The Scottish Parliament - Audit Committee Report

Audit Scotland Report on Late Movement of the Financial Position - Western Isles Health Board 2004/2005
Audit Scotland, Briefing Paper on Hospital Resources in Island Boards

11 January 2008 (1st Meeting, 2008 (Session 3))

Written Evidence

Mr John Turner, Acting Chief Executive, NHS Western Isles, 28 November 2007
Mr John Turner, Acting Chief Executive, NHS Western Isles, 4 December 2007

Oral Evidence

Ronnie Cleland, former Interim Chair, NHS Western Isles;
Malcolm Wright, former Interim Chief Executive, NHS Western Isles;
Donald Macleod, former Director of Finance, NHS Western Isles; Ken Matthews, Regional Organiser, UNISON;
Mr John Turner, Acting Chief Executive, NHS Western Isles;
Mr John Angus Mackay, Chair, NHS Western Isles;
Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Scottish Government;
Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Scottish Government;
Alex Smith, Director of Health Finance, Scottish Government; Alistair Brown, Deputy Director of Delivery, Scottish Government.

Supplementary Written Evidence

Ken Matthews, Regional Organiser, UNISON, 22 January 2008
Mr John Turner, Acting Chief Executive, NHS Western Isles, 31 January 2008
Mr John Turner, Acting Chief Executive, NHS Western Isles, 4 March 2008
Letter from Audit Committee, Convener to Mr John Turner, Acting Chief Executive, NHS Western Isles, 6 March 2008
Mr John Turner, Acting Chief Executive, NHS Western Isles, 10 March2008
Kevin Woods, Chief Executive of NHS Scotland and Director General Health Scottish Government, 4 February 2008
Kevin Woods, Chief Executive of NHS Scotland and Director General Health Scottish Government, 15 February 2008
Kevin Woods, Chief Executive of NHS Scotland and Director General Health Scottish Government, 6 March 2008

27 February 2008 (4th Meeting, 2008 (Session 3))

Written Evidence

Dick Manson, former Chief Executive, NHS Western Isles, 20 February 2008

Oral Evidence

Dick Manson, former Chief Executive, NHS Western Isles;
David Currie, former Chair, NHS Western Isles.

Supplementary Written Evidence

Dick Manson, former Chief Executive, NHS Western Isles, 5 March 2008
David Currie, former Chair, NHS Western Isles, 10 March 2008

12 March 2008 (5th Meeting, 2008 (Session 3))

Oral Evidence

Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Scottish Government;
Alex Smith, Director of Health Finance, Scottish Government;
Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Scottish Government;

Supplementary Written Evidence

Kevin Woods, Chief Executive of NHS Scotland and Director General Health Scottish Government, 27 March 2008

Annexe C: OTHER WRITTEN EVIDENCE

Marion Fordham, Director of Finance, NHS Western Isles, 7 January 2008
Trevor Jones, former Chief Executive of NHS Scotland, 1 April 2008

Remit and membership

Remit:

The remit of the Audit Committee is to consider and report on-

(a) any accounts laid before the Parliament;

(b) any report laid before or made to the Parliament by the Auditor General for Scotland; and

(c) any other document laid before the Parliament concerning financial control, accounting and auditing in relation to public expenditure.

(Standing Orders of the Scottish Parliament, Rule 6.7)

Membership:
Claire Baker
Willie Coffey
George Foulkes
Murdo Fraser (Deputy Convener)
Hugh Henry (Convener)
Jim Hume
Stuart McMillan
Andrew Welsh

Committee Clerking Team:
Clerk to the Committee
Tracey Reilly

Senior Assistant Clerk
Joanna Hardy

Assistant Clerk
Rebecca Lamb

Committee Assistant
Katie Packer

Report on the 2006/07 Audit of the Western Isles Health Board

The Committee reports to the Parliament as follows—

introduction

1. This report sets out the Committee’s findings in relation to the section 22 report by the Auditor General for Scotland (AGS) on the 2006/07 Audit of Western Isles Health Board.

Evidence

2. The Committee held three oral evidence sessions during this inquiry. These meetings took place on 11 January 2008 in Stornoway and 27 February and 12 March 2008 in Edinburgh. The following witnesses gave evidence to the inquiry:

11 January 2008

Ronnie Cleland, former Interim Chair and Malcolm Wright, former Interim Chief Executive, NHS Western Isles;

Donald Macleod, former Director of Finance, NHS Western Isles and Ken Matthews, Regional Organiser, UNISON;

Mr John Turner, Acting Chief Executive and Mr John Angus Mackay, Chair, NHS Western Isles; and

Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Alex Smith, Director of Health Finance and Alistair Brown, Deputy Director of Delivery, Scottish Government.

27 February 2008

Dick Manson, former Chief Executive, and David Currie, former Chair, NHS Western Isles.

12 March 2008

Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Alex Smith, Director of Health Finance and Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Scottish Government.

3. Written evidence received from the witnesses can be found at Annexe B, along with the AGS report. The Committee is grateful to all those who gave evidence to the inquiry.

The focus of the Committee’s inquiry

4. In view of the serious concerns expressed by the external auditors over successive years the Audit Committee agreed to conduct its own inquiry, focussing on the following four areas:

Governance arrangements and systems of internal control;
Leadership and management;
The financial recovery plan; and
Performance management arrangements.

5. This report will outline how the financial and managerial issues at the board arose, the steps that have been taken to address these issues, and the issues that remain for the future.

6. The Committee is aware that this inquiry has been the subject of considerable local and national interest. Committee members have received a high volume of correspondence raising a large number of issues, including numerous allegations of individual malpractice or incompetence. It is clear that there is considerable anger and dismay, especially in the local community, regarding the failures in systems and management that have taken place.

7. It has not been possible for the Committee to deal fully with all these issues and, in particular, the allegations against individuals, in this report, given the confines of the Committee’s remit. The remit of the Audit Committee, under the Standing Orders of the Scottish Parliament, is to consider and report on (a) any accounts laid before the Parliament; (b) any report laid before or made to the Parliament by the Auditor General for Scotland; and (c) any other document laid before the Parliament concerning financial control, accounting and auditing in relation to public expenditure. The Committee’s primary focus is therefore on the effective use of public funds.

8. A full rehearsal of all the issues raised during this inquiry would take considerable time and require a much more wide-ranging remit. The Committee notes that many correspondents have sought a full public inquiry into the issues surrounding NHS Western Isles and that Nicola Sturgeon MSP, Cabinet Secretary for Health and Wellbeing, has not ruled this option out.

9.The Committee recognises that there has been a regrettable loss of public confidence in the ability of NHS Western Isles to manage its affairs not only during 2006/07 but over a number of years. The Committee has not explored all of the concerns raised with it during the course of the inquiry but has examined in depth the main issues that have contributed to the problems at NHS Western Isles. It asks the Minister to consider whether any future investigation or inquiry should be pursued and to consider how the particular concerns that have been articulated should be pursued.

executive SUMMARY

10. This has been a long running inquiry, and the Committee has considered a large volume of evidence from those involved in the past and present management and oversight of NHS Western Isles.

11. By the end of the 2006/07 financial year NHS Western Isles had a cumulative deficit of £3.364 million. In the Committee’s view a number of factors have contributed to this situation, including external cost pressures arising from the rapid implementation of substantial changes in the National Health Service and changes in accounting practices nationally which reduced the financial flexibility that was previously available to the board. The Committee also notes that the clinical strategy pursued by the board involved investing heavily in acute care services, with a high level of hospital provision and a consequent high degree of reliance on the use of consultants, which also had had an adverse impact of the board’s finances. However, the pressures that the board was under were exacerbated by serious weaknesses in the board’s own internal control systems and financial management.

12. The Committee believes that the lack of a fully costed clinical strategy has hampered the ability of the board to manage its finances effectively. The Committee has serious concerns over the sustainability of the model of care which has historically been in place at NHS Western Isles. It is vital that the clinical strategy currently being developed by the board must be financially sustainable under the agreed funding formula. The Committee believes that the Scottish Executive Health Department must bear part of the responsibility for the failures that have taken place at the board, as it should have taken further steps to ensure that the strategy was financially sustainable. The Committee also believes that the Scottish Executive Health Department failed to grasp the significance of the problems at NHS Western Isles at an early enough stage and failed to brief Ministers adequately on the significance of what was developing. It should not have been left to the Minister to intervene in order to resolve management failures at the board.

13. There have been serious failures in the running of NHS Western Isles and, in particular, its finance department. Failures included a severe lack of communication, a failure to perform routine tasks and a failure to have in place adequate control systems. These issues were repeatedly raised in audit reports, year after year, without being resolved by the board. This is clearly unacceptable. The Committee is surprised that the former board Chair and Chief Executive were unable to recall a crucial report which was made on the failures at the board, known as the ‘Cook Report’ (which was commissioned as a result of a significant late movement in the board’s financial position in the 2004/05 financial year). This was unsatisfactory, extremely unhelpful to the inquiry and leads the Committee to regard their evidence as unconvincing. Had the Committee not been made aware of the report by other sources, its existence would never have come to light in the evidence presented by David Currie and Dick Manson.

14. The Committee is aware that remote and rural boards have considerable difficulty in attracting and retaining staff and board members with the right mix of skills and experience. A lack of financial expertise and knowledge amongst the board has hindered financial recovery at NHS Western Isles. Training and development for board members is vital for effective scrutiny and the Committee does not believe that effective scrutiny has always taken place in the past. The Committee recommends that the Scottish Government Health Directorates should review the arrangements for the recruitment, training and support provided to health board members, especially in relation to their audit responsibilities.

15. The board faces significant ongoing challenges in achieving recurrent financial balance. NHS Western Isles expects to achieve financial balance in the 2007/08 financial year by making non-recurring savings. The Committee commends the efforts and considerable success of the current leadership at NHS Western Isles in bringing the board back into financial balance. However, the use of non-recurrent savings to achieve balance is not sustainable in the longer term and the board must work with the Scottish Government Health Directorates to identify recurrent savings which can be made. The Committee believes that given the Scottish Executive Health Department’s responsibility for some of the failures of the board, the Health Directorates must take some responsibility for bringing financial sustainability back to NHS Western Isles.

16. Work to implement performance management systems at the board is continuing, although it will take some time to bed in. The Committee is particularly concerned that the board notionally has three Chief Executives.¹ The Committee believes this situation is unacceptable and must be urgently resolved by the board and the Health Directorates. The Committee also remains concerned that progress which has been made by the current management will not be maintained unless there is consistency of leadership at the board.

17. The Committee is concerned at the evidence it heard during this inquiry regarding appointment processes and that it could reflect wider practice within the NHS. The Committee is particularly concerned about the way that the temporary appointment of the Chief Executive in 2003 was made, and believes that the Accountable Officer and the Permanent Secretary should reflect on this. While recognising that some temporary posts need to be filled urgently, the Committee believes that permanent posts and long term secondment opportunities should be advertised in all but exceptional circumstances. The Committee is concerned that there has been a lack of transparency in the appointment of staff to temporary vacancies and seconded posts in the NHS. There is a worry that this might reflect a culture in the health service where failures in performance are not addressed, but where people are simply moved on to other posts, often in senior positions. The Committee would be concerned if this also happens in the wider civil service. The Committee therefore asks the Permanent Secretary to review the practice of transfers and secondments and to apply any lessons learned across the whole of the public sector. There should also be a review of the procedures for dealing with incompetence, inefficiency and failures in performance. The Permanent Secretary should report back on progress to the Committee.

18. The Committee also believes that there have been weaknesses in how the Health Department monitored and scrutinised the situation at the board. The Committee believes the Health Department should have intervened earlier and that the way the Health Directorates interact with health boards should be reviewed. The Health Department should have identified the management failures at NHS Western Isles much earlier and taken more decisive action. The Health Department contributed to and aggravated the situation at NHS Western Isles by failing to adequately monitor the stewardship of the board. There is a potential gap in accountability where boards are failing but are not taking sufficient action to resolve their failures. There should be a more robust mechanism to ensure health boards’ compliance both with recommendations made, often repeatedly, by external auditors and with the directions provided by the Scottish Government through the annual review process.

background

19. In 2007, the Scottish Executive changed its name to the Scottish Government. At this time the Scottish Executive Health Department became known as the Scottish Government Health Directorates. Both terms are used in this report, depending on the timeframe being discussed.

Financial history of the board

20. The financial year of 2006/2007 was the third consecutive year for which the Auditor General for Scotland (AGS) issued a Section 22 report on the annual audit of NHS Western Isles. Under the Public Finance and Accountability (Scotland) Act 2000, the AGS may prepare a report on the accounts of any public body and submit it to Scottish Ministers. In practice, Section 22 reports are used to highlight areas of concern which are identified in the course of the annual audit.

21. In the financial year 2006/07, NHS Western Isles had an in-year deficit of £0.880 million and a deficit of £2.484 million brought forward from 2005/06. This resulted in an overall cumulative deficit of £3.364 million. The board’s total allocation for 2006/07 was £58.223 million. The board had recorded an in-year deficit for all except one of the past 7 financial years and a cumulative deficit for the last 4 financial years. Previous audit reports had highlighted a number of serious weaknesses in the board’s governance arrangements. The 2006/07 report noted that while some improvements had been made, the auditor continued to have significant concerns about the corporate governance arrangements in place at the board.

22.The following table summarises the board’s financial position since the year 2000/01. (Figures in brackets indicate a surplus).

Year	In-year deficit/ (surplus)	Cumulative deficit/ (surplus)
	£millions	£millions
2000/01	0.549	nil
2001/02	(0.567)	(0.567)
2002/03	0.366	(0.201)
2003/04	0.495	0.294
2004/05	0.444	0.738
2005/06	1.746	2.484
2006/07	0.880	3.364

Staffing chronology

23. Alongside the financial and governance issues referred to above, the board was also subject to a number of staffing changes at senior level over this period. For ease of reference, these are summarised below.

24. In 2001, following an open competition, David Currie was appointed by Susan Deacon, the then Minister for Health and Community Care, as Chair of the board of NHS Western Isles. He was re-appointed to the position in 2005.

25. In early 2003, David Currie approached the then Chief Executive of NHS Scotland, Trevor Jones, and asked him to identify interim support to cover the sick absence of Murdo Maclennan,² who was then Chief Executive of NHS Western Isles. Trevor Jones identified Dick Manson, who had previously held the post of Chief Executive at the State Hospital at Carstairs, as a suitable candidate for the role of interim Chief Executive and he took on this role in May 2003. ³ Trevor Jones explained in writing to the Committee that due to the need to provide urgent support to the board and the difficulties experienced in finding suitable applicants for the substantive position of Chief Executive in the past, the interim position was not advertised.⁴ In May 2004, when the substantive post became vacant, there was an open competition for the post and Dick Manson was appointed on a permanent basis.

26. In November 2004, the then Director of Finance, Donald Macleod moved from his post to a risk management position within the board. The board again approached NHS Scotland for support and Murdoch Macdonald was appointed as Interim Director of Finance until April 2005. In April 2005 Marion Fordham assumed the post on a permanent basis following an open recruitment exercise.

27. On 1 August 2006 David Currie resigned as Chair. On the same day an interim support team consisting of Ronnie Cleland (Interim Chair), Malcolm Wright and a number of other team members was appointed by the then Minister for Health and Community Care, Andy Kerr MSP. Dick Manson was then seconded to a position in NHS National Services Scotland on 29 August 2006. Malcolm Wright was formally appointed as interim Chief Executive on 31 August 2006. The interim support team completed its work in January 2007.

28. On 25 January 2007, following an open competition, Laurence Irvine was appointed as Chief Executive and on 1 February 2007 John Angus Mackay was appointed as Chair. Since these appointments were made, Laurence Irvine has been suspended. His suspension was described by Kevin Woods⁵ as a “neutral act”⁶ (that is, it was not associated with any failures of performance). An acting Chief Executive, John Turner, was appointed in September 2007.

29. A table setting out these staffing changes is included below. Some of these staffing matters are examined in more detail in the sections of this report dealing with leadership and performance management.

	Chairman	Chief Executive	Chief Executive NHS Scotland
Jan 2005	David Currie	Dick Manson	Trevor Jones Kevin Woods
Sept 2006 Dec 2006	Ronnie Cleland (interim	Malcolm Wright (interim)
Jan 2007 Oct 2007	John Angus Mackay	Laurence Irvine John Turner (acting chief executive)

financial management, cost pressures and service design issues

The board’s financial position: Introduction

30. The paragraphs that follow describe a number of the underlying reasons for the ongoing deficit situation that NHS Western Isles finds itself in. In the Committee’s view a number of factors have contributed to this situation, including external cost pressures arising from the rapid implementation of substantial changes in the National Health Service and changes in accounting practices nationally, which reduced the financial flexibility that was previously available to the board. The Committee also notes that the clinical strategy pursued by the board involved investing heavily in acute care services. However, the pressures that the board was under were exacerbated by serious weaknesses in the board’s own internal control systems and financial management.

Service Design Issues

31. David Currie highlighted the infrastructure of the health service in the Western Isles, noting that hospital resources were underutilised and that “…if we were designing the most appropriate facilities and services for the islands today, they would look very different”.⁷ Dick Manson concurred, noting that unlike other island boards, NHS Western Isles had invested heavily in acute care services, with a high level of hospital provision and a consequent high degree of reliance on the use of consultants, which had had an adverse impact on the board’s finances. For example, approximately £1 million was spent during 2003/04 on consultant locums in order to comply with the European Working Time Directive⁸.

32. Figures presented to the Committee by Audit Scotland show that NHS Western Isles has more staffed hospital beds than either NHS Orkney or NHS Shetland. (For example, in 2006 the board had 7.63 staffed hospital beds per 1000 population, compared to 3.89 in Orkney and 4.57 in Shetland). There is a longer average stay in NHS Western Isles and a lower throughput per bed compared with the other island boards, with the result that productivity is lower.⁹ In Dick Manson’s view, while the board had tried to tackle the situation, it had not been able to change the model of care in time to absorb other cost pressures that came into the system. Mr Manson said that “I thought the key issue was that we needed to consider redesigning the clinical services”.¹⁰

33. Trevor Jones¹¹ also wrote that the service model needed to be reviewed to ensure that a sustainable and affordable service configuration was in place. He stated that “during my time as Accountable Officer the two most significant areas of concern were the need to strengthen the governance of the board and the need for the board to live within its means and develop a model of service that it could afford.”¹²

34. The Committee notes that during the time that these discussions were taking place, the board did not have any clear clinical strategy in place. While attempts have been made to engage with service redesign issues, it is only now that a clinical strategy is being developed. Dick Manson noted that more than 10 percent of staff were involved in service redesign working groups with the public during his tenure.¹³ The development of a clinical governance strategy was also a fundamental strand of the interim support team’s work. Malcolm Wright stated that “we saw the organisation’s clinical strategy as being fundamental...the unsustainability of the model of services that was being operated needed to be addressed. We needed to get the right balance between care that takes place off the island and care that is provided on the islands and between the hospital and the primary care sector”.¹⁴ Despite the importance of this issue, the Committee notes that the board still has no effective clinical strategy and is only now in the process of developing one.

35. Kevin Woods also outlined the work of the improvement and support team in the delivery directorate within the Health Directorates. He spoke of “national work on the future pattern of remote and rural health services, which is currently with ministers and will be responded to in the spring”.¹⁵

36. John Turner reported that work is underway to develop a clinical strategy for NHS Western Isles and that external and internal consultation on this plan will follow. He noted that it was “absolutely essential that that strategy is underpinned by a financial plan that, instead of focussing on how to get through the next financial year, takes a long-term, three to five year view of our income and expenditure, service charges, developments, investments, disinvestments and so on”.¹⁶

37. John Angus Mackay also noted that “there is a lot of scope for us to look afresh at the situation so that we can realign the finances, the workforce and the material aspects of our budgets with the requirements of the Western Isles – not the requirements of the past, but the requirements of the future”.¹⁷ The overall strategy is planned to be presented to the Health Directorates by July 2008.

38. The Committee has serious concerns over the sustainability of the model of care which has historically been in place at NHS Western Isles. The Committee expects NHS Western Isles to draw on the work being done by NHS Scotland on the future of remote and rural health services in preparing a long term clinical strategy for the future.

39. The Committee believes that the lack of a fully costed clinical strategy in the past has hampered the board’s ability to manage its finances effectively. The Committee concurs with John Turner’s view that any clinical strategy must be underpinned with rigorous financial information. The Committee believes that it is vital that any clinical strategy must be financially sustainable under the agreed funding formula.

40. The Committee believes that the Scottish Executive Health Department must bear part of the responsibility for the fact that the model of care designed and implemented at NHS Western Isles has not proved to be affordable, and was allowed to continue. The Committee believes that the Health Department should have taken further steps to ensure that the clinical strategy of the health board was financially sustainable under the funding arrangements in place, especially in the light of the cost pressures outlined below.

Cost pressures at NHS Western Isles

41. The Committee is aware of the significant challenges associated with delivering health services to an extremely remote, rural and widely dispersed area. Donald Macleod, former Director of Finance at NHS Western Isles (1995-2004), drew attention to these challenges, noting that the board’s geography “…is probably unique; it is made up of a long stretch of islands from north to south, with communities scattered around the spine, which need to be supported by the NHS”.¹⁸

42. The Committee notes that the 2004/05 and 2005/06 external audit reports identified a number of cost pressures facing NHS Western Isles. The 2005/06 report described NHS Western Isles as being an “environment of rapid and major change”.

43. Cost pressures on the board included the costs of implementing major service changes that were taking place on a national basis. Donald Macleod summarised the pressures as:

increased locum costs;
difficulty in complying with the working time directive;
increased mainland activity;
the cost of GP out of hours services;
the general medical service contract;
the changes to the consultant contract;
Agenda for Change;
a declining population leading to reduced funding under the Arbuthnott formula; and
pay modernisation.¹⁹

44. The Committee notes that under the new funding formula arrangements which will be introduced from 2009/10²⁰, it is anticipated that NHS Western Isles will continue to face a decline in funding.

Adequacy of funding

45. On the question of whether the NHS Western Isles funding allocations had been fair and adequate in the past, Kevin Woods said “we have a specific adjustment for the excess costs of care delivered in remote and rural areas”. He stated that “Western Isles is receiving about 50 per cent more per capita than the Scottish average…and significantly more per capita than Orkney or Shetland.²¹

46. Kevin Woods believes that the allocation process is “informed by the application of a detailed and thorough evidence-based formula that determines what the fair share of the NHS cake should be.” He added that the staff numbers working for the board have increased along with the services it offers.²²

47. Dick Manson reported to the Committee that he and David Currie had discussed the possibility of extra funds for NHS Western Isles with the then Chief Executive of NHS Scotland, Trevor Jones, in 2003 and had subsequent discussions with the finance director and deputy finance director of NHS Scotland. According to the witnesses “the consistent answer was ‘No’…It was very clear that the Health Department could not take money from other health boards and give it to the Western Isles when it needed to tackle areas of inefficiency”. ²³

48. In a letter to the Committee, Trevor Jones could not recall any specific requests for additional funding but confirmed that any such request would have been refused given that NHS Western Isles was “well funded in comparison to other health boards, including the other island boards. It was clear that the focus of the board should be to identify and address the cost pressures it faced”. ²⁴

49. Kevin Woods and Alex Smith confirmed that they had not received any requests for extra funding from NHS Western Isles in the last five years although an additional £250,000 was allocated to the board in 2005/06 to assist with “unexpected costs”.²⁵ Kevin Woods clarified during evidence on 12 March that this sum related to staff costs within the health board’s finance directorate.²⁶

50. The Committee notes that there were conflicting views as to whether NHS Western Isles requested additional funding.

Use of Accounting Flexibilities

51. Although the health board achieved cumulative financial balance in 2002/03, this had only been achieved through the use of non-recurring funding. In that year, both brokerage²⁷ and a one-off ring-fenced sum of money from the Scottish Executive were used. (This fact is recorded in the external audit report for 2002/03, which stated that the board had “only been able to meet their financial targets due to the use of brokerage of £500,000 and under-spends on ring fenced monies of over £520,000”).²⁸

52. The scope for such flexibility is now much reduced across the NHS in Scotland, although brokerage is still available. One-off adjustments such as capital to revenue transfers ceased to be available to NHS boards at the end of the 2005/06 financial year and while boards may still be allowed to retain unspent specific allocations, the control mechanisms are now more rigorous. These general moves to make NHS boards less reliant on non-recurring funding to break even and to tighten the control framework have had a significant impact on NHS Western Isles. The board’s history of relying on non-recurring funding has meant that the removal of this flexibility has affected its ability to break even.

53. The Committee notes the severe cost pressures that NHS Western Isles has experienced, and recognises the impact that the loss of accounting flexibilities across all NHS boards has had on the board’s ability to maintain balance. However, while recognising the challenges of serving a remote and dispersed population, the Committee is satisfied that funding for the Western Isles health board is reasonable and has been reasonable throughout the period described in this report.

Internal controls

54. The Committee invited the former Director of Finance for NHS Western Isles, Donald Macleod, to give evidence in order to examine the circumstances leading to the current financial position. He did not recall the internal auditors’ reports of January and March 2005 (his last year in post) identifying any high-risk areas.²⁹ When questioned on the £0.49 million deficit of 2003/04, he stated that “with such a deficit we could still have had a clean bill of health to a degree in that we had proper and adequate internal controls in place”. He did note that internal audit reviews had commented that the board was at risk, but said that the review “did not look specifically at the deficit...It looked at how we reported the deficit to the board and whether the board got the right information”.³⁰

55. However, the Committee is aware that external audit reports had raised a number of concerns over the financial sustainability of the board and the lack of internal controls in place over a number of years. For example, the external audit report made to the board for 2004/05 said that systematic weaknesses in financial controls during 2004/05 had impacted on the deterioration of the financial position. The report also drew attention to significant weaknesses in clinical and staff governance arrangements and stated that “the organisation is not yet supported by an adequate internal control environment.”³¹

56. By way of example, the Committee was told of a serious failure of the financial systems at the board which occurred during the 2004/05 financial year. Throughout the year, the board were receiving consistent reports that NHS Western Isles would achieve financial balance at the year end. The report on the financial position of the board at month 12 showed a surplus of £140,000, indicating a likely in-year surplus. However, when the end-of-year accounts were prepared an overspend of £444,000 was revealed. The Director of Finance asked Audit Scotland to investigate the late movement in financial position and it found that the anomaly was due to a range of accounting failures including some £168,000 of expenditure which had been omitted from the financial ledger. ³² The report also found that:

There was a lack of understanding of the new financial systems which were implemented in 2003, with only 2 staff being fully trained in the system;
There was a lack of communication within the department, with some staff being unwilling or unable to liaise with colleagues, along with poor morale;
There was a lack of perceived leadership in the department, along with a number of unresolved staffing issues, and
The department did not have formal operating procedures and straightforward but essential tasks, such as bank reconciliations, were not performed.

57. As a result of the Audit Scotland report, the Director of Finance commissioned an internal report in order to ascertain whether disciplinary action would be appropriate. When questioned about this report (which had subsequently become known as the “Cook Report”) during oral evidence, Dick Manson and David Currie claimed that they could not recall having seen the resulting report. However, NHS Western Isles was able to provide documentary evidence to the Committee confirming that both men had been present at a special private meeting of the board where the report was discussed. Subsequent to the committee meeting, the Committee also obtained a copy of the “Cook Report” from NHS Western Isles. Both David Currie and Dick Manson later wrote to the Committee to confirm that they had now recalled the report in question and had been present at a special board meeting held on 29 June 2006 which discussed the report. Had the Committee not been made aware of the report by other sources, its existence would never have come to light in the evidence presented by David Currie and Dick Manson. ³³

58. The Committee is surprised that neither witness was able to fully recall the events surrounding the preparation and consideration of the report whilst giving evidence and regards this set of circumstances as unsatisfactory and extremely unhelpful to the Committee’s inquiry. The Committee found Mr Manson and Mr Currie to be unconvincing witnesses in this respect. As explained later in this report, Mr Manson remains an employee of NHS Western Isles and the Committee notes that the board may wish to reflect on the nature of the evidence he presented to the Committee.

59. UNISON representative Ken Matthews said that “staff consistently raised a number of concerns about the breakdown of relationships and difficulties with budgets and service delivery…There was serious concern on the staff side that it took so long for there to be intervention”.³⁴ He also expressed concern about the internal investigation carried out by the health board (and subsequently referred to as “the Cook report” which he described as a ‘fundamentally flawed and hostile’ investigation into the finance department. He believed that staff had been made scapegoats given the financial situation of the board. ³⁵

60. Dick Manson stated that “within the finance team, there had been long-standing difficulties in getting figures properly reconciled and in doing basic tasks properly.” He described the key task of the new finance director Marion Fordham as “to rebuild the financial systems and establish financial controls in the board.” According to Mr Manson, she used “outside consultants to support her in doing that…because of the difficulty in recruiting people and getting them into the system”.³⁶

61. It was put to Mr Manson that he had made very little progress in addressing the weaknesses within the finance team during his three years at NHS Western Isles. He responded that “progress was made, but we could not get sufficient qualified accountants into the finance team for the long term to deal with the problems sooner…we started to rebuild the financial systems, but I do not think that they were complete.”³⁷

62. When the interim support team arrived in August 2006, it found that the 2006/07 budgets had been overstated in the ledger system by £1.631 million. In other words, the money allocated out to budget holders added up to more than the board’s total allocation. Internal audit reports concluded that this had been caused by basic errors in the reconciliation of income and expenditure figures.³⁸ The interim team found that financial controls, whilst improving, still fell short of what national recommendations and guidance required and Malcolm Wright noted that a number of ‘basic’ systems of management and control were not in place.³⁹

63. Internal audit reports commissioned by the interim support team also found that there had been “weaknesses in respect of individuals accepting responsibility for doing things about the variances and following through on agreed actions”.⁴⁰ Audit Scotland’s report on the accounts for 2006/07 also found that “the level of the deficit may in part derive from the lack of budgetary information.”⁴¹

64. It is apparent that there have been very serious failures within the finance department at NHS Western Isles over a number of years. In particular, the Committee notes that there was a serious lack of communication between key staff, a failure to perform routine financial tasks effectively and a failure by both the executive management and the wider board to satisfactorily resolve these issues. The Committee acknowledges that efforts were made to put adequate financial systems in place and to tackle inefficiencies. However, the fact remains that the same issues were consistently raised in audit reports year after year, without being resolved by the board. The Committee regards this as unacceptable.

the Financial recovery plan

The 2006 financial recovery plan

65. As noted above, external audit reports consistently raised serious concerns over the board’s financial sustainability.⁴² Dick Manson stated that his “overriding priority at the time [in 2006] was to get back into financial balance” and described the financial recovery plan which was produced in 2006 as “ambitious”.⁴³ He recalled that a detailed operational financial plan was drawn up with responsibility for each saving attached to a non-executive board member. Internal auditors reviewed the financial recovery plan.

66. He noted that the board approved a budget for 2006/07 which aimed to deliver in-year balance, and stated that “given the issues about change in the Western Isles…, it was probably overambitious. However, it was certainly worth trying to deliver it”.⁴⁴ This financial recovery plan was not signed off by the Scottish Executive. (Issues regarding the Scottish Government’s role in managing the board are detailed in later sections of this report describing the performance management of the board).

67. On arrival, the interim team scrutinised the financial recovery plan and found that it “was not adequate and, in many ways, fell far short of being sustainable and realistic, with large parts of it having no sound basis in action plans”.⁴⁵ According to Malcolm Wright, when the team attempted to put confidence ratings on what was in the plan and examine whether savings were really likely to happen “a lot of it started to fall away.”⁴⁶

68. The interim support team developed the financial recovery plan. Weekly meetings were held with the Chair, Chief Executive and the executive team. Ronnie Cleland noted that “everyone was left in no doubt that the position had to be rapidly recovered in order that a sustainable position could be built for the future”.⁴⁷ Malcolm Wright stated that “the immediate priority was to clamp expenditure” and described the immediate steps taken. These included reducing the number of staff with authority to commit expenditure, putting in place a vacancy review mechanism, obtaining greater control over staff leave and travel and reviewing the control mechanisms for referral of patients to the mainland.⁴⁸

The current financial recovery plan

69. John Turner assured the Committee that the board has continued to improve on the actions and measures put in place by the interim support team, although he noted that there is still a long way to go.⁴⁹ Reports are made regularly to the executive team. These are analysed and scrutinised by the Chair of the board and its non-executive directors.

70. The internal auditor was able to report that the budget setting process for 2007/08 had been much improved on the previous process, although more remains to be done.⁵⁰ However, the Committee is also aware that earlier versions of this financial plan have been shown to be unrealistic and notes that external auditors expressed concerns in their 2006/07 report that the targets appeared unrealistic and that planned savings were unlikely to be achieved.⁵¹

71. John Turner stated that, in partnership with colleagues on the mainland, they hoped to develop a more effective approach to enlisting the services of medical locums, the cost of which accounts for a significant slice of the health board’s budget.⁵² He later wrote to the Committee to say that a saving of £311,000 in forecast expenditure for 2007/08 has been achieved. This is a non-recurring saving although there is a possibility that some or all of the savings may be recurrent in future years.⁵³ John Turner stated that, if financial break-even is achieved in 2007/08, they will have used just over £2 million of resource that is currently classified as non-recurring to achieve this. However, he hopes that “a good proportion” of the savings made in this year can be turned into recurring savings.⁵⁴

72. The Committee notes that the board is currently aiming to break even at year end and that there is cautious optimism that this will be achieved.⁵⁵ However, the Committee also notes that in 2006/07, the board had to rely on £6.80 million of non-recurring funding in order to break even, which represents over 12% of its recurring income. ⁵⁶

73. The Committee notes the significant challenges faced by the board in achieving recurrent financial balance. The Committee commends the Chair and the acting Chief Executive for the progress which they have made towards achieving financial balance at the board. However, the Committee concurs with the views of many witnesses that much more still remains to be done to secure a truly sustainable future for NHS Western Isles. The Committee believes that given the Scottish Executive Health Department’s responsibility for some of the failures of the board, the Health Directorates must take some responsibility for bringing financial sustainability back to NHS Western Isles.

74. In particular, the Committee remains concerned at the continued reliance of the board on non-recurrent savings which represent a significant percentage of the board’s overall budget. The Committee considers this a high-risk and potentially unsustainable situation and recommends that the board works with the Scottish Government to identify recurrent savings which will help it to achieve the goal of recurrent financial balance. As noted above, work to achieve the goal of recurrent financial balance must be closely aligned with the work on developing a coherent and sustainable clinical strategy for NHS Western Isles.

Governance, Leadership and performance management

75. The following sections of the report describe issues of governance, leadership and performance management in relation to NHS Western Isles. The report examines the performance of the board and considers, in particular, whether the board has had sufficient leadership and internal capacity to effectively manage its affairs. The report also considers the role of the Scottish Government, the support it provided to NHS Western Isles and whether the Scottish Government’s monitoring and involvement was sufficiently timely and effective.

Governance

76. The Committee is aware that audit reports continued to express concern over governance arrangements within the board over a number of years. Concerns were frequently expressed about, for example, staff governance, the lack of a performance management framework, and weaknesses in the operation of the board’s committees. Often the same criticisms were made year after year with little evidence of major progress being made or the auditor’s recommendations being implemented.

77. During 2006, the interim support team commissioned a number of internal audit examinations into areas of concern which were reported back to the board. Malcolm Wright stated that “the main challenges that the board faced were in leadership, governance and management. We found a serious level of dysfunction in those areas”.⁵⁷ He outlined the purpose and aims of the interim support team and described the focus of its work as being on the following eight areas:

restoring partnership working with staff;
setting up partnership working with Comhairle nan Eilean Siar (particularly the establishment of the community health partnership);
resolving a number of grievances and disciplinary cases involving staff;
addressing the financial recovery plan and moving towards financial balance;
putting in place systematic clinical governance arrangements;
creating a clinical strategy for the board;
ensuring adequate internal and external communications; and
developing adequate corporate governance arrangements.⁵⁸

78. The interim support team also found a number of weaknesses in governance arrangements at NHS Western Isles. Internal audit reports indicated that there were a total of 29 priority one action points. These reports showed that a number of the board’s committees were not operating effectively. For example, the endowment committee, which deals with monies donated to the board from the public, had not met for four years. Four years’ worth of its accounts had not been considered and approved by the board.⁵⁹

79. The interim support team made a number of changes to the composition of the board’s committees. Ronnie Cleland met with both the executive team and non-executive directors to clarify responsibilities and to discuss what both the support team and the board members wanted to achieve. Action was taken to ensure that the board acted as a more cohesive unit. As Ronnie Cleland explained “It was important that we had engagement with the board such that the board was signed up to what we were asking it to do”.⁶⁰

80. The interim support team judged the issues to be very serious but “capable of resolution with good leadership and strong management.”⁶¹ A recovery plan was drawn up by the interim team which formed the basis of on-going performance management reporting to the board. Malcolm Wright reported that the Community Health and Social Care Partnership (CHaSCP) proposals were able to move forward, partnership working was restored and an employee director appointed to the board. A number of discipline and grievance cases were also resolved.⁶² He noted that “we were able to make significant progress although I cannot report that everything was sorted”. Ronnie Cleland agreed that significant progress had been made, but acknowledged that there was still work to be done with all individuals at board level. An indication of these requirements was passed on to the new Chair and Chief Executive.⁶³

81. Following the work of the interim support team, John Angus Mackay described a process of taking the board ‘back to basics’, clarifying roles and responsibilities, providing training and development for board members and reviewing key documentation (e.g. the board’s mission statement, financial recovery plan, standing financial instructions and standing orders).⁶⁴

82. A corporate risk register, bringing together all the departmental risks, has been formulated and is scrutinised by the board. In response to a critical NHS Quality Improvement Scotland (QIS) report on clinical governance and risk management the board has also put in place an action plan that clearly describes all the requirements on the board, identifies issues that the board must take forward and outlines the progress made. The Chairman and Chief Executive also described the progress which has been made in establishing the CHaSCP with the local council despite the board’s financial difficulties.⁶⁵ Of the 29 priority one action points identified in the internal audit reports to the interim support team, 18 points have been actioned, 8 are ongoing, and 3 are still to be progressed.⁶⁶

83. Corporate objectives were drawn up in June 2007 which informed a review of the terms of reference of all governance committees at the board. John Angus Mackay emphasised the need for clarity at the top about what the corporate objectives are.⁶⁷

84. John Angus Mackay stated that “I am clear that the board has a lot of serious, hard work ahead of it fully to meet the legitimate expectations of us and we take our responsibilities seriously. We are realistic and determined…there is an improving picture here and we can describe to you sound progress and the building blocks that are being put in place.”⁶⁸

Managerial and board capacity

85. The annual audit report by the external auditors on the 2006/07 accounts records a “general lack of financial management expertise and financial focus at board level” and stated that “weaknesses in the monitoring reports provided to members may result in an insufficient level of scrutiny and monitoring of progress towards financial recovery.” ⁶⁹ The lack of management and board capacity has been evident, and commented on by the external auditor, for some years.

86. David Currie also noted that when he joined the board he had found a ‘disconnect’ with NHS Scotland, particularly at management level, and a lack of understanding of the National Health Service agenda.⁷⁰

87. Dick Manson highlighted that “the lack of management capacity and development opportunities for all staff and board members in a small board is a major challenge in trying to make the necessary changes. NHS Scotland has not yet developed ways of providing support for smaller boards to enable them to benefit from the capacity and expertise of the larger boards. That issue requires to be addressed further”.⁷¹

88. Dick Manson reported that there were difficulties in recruiting and retaining people with the right skills. He requested help from the Scottish Executive and explored “how we could make NHS Western Isles an attractive stepping stone, where people could perhaps spend two or three years doing certain things before moving out”. The Scottish Executive did provide an interim finance director but was unable to help with the recruitment of general managers or other members of the finance team. Mr Manson added that the Health Department “had no magic supply of people who were keen to come to the Western Isles”.⁷² David Currie concurred, saying that while “officials often acknowledged the difficulties that we had” they did “not get much help” from the Health Department with short term secondments or with people to provide mentoring and coaching.⁷³

89. David Currie also admitted to the Committee that, during his tenure, “the processes were not in place for adequate scrutiny and monitoring, and the right skills were not around the board table” although he added that “progress had certainly been made” during his time at NHS Western Isles.⁷⁴ The Committee also notes that non-executive directors raised concerns with the then Minister in mid 2006, regarding a lack of communication within the board, and a lack of training, development and support for board members.⁷⁵

90. Malcolm Wright and John Turner both acknowledged the difficulties of recruiting and retaining staff. Malcolm Wright noted that “it will always be a challenge to get the breadth and depth of managerial and clinical capacity in a board of its size...we need to link into bigger centres so that their depth of expertise can be drawn on”. Ronnie Cleland and John Turner also strongly agreed that the board needed to link in with clinical and management networks within the NHS.⁷⁶ The Committee notes that Ronnie Cleland, John Turner and Malcolm Wright have all felt able to draw on a wide range of support from other NHS boards in areas where they felt that further expertise or mentoring would be helpful.

91. Both Trevor Jones and Malcolm Wright also highlighted issues of capacity.⁷⁷ Trevor Jones wrote that island health boards were encouraged to make use of the Remote and Rural Areas Resource Initiative (RARARI) which was established to support them in addressing particular problems they faced and develop innovative ways of developing services in their areas. Boards were also encouraged to collaborate and share good practice and to work with other northern health boards to address common problems. When vacancies arose in key positions, the then Health Department would support boards by identifying possible secondments to strengthen the management capacity.

92. John Angus Mackay believed that there were two prerequisites for the future survival of the board, saying “one is that we get our house in order internally, with whatever support we need from NHS Scotland in a range of disciplines…the other prerequisite is that we have good, strong links with our local partners in the public and voluntary sectors.”⁷⁸

93. The Committee believes that smaller and more remote NHS boards have an inherent difficulty in attracting and retaining staff and board members with the appropriate skills and experience. The Health Directorates should continue to work with small boards to ensure that they are able to draw on the support and expertise available within the wider NHS to deliver sustainable services. The Health Directorates should report back on what actions it will take to address the peculiar problems faced by small boards.

94. The Committee concurs with the comments in the report on the 2006/07 accounts⁷⁹ that a lack of financial management expertise and weaknesses in the financial reports provided to board members may have hindered financial recovery at NHS Western Isles. The Committee does not believe that effective scrutiny by the board has always taken place in the past. In the Committee’s view, the Health Department contributed to and aggravated the situation at NHS Western Isles by failing to adequately monitor the stewardship of the board. However, the Committee is encouraged by the steps taken by current management to achieve the effective operation of the board.

95. The Committee views development and training for all board members as key to the future good governance of the health board. Appropriate training and development for board members, especially non-executive members, ensures that they are able to effectively scrutinise and challenge the proposals presented to them. The Scottish Government has a key role to play in supporting this.

96. The Scottish Government Health Directorates should review current protocols for the selection and training of board members across the NHS in Scotland. The aim of this review should be to ensure that boards operate effectively and that members receive the appropriate training and support to enable them to effectively scrutinise and challenge the actions of the executive. In particular, steps should be taken to ensure board members are aware of and fulfil their audit responsibilities. It is clear that both executive and non-executive members failed to take effective action to ensure that recommendations made as part of the audit process were implemented.

97. The Committee is concerned that boards, as presently constructed, may not be able to rigorously and objectively hold management to account, and that the mix of skills available may be inadequate in some cases. The Committee would welcome further information from the Health Directorates on what checks are made to ensure that proper scrutiny by boards takes place. The Committee believes that the Health Directorates should give further thought to how the performance of boards can be made more transparent and publicly accountable.

Performance management

Performance management within the board

98. The 2004/05 audit reported that a local framework for measurement and management of performance had not yet been developed.⁸⁰ In 2006, the interim support team set personal objectives for each executive and non-executive member of the board. These were based on the eight key areas for action which had been agreed with the board (set out in the ‘Governance’ section above).

99. Malcolm Wright told the Committee that “I was responsible for performance management and I conducted performance appraisals before I left. We held weekly meetings of the executive team …I followed that up with a range of one-to-one or small-group meetings so that we could consider individual projects and really get into the detail and hold people to account for delivery of those projects.”⁸¹

100. John Angus Mackay said that “each board meeting has an item on performance management to ensure that we receive information on performance”. He added that “the board…is now better placed to question matters. There is also an on-going programme of training to ensure that we are asking the right questions and looking for the right answers”. The board’s remuneration committee is also kept informed by the Chief Executive on each executive member’s progress in achieving their performance objectives. ⁸²

101. The Committee is encouraged by the work being done to implement performance management systems at the board. However, it will require consistent effort over a period of time for any performance management system to really bed in. The Committee remains concerned that the management situation at the board, with the current Chief Executive suspended, another Chief Executive on secondment and an acting Chief Executive in place, may leave the board vulnerable and at risk of losing momentum when the acting Chief Executive departs. The Committee expects all board members, especially non-executive members, to play a full part in the continued recovery of the board.

Corporate objectives

102. The report on the 2006/07 audit found that “the organisation has not yet established a performance management framework to provide assurances to the board on the delivery of objectives.”⁸³

103. Ronnie Cleland said that it “is correct that the corporate performance management system was fragmented” when the interim team arrived in the Western Isles. The team found that there was no single document which clearly described action to be taken.⁸⁴ The board recovery plan drawn up by the interim team formed the basis of on-going performance management reporting to the board. Kevin Woods also said that many corporate objectives arose from the local delivery plan, from internal audit reports and the annual review. He stated that “I do not want to leave the committee with the impression that there had not been a dialogue about what the board’s objectives should be.”⁸⁵ A formal set of corporate objectives was finally agreed in June 2007.

104. The Committee accepts that the interim support team was focussed on the achievement of agreed objectives described by Malcolm Wright. However, the Committee believes that adopting formal corporate objectives sooner would have generated greater clarity among staff and provided further impetus for improvement. The Committee seeks reassurance from the board that the current objectives will be reviewed and realigned once the board’s clinical strategy has been developed and agreed.

Action taken by the Health Directorates

Performance management by the Scottish Government

105. Kevin Woods described the process through which the Scottish Government Health Directorates⁸⁶ monitor the performance of health boards. He said “we have a delivery group, which holds regular meetings, the HEAT (health, efficiency, access and treatment) system and a series of indicators that capture ministers' key priorities”. A key tool for measuring health boards’ performance is the local delivery plan. Plans are agreed between health boards and the Scottish Government Health Directorates which agree “the levels of service that they will achieve with the resources that they have”.⁸⁷

106. Kevin Woods summarised the reasons he believes NHS Western Isles found itself in financial difficulties as being weaknesses in internal controls, governance difficulties and failings in the board’s performance management regime. ⁸⁸

107. Kevin Woods described for the Committee how the Health Department sought to ensure that the board followed due process in dealing with financial, clinical and staff governance issues. ⁸⁹ He explained that “if we are not happy about what is being reported to us, we have an escalation process, which is intended to ensure that we seize and deal with issues early on”. ⁹⁰ He described the increasing level of concern amongst officials of the Health Department that assurances given by the board at the Annual Accountability review of September 2005 were not being delivered. He said that it became clear that “such improvements were not occurring” and added that “the situation was becoming untenable”.⁹¹

108. Paul Martin (Director of Health Workforce, NHS Scotland) provided the Committee with a detailed account of the events leading up to the introduction of the interim support team. Mr Martin worked with the health board in 2005 and 2006 to try to address workforce issues. He stated that “our job is to ensure the application of good policies and procedures that are recognised nationally...and agreed in partnership with trade union and professional organisations”. Mr Martin worked with senior staff and staff representatives and sought various assurances from the health board and the health board’s lawyers. He was advised that the board was following due and agreed process.⁹²

109. The partnership support unit within the Health Department also worked with the health board’s employee director to develop partnership working at the health board. Despite this, in February 2006, staff-side organisations met with the Chairman to express concerns over the organisational changes proposed through the board’s clinical strategy. This culminated in a vote of no confidence in the then Chair, Chief Executive and the medical director in March 2006.⁹³

110. Following this, Paul Martin held a series of meetings to discuss the concerns regarding leadership and the board’s decision-making processes which trade union officials had raised. Mr Martin agreed a five-point plan with the board and trade union officials, covering patient services, partnership working, service redesign, clinical strategy and wider engagement. Mr Martin also instructed the Chair of the board to review concerns expressed by staff regarding patient services. The Health Department also supplied senior human resources support.

111. Mr Martin said that by July and August of 2006, “It became clear that, collectively, the board was not responding to the challenges that we had placed…in the action plan. By then we had a body of evidence that told us it was perhaps time to take further action…the form that action took was the introduction of the support team. At that stage, our patience with the board was running out.”⁹⁴

112. Kevin Woods concurred, noting that it was undoubtedly the case that the situation was unsatisfactory by the middle of 2006 and that they were not seeing the progress they wished to.⁹⁵

113. Following the arrival of the interim support team, Dick Manson was offered a secondment to a post within NHS Scotland. Kevin Woods explained that sending in the interim support team had effectively meant that there were two people operating in the Chief Executive’s role and that it was not possible for this situation to continue, as clarity was needed about who was in charge of the board.⁹⁶ He described the situation surrounding Mr Manson’s departure as being ‘wholly exceptional’ and believed that the department had proceeded in a way that had enabled the Western Isles to move on.⁹⁷

114. Kevin Woods clarified that it is for the board to investigate or determine any concerns that it may have about any employee, even if that employee is the Chief Executive, or is on secondment elsewhere. To the best of his knowledge, the health board has not, to date, raised any performance or disciplinary issues with regard to Dick Manson’s tenure at the board. He stated that “the formal assessment of Mr Manson’s performance would have rested with the chair and the board. If they had consulted me, I would have given them my views and expressed my concerns about that. I was content that in moving to this secondment, Mr Manson would be able to undertake the duties that he has”. ⁹⁸ NHS Western Isles remains Mr Manson’s employer.

115. The Committee is concerned at the evidence it heard during this inquiry regarding appointment processes and that it could reflect wider practice within the NHS. The Committee is particularly concerned about the way that the temporary appointment of the Chief Executive in 2003 was made, and believes that the Accountable Officer and the Permanent Secretary should reflect on this. While recognising that some temporary posts need to be filled urgently, the Committee believes that permanent posts and long-term secondment opportunities should be advertised in all but exceptional circumstances. The Committee is concerned that there has been a lack of transparency in the appointment of staff to temporary vacancies and seconded posts in the NHS.

116. There is a worry that this might reflect a culture in the health service where failures in performance are not addressed, but where people are simply moved on to other posts, often in senior positions. The Committee would be concerned if this also happens in the wider civil service. The Committee therefore asks the Permanent Secretary to review the practice of transfers and secondments and to apply any lessons learned across the whole of the public sector. There should also be a review of the procedures for dealing with incompetence, inefficiency and failures in performance. The Permanent Secretary should report back on progress to the Committee.

117. The Committee notes that the board notionally has three Chief Executives. Mr Manson remains an employee of the board, although his salary costs are reimbursed to the board by the Scottish Government Health Directorates who are also covering the salary costs of the acting Chief Executive, John Turner. Laurence Irvine is currently suspended. The Committee regards this situation as unacceptable and urges the Board to work with the Health Directorates to resolve the situation as soon as possible.

118. The Committee believes that events leading to the introduction of the interim support team demonstrate weaknesses in the Health Directorates’ ability to effectively monitor the performance of boards. The Committee believes that the Health Department’s intervention in issues surrounding governance at the board should have been made at an earlier stage. The Health Directorates should therefore review practice in this area. The Committee believes that the Health Department failed to grasp the significance of the problems at NHS Western Isles at an early enough stage and failed to brief Ministers adequately. It should not have been left to the Minister to intervene in order to resolve management failures at the board.

119. The Committee considers that the annual review process has not been wholly successful in addressing the failures at NHS Western Isles. The Committee is particularly concerned that there may be a potential accountability gap where a board is failing but there is an absence of action by the board, particularly by non-executives to address any failures. The Committee acknowledges that it is important for health boards to have effective control of their own affairs. However, where a board is clearly not performing, there should be a mechanism for the Government to take swift action to resolve the situation. NHS boards must be clearly told when they need to take action to address failings and there must not be room for any perception that any continued failings will go unchallenged.

How the Scottish Government monitors boards’ financial performance

120. Kevin Woods stated that when assessing a board’s financial situation the Health Directorates assess both annual performance and the underlying recurring position. Alex Smith explained that in the case of overspend by NHS boards, funding is made available to match the requirements but this process must be accompanied by a financial recovery plan “to ensure that any overspend will be replaced in due course”.⁹⁹

121. NHS Scotland has tried to reduce reliance on non-recurring funds by boards and to reduce any ongoing deficits. The Audit Scotland NHS overview report for 2006/07 showed that all other boards except NHS Western Isles were operating at a cumulative balance, although 16 boards were still reliant on non-recurrent funding to achieve break-even in 2006/07. ¹⁰⁰

122. Trevor Jones wrote that “from 2002/03 it was clear that NHS Western Isles had a recurrent deficit which required firm action” and that “the financial situation was a clear focus in discussions between the board and the Health Department, reflected in the Annual Accountability Review letters”. ¹⁰¹

123. The Finance Directorate of the Health Directorates scrutinises monthly submissions from every NHS board. Any issues of concern are discussed and any serious issues escalated. Kevin Woods noted that he had visited the NHS Western Isles to discuss such issues in the past. Kevin Woods described how, following the first two Section 22 reports by the Auditor General, “We were being given assurances that the board was addressing the underlying financial issues”.¹⁰² He said that “we rightly interrogate boards' proposals for how they will achieve balance and overcome deficits, but we also rely on the assurances that we get from the leadership”.¹⁰³

124. Following assurances which were given by the board at the annual review in September 2005, a significant deterioration in the board’s outturn for 05/06 was picked up through routine monthly financial monitoring by the Health Department. It transpired that a financial error had been made by the board and that forecasted savings had been counted twice and this had given an unrealistically favourable impression of the financial situation.¹⁰⁴

125. In a letter to the Audit Committee, Kevin Woods described the Health Department’s reluctance to accept assurances at face value at the outset of the 2006/07 financial year given the failures of the previous year.¹⁰⁵ The Financial Recovery Plan produced in 2006 was not initially signed off by the Health Department. Kevin Woods said that “we needed to see consistent month-by-month performance to justify signing off the plan”. The board had also failed to establish a sub-committee of the Finance Committee to focus on financial planning and prioritisation (as agreed at the 2005 Annual Review) and budgets had not been notified to budget holders. Kevin Woods noted that “this situation did not give us confidence as to the robustness or viability of the financial plan”.¹⁰⁶

126. Kevin Woods stated that he was “cautiously optimistic” about whether the current financial recovery plan, which has now been signed off by the Directorate, is realistic. However, he noted that further work was required to ensure that it is sustainable on a year on year basis. Alex Smith added that “the documentation that we are seeing and the approach that is being taken lead us to be more assured”.¹⁰⁷

Tackling the accumulated deficit

127. There appears to be no firm agreement between NHS Western Isles and the Scottish Government regarding the clearing of the accumulated deficit.

128. On the question of potentially writing off the accumulated deficit, Kevin Woods said “our key priority is to get in-year balance, but I understand that there is concern about the legacy that must be resolved. In general, NHS Scotland's approach is to achieve that through a process of brokerage, because we think that it is important that debts are cleared from the places where they arise.” The only time a debt has been written off previously was when NHS Argyll and Clyde was abolished in 2006. Kevin Woods said that “Ministers have made it clear that they wish to see NHS Western Isles continue.”¹⁰⁸

129. John Turner emphasised to the Committee that the board’s priority is to achieve in-year balance and then to move to a situation of recurring balance. In his view, only then could they be in a position of confidence to discuss the deficit that has accrued. John Angus Mackay observed that it “would be very difficult to repay £3.4 million in one or even two or three dollops” given the financial environment the board is now in.¹⁰⁹

130. Kevin Woods emphasised the importance of continued service delivery in any future plans for financial recovery. He said “We want to ensure that clinical services are retained and maintained” and added that “it is possible to achieve improvements in financial performance through service redesign…brokerage may give some headroom in allowing detailed redesign work to take place to make services more cost effective.” ¹¹⁰

131. The Committee is encouraged by the progress that is being made at NHS Western Isles. However, the Scottish Government Health Directorates must work with the board in order to progress issues of service redesign which will allow recurrent savings to be made.

132. The Committee is concerned that the Scottish Executive Health Department continued to accept assurances for too long in the face of repeated financial failures at NHS Western Isles. It believes that earlier, more rigorous challenges might have prevented the health board from accumulating such a large deficit. The Committee is also concerned that if the Health Directorates continue to rely on such assurances in the future, there may be potential for a situation such as this to happen again. This highlights the need for effective monitoring and scrutiny of individual boards by the Health Directorates.

133. The Scottish Government Health Directorates should review the protocol for managing the performance of boards in the light of experience with NHS Western Isles.

134. The Committee expects the Scottish Government Health Directorates to ensure that the NHS Western Isles clinical strategy is both robust and financially sustainable. The Health Directorates should also reflect on whether addressing the accumulated deficit at NHS Western Isles in the years to come will present a barrier to achieving the sustained delivery of health services.

Looking to the future

135. Kevin Woods stated that avoiding a fourth Section 22 report from the Auditor General would take “determined leadership by the whole board - the executive members, the non-executive members and the stakeholder members. It requires effective working through the partnership systems that we have in NHS Scotland, and it will involve working with the public and patients who use services here in the Western Isles”.¹¹¹

136. The Committee notes the views of all witnesses who are involved in the current governance of the board that the situation is improving and that there are grounds for cautious optimism. The Committee wishes to take this opportunity to commend the work of the interim support team under Ronnie Cleland and Malcolm Wright, and the current team of John Angus Mackay and the acting Chief Executive John Turner.

137. The Committee believes that significant progress has been made in the past year. However, much more remains to be done in terms of developing a sustainable clinical strategy, re-establishing partnership working with staff, the wider NHS and the local community, and moving towards financial balance. The Committee remains concerned that future changes in the management of the board may present a risk that progress will be slowed or momentum lost. The Committee believes it is crucial that the board continues to put in place robust systems of governance and internal controls that will provide a degree of assurance that correct processes and procedures are being followed. It is also crucial that the board continues to engage with the Scottish Government Health Directorates and both internal and external auditors in developing the way forward.

Annexe A: extracts from the minutes of the Audit Committee

6th Meeting, 2007 (Session 3), Wednesday 7 November 2007

1. Decision on taking business in private: The Committee agreed to take agenda item 7 in private.

2. Section 22 Reports: The Committee received a briefing from the Auditor General for Scotland on the Section 22 report “The 2006/07 Audit of the Western Isles Health Board”.

7. Consideration of approach (in private): The Committee considered its approach to the Section 22 report entitled “The 2006/07 Audit of the Western Isles Health Board”.

The Committee agreed in principle to hold an inquiry on the Section 22 report “The 2006/07 Audit of the Western Isles Health Board” and to consider detailed arrangements for the inquiry at a future meeting.

8th Meeting, 2007 (Session 3), Wednesday 5 December 2007

Section 22 Report on Western Isles Health Board (in private): The Committee considered detailed arrangements for its inquiry on the Section 22 report “The 2006/07 Audit of the Western Isles Health Board”. The Committee agreed in principle to hold an oral evidence session in Stornoway in early January, and also agreed the lines of inquiry and the proposed witnesses for the oral evidence session. The Committee agreed to delegate authority to the Convener to approve any witness expenses in relation to the inquiry and approved in principle the use of air travel by witnesses. The Committee further agreed to consider the evidence received and consider draft reports relating to the inquiry in private at future meetings.

1st Meeting, 2008 (Session 3), Friday 11 January 2008

Section 22 Report on Western Isles Health Board: The Committee took evidence on its inquiry into the Auditor General for Scotland’s Section 22 Report on the 2006/07 Audit of the Western Isles Health Board from—
Ronnie Cleland, former Interim Chair and Malcolm Wright, former Interim Chief Executive, NHS Western Isles;
and then from—
Donald Macleod, former Director of Finance NHS Western Isles and Ken Matthews, Regional Organiser UNISON;
and then from—
Mr John Turner, Acting Chief Executive and Mr John Angus Mackay, Chair, NHS Western Isles;
and then from—
Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Alex Smith, Director of Health Finance and Alistair Brown, Deputy Director of Delivery, Scottish Government.

2nd Meeting, 2008 (Session 3), Wednesday 23 January 2008

Section 22 Report on Western Isles Health Board (in private): The Committee considered the evidence received at its meeting on 11 January 2008 on its inquiry into the Auditor General for Scotland’s Report on the 2006/07 Audit of the Western Isles Health Board. The Committee agreed to seek further written evidence from Dr Kevin Woods, Chief Executive of NHS Scotland and Director General Health. The Committee agreed to examine the response from Dr Woods and consider the next steps in the inquiry at its next meeting.

3rd Meeting, 2008 (Session 3), Wednesday 6 February 2008

Section 22 Report on Western Isles Health Board (in private): The Committee considered correspondence received from the Chief Executive of NHS Western Isles and the Accountable Officer and considered the next steps in the inquiry. The Committee agreed to invite Dick Manson, former Chief Executive, NHS Western Isles and David Currie, former Chair NHS Western Isles to give oral evidence to the Committee.

4th Meeting, 2008 (Session 3), Wednesday 27 February 2008

2. Section 22 Report on Western Isles Health Board: The Committee took evidence on its inquiry into the Auditor General for Scotland’s Section 22 Report on the 2006/07 Audit of the Western Isles Health Board from —
Dick Manson, former Chief Executive, and David Currie, former Chair, NHS Western Isles.

6. Section 22 Report on Western Isles Health Board (in private): The Committee considered the evidence taken at agenda item 2. The Committee agreed to invite Trevor Jones, former Chief Executive of NHS Scotland and Head of the Scottish Executive Health Department and Dr Kevin Woods, Chief Executive of NHS Scotland and Director General Health to give oral evidence to the Committee. The Committee also agreed to seek further written evidence from NHS Scotland.

5th Meeting, 2008 (Session 3), Wednesday 12 March 2008

2. Section 22 Report on Western Isles Health Board: The Committee took evidence on its inquiry into the Auditor General for Scotland’s Section 22 Report on the 2006/07 Audit of the Western Isles Health Board from —
Kevin Woods, Chief Executive of NHS Scotland and Director General Health, Alex Smith, Director of Health Finance and Paul Martin, Chief Nursing Officer and Interim Director for Health Workforce, Scottish Government.

6. Section 22 Report on Western Isles Health Board (in private): The Committee considered the evidence taken at agenda item 2. The Committee agreed to treat the ‘Cook Report’ received from NHS Western Isles, as a confidential document and to consider it in private, at the next meeting, on 26 March. The Committee noted the further written evidence provided by Dick Manson and David Currie and agreed to put a number of questions in writing to Trevor Jones.

6th Meeting, 2008 (Session 3), Wednesday 26 March 2008

Section 22 Report on Western Isles Health Board (in private): The Committee considered the “Cook Report” received from NHS Western Isles. The Committee also considered correspondence received from Trevor Jones, Former Chief Executive of NHS Scotland. The Committee agreed not to seek any further oral evidence and to consider a draft report on the inquiry in private at its next meeting.

7th Meeting, 2008 (Session 3), Wednesday 16 April 2008

Section 22 Report on Western Isles Health Board (in private): The Committee noted the correspondence received from Dr Kevin Woods, Chief Executive, NHS Scotland and Director General, Health, the Scottish Government. The Committee considered a draft report on its inquiry and agreed a number of changes. It was agreed to consider a further draft report in private at its next meeting. The Committee also agreed its approach to publishing the written evidence received during the course of its inquiry.

8th Meeting, 2008 (Session 3), Wednesday 30 April 2008

Section 22 Report on Western Isles Health Board (in private): The Committee considered a draft report on its inquiry. Subject to a number of minor changes, the report was agreed to. The Committee also agreed the arrangements for publishing the report.

Annexe B: Oral Evidence and Associated Written Evidence

6TH MEETING, 2007 (SESSION 3) 7 NOVEMBER 2007 – WRITTEN EVIDENCE

A REPORT BY THE AUDITOR GENERAL FOR SCOTLAND

REPORTS ON NHS BOARDS SUBMITTED BY THE AUDITOR GENERAL UNDER SECTION 22 OF THE PUBLIC FINANCE AND ACCOUNTABILITY (SCOTLAND) ACT 2000

The 2006/07 accounts of all NHS bodies have now been laid in Parliament. The Auditor General has issued a Section 22 report for one NHS board, NHS Western Isles.
NHS Western Isles failed to meet its Revenue Resource Limit (RRL) financial target in 2006/07. The board had an in-year deficit of £0.880 million in 2006/07. It had a brought forward deficit of £2.484 million from 2005/06, resulting in a cumulative deficit of £3.364 million in 2006/07. This is the third year that the Auditor General has issued a Section 22 report on its accounts. Previous Section 22 reports have highlighted a number of serious weaknesses in the board’s governance arrangements. The 2006/07 auditor’s report notes that whilst some improvements have been made the auditor continues to have significant concerns about the corporate governance arrangements in place at the board.

In the report, the Auditor General also draws attention to the appointment of an Acting Chief Executive on the 7 September 2007 following the suspension of the Chief Executive.

Robert W Black
Auditor General for Scotland
23 October 2007

A REPORT BY THE AUDITOR GENERAL FOR SCOTLAND UNDER SECTION 22(3) OF THE PUBLIC FINANCE AND ACCOUNTABILITY (SCOTLAND) ACT 2000

THE 2006/07 AUDIT OF western isles health board

I submit the audited accounts of Western Isles Health Board and the auditor’s report in terms of section 22(4) of the Public Finance and Accountability (Scotland) Act 2000, together with this report which I have prepared under section 22(3) of the Act.

The auditor’s report highlights a failure to meet a financial target although the auditor’s opinion is not qualified in this respect. An NHS board’s annual revenue expenditure, its ‘net resource outturn’, should not exceed its Revenue Resource Limit (RRL). In 2006/07 Western Isles Health Board recorded an in-year deficit of £880,000, giving a cumulative deficit of £3,364,000 against the RRL. This represents six per cent of the total RRL.

This is the third consecutive year that I have prepared a report on the accounts of the Western Isles Health Board. While the Board has developed a financial recovery plan, the auditor, in his report, expressed concerns that the targets appeared unrealistic and planned savings were unlikely to be achieved. The latest forecasts are that the Board could return an in-year deficit of £0.3 million in 2007/08.

The auditor was also concerned that the lack of financial management expertise and financial focus at Board level may result in insufficient scrutiny and monitoring of progress towards the achievement of financial recovery.

The auditor’s report highlighted a number of serious weaknesses concerning the Board’s corporate governance arrangements. The Board’s Internal Audit Service has concluded that, as in the previous year, the Board did not have an adequate or effective system of internal controls in place during 2006/07. Particular concerns were raised about a lapse in budgetary control during the year, which led to the over-statement of the Board’s budget by £1.6 million. Some progress has been made to strengthen the Board’s corporate governance arrangements, but t