Board
Declarations
South Warwickshire NHS Foundation Trust
Audit 2009/10
Contents
Summary report
3
Appendix 1 – Going concern
5
Appendix 2 – Fraud and breaches in Internal Control
9
Status of our reports
The Engagement Letter issued by the Audit Commission explains the respective
responsibilities of auditors and of the audited body. Reports prepared by engagement
leads are addressed to governors, members, non-executive directors, directors or officers
and are prepared for the sole use of the audited body. Auditors accept no responsibility to:

any governor, member, non-executive director, director or officer in their individual
capacity; or

any third party.
Summary report
Summary report
Introduction
1
This paper sets out the key issues to be considered at the year end by the Trust Board
when making certain assertions in relation to the financial statements – in relation to
going concern and fraud in internal control.
2
For each of the key issues, we will be asking that the Letter of Representation reflects
the view of the Trust Board - in addition to any specific assertions required as a result
of the audit work carried on the financial statements.
3
The paper is initially for consideration by those charged with governance (the Audit
Committee, in this case) when approving the financial statements and supporting
documents before these are taken to the Trust Board. The Audit Committee members
may then choose to take the paper to the main Trust Board.
Going concern
4
'Going concern' is a key concept in the preparation of the financial statements for the
Trust. The accounting concept of going concern refers to the basis of measurement of
an organisation's assets and liabilities in its accounts (that is, the basis on which those
assets and liabilities are recorded and included in the accounts).
5
The going concern assumption is a fundamental principle in the preparation of financial
statements, under which an entity is ordinarily viewed as continuing in business for the
foreseeable future. Accordingly, assets and liabilities are recorded on the basis that the
entity will be able to realise its assets and discharge its liabilities in the normal course
of business. If the entity could not continue as a going concern, assets and liabilities
would need to be recorded in the accounts on a different basis, reflecting their value on
the winding up of the entity. Consequently, assets would be likely to be recorded at a
much lower break-up value and medium- and long-term liabilities would become
short-term liabilities.
6
The Audit Commission has issued detailed guidance to NHS Trusts in considering the
Going Concern assumption. This guidance states that we, as external auditors to the
Trust, will consider what the directors have done to satisfy themselves that the
accounts should be prepared on a going concern basis. How we do this is set out in
the International Standard on Auditing 570 (United Kingdom and Ireland) (ISA 570
(UK&I)): Going Concern.
7
We have therefore discussed the going concern assumption with key officers at the
Trust and we have reviewed the financial and operating performance of the Trust for
this year, and that expected for the next year. We have attached the Audit
Commission's checklist for Board Members as an appendix to this report and we would
request that those charged with governance consider the key questions.
3
South Warwickshire NHS Foundation Trust
Summary report
8
For 2009/10, we have requested that the Letter of Representation signed by the Trust
confirms that the Trust Board has considered the going concern assumption.
Fraud and breaches in Internal Control
9
International Standards for Auditing and our audit approach require us to obtain an
understanding of how those charged with governance exercise oversight of
management's processes for identifying and responding to risks of fraud and breaches
in internal control in the organisation, and the internal control that management has
established to mitigate those risks. We are also required to inquire as to whether those
charged with governance have knowledge of any actual, suspected or alleged fraud
affecting the entity.
10
We would ask those charged with governance to discuss and minute their assessment
of risk of fraud in the financial statements for the year. We have attached at
Appendix 2 a list of key issues to consider.
Mark Stocks
Engagement Lead
(Officer of the Audit Commission)
South Warwickshire NHS Foundation Trust
4
Appendix 1 – Going concern
Appendix 1 – Going concern
Responsibilities of Management
1
To comply with International Accounting Standard (IAS) 1, management must, in
preparing the annual statement of accounts, undertake an assessment of the trust's
ability to continue as a going concern. Paragraph 5 of International Standard for
Auditing (ISA) 570 (UK&I) states: ’there may be no explicit requirement for
management to make a specific assessment of the entity's ability to continue as a
going concern. Nevertheless, since the going concern assumption is a fundamental
principle in the preparation of the financial statements, management has a
responsibility to assess the entity's ability to continue as a going concern even if the
financial reporting framework does not include an explicit responsibility to do so.’
2
In making this assessment, management should take into account all information
about the future that is available at the time at which the judgement is made. As
minimum, this assessment should cover at least a 12-month period from the date of
approval of the accounts, although this period will need to be extended where
management is aware of events and related business risks further in the future that
may cast doubt on the going concern assumption. If the assessment covers a shorter
period, this should be disclosed in the financial statements. The degree of
consideration will depend on the facts in each case. ISA 570 (UK&I) states:
’When an entity has a history of profitable operations and ready access to financial
resources, a conclusion that the going concern basis of accounting is appropriate may
be reached without detailed analysis. In other cases, management may need to
consider a wide range of factors relating to current and expected profitability, debt
repayment schedules and potential sources of replacement financing before it can
satisfy itself that the going concern basis is appropriate.’
3
5
As the Trust attained Foundation Trust status on 1 March 2010, Management will need
to consider the trust's performance against Monitor's risk ratings as this is the regime it
is now operating under. The following areas should be considered form a view on the
Trust’s ability to continue as a going concern in the longer term.

Financial risk - where the trust's performance against the key financial performance
criteria indicate a financial risk rating of 1 or 2, management would need to
consider the possibility of an intervention by Monitor under section 25 of the Health
and Social Care (Community Health and Standards) Act 2003.

Governance risk - where the trust could potentially have a red governance risk
rating, management would need to consider the possibility of intervention.

Mandatory services risk - a potential red mandatory services risk rating would also
require consideration of the possibility of intervention.
South Warwickshire NHS Foundation Trust
Appendix 1 – Going concern
Responsibilities of Those Charged with Governance
4
When approving the accounts, those charged with governance will need to consider
which of the following three basic scenarios is the most appropriate.

The body is clearly a going concern and it is appropriate for the accounts to be
prepared on the going concern basis.

The body is a going concern but there are uncertainties regarding future issues
which should be disclosed in the accounts to ensure the true and fair view.

The body is not a going concern and the accounts will need to be prepared on an
appropriate alternative basis.
5
To enable those charged with governance to do this, management will need to report
to them the process it has followed in forming a view on going concern and the
assumptions on which that view is based. Those charged with governance should,
where appropriate, challenge those assumptions, particularly where they are aware of
any significant issues that do not appear to have been taken into account, to ensure
that the financial statements have been prepared on an appropriate basis.
6
To help them form a view on the appropriateness of the going concern assumption,
board members may wish to consider the following questions. Those charged with
governance may wish to consider to what degree some or all of the questions have
been considered by management when forming a view on going concern, and it may
be appropriate to request management to specifically address these in its report,
providing the necessary supporting evidence. The table overleaf may support this
review.
Questions for those charged with governance
7
These questions will help assess the appropriateness of the going concern
assumption.
Question
Management Response
Are the implications of statutory or policy changes
appropriately reflected in the business plan,
financial forecasts and report on going concern
(eg, Payment by Results, Patient Choice, Agenda
for Change)?
Are there any indications that commissioners are
reviewing their commissioning arrangements such
that income streams and activity levels could be
adversely affected?
Our 2010/11 contracts and budget take account of the
changes to the national tariff for 2010/11.
Warwickshire PCT are working on making significant
financial savings by moving care out of acute settings
and by managing demand for healthcare downwards.
However, this is being done in consultation with the
Trust and the timescales and planned scale of this
work in 2010/11 are not such as to put our plans at
significant risk. In addition, our true estimate of
contract activity is higher than the value in our signed
contract, so we expect to overperform against the
contract. Even if this is offset by some demand
management or transfers of care, this gives us a
South Warwickshire NHS Foundation Trust
6
Appendix 1 – Going concern
significant margin of safety in the event of adverse
changes to demand.
Have there been any significant issues raised with
the board during the year (eg, adverse comments
raised by internal and external audit regarding
financial performance or significant weaknesses in
systems of financial control, or significant
variances to activity levels compared to those
planned), which could cast doubts on the
assumptions made?
Does a review of available financial information
(annual accounts, in-year financial monitoring
reports, future year financial forecasts) identify any
of the following adverse financial indicators.
 Negative cash flow (ie, expenditure greater
than income).
 Poor or deteriorating performance against
the better payment practice code (ie,
deteriorating performance in the payment of
creditors, possibly indicating cash flow
problems).
 Delay or deferral of PDC or other loan
repayments.
If so, what action is being taken to improve
financial performance?
There have been no audit recommendations made
this year or last that would impact adversely on our
ability to forecast our financial position with material
accuracy.
Has an analysis been undertaken of the trust's
projected or actual performance against Monitor’s
risk rating criteria? If not, what assurances can
management provide that the trust will be able to
perform effectively within the foundation trust
regime?
Our year end return to Monitor shows that we
achieved a financial risk rating of 4 for the year
2009/10. We are currently working on our Annual
Plan for 2010/11 but expect this to show a risk rating
of 3. This is primarily because our forecast surplus is
significantly lower than in 2009/10.
If such an analysis has been undertaken, is it
robust and does it identify any areas of potential
concern? If so, what action is being taken to
address those areas of potential weakness?
As part of our foundation trust application we were
required to consider downside scenarios and our
responses to these, and were able to demonstrate
that we could maintain a positive I&E position and
cash balance under reasonable downsides. These
downsides and mitigations were reported to the Board
in February 2010. The downsides put forward by
Monitor were in any case not sufficient to threaten our
going concern status during 2010/11, even if they had
not been mitigated.
If a deficit exists, is there a recovery plan, agreed
with all key external stakeholders (eg, strategic
health authority and PCTs)?
Where the recovery plan includes proposed future
savings, is there a realistic, documented
implementation plan showing how those savings
will be achieved, and over what timescale? Has
7
We had a slight cash inflow in 2009/10 as our loan
repayments were funded from current and past
surpluses and our capital programme was funded in
part by additional transfers of PCT. Our current
liabilities are higher at 31 March 2010 than they were
at 31 March 2009, but this has been taken account of
in our cash flow forecasts discussed above.
Our creditor payments performance has remained
broadly constant across the year 2009/10 with no
consistent trend.
We have not delayed or deferred repayments of PDC
or loans.
We are not currently in a recovery plan position. We
are, however, required to repay our Working Capital
Loan by 2014/15. We have made early repayments
on our Working Capital Loan during 2009/10 and
South Warwickshire NHS Foundation Trust
Appendix 1 – Going concern
the implementation plan been agreed by those
within the organisation expected to deliver the
savings (eg, department heads, clinicians)?
If achievement of the recovery plan is dependent
on additional financial support (eg, funding from
the NHS Bank or additional resource allocation
from the strategic health authority), has the
provision of that support been confirmed in
writing?
Does the organisation have sufficient staff in post,
with the appropriate skills and experience,
particularly at senior manager level, to ensure the
delivery of the organisation’s objectives? If not,
what action is being taken to obtain those skills?
Has the board been notified of any proposals,
either from the Department of Health or strategic
health authority that could have implications for
the future operation of the organisation (eg,
possible service reconfiguration or restructuring)?
have built the impact of required minimum
repayments into the forecasts referred to above.
We have a stable management team at present that
has led significant improvements in the organisation's
performance.
The Trust Board is aware of the potential transfer of
community services from Warwickshire PCT.
South Warwickshire NHS Foundation Trust
8
Appendix 2 – Fraud and breaches in Internal Control
Appendix 2 – Fraud and
breaches in Internal Control
1
We have asked management to restate their approach to fraud and to internal control
and the responses are set below. We have reproduced the responses of management
to support our request to those charged with governance to consider how they
exercise oversight of these management functions and to make their own assessment
of the likely risk in the financial statements for the year.
Issue
Management Response
Management’s assessment of the risk that
the financial statements may be materially
misstated due to fraud.
Management does not consider that there is a significant
risk that the financial statements may be materially
misstated due to fraud. The findings of our auditors and the
Local Counter Fraud Service, together with management's
knowledge of operations of the Trust during 2009/10, does
not indicate significant risk in this area. A number of
weaknesses in internal control have been identified and
reported to Audit Committee during the past year, but the
significance of these, and the existence of compensating
controls such as budgetary control, mitigates any significant
risk of material misstatement in our financial statements.
A risk based programme of work for the Local Counter
Fraud Service and for Internal Audit is drawn up each year
in consultation with management to reflect known risk
areas. Our Local Counter Fraud Officer also provides the
Trust with updates on fraud risks and actions to prevent
fraud identified through membership of the NHS Counter
Fraud Service and through attendance at training events.
Management also reviews its risk register for all significant
risks and for actions taken to mitigate these risks, and these
would potentially include any significant risks identified
around fraud. As a result of these arrangements,
management has not identified any fraud risks that lead to a
significant risk of misstatement in the Trust's financial
statements.
Actions taken to prevent and detect fraud, to investigate
suspicions of fraud, and to take action in the event of actual
fraud, are reported to each Audit Committee by our Local
Counter Fraud Service.
Sessions on fraud and conduct are built into the Trust's
Corporate Induction programme, so that all new members
of staff are made aware of the Trust's policies, including the
whistleblowing policy, and of our Counter Fraud
arrangements. The Trust's whistleblowing policy is
available on the intranet. All staff were reminded of these
arrangements during 2009/10 by an automatic screensaver
on Trust PCs with details of Counter Fraud and
whistleblowing arrangements.
Management’s process for identifying and
responding to the risks of fraud generally
and specific risks of misstatement in the
financial statements.
Management’s arrangements for reporting
about fraud to those charged with
governance (eg audit committee).
Management’s communication, if any, with
employees, members, partners and
stakeholders regarding ethical governance
and standards of conduct and behaviour.
Source: Audit Commission 2005
9
South Warwickshire NHS Foundation Trust