In this ethics special, Dr Geraldine Smith FCCA, assistant national director with HSE’s internal audit division, says auditors are vital in holding voluntary agencies to account
Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.
This article was first published in the October 2017 Ireland edition of Accounting and Business magazine.
As taxpayers’ money, 0all funding provided to the Health Service Executive (HSE) is, quite rightly, subject to robust public accountability mechanisms. HSE’s director general is accountable to the Oireachtas (through the Public Accounts Committee) for the stewardship, regularity and propriety use of all funding provided to HSE.
Regularity refers to transactions being in accordance with the legal authorities governing them and that the funds are applied for the purposes intended. Regularity extends to the substance of transactions and the entitlement of the recipients of public money.
Propriety refers to the way in which public business is conducted. Governance and ethics are key elements of this. It is wider than regularity as it extends to standards of conduct, behaviour, corporate governance, fairness, integrity (including avoidance of personal profit from public business), even-handedness in the appointment of staff, open competition in the award of contracts, and the avoidance of waste and extravagance.
In 2016, HSE received €14bn of funding, of which €3.8bn was paid in revenue grants to 2,288 organisations to deliver health and social care services. These organisations, known as either ‘section 38’ or ‘section 39’ voluntary agencies, range from large voluntary hospitals, such as St James’ Hospital in receipt of over €300m, to small community-based organisations in receipt of €500. Some of these organisations are also charities in receipt of funds from donations and fundraising. All such money is public money, regardless of how it is obtained.
HSE has established an accountability framework to provide assurance on the funding provided to voluntary agencies. All voluntary agencies in receipt of funding in excess of €250,000, are required to sign a service arrangement (SA), essentially a contract, which sets out the terms and conditions under which the funding is provided and the services to be delivered. Funding less than €250,000 is governed by a grant-aid agreement. Agencies with turnover exceeding €150,000 are required to have their accounts audited.
The SAs require voluntary agencies to comply with strict criteria for the use of public money. Regularity, propriety and stewardship are at the heart of these requirements, which include adherence to the Code of Practice for the Governance of State Bodies, public sector pay policy, public procurement policies, taxation obligations, Garda clearance, legal obligations, and the proper disclosure of funding in the voluntary agencies’ annual accounts.
Essentially, in return for taxpayers’ funding, HSE expects voluntary agencies to ensure that they properly control, spend, account for and disclose the funding. In essence, voluntary agencies are fully accountable to HSE (ie the taxpayer) for this funding. Commenting on a recent HSE audit where a section 38 agency asserted to HSE that it was not accountable to HSE for the taxpayer funding it receives, a newspaper editorial stated that ‘€49m of funding buys €49m of accountability… Any agency that gets even €1 of state funds is accountable to the Irish people.’ That essentially sums up the concept of accountability to the taxpayer.
Voluntary agency audits
As part of its accountability framework, HSE undertakes audits of section 38 and section 39 agencies to ascertain compliance with the SA. The results in some cases identified governance and control issues. What is concerning is that these voluntary agencies received unqualified audit opinions from their statutory auditors on their audited annual financial statements.
The issues identified by HSE’s audits relate to inadequacies in regularity, propriety, oversight and stewardship of the public funds by agencies – essentially non-compliance with the terms and conditions of the funding. Examples include: inadequate oversight and stewardship by boards; inadequate financial records and supporting documentation; non-retention of documentation; inadequate segregation of duties; inadequate cash receipting, recording and control; pre-signed blank cheques; inadequate bank reconciliation processes; non-compliance with public sector salary scales; privately funded salary top-ups, compensation payments and additional privately funded pension funds for senior managers, contrary to public pay policy; weak credit card controls, non-business related expenditure on credit cards, no evidencing of business rationale for credit card expenditure and a lack of board oversight of CEO credit card expenditure; inadequate procurement processes; travel expenses not in accordance with approved rates; expenditure on entertainment; salary payments to directors of charities; non-disclosure of related parties; tax compliance issues; and non–disclosure of HSE funding in audited financial statements.
In recent years HSE’s audits of two agencies (Positive Action and Console) identified significant and serious deficiencies in governance and control, despite these agencies’ audited accounts receiving unqualified audit opinions. As a result of HSE’s audits, HSE ceased funding these two agencies and, in Positive Action’s case, a director was convicted of fraud. Console is currently being investigated by the Garda.
The deficiencies identified by HSE’s audits resulted in recommendations to further strengthen the accountability framework. For example, in 2013, arising from significant deficiencies identified by HSE’s audit of Compliance by Section 38 Agencies with Public Sector Pay Policy, HSE introduced a requirement for the chairpersons of boards of all section 38 agencies to sign an annual compliance statement confirming their compliance with the SA, and to disclose any areas of non-compliance and their plan of action to address their non-compliance. This has been extended in 2017 to all section 39 agencies receiving HSE funding in excess of €3m per year.
Funded agencies with turnover greater than €150,000 are required to provide independently audited annual financial statements to confirm that the funding was received and properly spent, accounted for and disclosed in the audited accounts. The type of audit opinion, post-balance sheet events, directors’ fees, related party transactions and whether the accounts were prepared on a going concern basis are issues of interest to funders.
The importance of audited accounts to a public funder cannot be underestimated. Audited accounts are a key assurance mechanism to HSE and indeed to all state funders who rely, and must be able to rely, on such audited accounts. The importance is further emphasised because HSE, like all state funders, cannot audit all funded bodies, as this would require an army of auditors.
The ability of a funder to rely on audited accounts highlights the importance of a robust statutory external audit process and the importance of the exercise of professional scepticism by auditors.
The need to improve the quality of statutory audits and improve professional scepticism is a matter of concern to ACCA, all professional accountancy bodies and the Financial Reporting Council (FRC). The FRC recently reported that high-profile accounting failures, as well as the results of audit monitoring, continue to highlight cases where auditors have not met expectations and that the greatest number of issues arise with professional scepticism.
Dr Geraldine Smith FCCA, assistant national director HSE internal audit division
CPD technical article
"Improving the quality of statutory audits and professional scepticism is a matter of concern to all professional accountancy bodies"