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There was a deficit across the NHS as a whole in 2004-05 for the first time since 1999-00. Latest figures also show the deficit has worsened for 2005-06. Compared to 2003-04, the number of NHS bodies with deficits increased, and more of these deficits were significant in size, according to Financial Management in the NHS, a joint study by the National Audit Office and the Audit Commission.

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The overspend for 2004-05 was £251 million compared to an underspend of £65 million in 2003-04. Some 171 NHS bodies (28 per cent) incurred a deficit, compared to 106 (18 per cent) in the previous year. Of these, 143 had a significant deficit (over 0.5 per cent of their income). This is an increase on 2003-04, when 76 NHS bodies incurred a significant deficit.

The aggregate deficit across the NHS in 2004-05 was relatively small in the context of overall expenditure, and 72 per cent of NHS bodies achieved break-even or surplus. But clearly without action some organisations with significant deficits will have difficulty meeting financial commitments. In 2004-05, a small number of NHS bodies considered deferring payment of key creditors. Today’s report states this is a cause for concern because the steps which an NHS body needs to take to restore financial balance may affect service delivery as it diverts resources and management attention way from normal operational and strategic priorities.

The Department of Health has introduced welcome changes to the NHS funding and accounting regime, which should provide the right incentives and reporting arrangements to support long-term financial sustainability and help prepare NHS trusts for the rigours of Foundation Trust status. However, more still needs to be done to encourage transparency and comparability in NHS bodies’ accounts. This will be addressed in the Audit Commission’s review of the NHS financial management and accounting regime requested by the Secretary of State.

The report also highlights the fact that there was a disappointing reduction in the quality of accounts submitted for audit in 2004-05. Whilst increases and decreases in income and expenditure as a result of audit adjustments are to be expected, they usually balance each other out. In this case, adjustments increased the overall deficit across the NHS from £133.9 million to £251.3 million although only a small proportion of organisations were responsible for the bulk of the change. This nevertheless raises concerns about the quality of financial information used for local decision-making, as well as the ability of the NHS to meet the required timetable for faster production of accounts.

New unaudited figures suggest that the year-end deficit for 2005-06 is in the region of £536 million. Looking forward, developments which may increase risks to financial balance in 2005-06 and beyond include the extension of Payment by Results and the start of a new and major wave of mergers and rationalisation of Primary Care Trusts and Strategic Health Authorities.

There is no single cause of the deficits at NHS bodies and no single answer either. There are some systemic issues that have contributed to the deterioration in financial performance, but there are also local failings. The Commission is exploring this in more depth in two forthcoming reports - the review of the NHS financial management and accounting regime requested by the Secretary of State and Learning the Lessons from Financial Failure. Both of these reports will make recommendations to help put the NHS back onto a firmer financial footing.

‘One thing is clearer than ever: financial balance can only be achieved with commitment from finance staff, managers, clinicians and Board members. However the requirement for high quality, timely accounts must not be overlooked. There have been acknowledged weaknesses in the accounts of the NHS bodies and in 2004-05 there was evidence of inappropriate adjustments or omissions in more than a fifth of the accounts submitted for audit by NHS bodies. We have worked with NHS bodies, the Department of Health and NAO to address the weaknesses and hope to see an improvement in the quality of the 2005-06 accounts.’

Sir John Bourn, head of the NAO, said:

'Many NHS bodies are managing their finances well, but it is worrying that a significant number are in deficit. All parts of the NHS and staff throughout the organisation must act together and take responsibility for improving financial management.

'It is especially vital that financial control is not weakened as NHS bodies prepare for the impact of mergers and restructuring, as well as implementing Payment by Results and other national initiatives. It is also imperative that NHS bodies improve the quality of information underpinning both management and annual accounts. As well as supporting NHS Boards in informed decision-making, this will also allow local and national NHS accounts to be prepared, audited and published sooner.'

Steve Bundred, Chief Executive of the Audit Commission


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