Main matters arising from the 2016/17 audits of district health boards

Letter sent on 25 May 2018 to chief executives and board chairs of district health boards by Greg Schollum, Deputy Controller and Auditor-General giving a brief summary of the main matters arising from the 2016/17 audits of district health boards.

Tēnā koe

MAIN MATTERS ARISING FROM THE 2016/17 AUDITS OF DISTRICT HEALTH BOARDS

This letter is a brief summary of the main matters arising from the 2016/17 audits of district health boards (DHBs). By identifying and sharing our observations of all DHBs, we hope to increase the value of our audits beyond the independent assurance that they provide.

Each of the 20 DHBs has its own unique set of circumstances. However, all DHBs share the same fundamental structure, governance, and objectives. Risks and opportunities that we observed in some DHBs may be undetected in others.

DHBs all face the challenge of maintaining continuity of services while dealing with significant changes in their operating environment. By sharing this summary information, I hope that we will help the health sector make the improvements needed.

I have already sent you a letter, dated 16 May 2018, on my general observations of the audits of entities in the broader central government sector. This letter focuses only on those matters that arose specifically from our audits of DHBs. These include:

• the challenges DHBs face maintaining their financial sustainability and the risks that can arise from operating in such a pressured environment;
• asset management and DHBs’ responses to our 2016 report on how well they are managing their significant asset base; and
• procurement and contract management, how this continues to change in the health sector, and the need for DHBs to remain in control and accountable, including where third parties carry out activities.

We also include information on earnings management practices that still persist; the Board’s responsibility for the tone set at the top of the DHB, including in relation to sensitive expenditure; and the sector’s response to potential non-compliance with the Holidays Act 2003.

Financial sustainability is a growing challenge

It is likely that DHBs will always be under pressure to balance the growing demand for services with available funding. It is also likely that living within their means will always require very careful management. However, we observed in 2016/17 that DHBs are finding this increasingly difficult.

The DHB sector’s deficit increased to more than $119 million, a variance from budget of more than $60 million and a significant increase from the sector’s deficit in 2015/16 (although that year’s deficit was reduced by deficit funding provided to Canterbury DHB).

Several DHBs are operating savings plans and taking steps to reduce expenditure and/or gain efficiencies. It is important that there is clarity about which savings are efficiencies and which will affect services, so that boards can make decisions based on good information about the potential effect of these savings.

Financial challenges contribute to a climate of pressure that can exacerbate risk

In pursuit of clinical and financial sustainability, DHBs are looking beyond efficiencies that will provide cost savings, to innovations that will change the way services are delivered. These innovations can include changes to workforce utilisation, stronger integration between primary and secondary care, and technological innovations. Innovation is crucial and can lead to positive outcomes, but I would like to emphasise the importance of continuing to manage the basics well while pursuing new solutions to old problems.

DHBs’ boards and management should remain mindful that they need to be able to demonstrate value for money, using processes that are appropriate for the nature and scale of the procurement.

As a result of what we saw in the audit of Waikato DHB, I have decided to look further into its procurement of technology to enable healthcare provision through mobile devices, using the inquiry powers under section 18 of the Public Audit Act 2001. We will publish our findings and any associated recommendations when our work is complete.

Asset management

DHBs collectively own more than $6 billion worth of assets, such as hospitals and clinical equipment. DHBs rely on these assets to provide health services. We looked closely at DHBs’ asset management in our 2016 report District health boards’ response to asset management requirements since 2009.

We found that, in general, asset management in DHBs was not as mature as we would expect from organisations of this scale and with this level of reliance on their assets to continue to deliver essential services. This raised doubts about how well positioned DHBs are to support future service delivery. DHBs appeared to focus more on short-term results and less on how they ensure their ongoing capability to deliver results. We made several recommendations to help DHBs improve this.

During the 2016/17 audit, we checked on some DHBs’ progress with our recommendations and found that there had been little progress. DHB boards, that have not already done so, should examine our report and consider how to implement its recommendations to improve their longer-term capability to provide for the health of the communities they serve.

We will continue to focus on this issue.

Procurement and contract management

Some of the matters already referred to above touch on procurement and contract management. This is not surprising given that up to 60% of DHB expenditure is on some form of procurement.

In 2018/19, we will place a particular focus on procurement and contract management throughout the public sector for our broader work programme of research and performance audits. This should not result in any changes for DHB audits, as procurement is already an area of focus for these.

We have observed improvements in DHB procurement policies and practices, particularly for day to day transactions. However, overall DHBs could strengthen their contract management.

Third parties deliver a lot of health services paid for by DHBs. DHBs have often relied heavily on trust rather than actively managing contracts to ensure that the third parties deliver services to the required standard.

The DHB procurement and contract management environment has been fluid during the last few years, which has heightened risks. Agents such as NZ Health Partnerships Limited, healthAlliance N.Z. Limited, and Pharmac are playing a large part in DHB procurement. However, recent changes, in the mix of which agent is responsible for what, has led to a situation where some DHB staff are unsure what procurement services are now provided and by whom.

Amplifying this risk, some DHBs’ procurement staff have left in anticipation of a greater centralisation of procurement. This means that some DHBs may not now have the procurement expertise they need in-house.

DHBs should consider carefully their capability to carry out their procurement and contract management. Even where agents carry out activities on their behalf, responsibility for ensuring value for money and good service delivery remains with the entity spending the public funds, that is, the DHB.

Accountability fundamentals remain sound

Our audits provide assurance that your reporting of financial and service performance fairly reflects actual performance and can be relied on. We spend significant time looking at the relevant systems and controls you have in place to gain that assurance. We assess and grade the strength of these systems and controls.

In general, we found that DHBs have sound systems and controls in place. The overall quality showed a small improvement compared with last year. DHBs have shown a significant improvement in the clarity and comprehensiveness of their performance reporting during the last few years. This is especially noteworthy given the complexity and scale of their operations.

It was also encouraging to note the uptake of the new audit methodology for providing assurance over reporting of performance measures for activities carried out by third parties. Difficulties in doing this had led to qualified audit opinions on performance information throughout the sector beginning in 2012/13. In 2016/17, 19 DHBs obtained unqualified opinions for their 2016/17 performance information. Only one DHB declined to use the new methodology in 2016/17, and we will continue to work with that DHB to resolve this.

Earnings management

In previous years’ audits, we observed that some DHBs appear overly focused on achieving a particular surplus or deficit (often in line with their budget). To achieve this, those DHBs have made judgements about such things as accruals, provisions, asset lives, and estimated leave liabilities that could not be supported by the available evidence. Although there was less of this behaviour in 2016/17, it is unfortunately still happening.

I expect all DHBs to approach financial year-end cut-offs and valuations consistently and not make judgements that are biased towards a particular result. My auditors will continue to be alert for biased judgements in the financial reporting process. They will continue to report to DHB boards where they find bias and, if corrections are not made, report to the Minister and to Parliament’s Health Committee.

Sensitive expenditure

During the 2016/17 audit, the then Chair of Waikato DHB’s board asked us to pay close attention to the then chief executive’s expenses. We had several concerns about the approval process, business purpose, consideration of personal leave, and lack of supporting documentation, particularly in relation to travel. We made several recommendations to improve practices.

This matter has been reported on extensively, including by the State Services Commissioner, so I will not go into further detail here. However, I would like to make two points that apply to all DHBs.

The first is that DHB boards employ only one staff member: the chief executive. It is vital that boards exercise their oversight of chief executives with diligence, demonstrating awareness that the tone and culture set at the top of the organisation is ultimately the board’s responsibility.

The second point is that I would like to remind senior staff at DHBs that, if they have concerns about financial mismanagement or misuse of public funds in their organisation, regardless of the level at which it occurs, they should bring it to the attention of their auditor.

The auditor will treat the source of the information in confidence and will consider appropriate actions to take as part of the audit. Holding information of this nature back from the auditor exposes the entity to ongoing risk and compromises the effectiveness of the audit.

Staff can also consider using protections provided by the Protected Disclosures Act 2000. The Auditor-General is an “appropriate authority” for disclosures made under this Act. All DHBs should ensure that their policies and processes for protected disclosures are up to date, easily accessed, and understood by their staff.

Liability for non-compliance with the Holidays Act 2003

Several agencies in the public and private sector have experienced problems arising from non-compliance with the Holidays Act 2003. This is because pay systems have not been configured to factor in differential leave entitlements for employees who work non-standard work hours.

There is potential for this to be a significant risk for DHBs, given the 24-hour nature of their operations. Although the liability for each DHB is unlikely to be material for its own financial statements, the overall sector liability may be a significant amount.

During the last two audits, we asked DHBs what they are doing to understand their risk and how they are accounting for any potential liability. In 2016/17, the DHBs commissioned Central Region’s Technical Advisory Services (TAS) to develop an approach for DHBs to assess their liability. In the meantime, DHBs have adopted a range of different approaches to accounting for a potential liability.

I expect DHBs will pick up on the work from TAS to identify what liability, if any, they have arising from non-compliance with the Holidays Act so that this will be resolved as soon as is practicable.

Future work from the Office of the Auditor-General

We expect to present a report on the health sector to Parliament next month. In addition to covering the points raised here, the report will include more detail from audits across the sector and more information on DHB financial performance.

I have signalled in our draft annual plan for 2018/19 our intention to focus during the next few years on the significant investment the health sector makes in buildings and other infrastructure. We are consulting with Parliament and other key stakeholders on our draft annual plan before we finalise the finer details of this work programme. However, it is likely to include a look at the quality of the planning for major investments in the health sector and the effectiveness of the resulting implementation.

I encourage you to consider the contents of this letter and what the matters raised might mean for your DHB. I also encourage you to discuss this letter with your appointed auditor and/or the health sector manager, Greg Goulding.

I would also be happy to have a conversation about the matters raised or other matters of interest with the Board and the senior leadership team of your DHB.

Nāku noa, nā

Greg Schollum
Deputy Controller and Auditor-General