Audit Commission

Ineffective management or inadequate board-level leadership, and sometimes both, have caused the serious financial problems seen in a small number of NHS bodies, a new Audit Commission report reveals.

In Learning the Lessons from Financial Failure in the NHS, the Audit Commission reviews what happened in the organisations which in recent years have been the subject of public interest reports (PIRs) published by auditors. In 2005/06, 25 PIRs were issued and together those bodies incurred a total deficit of £174 million in the previous year. The report identifies common themes leading to financial failure and proposes a series of indicators that will help NHS organisations to identify and avoid financial failure in the future.

Sir Michael Lyons, Acting Chairman of the Audit Commission, said:

'Financial failure is rare but serious. To varying degrees, combinations of weak governance, poor management and lack of engagement of clinicians have contributed to financial failures in a small number of NHS bodies. There are lessons to be learned and our report identifies a series of indicators that will help all NHS organisations promptly to identify when they are at risk and to take action to avoid financial failure. It is crucial that boards and management get the basics right. Financial failure is often a reflection of wider organisational failure.'

Identified in the report are a number of common themes or attributes in organisations that have experienced financial failure. Not all the factors leading to financial failure identified in the report were experienced by each organisation we visited, but we found a considerable degree of consistency.

Factors include:

• ineffective management or inadequate board-level leadership, and sometimes both;
• a lack of robust budget-setting and weaknesses in the information available to the organisation in financial monitoring and forecasting and in financial reporting;
• a lack of engagement of clinicians in an organisation’s core management processes;
• inadequate attention to the day-to-day operation of the organisation while senior management attention was focussed on a major project; and
• a reliance on short-term fixes to solves recurrent problems, which store up problems for future years.

The warning indicators in the report cover financial, governmental and environmental factors. These should be used by boards to monitor their own performance and by strategic health authorities and the Department of Health to identify those organisations at risk of financial failure.

Learning the Lessons from Financial Failure in the NHS is not a commentary on the current management or current performance of the organisations reviewed. It is a historical analysis and many are on the road to recovery. However, its recommendations are important for individual organisations and for the wider operation of the NHS. The findings of this report are contributing to the Commission’s review of the financial management and accounting regime in the NHS, a subject on which we will be reporting to the Health Secretary at the end of this month.

Notes to editors

25 out of approximately 600 NHS bodies were subject to public interest reports.

The Audit Commission is an independent body responsible for ensuring that public money is spent economically, efficiently and effectively, to achieve high quality local services for the public. Our remit covers around 11,000 bodies in England, which between them spend more than £180 billion of public money each year. Our work covers local government, health, housing, community safety and fire and rescue services.

As an independent watchdog, we provide important information on the quality of public services. As a driving force for improvement in those services, we provide practical recommendations and spread best practice. As an independent auditor, we ensure that public services are good value for money and that public money is properly spent.