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Learning from governance failures

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  1. Learning from governance failures Damian Murray The Audit Commission’s Trust Practice Northern Region Lead

  2. Recent headlines… "NHS finance chief jailed for fraud" "NHS FDs forced into 'tricks'"

  3. Learning from governance failure • “At least when the Titanic went • down the lights were still on.” • Enron: The Smartest Guys in the Room

  4. Learning from governance failure • Need for hindsight • is inversely related to • Presence of foresight

  5. Learning from governance failure • Correct procedures necessary • but not sufficient • to ensure an effective Board or • Audit Committee

  6. Public Interest Reports • “…where auditors consider a matter is sufficiently important to be brought to the notice of the audited body or the public as a matter of urgency.” • Some common themes • Rarely result of fraud, corruption etc

  7. Public interest report themes • Underlying financial position deteriorating over years • Obscured by ‘non-recurrent support’ • Political pressures of organisational change (FTs, mergers) and investment projects (PFI) • High turnover of key managers and directors • Poor relationships between trusts and commissioners

  8. Public interest report themes • Service level agreements chronically in dispute • Business and cost improvement plans unrealistic • No risk assessment or contingency • Unforeseen cost pressures • In-year financial reporting late, erroneous and difficult to understand • Annual accounts inconsistent with in-year reports

  9. Public interest report themes • Accounting ‘fixes’ used to improve reported financial position • Audit reports disregarded and not acted upon • Audit amendments blamed for financial out-turn

  10. Example audit amendments

  11. In hindsight the Audit Committee could have... • Read strained relationships as indicator of underlying problems • Questioned dependency of financial performance on accounting devices or single transactions • Focussed on capacity of assurance framework to control business risk

  12. In hindsight the Audit Committee could have... • Maintained more critical distance from executive directors • Taken audit reports as indicator of serious underlying problem • Questioned projected break-even in light of service budget overspends • Required explanation of technical accounting adjustments and relation to cash position

  13. In hindsight finance managers could have… • Acknowledged real economic and business issues • Provided projections, especially cash flow, with sensitivity and scenario analysis • Presented fuller, prioritised reports in plain language • Proposed practical and achievable solutions with related risk assessments • Explained underlying causes of behavioural problems

  14. Accounting policies matter • Need to understand what your policies are and what they mean • Accounting knowledge on Audit Committee desirable • Clear explanation in lay terms by DoF as minimum • Need to manage risk of dependence upon executive to explain their own decisions and behaviours

  15. Learning from governance failures Damian Murray The Audit Commission’s Trust Practice Northern Region Lead