Auditing is becoming an increasingly expensive part of the management of health care. Discuss the role it plays in the financial management of a hospital, and comment on the value this adds.

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MBA (Health Executive) Programme 2001

Accounting and Financial Management


Auditing is becoming an increasingly expensive part of the management of

health care.  Discuss the role it plays in the financial management of a

hospital, and comment on the value this adds.

Student Number:  020109477

Report to:        Education and Training Development Group of a NHS Trust

From:        Student Number:  020109477

Subject:        A review of the present system of, and the future for, financial audit within

the overall audit framework of the National Health Service.  

1.        Introduction to paper

This paper aims to define audit within the context of the National Health Service (NHS) with

a particular focus on the financial auditing of NHS Trusts.  The paper will provide an

introduction to public sector and NHS audit, discuss the uncertainty concerning audit and

identify key implications for the future.

2.        Introduction to Audit

The Collins Concise English Dictionary defines audit as “an inspection, correction and

verification of business accounts by a qualified accountant” and “any thoroughgoing

examination or check.”  Within the NHS the term audit refers to both the financial aspects of

the business and the quality of services through clinical audit.

The key purpose of financial audit is to ensure the appropriate use of resources, within the

public sector this primarily relates to the use of tax payers money.  Therefore, the

Government must ensure audit is an essential part of Parliamentary and public sector bodies

processes.  The National Audit Office (NAO) (2001) stated “accountability for the use of

public funds is a cornerstone of democratic government.”  The demonstration of this

accountability is through the process of audit which provides an independent and skilled

assessment that the financial accounts accurately reflect the financial position of the

organisation and that resources have been utilised effectively.  In carrying out this duty all

public sector organisations are responsible for “putting in place proper arrangements for the

governance of their affairs and the stewardship of the resources at their disposal” Audit

Commission (2002c).

The Audit Commission (2002c) states that public sector organisations, including NHS

Trusts, have a duty to ensure that public money is “properly accounted for and used

economically, efficiently and effectively.”  Therefore, audit must not be limited to financial

regimes, but must also evaluate clinical practice and other processes.  Moreover, the

documenting of audit processes and results are essential.

The Cadbury Committee in 1992 (cited in HFMA and the NHS Executive - 2001)

identified three key fundamental requirements for good corporate governance in

organisations, these being:

*        Internal financial controls

*        Efficient and effective operations and

*        Compliance with applicable laws and regulations

Within the financial professions audit can be defined as “the process of validation of the

accuracy, completeness, adequacy of disclosure of financial records” (HFMA and the NHS

Executive - 2001).

There is a legal framework which governs how audit is carried out and by whom.  In the

past 10 years the legal framework within the United Kingdom (UK) has become more

complex and comprehensive as a result of strengthening the audit requirements because of a

number of financial scandals during the late 1980’s.  

3.        A Two-Tiered Audit System

A key element of the audit process is the legal segregation of internal and external audit.  

The two separate systems are linked and often there is collaboration between the two.  

However, the separation is to ensure appropriate relationships are maintained and to

demonstrate accountability for resources, through an additional system of checks.

Internal audit is defined as “an independent and objective appraisal service within an

organisation” (HM Treasury Governmental 2001).  Within the same document

“independent” is defined as being “separate from the process or activity being audited”,

therefore “impartial and effective professional judgements and recommendations” can be

implemented.  Internal audit must be an ongoing, independent process of management, to

ensure general management and financial management systems are robust and not open to


To implement this process within NHS Trusts a lead officer for internal audit, often referred

to as the “Head of Internal Audit”, must be appointed.  Their independence is vital,

however, they will work closely with the accountable officer (normally the Director of

Finance), moreover, they must have direct access to the organisation’s audit committee.  

They will monitor the financial systems and assess the budgets in order to discharge the

requirements of internal audit.

The second level of audit is external audit, the Audit Commission (2002c) notes external

audit provides “an essential element in the process of accountability for public money and

makes an important contribution to the stewardship of public resources and the corporate

governance of public services.”  Within the public sector one role of external audit is to

provide an independent opinion on the financial statements of the public bodies.  Moreover,

the external auditors review and report on financial systems and arrangements in managing

the resources of an organisation.  In recent years, the external auditors have considered

wider issues on the effective use of resources in terms of management, systems and


As the name suggests external auditors are brought in from other organisations, normally

commercial audit companies, to carry out a risk assessment of the organisation and its

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systems against specific standards and potential risks.  Within the NHS, the Audit

Commission appoints external auditors, from a “long list” of companies.  The long list is

includes companies who are able to demonstrate they satisfy the standards laid down by the

Audit Commission.  

However, it should be noted that each NHS trust agrees a  three year rolling audit plan

which identifies the work to be carried out across nine standards.  The agreement is reached

by the Accountable Officer and the external auditors.  The decision on the audit priorities

will be based on ...

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