External Audit: Annual Audit Letter 2006-07

1. INFRASTRUCTURE, GOVERNMENT AND HEALTHCARE External Audit: Annual Audit Letter 2006-07 The Shrewsbury and Telford Hospital NHS Trust August 2007 AUDIT

2. Content The contacts at KPMG in connection with this report are: Will CarrPartner KPMG LLP (UK)Tel: 0121 232 3308 will.carr@kpmg.co.uk Helen DempseySeniorManagerKPMG LLP (UK)Tel: 0121 232 3901helen.dempsey@kpmg.co.uk Simon Stanyer Assistant ManagerKPMG LLP (UK)Tel: 0121 232 3694simon.stanyer@kpmg.co.uk • Purpose • The purpose of this Annual Audit Letter (the letter) is to summarise the key issues arising from the work that we have carried out during 2006-07 at The Shrewsbury and Telford Hospital NHS Trust. • Although this letter is addressed to the directors of the Shrewsbury and Telford Hospital NHS Trust (‘you’), it is also intended to communicate those key issues to key external stakeholders, including members of the public. The letter will be published on the Audit Commission website at www.audit-commission.gov.uk. It is the responsibility of the Trust to publish the letter on the Trustwebsite at www.sath.nhs.uk. • Responsibilities of the auditor and the Trust • We have been appointed by the Audit Commission as your independent external auditor. The Audit Commission has issued a document entitled Statement of Responsibilities of Auditors and Audited Bodies which is available from www.audit-commission.gov.uk. This summarises where the responsibilities of auditors begin and end and what is expected from you as the audited body. External auditors do not act as a substitute for the audited body’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively. • The scope of our work • The statutory responsibilities and powers of appointed auditors are set out in the Audit Commission Act 1998. Our main responsibility is to carry out an audit that meets the requirements of the Audit Commission’s Code of Audit Practice (the Code). Under the Code we are required to review and report on: • the use of resources - that is whether you have made proper arrangements for securing economy, efficiency and effectiveness (‘value for money’) in your use of resources • the accounts – that is the financial statements and the Statement on Internal Control. If you have any concerns or are dissatisfied with any part of KPMG’s work, in the first instance you should contact Will Carr who is the engagement director to the Trust, telephone 0121 232 3308email will.carr@kpmg.co.uk who will try to resolve your complaint. If you are dissatisfied with your response please contact Trevor Rees on 0161 246 4000, email trevor.rees@kpmg.co.uk, who is the national contact partner for all of KPMG’s work with the Audit Commission.After this, if you still dissatisfied with how your complaint has been handled you can access the Audit Commission’s complaints procedure. Put your complaint in writing to the Complaints Team, Nicholson House, Lime Kiln Close, Stoke Gifford, Bristol, BS34 8SU or by e mail to: complaints@audit-commission.gov.uk. Their telephone number is 020 7166 2349, textphone (minicom) 020 7630 0421.

3. Section OneKey messages • This letter summarises the significant issues arising from our audit work in 2006/07. We highlight both areas of good performance and provide recommendations to support areas where you could improve performance. A summary of our key recommendations drawn from our previous reports is summarised in Appendix 1. The issues summarised in this letter have previously been reported to you and a list of all reports issued to you in relation to the 2006/07 audit is provided in Appendix 2. • Financial Management • The Trust has experienced severe financial pressures since its establishment. The financial plan for 2006/07 included a £9.4 m Cost Improvement Programme (CIP), of which £2.2m was unidentified at the start of the year. In addition, the budget also included £2.8 m financial support from the West Midlands NHS bank. The audited deficit was £2.84m for the year ended 31st March 2007. • Although still in deficit, the Trust’s financial performance in 2006/07 represented a significant improvement over previous years. Whilst not achieving its full CIP, and experiencing some areas of overspending, the Trust significantly over performed on activity. This resulted in a favourable variance to income. The Trust achieved financial balance on its monthly run rate, i.e. the difference between income and expenditure, for the first time in February 2007 with an in-month surplus of £0.945m being reported. This was followed by a surplus run rate in March 2007 of £0.325m. This trend has continued into 2007/08 and continues to be projected for the remainder of the financial year. • The Trust Board approved the 2007/08 budget on 28th March 2007. The budgeted surplus for the year is £4.1m. This equals the amount required to repay the principal due on the working capital loan of £12.299m which the Trust received in 2006/07 to underpin its cash position. The 2007/08 budget included a CIP of £7.5m, which is a particular challenge given the £9.4m CIP included within the 2006/07 budget. At the time that the 2007/08 CIP was developed, £2.2m remained unidentified. • As at 30 June 2007 (the latest figures available at the time of drafting this letter) the Trust reported a in-year surplus of £0.175m which is consistent with budget and based upon prudent assumptions on activity.. Although still at risk, the Trust’s financial health is improving, and based on current assumptions, the Trust’s forecast remains £4.1m surplus for the full year. • Foundation Trust process • The Trust has met the initial eligibility requirements for Foundation Trust status and has entered into the Department of Health pre-admission phase of the application process. The Trust is awaiting confirmation from the Department of Health that its assessment will be completed by Monitor as a wave 8 applicant in April 2008. If successful in its Monitor assessment, the Foundation Trust licence would be granted from 1July 2008. • As part of the application process, the Trust must finalise a detailed integrated strategic business plan (IBP) for formal submission in March 2008.The IBP sets out the Trust’s strategy for the next five years. This is an evolving document which should assist the Trust to plan for the risks and opportunities it will face as an independent public benefit corporation. • As part of the process, the Trust is also required to prepare a long term financial model (LTFM). The financial projections will form the basis for the discussions of the Trust’s future plans at the “Board to Board” meeting. At the Board to Board meetings the Trust will be required to present its IBP to the Monitor Board which will ask questions and challenge the Trust’s application. • Taken alongside the financial recovery process, the Foundation Trust application process will prove a significant challenge in terms of management capacity to deliver the workload required. The Board will need to ensure that its focus remains balanced between reviewing day to day performance issues, whilst developing and challenging the future strategies and plans and levels of documentation and review which are needed to deliver the ambition to achieve Foundation Trust status.

4. Section TwoKey issues arising from use of resources work • The main elements of our use of resources work are: • Auditor’s Local Evaluation (ALE) - we are required to assess how well NHS bodies manage and use their financial resources by providing scored judgements on your arrangements in five specific areas. • Value for money conclusion – in part based on the ALE assessment above, we are required to issue a conclusion on whether we are satisfied that you have put in place proper arrangements for securing economy, efficiency and effectiveness in your use of resources. • Specific risk based work - we have not performed any risk based work to support our use of resources opinion. • The key findings from this work are summarised below. • Wherever we identified an area to improve performance, we communicated this to the Trust as a ecommendation. A summary of the most important recommendations raised, along with the Trust’s management’s response, has been provided at Appendix 1. • The Audit Commission is a signatory to the concordat between bodies inspecting, regulating and auditing healthcare. All recommendations from our use of resources work will be loaded onto the concordat website at www.concordat.org.uk and an annual update of progress against these plans will be provided to the Audit Committee.

5. Section ThreeKey issues arising from the audit of the accounts • Opinion • We issued an unqualified opinion on your accounts on 25 June 2007. This means that we believe the accounts give a true and fair view of the financial affairs of The Shrewsbury and Telford Hospital NHS Trust and of the income and expenditure recorded by the Trust during the year. • Before we give our opinion on the accounts, we are required to report to your Audit Committee any significant matters arising from the audit. We did this on 20 June 2007 and the key issues are summarised here. • Accounts production and adjustments to the accounts • We received a complete set of draft accounts by the deadline set by the Department of Health which were supported by good quality working papers.. • We identified two adjustments required to the accounts which you did not agree to amend. These were reported to the Audit Committee. These adjustments were not significant enough to have an impact on our opinion on the accounts. • To support our audit work on the annual accounts, we complete work on the financial systems and processes. This work is supported by that completed by your internal audit function. In 2006/07, we undertook work on the financial and IT controls in place at the Trust. In addition, we undertook a review of the controls in place during the Trust’s general ledger migration from the McKesson Integra system to the Oracle e-Business suite. No significant weaknesses were identified which impacted on the accounts production although we identified several issues on the Trust IT controls in relation to the Trust’s network security arrangements, password settings and system change controls. The Trust accepted our recommendations in this area. • Financial Standing • NHS bodies are given financial targets every year. One of these, the breakeven duty, is statutory, which means you must achieve it. The others are administrative, which means you should achieve them. Your performance against the targets in 2006-07 is outlined below. • . During the year, the Trust entered into a three year loan agreement with the Department of Health for a working capital loan totalling £12.299m. This is to be repaid over a three year period and is subject to a rate of interest of 5.5%. This loan underpinned the cash support required for the deficit incurred during 2005/06. The Trust also received a permanent cash adjustment, by way of Public Dividend Capital, of £5m from the West Midlands Strategic Health Authority.

6. Section ThreeKey issues arising from the audit of the accounts (continued) • .Financial forecasts for 2007/08 • The Trust Board approved a balanced budget on 28th March 2007 for the 2007/08 financial year. The budget includes income growth of £9m (4.4%), and, forecasts a surplus of £4.1m which is the amount required to repay the principal and interest on the working capital loan received in 2006/07. • The budget is based upon the achievement of £7.5m CIPs of which, £2.2m (29%) of these savings were unidentified when the original CIPs was developed. The CIPs represent 3.5% of the total Trust turnover and the Trust must continue to monitor the delivery of these CIPs and provide assurance to the Board and its stakeholders on their delivery. This is challenging given the size of the CIP of £9.4m included within the 2006/07 Trust budget. In setting the 2007/08 financial plans, the Trust has budgeted for a positive run rate throughout the year culminating in the forecast surplus of £4.1m at the year end. • However, the immediate challenge facing the Trust is the continued late phasing of the CIP. Although the phasing of the CIP is improved from previous years, 63% of the CIP of £7.5m is due to be delivered in the final half of 2007/08.In addition, the Trust is forecasting that £2.74m (67%) of the year end surplus of £4.1m, will be delivered in the final half of the year. • As at 30 June 2007 (the latest figures available at the time of drafting this letter) the Trust had reported a in-year surplus of £0.175m which is consistent with budget and based upon prudent assumptions on activity. • Although the financial performance to date is broadly to plan, the challenge facing the Trust will be the ongoing delivery of challenging CIPs and run rates which become greater during the latter part of the financial year.

7. AppendicesAppendix 1: Key recommendation themes This appendix summarises the main recommendations that we have identified during the 2006-07 year, along with your response to them. Where recommendations have reached their due date for implementation we provide an update of progress. The detail of the recommendations have been communicated to you during the year.

8. AppendicesAppendix 2: Reports issued in relation to the 2006-07 audit