Trusts

None 69% 85%

Some 21% 11%

more 10% 4%

Usually, the chair appraises the chief executive’s performance. However, given the proximity of their working relationship, the involvement of NEDs would bring a wider perspective to the review, avoiding a perception of an internally focused and narrowly based perspective.

22%

FTs

2%

Trusts


Monitor is placing increasing importance on the role, and its expectation, of governors to hold FTs to account. It therefore becomes increasingly important for FTs to demonstrate how governors have fulfilled their role during the year. Unfortunately, many (46%) use ‘boilerplate’ descriptions of the role of governors.

Broadly, the governor role involves representing the local areas served by the FT, appointment of the chair and holding the board to account through the chair.

Monitor’s ‘Survey of NHS Foundation Trust Governors 2010/11’ shows a significant expectations gap between what governors see as their role compared to the views of chairs and chief executives.

The actual role of the council of governors is still not clearly defined or understood in some FTs. There are pockets of good practice, but, based on our own experience and that presented in Monitor’s 2010/11 survey of governors, how this group holds a board to account is sometimes unclear. We discussed these difficulties in our handbook ‘Finding your bearings: A governor’s guide to Monitor’s audit code for NHS foundation trusts’ where we provided question prompts to help governors better understand their accountability role.

The annual report should include a statement of how the board of directors and the board of governors operate, including a high-level statement of which types of decision are to be taken by each of the boards.


The report should include a statement about the number of meetings of the board of governors and individual attendance by governors and directors.


DOES THE FT DESCRIBE THE ROLE OF GOVERNORS?

Average number of governors Average

FTs 31

meetings of the council of governors

Average Highest Lowest

FTs 5.0 9.0 3.0

SOmE

46%mORE

52%

NONE

2%

Half of FTs provide only ‘boilerplate’ descriptions of the role of governors, reflecting a residual lack of clarity from FTs around how to maximise the effectiveness of their governor input.

FTs

NEDs and governors

Governors


An average FT has 31 governors attending 76% of the five council of governor meetings each year. This is a large number of people and managing the council of governors, including elections and meetings, is costly, in terms of both time and money. To engage with governors, FTs sometimes invite them to attend board committees. However, these can turn into debate on the topic matter rather than helping the governors to discharge their responsibilities for assessing the performance of the board.

We therefore suggest FTs, and aspiring FTs, ask themselves:• is the cost of servicing our existing council

of governors, including any subcommittees, commensurate with the contribution they currently make?

• are we clear about the role of governors and does this match governors’ perception of their role?

• are we doing enough to attract and retain those governors that would add real value to the trust?

• what can we do with the existing council to bring quality and expertise to the fore?

If managed well, the council of governors can be a valuable tool, to enhance governance and accountability to the local population.

FTs should invest more time in ensuring that they are maximising the effectiveness of their governor input.


Risk and performance

Principal risks

THE ANNuAL REPORT INCLuDES A STATEmENT THAT THERE IS AN ON-GOING PROCESS FOR IDENTIFyING, EVALuATING AND mANAGING THE SIGNIFICANT RISkS FACED By THE ORGANISATION

The board should, as a minimum, disclose that there is an on-going process for identifying, evaluating and managing the significant risks faced by the company, [and] that it has been in place for the year under review.

Turnbull Report, 1999, paragraph 34

In the fallout of the initial financial crisis in the banking sector, private companies were heavily criticised for the poor information on risk, and sensitivity to risk, included in their annual reports. We are in the midst of substantial change in the NHS and it is essential that trusts and FTs take on board the lessons learnt from the corporate sector and ensure that sufficient disclosure is made on the process they have used to identify, evaluate and manage significant risks.

While the best trusts and FTs provide a joined-up picture, linking strategy to risk and response, our findings indicate that trusts and FTs need to better describe how they are managing risks with more detail on those that are more significant.

Trusts need to agree their risk appetite, explain their exposure to risk and how this may change as a result of changes to strategy and the operating environment.

99% FTSE 350

77% Trusts

90% FTs

Trusts and FTs need to improve their principal risk reporting in the annual report. 23% of trusts and 10% of FTs fail to describe the risk management process, while 45% of trusts and 13% of FTs make no mention of the principal risks.


TO WHAT ExTENT DO TRuSTS AND FTs DESCRIBE THEIR PRINCIPAL BuSINESS RISkS AND uNCERTAINTIES?

FTSE 350 FTs Trusts

None 0% 13% 45%

Some 26% 52% 45%

more 71% 35% 10%

The business review must contain a description of the principal risks and uncertainties facing the company.

Companies Act 2006, s417 (3b)

The strength of risk management, within the assurance framework, is a key component of an effective board. For the board to be assured about the management of current risks, it needs to be supported by a strong risk management culture that is embedded throughout the organisation. The board’s agenda should be driven by risk management and should strike a healthy balance between horizon scanning and managing current risks.

It is important for boards to spend time in defining their risk appetite and applying this to their assessment of risks and opportunities.

Trusts and FTs will need to monitor broader strategic issues that could give rise to principal risks, such as:• demographic changes to the population that will impact on

how and where care is delivered

• increasing expectations and subsequent complexities of joint working across the NHS, local government and private sectors, how these will be governed and how the associated clinical quality standards will be met

• a toughening financial climate for NHS providers.

Six considerations to improve your principal risk reporting

1 Do the disclosures state clearly which are the principal risks and uncertainties facing the trust/FT?

2 Are those principal risks and uncertainties the main risks and uncertainties currently facing the trust/FT? For example, have they been the subject of recent discussions at board or audit committee meetings? Are there any risks, which have been the subject of such discussions, that should be considered as principal?

3 Is the description of each principal risk and uncertainty sufficient for stakeholders to understand the nature of that risk or uncertainty, and how it might affect the trust/FT?

4 Are the principal risks and uncertainties described in a manner consistent with the way in which they are discussed within the trust/FT?

5 Are they consistent with the rest of the report and accounts? Are there risks and uncertainties on the list which are not referred to elsewhere – or are there significant risks and uncertainties discussed elsewhere which do not appear on the list?

6 Is there a description in the directors’ report (or elsewhere in the report and accounts and explicitly cross-referenced from the directors’ report) of how the trust/FT manages each of the principal risks and uncertainties?

Adapted from the Financial Reporting Review Panel, February 2011


The average number of strategic risks disclosed is 5.8 (FTs) or 6.9 (trusts), half the number presented by the FTSE 350, and around 40% of the number of risks presented by large corporate companies in the healthcare sector.

Are trusts understating their risks?We compared the risks presented in the annual report to the strategic (or corporate) risk registers for a sample of trusts. We found a number of differences between the annual report and the views presented to the board. For example, some of the key board level risks not included in annual reports were:• failure to engage clinicians in the transformational change

needed to achieve financial balance

• failure to manage the performance of clinical staff

• loss of sensitive data and resultant financial and reputational damage

• excessive work stress to staff resulting in deterioration in clinical care.

This means that some annual reports fail to describe the key risks being managed by the board. Trusts and FTs should consider the completeness and quality of their risk disclosures, to ensure they provide a clear picture to stakeholders of the principal risks that the trust or FT is dealing with.

HOW WELL IS mONITOR’S RISk RATING ADEQuATELy ExPLAINED?

NHS foundation trusts should include within their annual report a section detailing their risk ratings from Monitor, together with a comparison of the expectation of the annual risk rating as detailed in their annual plan.


17% NONE

35%MORE

48%SOME


monitor’s risk ratings (FTs only)Although some trusts referred to Monitor’s risk ratings, only FTs are included in this section.

FTs need to clearly explain the risk ratings, their role in regulation, the impact of failure and, where possible, their assessment of how they expect to perform over the forthcoming years. Given this is a fundamental part of Monitor’s regulatory regime, the number of FTs either missing this detail out, or providing the bare minimum of ‘boilerplate’ disclosures is too high.

Average risks reported

Financial Operational macro-economic / political risks

Clinical risks Other Total number of risks reported

FTs 2.4 1.8 0.3 0.6 0.7 5.8

Trusts 0.9 3.2 0.2 1.1 1.6 6.9

FTSE 350 2.9 2.3 1.6 n/a 4.5 11.3

FTSE 350 healthcare 2.6 3.4 1.9 n/a 6.7 14.6


PERCENTAGE OF FTs AT 30 SEPTEmBER 2011 WITH EACH GOVERNANCE RISk RATING

PERCENTAGE OF FTs AT 30 SEPTEmBER 2011 WITH EACH FINANCIAL RISk RATING

FRR 2

6%

FRR 3

49%

FRR 4

33%

FRR 5

8%FRR 1

4%

FTs

RED

14%

RED/AmBER

23%

GREEN

40%

AmBER/GREEN

23%

FTs

When the financial and governance risk ratings from Monitor’s quarterly report for the period to 30 September 2011 are overlaid with the findings from our survey, we would expect ‘more’ disclosure from those trusts with a low rating. However, FTs with financial risk ratings of 1 and 2, or with governance risk ratings of red or red/amber, provided no more disclosure than the better performing FTs. We expect improved disclosures in 2011/12 as the financial pressures facing the sector have an increasing impact on the financial and governance risk ratings of FTs.



TO WHAT ExTENT DO TRuSTS AND FTs DESCRIBE SPECIFIC kEy PERFORmANCE INDICATORS (kPIs) WHICH mEASuRE THEIR PERFORmANCE?

3%

FTSE 350

39%

FTs

55%

Trusts

Some

None

59%

FTSE 350

41%

FTs

39%

Trusts

38% 20% 6%

more

FTSE 350 FTs Trusts

Average number of kPIs Financial kPIs Non-financial kPIs

FTs 2.6 14.3

Trusts 2.0 14.3

FTSE 350 5.3 3.0

FTSE 350 healthcare 4.8 0.9

• Ananalysisusingfinancialkeyperformanceindicators.

• Whereappropriate,ananalysisusingotherkeyperformanceindicators,includinginformation relating to environmental matters and employee matters.


This may include the Key Performance Indicators (KPI), both financial and non-financial, used by the directors to assess progress against their stated objectives. The KPIs disclosed shall be those that the directors judge are effective in measuring the delivery of their strategies and managing their business.

Department of Health manual for Accounts 2010/11, Paragraph 2.18-2.19

Key performance indicators

In the main, trusts and FTs use a balanced scorecard of KPIs to manage day-to-day business. Yet 39% of FTs and 55% of trusts omit KPI information from the annual report, contrary to the spirit and principles of the annual report. Best practice includes an explanation of KPI selection, calculation and performance both over time and in comparison to other similar bodies.

While trusts and FTs manage significant financial risks, those that have described their key performance indicators show predominantly non-financial measures. A correlation between the risk and performance reporting is required, otherwise the annual report is internally inconsistent.

All trusts and FTs need to ensure their board reporting arrangements provide a comprehensive and balanced view of performance. It is commonly recognised that integrated financial, risk and performance management reports support efficient and effective decision making by the board and these arrangements should be reflected in the annual report. This would support the principles of good reporting ‘through the eyes of management’ to give stakeholders a complete and balanced picture of the trust’s performance for the year.

Trusts and FTs disclosed between zero and 30 non-financial KPIs, with the average being 14.3. This average is significantly higher than FTSE 350 equivalents.

Trusts and FTs should revisit the KPIs disclosed in the annual report and consider whether these really are the most appropriate to support strategic management.


The use of key performance indicators, to help the reader understand how a trust or FT manages and measures the relative success of its strategy, is missing from 39% of FT and 55% of trust annual reports.


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mark Prisk, mP, minister of State for Business and Enterprise

www.promptpaymentcode.org.uk

Better and prompt payments

WAS COmPLIANCE WITH THE BETTER PAymENTS CODE INCLuDED IN THE BODy OF THE ANNuAL REPORT OR SIGNPOSTED TO THE ACCOuNTS?

FTs Trusts

missing 20% 7%

Signposted 30% to accounts 26%

Annual Report 50% 67%

Aside from not meeting the regulatory reporting requirements, the failure to declare that it has signed up to the prompt payment code could be seen as a lack of commitment by the trust or FT to supporting the local economy in difficult economic times.

Of the 80% of FTs that made a prompt payments disclosure, the level of performance against the invoice payment target ranged from 61% to 100%, with an average of 89%. For the 93% of trusts that disclosed, the average was 71%, but this figure is affected by a much wider variance of compliance, from a low of 31% to a high of 97%.

57% of trusts and only 15% of FTs confirm that they have signed up to the prompt payments code.

• AnarrativesummaryoftheConfederationofBritishIndustryBetter Payments Practice code.

• Quantitativeevidenceofcompliancewiththatcode.

• Wheretheannualreportincorporatesthefullannualaccounts,the annual report must, as a minimum, state “details of compliance with the code are given in note x to the accounts”.

Department of Health manual for Accounts 2010/11 Paragraph 2.32

A statement describing the better payment practice code, or any other policy adopted on payment of suppliers, and performance achieved.


15%

FTs

HAS THE TRuST OR FT DECLARED IT HAS SIGNED uP TO THE PROmPT PAymENTS CODE?

57%

Trusts


While the reporting of internal controls and the effectiveness of them is often only done through the SIC or AGS, these statements do not necessarily address the risk and control reporting requirements of the annual report. This therefore restricts a trust’s or FT’s ability to clearly explain, both the key issues and the effectiveness of its systems of internal control.

Best practice is to include a clear, self-standing articulation of the internal control system, including its effectiveness, in the main body of the annual report, which is then cross-referenced to the SIC/AGS.

77% of FTs and only 58% of trusts confirm that they have carried out an annual review of the effectiveness of their internal controls in the body of the annual report. This is in comparison to 100% of the FTSE 350.

Internal controls

The board should at least annually, conduct a review of the effectiveness of the group’s system of internal control and should report to shareholders that they have done so.

Combined Code, C.2.1

The board should conduct, at least annually, a review of the effectiveness of the NHS foundation trust’s system of internal control and should report to members that they have done so. The review should cover all material controls, including financial, clinical, operational and compliance controls and risk management systems.


100% FTSE 350

77% FTs

58% Trusts

IS THERE A STATEmENT THAT A REVIEW OF THE EFFECTIVENESS OF THE ORGANISATION’S INTERNAL CONTROLS HAS BEEN uNDERTAkEN AT LEAST ANNuALLy?

A better description of the internal control system and the annual review of its effectiveness is required in FT and, particularly, trust annual reports. Currently 77% of FTs and only 58% of trusts do this.

Review of effectiveness


Our review shows that 39% of FTs and 50% of trusts only provide basic information on their risk management and internal control process, and are not often clear whether the annual review of effectiveness has covered all material controls.

Additionally, 12% of FTs and 44% of trusts do not describe the review process.

The assurance framework provides organisations with a simple but comprehensive method for the effective and focused management of the principal risks faced, while delivering their core/strategic objectives. It also provides a structure for the evidence to support the SIC/AGS. The assurance framework simplifies board reporting and the prioritisation of action plans which, in turn, allows for more effective performance management. Given its importance, disclosures on the assurance framework and its effectiveness need to be enhanced.

NHS bodies are required to publish, as a single document, an annual report and accounts. This document includes a statement on internal control (SIC).

manual for Accounts, Chapter 2. Department of Health

The annual report of NHS foundation trusts must, as a minimum, include a Statement on Internal Control/ an Annual Governance Statement.

NHS Foundation Trust Annual Reporting manual, Chapter 7. monitor

IS THERE A SummARy OF THE PROCESS THE BOARD/COmmITTEES HAVE APPLIED IN REVIEWING THE EFFECTIVENESS OF THE SySTEm OF INTERNAL CONTROL?

FTSE 350 FTs Trusts

None 4% 12% 44%

Some 70% 53% 44%

more 26% 35% 12%

Trusts and FTs need to move beyond the template documents provided by the Department of Health and Monitor to create something bespoke, meaningful and relevant.The review [of the effectiveness of the group’s system of internal

control] should cover all material controls, including financial, operational and compliance controls and risk management systems.


IF DISCLOSED, IS IT CLEAR THAT THIS REVIEW COVERS ALL mATERIAL CONTROLS INCLuDING FINANCIAL, OPERATIONAL AND COmPLIANCE CONTROLS, AND RISk mANAGEmENT SySTEmS?

61%FTs

50%Trusts


The business review must contain a description of the principal risks and uncertainties facing the company.

Companies Act, s417

Guidance: The annual report and accounts should include such meaningful, high level information … to assist shareholders’ understanding of the main features of the company’s risk management processes and system of internal control.

Turnbull Report, 1999, paragraph 33

HOW muCH INFORmATION IS THERE SuRROuNDING THE ORGANISATION’S RISk mANAGEmENT AND INTERNAL CONTROL PROCESS?

FTSE 350 FTs Trusts

None 0% 0% 19%

Some 45% 40% 50%

more 55% 60% 31%

Internal controls

DID THE TRuST OR FT INCLuDE A STATEmENT ON INTERNAL CONTROL (SIC) OR ANNuAL GOVERNANCE STATEmENT IN THE ANNuAL REPORT?

FTs Trusts

missing 6% 17%

AGS 27% 0%

SIC 67% 83%

The Department of Health’s Manual for Accounts requires trusts to produce a ‘governance’ statement and Monitor requires all FTs to produce an AGS from 2011/12. There will be a challenge for many trusts in ensuring the [annual] governance statement is meaningful, comprehensive and integrated into the annual reporting.

FTs in particular will need to ensure that their assurance framework and governance arrangements support the AGS. The audit committee will need far wider assurance than previously received, as clinical and quality governance should also be included.

The introduction of the AGS into FTs offers the opportunity to review and improve public reporting of internal controls and governance.

In 2007/8, local government moved from the SIC to the AGS. Success has been mixed and there are lessons that FTs (and any trusts opting to produce an AGS) could learn from the local government experience.


The annual governance statement

Although the NHS environment is different to local government, for example through having more developed board assurance processes, we believe that lessons from local government should serve as a useful aide memoire to NHS bodies as they develop their AGS.

We have recently completed a review of more than 200 local government AGS against our good practice checklist. A headline finding was that AGS on average scored 2.5 out of 5 on our overall quality index (somewhere between ‘part missing’ and ‘reasonable’).

The results of our research this year and our experience since 2007/08 tells us that, for such an important document, the AGS is often not given the attention it deserves.

In many cases, the focus is ‘bottom up’ compliance with CIPFA’s framework and guidance notes, rather than ensuring that the AGS fulfils the purpose for which it is intended. First and foremost, the AGS should explicitly and clearly document the extent to which an authority’s governance arrangements have provided sufficient assurance over achievement of its vision and strategic objectives.

What are the main issues with local government AGS?

Missing the big picture

The AGS in local government rarely addresses fundamental questions such as:

• What is the level of assurance we are trying to achieve this year?

• Will the processes and controls we are describing provide sufficient assurance?

• What assurances have these processes actually given and to whom?

• Have we achieved the level of assurance we need and, if not, what are we going to do about it?

Static, year end focus

We found that statements are generally:

• prepared at year end rather than year round

• amended incrementally each year

• not updated to reflect significant issues arising between the draft accounts and audit opinion.

Inadequate ownership and challenge

Statements are usually:

• written and presented by internal audit - a potential conflict issue given their formal role in reviewing the AGS

• senior officers and members tend to focus on minor details, rather than key strategic issues.

Significant governance issues poorly articulated

Statements were:

• unclear if those issues recorded were significant in the context of achievement of the council’s vision

• unclear which part of the framework identified the issue and what this meant for the wider governance processes

• often vaguely articulating ‘significant’ issues identified in year and the follow up action on prior year issues

• rarely meeting the ‘SMART’ test for action planning.

What have we advised councils to do?

To add real value we believe the AGS should:

• have greater status within the council’s management and reporting processes as the key document that records the planned and obtained assurances over achievement of the vision and strategic objectives

• be owned from the top, used to plan and monitor internal and external assurance gathering throughout the year

• be fundamentally reviewed each year so that it clearly includes what is significant and excludes what is not

• have only significant weaknesses recorded with SMART action planning

• provide a robust, transparent and honest assessment of the governance framework for the year.

The AGS - learning from local government


A separate section of the annual report should describe the work of the committee in discharging those responsibilities.


A description of the work of the audit committee in discharging its responsibilities.


Audit and assurance

IS THERE A SEPARATE SECTION OF THE ANNuAL REPORT WHICH DESCRIBES THE WORk OF THE AuDIT COmmITTEE?

95%FTs

99%FTSE 350

37%Trusts

Annual reports for 95% of FTs and 99% of FTSE 350 companies include a good description of the work of the audit committee. Only 37% of trusts, however, provide this level of coverage.

NHS audit committees play an important role in driving governance, but the value they add is often not described in the annual report.

They meet, on average, five times a year and cover an increasing agenda around audit, governance, risk, quality accounts and now clinical governance. Our experience is that many trust and FT audit committees have improved over the years and often provide effective leadership and challenge on governance. However, disclosures in trust and FT annual reports often underplay the importance of the audit committee. FTs are required to describe the work of the audit committee and 95% of them do so. Trusts are not required to and 63% do not, reinforcing the message that many are not going beyond the ‘tick box’ approach to the annual report. Few annual reports included independent commentary from the audit committee and fewer still confirmed whether the audit committee reported to the board.

FTs and trusts should consider whether the audit committee is asked to review the draft annual report. While this should not replace the board’s consideration of the document, it would allow the audit committee to carry out a governance review of the report prior to final board sign-off. Specifically, the audit committee should consider in detail the trust-wide governance arrangements, as they are described in the document.

Audit committees


The value of an audit committee

• An effective audit committee will provide strong assurance that the entity is making efficient use of resources and delivering value for money.

• Effective internal control – an audit committee cannot eliminate risk of serious fraud, misconduct or misrepresentation of the financial position, but an audit committee can:

– raise greater awareness of the need for internal control and the implementation of audit recommendations

– increase public confidence in the objectivity and fairness of financial and other reporting

– reinforce the importance and independence of internal audit, external audit and other similar review process (eg the Annual Governance Statement)

– provide additional assurance through a process of independent and objective review.

A quarter of trusts and half of FTs confirm that at least one member of the audit committee has recent and relevant financial experience. While this may be under-reporting rather than the real position, it is important to provide this confirmation as:• the current financial pressures for the NHS mean financial

literacy is key to support rigorous challenge on any financial reports that are presented to the audit committee

• financial reporting now falls under International Financial Reporting Standards and the audit committee has a key role to oversee the development of sound accounting policies and to fulfil the role of ‘those charged with governance’ for the annual financial statements

• for FTs, the audit committee needs to understand Monitor’s financial risk ratings

• their annual reports have, on average, two to three financial KPIs and one to three strategic financial risks that must relate to the financial statements.

The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.


As a minimum one member of the Committee must have recent relevant financial experience.

NHS Audit Committee Handbook

DOES THE AuDIT COmmITTEE STATE, IN THE ANNuAL REPORT, IT HAS AT LEAST ONE mEmBER WITH RECENT AND RELEVANT FINANCIAL ExPERIENCE?

49%FTs

93%FTSE 350

24%Trusts


AN EFFECTIVE AuDIT COmmITTEE mANAGES TO ALIGN ITS RESPONSIBILITIES TO mAkE A REAL CONTRIBuTION TO GOOD GOVERNANCE

Clear structureand role

Has the requisite skills and knowledge

understands its role in risk management

Oversees the activities of internal and

external audit

Fraud, internal control and the

SIC/AGS

Financial reporting

The audit committee

The role of the audit committeeThe main objective of the audit committee is to independently contribute to the governance framework and ensure an effective internal control system is maintained.

Clear structure and roleThe scope of the audit committee’s work should be defined in its terms of reference and should encompass all the assurance needs of the board and accountable officer. The audit committee has a particular role to play in understanding and reviewing the work of internal audit, external audit and in financial reporting. The structure and role of the audit committee must also be clearly set out within the overall governance framework to prevent misinterpretation of roles.

Skills and knowledgeThe chair of the audit committee is responsible for audit committee effectiveness and members should collectively have the necessary business, reporting, auditing and governance skills to fulfil their responsibilities. At least one member should have significant, recent and relevant financial experience.

Risk managementThe audit committee should review the assurance framework and risk management arrangements annually to help inform its forward agenda. The audit committee should not be responsible for identifying and assessing risk, but for obtaining assurance over risks identified and reporting back any weaknesses resulting from assurance reviews.

Internal and external auditThe audit committee should review and understand the role of internal audit, its annual plan and the overall effectiveness of internal audit. The audit committee should ensure that a professional relationship is maintained between internal and external audit so that lines of reporting can be used effectively and duplication of effort is avoided.

Fraud, internal control and the SIC/AGSThe audit committee has an important role in overseeing the reporting and investigation of suspected or actual fraud or impropriety and ensuring that effective whistleblowing arrangements are in place. In addition, the trust or FT must produce a meaningful SIC/AGS, which should be approved by the audit committee.

Financial reportingThe FT or trust’s financial statements are an essential means by which it accounts for the stewardship of resources and its financial performance in the use of those resources. The audit committee should review the significant financial reporting issues and judgements made in connection with the preparation of the financial statements and related formal statements (eg summary accounts). It is management’s, not the audit committee’s, responsibility to prepare complete and accurate financial statements and disclosures in accordance with financial reporting standards and applicable rules and regulations. The audit committee, however, should consider significant accounting policies, any changes to them and any significant estimates and judgments.

Audit and assurance


Monitor has made it clear that clinical audit is a key part of the assessment of the quality of provider organisations and integral to the Quality Governance framework. The Audit Commission also identified clinical audit as an underused function in its ‘Taking it on Trust’ report for NHS boards.

Clinical audit has long been a part of the provider landscape. Consultant job plans often clearly express the need to carry out clinical audits. Consultants have used clinical audit to improve their services. Many GPs have used clinical audits to support peer improvement and review. The Royal Colleges and the BMA very much support clinical audit as an effective tool for clinical improvement and peer learning.

The latest revision to the NHS Audit Committee Handbook reinforces the need to have clinical audit considered by the audit committee as part of its holistic consideration of the system of governance and control. Despite this, there is a real sense that the true value of clinical audit is yet to be realised. Management and boards have yet to use clinical audit in a structured way which clearly adds value to the organisation.

What are the main issues?• Planning is not risk based – Modern financial and

governance audit is driven by statutory requirements and the assurance framework. If it is not a risk or a statutory requirement then it does not get audited. Clinical audit is not driven by an organisational risk assessment. Our research shows that the planned volume and nature of clinical audit has little to do with the size and complexity of the organisational, or the historic risks associated with the services. Often, clinical audit is driven by clinical interest and focus, which adds value to individual services but little to the organisation as a whole.

• Execution is not consistent – There is no consistent national, regional or even local template for the delivery and execution of clinical audit. There are no specified requirements in respect of the individuals or teams carrying out the work. There are no templates for reporting and no requirements to develop prioritised action-orientated recommendations with agreed responsibilities for action and timescales for completion.

Clinical audit

The latest revision of the NHS Audit Committee Handbook encourages audit committees to get involved in driving the more effective use of clinical audit in improving governance.

• Reporting is not consistent or transparent – We have identified a myriad of methods by which the results of clinical audit are reported. Sometimes it is almost an entirely internal process to the consultant and his/her team, sometimes there is wider learning within a directorate. The medical director rarely has a consistent overview of outcomes. We have seen some reports to the committees responsible for clinical governance but rarely as a high profile agenda item with a focus on achieving organisational learning and change. Also, best practice is shared but in an inconsistent way.

• Results are not fed into organisational risk assessment – We see many examples where individuals or groups learn from clinical audit and adjust their practice accordingly. However, we see virtually no examples where the results of clinical audit feedback into the board’s risk assessment and business planning.

What needs to be done? As a process, we see little difference between clinical and internal audit and would therefore expect to see:• a risk based plan for the whole trust, based on discussions

with key stakeholders and approved by the appropriate board committee

• accredited professionals authorised to carry out clinical audits

• FT and trust clinical audit leadership arrangements set out more clearly. We see this as an area where the medical director should lead and encourage colleagues and should take board level responsibility for the effective delivery of the annual clinical audit plan

• a reporting template with prioritised action plans

• quarterly reporting to the relevant board committee

• a robust process for the follow up of agreed recommendations

• the audit committee using clinical audit findings as a key source of assurance to support the SIC or AGS.


Internal audit provides objective assurance that the risk management framework and systems of internal control are operating effectively and efficiently. The internal audit plan needs to reflect priorities to ensure suitable controls are in place to help the trust achieve its objectives.

Comparable to the FTSE 350, 88% of FTs confirmed in the annual report that the audit committee monitors and reviews the work of internal audit. While not formally required, it is good practice for trusts to confirm this and 59% of them do.

Only 71% of FTs and 43% of trusts made reference in the annual report to an internal audit effectiveness review having been performed. This could be an omission in the annual report, or an indication that the external auditor has not performed this role. Greater clarity and consistency of such reviews should therefore be provided in annual reports, as evidence that internal audit is effective.

Internal audit

DOES THE AuDIT COmmITTEE mONITOR AND REVIEW THE EFFECTIVENESS OF INTERNAL AuDIT ACTIVITIES?

The main role and responsibilities of the audit committee should … include … to monitor and review the effectiveness of the company’s internal audit function.


The audit committee should monitor and review the effectiveness of the NHS foundation trust’s internal audit function.


88%FTs

92%FTSE 350

59%Trusts

An effective internal audit function serves as the eyes and ears of the audit committee, providing an objective assurance programme that gives the audit committee comfort that good governance is in place. However, with only 43% of trusts and 71% of FTs referring to an effectiveness review, there is room for improvement.

Audit and assurance


The audit committee should ensure that the function has the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with appropriate professional standards for internal auditors.

FRC Guidance on Audit Committees, 4.1.3

Internal assessments should include: On-going reviews of the performance of … internal audit … and periodic reviews performed through self-assessment or by other persons …

International Standards for the Professional Practice of Internal Auditing – 1311

External assessments should be conducted at least once every five years. The potential need for more frequent external assessments … should be discussed … with the board. Such discussions should also consider the size, complexity and industry of the organisation.

International Standards for the Professional Practice of Internal Auditing – 1312

TRuSTS THAT mAkE REFERENCE TO AN INTERNAL AuDIT EFFECTIVENESS REVIEW BEING PERFORmED

71%

FTs

43%

Trusts

Role of internal audit

• Review the comprehensiveness, reliability and integrity of assurances in meeting organisation’s assurance requirements.

• Provide opinion on adequacy/effectiveness of governance, risk management and internal control environment.

• Evaluate and report on the adequacy of the control environment as a contribution to the proper, economic, efficient and effective use of resources.

• At the request of management, to support the local counter fraud specialist to investigate suspected fraud or corruption.

All trusts and FTs have an internal audit function, but not all extract the most value from this resource. It is important to perform an effectiveness review to ensure the internal audit days provide added value by positively contributing to the assurance and governance framework.


An explanation of how, if the auditor provides non-audit services, auditor objectivity and independence is safeguarded.


Narrative disclosures should be provided to explain the NHS body’s policy for ensuring that the auditor’s independence has not been compromised.


IF THE AuDITOR PROVIDES NON-AuDIT SERVICES, IS THERE A STATEmENT AS TO HOW THE AuDITOR’S OBjECTIVITy AND INDEPENDENCE IS SAFEGuARDED?

26%FTs

100%FTSE 350

11%Trusts

External audit

Auditor independenceExternal audit is an essential part of the process of accountability for public money. It makes an important contribution to the stewardship of public resources and the corporate governance of public services. External auditors in the public sector give an independent opinion on public bodies’ financial statements and review and report on aspects of the arrangements put in place to ensure proper stewardship and governance and to secure economy, efficiency and effectiveness in the use of resources.

Auditor independence is therefore a critical part of the accountability equation. Trusts are not able to appoint their own auditor, whose independence is secured through appointment by the Audit Commission. While FTs do appoint their own external auditors, only 45% explain how the audit committee reached its recommendation to the board on the appointment, re-appointment or removal of the external auditors. Fewer still disclose in their annual report key aspects of audit appointment, such as tendering frequency, tenure of the incumbent and any contractual obligations that restrict the organisation’s choice. Such disclosure would give stakeholders real insight into the appointment process.

Auditor quality The audit committee should review the effectiveness of the external audit process, taking into account relevant professional and regulatory standards. As best practice, the annual report should include a statement on how the FT or trust has assured itself that external audit quality and ethical standards have been met. This is particularly important where non-audit services have been provided, in order to demonstrate that external audit independence has been maintained.

A substantial number of trusts (89%) and FTs (74%) fail to confirm that the external auditor’s objectivity and independence is maintained when, on average, the value of non-audit fees is equivalent to 13% of a trust’s, and 51% of a FT’s, audit fee.

Audit and assurance


DOES THE TRuST PROVIDE A BREAkDOWN OF AuDIT AND NON-AuDIT FEES IN ITS ANNuAL REPORT?

The name of the NHS body’s external auditor and disclosure of the cost of work performed by the auditor in respect of the reporting period. Disclosure should provide sufficient information about the nature and extent of services provided to allow readers to make an informed judgement as to whether the potential for conflicts of interest has been satisfactorily addressed by the auditor and by those charged with the governance of the NHS body.


[The annual report] should: … set out … the fees paid to the auditor for audit services, audit related services and other non-audit services; and if the auditor provides non-audit services, other than audit related services, explain for each significant engagement, or category of engagements, what the services are.

Consultation revisions to FRC Guidance on Audit Committees, 4.38

80%

FTs

11%

Trusts

Audit fees Trusts and FTs are required to set out the levels of audit and non-audit fees in a note to the accounts. However, only 14% of trusts and 92% of FTs include the full financial statements with the annual report (see page 6). 80% of FTs compared to 11% of trusts provided a breakdown of audit and non-audit fees in the body of the annual report.

Our review of published NHS accounts found that non-audit fees, as a percentage of audit fees, were greater for FTs, whose auditors provided additional services worth 51% of the total audit fee. Trust auditors, in contrast, provided 13% of additional services, although this is partly attributable to higher statutory audit fees, due to the broader scope of audit applicable to them.

The Audit Commission’s appointment rules limit the value of non-audit services for trusts and the Commission monitors and regulates such activity. However, FTs are outside this regime and have greater freedoms in this area.

FT governors and the audit committee should, therefore, provide oversight of non-audit services, including governance processes in place over the procurement of such services. However, only 26% of these bodies confirmed in their annual report that the independence of the external auditor had been maintained which we believe will have a significant positive impact. A greater focus on this issue should be applied, in our opinion, given the level of non-audit services being reported.

The audit committee section of the annual report should explain to shareholders how it reached its recommendation to the board on the appointment, reappointment or removal of the external auditors. This explanation should normally include supporting information on tendering frequency, the tenure of the incumbent auditor and any contractual obligations that acted to restrict the committee’s choice of external auditors.

FRC Guidance on Audit Committees, 4.22.

TO WHAT DEGREE DOES THE AuDIT COmmITTEE REPORT ON HOW IT REACHED ITS RECOmmENDATION TO THE BOARD ON THE APPOINTmENT, REAPPOINTmENT OR REmOVAL OF THE ExTERNAL AuDITORS?

FTSE 350 FTs

None 34% 55%

Some 49% 36%

more 17% 9%


1992kEy GuIDANCE

CADBuRy REPORT Produced in response to UK governance failures such as Polly Peck, BCCI and Maxwell.

OuTCOmES

• Separation of chair and chief executive roles

• Requirement for two independent NEDs

• Requirement for an audit committee of NEDs

1995kEy GuIDANCE

GREENBuRy REPORT Produced in response to public anger over executive pay such as the British Gas ‘fat cats’.

OuTCOmES

• Requirement for remuneration committee of NEDs

• Long-term performance related pay introduced

1998kEy GuIDANCE

HAmPEL REPORT Reviewed implementation of Cadbury and Greenbury.

OuTCOmES

• Combined Code on corporate governance issued with a focus on principles as opposed to detailed guidelines

1999kEy GuIDANCE

TuRNBuLL REPORTProduced to clarify reporting on internal control.

OuTCOmES

• Requirement for the board to review the system of internal control and risk management

The corporate influence

Since Cadbury first put governance in the spotlight in the early nineties, a regular stream of guidance has kept it, and its evolution, centre stage.

“The board also needs to operate in the context set by the Financial Services Authority’s ‘Combined Code on Corporate Governance’ and the implications for non-executive directors and the NHS identified by the Higgs Review.”

Integrated Governance Handbook 2006, Department of Health

“In developing the code, our approach has been to bring best practice from the private sector to the NHS foundation trust sector. The code builds on the principles and provisions of the Combined Code of Corporate Governance (the combined code), which is well established as the prime standard of corporate governance best practice for the private sector in the UK.”

The NHS Foundation Trust Code of Governance 2010, monitor

1992CADBuRy REPORT

1998HAmPEL REPORT

1995GREENBuRy REPORT

1999TuRNBuLL REPORT

Appendix A


2003kEy GuIDANCE

HIGGS REPORT AND LAST mAjOR CODE REVISIONS Produced in response to US corporate failures such as Enron, Worldcom and Tyco.

OuTCOmES

• Backed the ‘comply or explain’ principle (as opposed to US approach of regulation through the Sarbanes-Oxley Act)

• Requirement for at least half of the board to be independent NEDs

• Introduced annual board and director evaluation

2003kEy GuIDANCE

SmITH REPORT ON AuDIT COmmITTEESProduced in response to concerns over auditor independence.

OuTCOmES

• Provides guidance on role and responsibilities of audit committees

• Focus on independence of external auditors and level of non-audit services provided

2009kEy GuIDANCE

WALkER REVIEW Reviewed governance of the UK banking industry in response to the global credit crunch.

OuTCOmES

• Number of recommendations incorporated into the renamed 2010 UK Corporate Governance Code

2011kEy GuIDANCE

FRC’s Guidance on Board Effectiveness.

OuTCOmES

• Provides guidance on sections A and B of the Code around leadership and board effectiveness

Monitor’s Foundation Trust Code of Governance or the Department of Health’s Integrated Governance Handbook may be a trust’s first port of call for guidance, but these are only two documents in a much bigger framework that support good governance.

As trusts move towards an all FT market and become increasingly regulated by Monitor, the corporate influence on governance and the annual report will increase and trusts will need to improve the quality of their reports.

2003SmITH REPORT, HIGGS REPORT

2009WALkER REVIEW

2006NHS INTEGRATED

GOVERNANCE HANDBOOk

2010THE HEALTHy NHS BOARD, FOuNDATION

TRuST CODE OF GOVERNANCE


Public Sector Annual Reports: Sustainability Reporting – guidance for the 2010-11 Dry Run – HM Treasury

DOES THE ANNuAL REPORT CONTAIN A STATEmENT THAT AN ASSESSmENT OF THE ImPACT OF THE ORGANISATION’S BuSINESS ON THE ENVIRONmENT HAS BEEN uNDERTAkEN?

Further developments in narrative reporting

Government consultation on ‘The Future of Narrative Reporting’• Wide ranging consultation in 2010 sought ideas on how to improve the

quality of company reporting.

• A summary of responses was published on the consultation in December 2010.

• The government, in the March 2011 budget, announced that it plans to consult, in July 2011, on how to “materially simplify” narrative reporting for quoted companies, for example by:

- removing duplicate reporting requirements

- improving non-regulatory guidance

- promoting a framework for company reporting that makes it as easy as possible for businesses to adapt to national and international developments.

Proposals are expected shortly.

FRC ‘Effective Company Stewardship’• Discussion paper published by the FRC in January 2011 with a summary

of responses published in September 2011 setting out the next steps.

• Proposes extending the remit of the audit committee to determine whether the annual report viewed as a whole is fair and balanced.

FRC supporting the government in their proposals.

Financial Reporting Laboratory launched in October 2011.

International Integrated Reporting Committee (IIRC)• Discussion paper, ‘Towards Integrated Reporting – Communicating

Value in the 21st Century’ published in September 2011.

• Objective of developing a new approach to reporting, building on the foundations of financial, management commentary, governance and remuneration, and sustainability reporting in a way that reflects interdependence.

Consultation on discussion document closes 14 December.

Two year pilot programme commencing in October 2011.

Exposure Draft of an International Integrated Reporting Framework to be published for comment in 2012.

99% FTSE 350

70% Trusts

67%FTs

Sustainability reporting is a topic for trusts to watch out for in 2011/12, and there are more developments on the way.

Appendix B


About us

In this dynamic marketplace, our highly experienced healthcare sector team offers a comprehensive range of audit, tax, financial advisory and consultancy services. We pride ourselves on listening to our clients, working in an open and flexible manner and developing innovative, bespoke solutions to maximise efficiency and effectiveness.

Our team, which includes current NHS non-executive director and FT governor post-holders, provides advice at all levels of the UK healthcare system to our clients including FTs, trusts, PCTs/provider arms, GPs, SHAs, commissioning consortia, healthcare community interest companies and private healthcare providers.

We also provide consultancy services to regulatory bodies such as Monitor and the Department of Health. Our team members speak regularly at healthcare conferences and contribute to industry journals, and have a deep understanding of the regulatory and operating environment which enables us to provide robust and practical advice to our clients.

Our high-quality audit and assurance service is tailored to identify where improvements can be made to governance processes, the assurance framework and performance management, to help deliver value for money and move organisations towards best practice. We also provide a wide range of other financial advisory services including preparation for FT status, business case reviews, performance improvement services, organisational and operational efficiency support, support on PFI/PPP projects and LIFT schemes, specialist corporate finance and due diligence expertise.

As part of our commitment to the wider debate, Grant Thornton actively contributes to regulatory discussion papers. At an international level, Grant Thornton International responded to the International Auditing and Assurance Standards Board (IAASB) discussion paper ‘The Evolving Nature of Financial Reporting: Disclosure’ and its audit implications. We also published a book titled ‘One Report: Integrated

Grant Thornton UK LLP is a leading business and financial adviser with client-facing offices in 25 locations nationwide. Led by over 200 partners and employing nearly 4,400 professionals, we strive to deliver unparalleled service standards and tailor-made solutions to over 40,000 corporate, public sector and individual clients.

Reporting for a Sustainable Strategy’, which was co-authored with the Harvard Business School. The book advocates the integration of financial and non-financial information into ‘One Report’ to promote greater transparency and improve corporate reporting.

Over the coming year we will talk with FTs and trusts about the results of our findings and the implications for their governance and annual reporting arrangements.

© 2012 Grant Thornton UK LLP. All rights reserved.

‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership.

Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.

This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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