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West London MentalHealth NHS TrustReport to the those charged withgovernance (ISA 260 (UK&I))2010/11 Audit

June 2011

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West London MentalHealth NHS TrustReport to the those charged withgovernance (ISA 260 (UK&I))2010/11 Audit


West London MentalHealth NHS TrustReport to the those charged withgovernance (ISA 260 (UK&I))

PricewaterhouseCoopers LLP, 7 More London Riverside, London SE1 2RTT: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 7500, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regiLLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Servicesbusiness.

Audit CommitteeWest London Mental Health NHS TrustSt Bernard’s HospitalUxbridgeSouthallLondonUB1 3EU

June 2011

Dear Sirs

We are pleased to enclose our report to the Board in respect of our audit of West London MentalHealth NHS Trust (“the Trust” or “WLMH”) for the year ended 31 Marwhich is to communicate the significant findings arising from our audit.

The scope and proposed focus of our audit work was summarised in our Audit Plan, which wepresented to the Audit Committee on 2 December 2010. We havePlan and concluded that our original risk assessment remains appropriate. The procedures we haveperformed in response to our assessment of significant audit risks are detailed in Appendix 1.

We have completed the majority oopinion on the financial statements on 8 June 2011. At the time of writing, the key outstandingmatters, where our work has commenced but is not yet finalised, are the review of the detaidisclosures in the financial statements, and minor outstanding queries. We will provide an oral updateon these matters at the meeting on 1 June 2011.

We look forward to discussing our report with you on 1 June 2011. Attending the meeting from PwCwill be Sarah Isted and Ruth Nolan.

Yours faithfully

Sarah Isted

Partner, Government & Public Sector AssurancePricewaterhouseCoopers LLP

houseCoopers LLP, 7 More London Riverside, London SE1 2RTT: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 7500, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The regiLLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services

l Health NHS Trust

We are pleased to enclose our report to the Board in respect of our audit of West London MentalHealth NHS Trust (“the Trust” or “WLMH”) for the year ended 31 March 2011, the primary purpose ofwhich is to communicate the significant findings arising from our audit.

The scope and proposed focus of our audit work was summarised in our Audit Plan, which wepresented to the Audit Committee on 2 December 2010. We have subsequently reviewed our AuditPlan and concluded that our original risk assessment remains appropriate. The procedures we haveperformed in response to our assessment of significant audit risks are detailed in Appendix 1.

We have completed the majority of our audit work and expect to be able to issue an unqualified auditopinion on the financial statements on 8 June 2011. At the time of writing, the key outstandingmatters, where our work has commenced but is not yet finalised, are the review of the detaidisclosures in the financial statements, and minor outstanding queries. We will provide an oral updateon these matters at the meeting on 1 June 2011.

We look forward to discussing our report with you on 1 June 2011. Attending the meeting from PwCll be Sarah Isted and Ruth Nolan.

Partner, Government & Public Sector AssurancePricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopersLLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services Authority for designated investment

We are pleased to enclose our report to the Board in respect of our audit of West London Mentalch 2011, the primary purpose of

The scope and proposed focus of our audit work was summarised in our Audit Plan, which wesubsequently reviewed our Audit

Plan and concluded that our original risk assessment remains appropriate. The procedures we haveperformed in response to our assessment of significant audit risks are detailed in Appendix 1.

f our audit work and expect to be able to issue an unqualified auditopinion on the financial statements on 8 June 2011. At the time of writing, the key outstandingmatters, where our work has commenced but is not yet finalised, are the review of the detaileddisclosures in the financial statements, and minor outstanding queries. We will provide an oral update

We look forward to discussing our report with you on 1 June 2011. Attending the meeting from PwC

West London Mental Health NHS Trust Draft

Contents

Executive summary 1

Audit approach 2

Significant audit and accounting matters 4

Internal controls 8

Reporting requirements 8

Summary of internal control deficiencies 8

Risk of fraud 13

Fees update 14

Fees update for 2010/11 14

Recent developments 15

Accounting developments 15

Alignment project 16

Appendices 17

Appendix 1 Update on significant risks 18

Appendix 2 Summary of uncorrected misstatements 20

Appendix 3 Letter of representation 21

Code of Audit Practice and Statement of Responsibilities of Auditors and of Audited Bodies

In April 2010 the Audit Commission issued a revised version of the ‘Statement of responsibilities of

auditors and of audited bodies’. It is available from the Chief Executive of each audited body. The

purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities

of auditors begin and end and what is to be expected of the audited body in certain areas. Our reports

and management letters are prepared in the context of this Statement. Reports and letters prepared by

appointed auditors and addressed to members or officers are prepared for the sole use of the audited

body and no responsibility is taken by auditors to any Member or officer in their individual capacity or

to any third party.


Report to the those charged with governance (ISA 260 (UK&I)) PwC 1



The purpose of this report

Under the Auditing Practices Board’s International Auditing Standard (UK and Ireland) 260 (ISA (UK&I) 260)- “Communication of audit matters with those charged with governance” we are required to report to thosecharged with governance on the significant findings from our audit before giving our audit opinion on theaccounts of the West London Mental Health NHS Trust (‘the Trust’). As agreed with you, we consider that“those charged with governance”, at the Trust, are the Audit Committee.

This letter contains the significant matters we wish to report to you arising from all aspects of our auditprogramme of work in accordance with ISA (UK&I) 260.

Our audit work during the year was performed in accordance with the plan that we presented to you on 2December 2010. An audit of financial statements is not designed to identify all matters that may be relevant tothose charged with governance. Accordingly, the audit does not ordinarily identify all such matters. We haveissued a number of reports during the audit year, detailing the findings from our work and makingrecommendations for improvement, where appropriate.

We have set out below what we consider to be the most significant matters that we have discussed with you inthe course of our work.

Significant matters

Preparation of draft accounts and working papers;

Property, plant and equipment

o Prior period adjustment for double counted assets;

o Charing Cross road land adjustment;

o PICU impairment; and

o Negative assets on the fixed asset register.

We will discuss the matters contained within this letter with the Audit Committee on 1 June 2011.

Please note that this report will be sent to the Audit Commission in accordance with the requirements of theirstanding guidance.

We would also like to take this opportunity to express our thanks for the co-operation and assistance we havereceived from the management and staff of the Trust throughout our work.

Executive summary



Code of Audit Practice

Under the Audit Commission’s Code there are two aspects to our work:

Accounts including a review of the Statement of Internal Control (SIC); and

Use of Resources.

We are required to issue a two-part audit report covering both of these elements. These elements are includedin this report.

Accounts

Our audit of your accounts is carried out in accordance with the Audit Commission’s Code objective, whichrequires us to comply with International Standards on Auditing (ISAs) (UK & Ireland) issued by the AuditingPractices Board (APB). These standards have recently been fully updated and revised to improve their clarityand in some cases this is accompanied by additional audit requirements. We are required to comply with themfor the audit of your 2010/11 accounts.

We plan and perform our audits to be able to provide reasonable assurance that the financial statements arefree from material misstatement and give a true and fair view. We used professional judgement to assess what ismaterial. This includes consideration of the amount and nature of transactions.

Our audit approach is based on a thorough understanding of your business and is risk-driven. It first identifiesand then concentrates resources on areas of higher risk and issues of concern to you. This involves breakingdown the accounts into components. We assess the risk characteristics of each component to determine theaudit work required.

Our audit approach is based on understanding and evaluating your internal control environment and whereappropriate validating these controls, where we wish to place reliance on them. This work is supplementedwith substantive audit procedures, which include detailed testing of transactions and balances and suitableanalytical procedures.

We also aim to rely on the work done by internal audit wherever this is appropriate. We will ensure that acontinuous dialogue is maintained with internal audit throughout the year. We receive copies of all relevantinternal audit reports, allowing us to understand the impact of their findings on our planned audit approach.

Use of Resources

Our Use of Resources Code responsibility requires us to carry out sufficient and relevant work in order toconclude on whether you have put in place proper arrangements to secure economy, efficiency and effectivenessin the use of resources.

In accordance with recent guidance issued by the Audit Commission, in 2010/11 our conclusion is based on twocriteria:

The organisation has proper arrangements in place for securing financial resilience; and

The organisation has proper arrangements for challenging how it secures economy, efficiency and

effectiveness.

Audit approach



Quality Accounts

All NHS bodies which provide healthcare are required by the Health Act 2009 and associated regulations topublish an annual quality account. Department of Health regulations require NHS trusts to send their 2010/11quality account to the Secretary of State and upload a copy onto NHS Choices by 30 June 2011.

The DH required the 2010/11 NHS trust quality accounts to be subject to external assurance. The AuditCommission therefore mandated its appointed auditors to undertake a 'dry run' of gaining external assuranceon quality accounts in 2010/11. The required work was set out in guidance from the Audit Commission toinclude:• A review of the NHS trust's arrangements for satisfying itself that the quality account is fairly stated, and in

accordance with relevant requirements; and• Testing of two performance indicators included in the quality account.

Our work commenced in May 2011 and, as required, we will report our findings to the Trust's managementteam before 30 June, to allow the Trust to address any significant issues identified during the review for thefinal quality account.



ISA (UK&I) 260 requires us to communicate to you relevant matters relating to the audit of the financialstatements sufficiently promptly to enable you to take appropriate action.

AccountsWe have completed our audit, subject to the following outstanding matters:

approval of the financial statements and letters of representation; minor outstanding audit queries; and completion procedures including subsequent events review.

Subject to the satisfactory resolution of these matters, the finalisation of the financial statements and theirapproval by those charged with governance we expect to issue an unqualified audit opinion.

Accounting issues

Preparation of the draft accounts and working papers

The Trust prepared a good first set of draft accounts and annual report, which were supported by electronic andhard copy working papers. Clear progress has been made on the general quality of the working papers sinceprior year. However, a number of adjustments were made to the draft accounts following submission for audit,to ensure that these agreed to underlying accounting records. Particular issues were noted with the quality ofthe property, plant and equipment and revaluation reserve working papers, which did not provide a clear audittrail to the draft financial statements. The working papers and notes in the financial statements for this arearequired significant re-work before these could be audited. Further details have been provided in the InternalControls section of this report, and we have agreed with the finance team that we will run a workshop to helpaddress this issue for 2011/12.

Property, plant and equipment

The Trust brought to our attention a number of significant fixed asset issues during 2010/11, which has allowedus to agree the correct accounting treatment with the Trust prior to audit fieldwork, and obtain the relevantevidence. We would like to thank the Trust for its cooperation over this period.

These issues are discussed below.

Prior period adjustment: Double counting of fixed assets

In the prior year ISA260, it was noted that several assets within “fixtures and fittings” were found to have usefuleconomic lives (“UEL”) of greater than 12 years, which appeared unusually long, and we recommended theTrust review the UEL of its assets. Following this investigation, the Trust identified a number of assets whichwere included as both “fixtures and fittings” and “buildings” in the 2009/10 financial statements.

The issue arose during the 2009/10 District Valuer (“DV”) estate valuation, where a number of fittings werevalued by the DV as part of the fabric of the buildings. Therefore when the building values were adjusted toreflect the DV’s report, the value of these fixtures and fittings were included in the “buildings” classification,whilst historically they were also included the “fixtures and fittings” classification by the Trust. The Trust hastherefore removed the double counted assets from the “fixtures and fittings” balances.

The estimated net book value of these assets is £4.5m and is considered to be material. The Trust has thereforeamended the values through a prior period adjustment, removing the assets from both the 2010/11 and

Significant audit and accountingmatters



2009/10 financial statements. This has resulted in the Trust restating the prior year balance sheet, and the“Property, plant and equipment” note. Furthermore, the Trust must included a specific note in the 2010/11financial statements which explains the circumstances and impact of this prior period adjustment.

Charing Cross Road land adjustment

During 2010/11, the Trust noted that a piece of land under a mental health unit at Charing Cross Hospital hasbeen recognised as an asset by both WLMH and Imperial College Healthcare NHS Trust, who administer thehospital.

The land is currently leased to WLMH under a finance lease (with peppercorn rent), and is owned by ImperialCollege Healthcare NHS Trust. The two Trusts are currently re-negotiating the lease so that a more substantialrent will be payable to Imperial College Healthcare NHS Trust, which will cover the capital charges it incurs onthe asset.

The current arrangement under the 94 year lease is considered to be a finance lease, with WLMH bearing therisk and rewards of the arrangement. Therefore, the asset has been correctly recognised in the Trust’s 2010/11balance sheet. However, under the new lease arrangement, the risk and rewards will transfer back to ImperialCollege Healthcare NHS Trust, as they bear the financial risk (i.e. that the capital charge levy may risedisproportionately to the rent they receive from WLMH). This renegotiation to an operating lease is anindication of impairment, and the asset should therefore be impaired in the 2010/11 financial statements downto the remaining value WLMH will derive from the current lease arrangement. This has led to the total value ofthe land (£1.98m) being written out of the Trust’s asset base. From 2011/12, the lease arrangement will betreated as operating lease in the Trust’s financial statements.

PICU impairment

The Trust has refurbished its Psychiatric Intensive Care Unit in 2010/11, costing the Trust £5.1m. The asset hascome into use, and the Trust has therefore reclassified it in the financial statements from “Assets underconstruction” to “Buildings”. The asset has been valued as part of the DVs desktop review, resulting in a loss invalue of £2.3m.

The Trust has therefore recognised this impairment in the financial statements in the 2010/11 Statement ofComprehensive Income.

Negative assets on the fixed asset register

In the 2009/10 ISA260, a recommendation was raised for the Trust to review its fixed asset register andperform procedures to identify any negative balances which existed within it. Following this review, £350k ofnegative assets were identified in the Trust’s fixed asset register.

The Trust has therefore performed the appropriate adjustment in 2010/11 to remove these negative assetsfromthe fixed asset register and, therefore, the financial statements.

Assets held for sale

During our interim fieldwork, the Trust communicated to us that it was planning on recognising two assets as“Assets held for sale” at year end, in line with the requirements and criteria stipulated in IFRS 5. We have beenprovided with the working papers for recognising these sites as “Assets held for sale”, and are currentlyexamining them to ensure this recognition is appropriate. Total net book value of these assets is approximately£835k, and we expect this adjustment to be recognised in the final version of the financial statements.

Misstatements and significant audit adjustments

We are required to report to you all unadjusted misstatements which we have identified during the course ofour audit, other than those of a trivial nature. These misstatements are described in Appendix 2 to this report.



Significant accounting principles and policies

Significant accounting principles and policies are disclosed in the notes to the financial statements. We will askthe Audit Committee to represent to us that they have considered the selection of, or changes in, significantaccounting policies and practices that have, or could have, a material effect on the entity's financial statements.

Judgments and accounting estimates

The following significant judgments or accounting estimates were used in the preparation of the financialstatements:

Accrued income and expenditure;

Allowance for doubtful accounts for NHS debtors;

Valuation of assets classified in Assets Held for Sale;

Useful economic lives of property, plant and equipment; and

Other significant provisions and accruals.

For each of these areas we have reviewed the basis on which the accounts have been prepared and have nomatters to raise.

Management representations

The final draft of the representation letter that we are requesting management and those charged withgovernance to sign is attached in Appendix 3.

Audit independence

We confirm that, in our professional judgment, as at the date of this document, we are independent auditorswith respect to the Trust and its related entities, within the meaning of UK regulatory and professionalrequirements and that the objectivity of the audit engagement leader and the audit staff is not impaired.

Accounting systems and systems of internal control

It is the responsibility of the Trust to develop and implement systems of internal financial control and to put inplace proper arrangements to monitor their adequacy and effectiveness in practice. As auditors, we reviewthese arrangements for the purposes of our audit of the financial statements and our review of the statement ofinternal control. We have provided details of these deficiencies in internal control on page 8. We have notnoted any significant control weaknesses through our work.

Statement on internal control

NHS Trusts are required by the Department of Health to produce a Statement on Internal Control (SIC), to beincluded in the financial statements and the Annual Report The aim of the SIC is to disclose whether the Trusthad risk management and review processes, as evidenced by the Department of Health’s Assurance Framework,in place for the whole of the period covered by the Accounts.

We reviewed the SIC to consider whether it complied with relevant guidance and whether it was misleading orinconsistent with other information known to us from our audit work. We found no areas of concern to reportin this context.



Directors’ report

The NHS Trust Manual for Accounts requires NHS Trusts to include a Directors’ Report in their Annual Report.The Audit Code requires auditors read the Directors’ Report and assess whether it is consistent with thefinancial statements. We are then required to report on this assessment in our audit report.

We reviewed the Directors’ Report to assess whether it is consistent with the financial statements. We found noareas of inconsistency to report in this context. However we do believe the annual report focuses heavily on thepositive aspects of 2010/11, and would benefit from further discussion of areas for development, and the actionsit is taking in this regard. We have fed these comments back to the appropriate individuals at the Trust.

Economy, efficiency and effectiveness

Our Use of Resources Code responsibility requires us to carry out sufficient and relevant work in order toconclude on whether you have put in place proper arrangements to secure economy, efficiency and effectivenessin the use of resources.

In accordance with guidance issued by the Audit Commission, in 2010/11 our conclusion is based on twocriteria:

The organisation has proper arrangements in place for securing financial resilience; and

The organisation has proper arrangements for challenging how it secures economy, efficiency and

effectiveness.

Unlike in previous years, we have not been required to reach a scored judgement in relation to these criteria andthe Audit Commission has not developed ‘key lines of enquiry’ for each criteria. Instead, we have determined alocal programme of audit work based on our audit risk assessment, informed by these criteria and our statutoryresponsibilities.

We anticipate issuing an unqualified value for money conclusion. However, we have identified the followingmatter which we wish to bring to your attention to:

We recommend that future CIP plans are clearly identified as recurrent or non recurrent to facilitate theTrust’s long term efficiency savings plans. As well as being good practice, this will also be a requirement ofthe Trust’s application to Foundation Trust status.

Quality accounts

All NHS bodies which provide healthcare are required by the Health Act 2009 and associated regulations topublish an annual quality account. The DH has determined that the quality accounts published by NHS trustsin 2010/11 should be subject to external audit review.

The work that we are required to undertake in relation to quality reports is set out in guidance published by theAudit Commission.

In 2010/11 we are required to complete this work before the publication of the quality report on the NHSChoices website. The deadline for publication is 30 June. We are currently undertaking this work and expect toreport to management on 1 June 2011.

In accordance with the Audit Commission’s guidance, we are required to undertake the following:

Review your arrangements for the production of the quality account. This will include a review of the

content of the quality account against the relevant regulations and toolkit issued by the DH; and

Provide you with a detailed report in relation to two performance indicators specified by the Audit

Commission.



Reporting requirements

We are required to report to management and those charged with governance any deficiencies in internal control that we have identified during the audit. Inour professional judgment, we believe the following matters should be brought to your attention.

Summary of internal control deficiencies

Deficiency Recommendation Management response

Audit working papers

In the prior year we noted the working papers which supported thefinancial statements were of poor quality.

We would like to acknowledge that significant improvements havebeen made to working papers during 2010/11. This included beingprovided with both electronic and paper files at the outset of the auditfieldwork in response to a deliverables list we provided the Trust inMarch 2011.

However, the fixed asset working papers were still not of sufficientquality to allow us to reconcile the balances per the first draft of thefinancial statements to the supporting documentation. In addition tonumerous adjustments within working papers which staff were unableto immediately explain, WLMH had recognised indexation throughoutthe year against every asset. The aim of this exercise has been to allowthe Trust to apply a more accurate depreciation charge in anticipationof increased asset valuations by the District Valuer at year end.

However, this indexation resulted in working papers which did notclearly reconcile the closing balance from the 2009/10 auditedaccounts to revaluation as at 31 March 2011, as the Trust has appliedan uplift which had changed the asset value and depreciation

We recommend that the Trust should continueto work with us during the year to providesufficient and appropriate working papers whichwill support the Trust in the preparation of thefinancial statements, and provide a sufficientaudit trail during the year end fieldwork stage.

As we have noted, the Trust made significantprogress in this area this year, and we are keento help the Trust to continue to improve thequality of its working papers, especiallyproperty, plant and equipment. We have agreedwith the finance team that we will run aworkshop to help address this issue for 2011/12,and recommend one individual performs a fullreview of all working papers before beingprovided to us at the outset of the auditfieldwork.

Agreed, steps will be taken toimprove the quality of fixedasset working papers, and fullreview will be carried out by oneindividual.

Will work with PWC to arrangeworkshops for Finance Team.

Internal controls




throughout the year in the Trust’s internal working papers. Wetherefore had to request the fixed asset working papers be reproducedstripping out the impact if this in year indexation charge, which led toan adjustment of £405k to remove the indexed depreciation chargefrom the financial statements at year end. At the time of writing, thevalue of this adjustment is being reviewed by the audit team.

Furthermore, in the first draft of the financial statements, the fixedasset notes had incorrectly disclosed the impact of the fixed assetadjustments noted in the “Significant audit and accounting issues”section of this report.

The absence of quality working papers weakens the audit trailunderpinning the accounts, increasing the likelihood of auditadjustments arising. It also reduces the efficiency of the audit process.

Year end reconciliations

Timely and accurate reconciliations provide assurance to the Trust thatall transactions are being accurately and appropriately captured in thefinancial records. During our audit fieldwork, we noted the followingissues with the reconciliations process in place at the Trust:

Bank and cash The month 12 bank reconciliation for the GBS account

(Citibank account number 12274663 and RBS account number10004181) did not reconcile to the general ledger by £70.17,although after further investigation during the audit this itemwas successfully resolved;

Additionally, the cash book for this account also does notreconcile to the general ledger (although it does match thebank reconciliation);

The April and July 2010 bank reconciliations for the GBSaccounts noted above were not prepared or reviewed within 30days of month end. We did note however, the March 2011 bankreconciliations had been prepared and reviewed by 13 April2011;

Historic items were present on the bank reconciliations. For

We recommend:

Bank and cash The Citibank reconciliation is further

investigated to ensure all reconcilingitems can be fully explained, and toensure the cash book, bankreconciliation and general ledger allmatch;

Bank reconciliations are produced andauthorised within 30 days of month endfor every bank account. They should besigned and dated by the preparer andreviewer;

A reconciliation should be performed onthe Ealing patient monies account;

The Trust should implement a monthlyreconciliation log, which could monitorthe date of preparation andauthorisation of key reconciliations, to

Agreed, will work towardsresolving the issues muchquicker, and will build inadditional controls.




example, the month 12 reconciliations include reconcilingitems from April 2010;

Reconciliations have not been performed for the patientmonies account on the Ealing site throughout the year,including year end. We do, however, note that this has beenperformed on the Broadmoor site throughout the year; and

There is a discrepancy between the patient monies asset andliability balances held on the Trust’s balance sheet of £95,834.

Property, plant and equipment At month 12 the fixed asset RAM system did not reconcile to

the general ledger by £12k.

Payroll reconciliations One of three payroll reconciliations tested was not performed

and reviewed with in thirty days of the month end (August2010 reconciliation prepared and reviewed 4 October 2010).

enable the Trust to monitor outstandingreconciliations as part of the standardmonth end process.

Property, plant and equipment The Trust investigates the reconciling

items between the RAM system andgeneral ledger regularly.

Payroll reconciliations Payroll reconciliations are produced and

authorised within 30 days of month.

We are happy to support the Trust in improvingits reconciliation process across the financialstatements. This could include providing aworkshop to the Trust explain the importance ofreconciliations in the audit process, andproviding feedback on particular reconciliationsto make them more efficient.

Stripping out indexation led tosome discrepancies between theledger and RAM, removing theneed to index in year shouldresolve some of these issues.

The reconciliations will beprepared within the specifiedtime limits,

Cut off/ accruals

During our audit process we noted a number of transactions beingposted in the in correct financial year, or incorrectly accrued for. Theissues we noted were as follows:

Expenditure Three items of expenditure (from a sample of 15) posted in

month 1 2011/12 had not been accrued for in the 2010/11financial statements;

A further two items in the same sample had been accrued for,but the actual amount when the invoice was received washigher than management’s original estimate. Per our auditmethodology, we are required to extrapolate these errors tojudge whether if they were repeated through the entirepopulation, there would be a material impact on the financialstatements. The extrapolation of these errors has been

We recommend that the Trust: Reminds staff of the year end

procedures for recognising expenditureto ensure the accruals balance iscomplete and accurate;

Matches capital payments to therelevant accrual after year end, toprevent the need for a reversal of capitalaccruals in preparation for thesubsequent financial statements; and

Provides additional training to staff toensure they are able to correctlyrecognise the criteria for which atransaction must meet to be recognisedas a prepayment.

Agreed. Staff will be reminded ofcorrect procedures.




included in Appendix 2.

Capital accruals It was noted during additions testing that capital accruals

raised in the prior year have had to be reversed at year end inthe preparation of the 2010/11 financial statements. This iscaused when the invoice from prior year had been receivedand paid after year end, but the original accrual has not beenmatched and reversed from the financial statements. Thereversal of year end accruals should take place at the start ofthe following financial year.

Prepayments Two prepayments from our testing sample(of six items) were

found not to be prepayments, as invoice payments had beencancelled prior to year end (and no cash payment made);

A further three items in the sample had been paid after yearend, and therefore cannot be recognised as prepayments in thefinancial statements.

These prepayment errors resulted in a £200k adjustment in the finalversion of the financial statements.

Reconciliation process willinvolve this

Staff will be trained of correcttreatment of Prepayments

Classification of transactions in the accounts

During the audit, we noted a number of classification errors in thefinancial statements which resulted in disclosure adjustments toensure transactions were appropriately disclosed. The adjustmentsnoted did not have an impact on the surplus report by the Trust. Theerrors noted were as follows;

Creditors and accruals Four items noted in our accruals sample of 15 items were

creditors rather than accruals.

We recommend: The Trust reminds staff of the various

classifications of balances in thefinancial statements to ensure staff areable to recognise the most appropriatedisclosure of transactions; and

A sufficient level of initial review is putin place to ensure balances are beingappropriately classified in the financialstatements.

Full reviews will be carried outin advance.



As communicated to you in our Audit Plan on 2 December 2010, the preparation of the financial statements isthe responsibility of management. Our responsibility as auditors is to express an opinion on those financialstatements. Effective internal control reduces the likelihood that errors, fraud or illegal acts will occur andremain undetected; however, it does not eliminate that possibility.

Our responsibility regarding fraud is to obtain reasonable assurance that material misstatements resulting fromfraud will be detected. Accordingly, while we cannot guarantee that all errors, fraud or illegal acts, if present,will be detected, we have designed our audit to provide reasonable, but not absolute, assurance of detectingerrors or fraud that would have a material effect on the financial statements as well as illegal acts having adirect and material effect on the financial statements.

As a result of our audit, no material errors, fraud or illegal acts have come to our attention.

Risk of fraud



Fees update for 2010/11We reported our fee proposals as part of the Audit Plan for 2010/11. We varied our fees due to further work wehave been required to perform for several fixed asset adjustments which you have brought to our attention, andreported our revised fees to Audit Committee on 20 April 2011.

Our fees charged were therefore:

2010/11 Outturn 2010/11 Fee proposal

Financial statements 124,400 124,400

Additional audit work 5,000 -

Local value for money conclusion

(including risk-based audit work)

25,000 35,200

Total audit fee 154,400 159,600

Teachers pension grant certification 1,600 TBC

Quality Accounts 15,000 TBC

Total fee 171,000 159,600

Fees update



Accounting developments

For 2011/12, we do not expect that there will be many changes to IFRS accounting standards andinterpretations which will affect NHS bodies.

One accounting standard which has changed and which may affect the accounts of NHS bodies is IAS 24(revised) Related Party Disclosures. The revised standard reduces the extent of disclosures required bygovernment entities whose transactions are principally with other government entities.

The standard applies with effect from 2011/12. However, it will be for the Department of Health to determinewhether the standard will be adopted in full or whether it will retain the existing disclosures.

In preparing the Manual for Accounts, the Department of Health must take account of the requirements of theGovernment FReM issued by HM Treasury. In some cases, where there is a compelling reason, Treasury maygrant permission for the Department of Health not to adopt a change to the FReM in the Manual for Accounts.The following changes to the FReM may be incorporated into the Manual for Accounts from 2011/12.

i) Treatment of grants received

Under the new approach, grants received towards the cost of an asset are recognised in income unless thefunder imposes a condition on the grant e.g. that it must be used to fund the construction or acquisition of anasset. If there are no conditions, or once all conditions have been met, the grant is recognised in full in income.If this change is adopted in the Manual for Accounts, the impact is likely to be an increase in volatility in annualresults where capital grants are received or released once conditions have been met. In addition, there will nolonger be an annual release from the government grant reserve to income to offset the depreciation charge ongovernment granted assets. When the change is applied, the existing government grants reserve will beremoved, with the balance transferred as appropriate to Retained Earnings, the revaluation reserve and –where there are conditions attached to assets - to deferred income. We do not deem this currently to be asignificant issue for WLMH as the Trust does not receive grants towards the purchase of property, plant andequipment. The Trust should, however, keep this under review in the future.

ii) Donated assets

There is a new approach for donated assets which is effectively identical to that for government grants above.Where donations are received without conditions, or if they have conditions, once these have been met, theyshould be recognised in income. If brought into effect it would result in most, or all, donations being reflected inincome in the year of receipt which could lead to greater volatility in the annual result. The existing donatedasset reserve will be removed, with the balance transferred to Retained Earnings, the revaluation reserve and -where there are conditions attached to assets - to deferred income. We do not deem this currently to be asignificant issue for WLMH as the Trust does not receive large amounts of donated assets. The Trust should,however, keep this under review in the future.

c) Other changes

For 2011/12 the Manual for Accounts may remove the present exemption from consolidating NHS charitablefunds that are controlled by NHS trusts (i.e. where the NHS trust is the corporate trustee). The effect on anNHS trust’s accounts will be to include the charitable fund's income, expenditure, gains and losses, assets,liabilities and reserves. Income and expenditure between the NHS trust and the charitable fund will beeliminated on consolidation. The assets, liabilities and reserves of the charitable fund will also be consolidated,but with balances between the fund and the NHS trust being eliminated on consolidation. The NHS trust’sdonated asset reserve may largely represent past amounts received from the charitable funds and therefore maybe eliminated to a considerable degree on consolidation. (If the change in treatment of donated assets describedabove occurs then an amount equivalent to the donated asset reserve would be removed from the retainedearnings and the revaluation reserve instead on consolidation.)

Recent developments



Alignment project

HM Treasury’s alignment project (or clear line of sight project) is intended to bring alignment between centralgovernment budgets, estimates and accounts.

The changes for 2011/12 will have an impact on NHS trusts because they will, for the first time, be broughtwithin the Department of Health’s resource accounting boundary. This means that their accounts will be fullyconsolidated into the Department of Health’s resource accounts. This has several implications:

There will be some additional disclosures for NHS trusts to allow the Department of Health to make the

disclosures they are required to make. In particular, all expenditure will have to be classified as

‘programme’ or ‘administration’; and

There may be a change to the auditor’s role to introduce the regularity opinion for NHS trusts.

[Date]


Appendices



We have included below our original assessment of the 2010/11 audit risks as reported to you in our Audit Plan, and the approach we have taken to respond to theserisks.

Potential issues noted in original audit plan Audit approach

Expenditure recognition

All NHS organisations are under significant financial pressure in the current

economic environment. There is a risk that NHS entities will attempt to

manage their financial result through the use of inappropriate estimates,

provisions, prepayments and impairments at year end. We therefore need to

review the expenditure that is recognised in the financial statements to

ensure that it is complete and accurate.

During our interim audit, we updated our understanding of the journals, provisions and

accruals recognition process. At final audit, we performed a number of audit procedures

to examine significant estimates and judgments. This included testing a sample of

accruals and provisions to supporting documentation. We also performed testing on

expenditure posted in month 12 2010/11 and month 1 2011/12 to satisfy ourselves

expenditure had been recognised in the correct financial year.

Our internal controls section on page notes the following issues found:

Three items of expenditure (from a sample of 15) posted in month 1 2011/12 hadnot been accrued for in the 2010/11 financial statements; and

A further two items in the same sample had been accrued for, but the actualamount when the invoice was received was higher than management’s originalestimate.

Income recognition

In 2009/10 the Trust generated over 94% of its income from Primary Care

Trusts. In 2010/11, the Trust is already experiencing requests from its three

main PCT Commissioners (Hounslow, Ealing and Hammersmith & Fulham)

to reduce the 2010/11 contracts.

Due to the uncertain economic environment, the PCTs are under increasing

financial pressure and are looking to minimise expenditure. Therefore there

is significant risk that the Trust may not receive all the income it is entitled to

from the PCTs, even if expected activity levels have been exceeded.

During the year, we met with the Trust several times to understand the progress made

with agreeing the activity and associated income with the PCTs throughout the year.

Whilst performing out audit fieldwork, we applied audit procedures to verify the incomebalance included in the financial statements. This included testing a sample of income tothe bank, and confirming income and debtors balances with the auditors of the relevantNHS organisations. We also examined the year end debtors balances, and gained anunderstanding of the feasibility of recovering any outstanding income. No issues werenoted with this testing.

Appendix 1 Update on significant risks



Potential issues noted in original audit plan Audit approach

Valuation of property, plant and equipment

The Trust had two revaluations of its estate during 2009/10. The first was a

full modern equivalent asset valuation on 1 April 2009, which was a new

form of valuation which the

NHS has adopted, and the second was a desk top review as at 31 March 2010,

in order to ensure asset values were fairly stated at the year end.

Under IFRS the Trust needs to consider the valuation of its estate on anannual basis. Given the current volatility in the property market we wouldexpect the Trust to undertake a review of the valuation in the year.

We have reviewed the desktop valuation exercises performed by the District Valuer,

including the judgments made in deriving their valuation, such as the square metre size

of the Trust’s estate, and are satisfied with the results of these procedures. We have

reviewed the Trust’s working papers to ensure the valuation has been correctly applied

to the financial statements. Furthermore, we have reperformed a sample of the Trust’s

asset verification exercise to gain assurance over the existence of assets.

No issues were noted during the course of our work over the valuation of property, plant

and equipment.

Management override of controls

In any organisation, management may be in a position to override thecontrols that have been put in place. A control breach of this nature mayresult in a material misstatement to the financial statements. For the Trust,the key areas where management could override the controls are in relationto judgemental areas, journals that are processed outside of the standardaccounting systems and in any areas where there are weaknesses aroundsegregation of duties.

During the audit we focused on areas where management could override the control

environment to materially misstate the financial statements. We performed a number of

audit procedures to examine significant estimates and judgments. This included testing

a sample of accruals and provisions to supporting documentation. Furthermore, we

examined a number of journals across the year and at year end, seeking explanations

and key documentation from staff to understand the purpose of the journals.

We reviewed the work of internal audit on the key controls in place at the Trust to

identify any areas of concern.

We also performed a number of unpredictable procedures to ensure we did not focus onthe same nature of transactions and activity in our audit as prior year. This includedtesting a number of immaterial balances, and changing the basis of our journal sampleselection.

No issues were noted in this area.



We have identified the following errors during our audit of the financial statements that have not been adjustedby those charged with governance. The Audit Committee are requested formally to consider the unadjustederrors listed and determine whether they would wish the accounts to be amended. If the errors are not adjustedwe will require a written representation from you explaining your reasons for not making the adjustments.

The Trust has adjusted all actual misstatements which were identified during the course of the audit.All the errors noted below are extrapolated errors, where misstatements have been found in a sample test wehave performed. Audit methodology requires us to estimate the potential impact on the whole population if thesame error rate was projected across the whole balance. We have reported to you those errors which exceed the£50k posting level agreed with you at the February Audit Committee meeting. We do not propose that thesemisstatements are adjusted in the final version of the financial statements.

No Description of misstatement(factual, judgemental, projected)

Balance sheetDr Cr

Income statementDr Cr

1 Dr ExpenditureCr Accounts payable

Being an adjustment to remove two capitalaccruals incorrectly accrued for. Actual errornoted was £6,381, and projected errorestimated at a further £47,574.

Total extrapolated error: £53,955

P£54k

£54k

2 Dr ExpenditureCr Accounts payable

Being an adjustment to correct posting ofexpenditure into incorrect financial year.Actual error noted three items totalling £7kwhich had not been accrued for in 2010/11,and a further two items where insufficientaccruals had been recognised (total £16kdifference). Further projected errorestimated of £562k.

Total extrapolated error: £585k

P£585k

£585k

3 Dr AccrualsCr Expenditure

Being an adjustment to correct overaccruals. Actual error noted in sample was£63k, and a projected error across wholesample of £133k.

Total extrapolated error: £196k

P £196k£196k

Total uncorrected misstatements £196k £639k £639k £196k

Net effect £443k Cr £443k Dr

Appendix 2 Summary ofuncorrected misstatements



To PricewaterhouseCoopers LLP

7 More London RiversideLondonSE1 2RT

This representation letter is provided in connection with your audit of the financial statements of West LondonMental Health Trust (“the Trust”) for the year ended 31 March 2011.

Your audit is conducted for the purpose of expressing an opinion as to whether the financial statements of theTrust give a true and fair view, in accordance with International Financial Reporting Standards (IFRSs) asadopted by the European Union and interpreted by the HM Treasury Financial Reporting Manual (FReM), ofthe gains and losses, cash flows and financial state at the end of the financial year 31 March 2011 in accordancewith the direction of the Secretary of State.

We acknowledge that the Chief Executive has been designated as the Accountable Officer for the Trust by theSecretary of State and that the following requirements included in the Accountable Officer Memorandum havebeen complied with:

“You have a particular responsibility for ensuring that expenditure by the Trust complies with Parliamentaryrequirements. The basic principle which must be observed is that funds should be applied only to the extentand for the purpose authorised by Parliament…”

“As the Accountable Officer you have a responsibility to see that appropriate advice is tendered to the Board onall matters of financial probity and regularity…”

“If the Board or the Chairman is contemplating a course of action which you consider would infringe therequirements of propriety and regularity, you should set out in writing to the Chairman and the Board yourobjection to the proposal and the reasons for it.”

We confirm that the following representations are made on the basis of enquiries of management and staff ofthe Trust with relevant knowledge and experience and, where appropriate, of inspection of supportingdocumentation sufficient to satisfy ourselves that we can properly make each of the following representations toyou.

We confirm, for all directors at the time the directors’ report is approved, to the best of our knowledge andbelief and having made the appropriate enquiries, the following representations:

Information provided

Each director has taken all the steps that he or she ought to have taken as a director in order to make himself orherself aware of any relevant audit information and to establish that you (the Trust’s auditors) are aware of thatinformation, including that:

Appendix 3 Letter ofrepresentation



All the accounting records, whether for the purposes of financial reporting or any other purpose such asfiscal reporting, have been made available to you for the purpose of your audit and all the transactionsundertaken by the Trust have been properly reflected and recorded in the accounting records.

All other records and related information which might affect the truth and fairness of, or necessarydisclosure in, the financial statements, including minutes of directors’ and relevant managementmeetings, have been made available to you and no such information has been withheld.

So far as each director is aware, there is no relevant audit information of which you are unaware.

Financial Statements

We acknowledge as directors our responsibilities under the National Health Service Act 2006 for preparingfinancial statements of the Trust which give a true and fair view, in accordance with IFRSs, and for makingaccurate representations to you.

All transactions have been recorded in the accounting records and are reflected in the financialstatements.

The restatement made to correct a material misstatement in the prior period financial statements thataffect the comparative information has been appropriately accounted for and disclosed in accordancewith the requirements of IFRSs as adopted by the European Union.

Significant assumptions used by us in making accounting estimates, including those surroundingmeasurement at fair value, are reasonable.

All events subsequent to the date of the financial statements for which IFRSs as adopted by theEuropean Union require adjustment or disclosure have been adjusted or disclosed.

The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to thefinancial statements as a whole. A list of the uncorrected misstatements is attached in appendix one.

The financial statements disclose all matters of which we are aware that are relevant to the Trust’sability to continue as a going concern, including all significant conditions and events, mitigating factorsand the Trust’s plans. The Trust also has the intent and ability to take actions necessary to continue as agoing concern.

Accounting policies

We confirm that we have reviewed the Trust’s accounting policies and estimation techniques and, having regardto the possible alternative policies and techniques, the accounting policies and estimation techniques selectedfor use in the preparation of the financial statements are the most appropriate to give a true and fair view forthe Trust’s particular circumstances, as directed by the Secretary of State.

Related parties transactions

We confirm that we have disclosed all related party transactions relevant to the Trust and that we are not awareof any other such matters required to be disclosed in the financial statements whether under IAS 24 or otherrequirements, for example, the Manual for Accounts.

Employee benefits

We confirm that we have made you aware of all employee benefit schemes in which employees of the Trustparticipate.

Contractual arrangements/agreements

All contractual arrangements (including side-letters to agreements) entered into by the Trust with third partieshave been properly reflected in the accounting records or, where material (or potentially material) to thefinancial statements, have been disclosed to you.



Litigation and claims

We have disclosed to you all known actual or possible litigation and claims whose effects should be consideredwhen preparing the financial statements and such matters have been appropriately accounted for and disclosedin accordance with IFRSs as adopted by the European Union.

Fraud and non-compliance with laws and regulations

We acknowledge our responsibility for the design, implementation and maintenance of internal controlto prevent and detect fraud.

We have disclosed to you the results of our assessment of the risk that the financial statements may bematerially misstated as a result of fraud.

We have disclosed to you all information in relation to fraud or suspected fraud that we are aware ofand that affects the Trust and involves:– Management;– Employees who have significant roles in internal control; or– Others where the fraud could have a material effect on the financial statements.

We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affectingthe Trust’s financial statements communicated by employees, former employees, analysts, regulators orothers.

We have disclosed to you all known instances of non-compliance or suspected non-compliance withlaws and regulations whose effects should be considered when preparing financial statements.

We are not aware of any irregularities, or allegations of irregularities, involving management oremployees who have a significant role in the accounting and internal control systems, or that could havea material effect on the financial statements.

Taxation

We have complied with the taxation requirements of all countries within which we operate and have brought toaccount all liabilities for taxation due to the relevant tax authorities whether in respect of any corporation orother direct tax or any indirect taxes. We are not aware of any non-compliance that would give rise toadditional liabilities by way of penalty or interest.

In particular:

In connection with any tax accounting requirements, we are satisfied that our systems are capable ofidentifying all material tax liabilities and transactions subject to tax and have maintained all documentsand records required to be kept by the relevant tax authorities in accordance with the law of eachcountry or in accordance with any agreement reached with such authorities.

We have submitted all returns and made all payments that were required to be made (within therelevant time limits) to the relevant tax authorities including any return requiring us to disclose any taxplanning transactions that have been undertaken, whether for the Trust’s benefit or any other party’sbenefit.

We are not aware of any taxation, penalties or interest that are yet to be assessed relating to either theNHS body or any associated company for whose taxation liabilities the Trust may be responsible.

Income

We confirm that we have recognised all income receivable in 2010/11 in the Statement of ComprehensiveIncome except where this income relates to specific activity to be delivered in future years.

Using the work of experts

We agree with the findings of the District Valuer, experts in evaluating the carrying amount of land andbuildings and have adequately considered the competence and capabilities of the experts in determining theamounts and disclosures used in the preparation of the financial statements and underlying accounting records.



We did not give or cause any instructions to be given to experts with respect to the values or amounts derived inan attempt to bias their work, and we are not otherwise aware of any matters that have had an impact on theobjectivity of the experts.

Provisions

Provisions for depreciation and diminution in value including obsolescence have been made against fixed assetson the bases described in the financial statements and at rates calculated to reduce the net book amount of eachasset to its estimated residual value by the end of its probable useful life in the NHS foundation trust’s business.In this respect we are satisfied that the probable useful lives have been realistically estimated and that theresidual values are expressed in current terms.

Full provision has been made for all liabilities at the balance sheet date including guarantees, commitments andcontingencies where the items are expected to result in significant loss. Other such items, where in our opinionprovision is unnecessary, have been appropriately disclosed in the financial statements.

Mergers and Acquisitions

We are not in negotiations to merge with any other NHS body or take on any other NHS body’s functions in thenext financial year.

As minuted by the board of the Trust at its meeting on 8 June 2011.

........................................ ........................................

(Chairman) (Secretary)

For and on behalf of West London Mental Health NHS Trust

Date ………………

In the event that, pursuant to a request which West London Mental NHS Trust has received under the Freedomof Information Act 2000, it is required to disclose any information contained in this report, it will notify PwCpromptly and consult with PwC prior to disclosing such report. West London Mental Health NHS Trust agreesto pay due regard to any representations which PwC may make in connection with such disclosure and WestLondon Mental Health NHS Trust shall apply any relevant exemptions which may exist under the Act to suchreport. If, following consultation with PwC, West London Mental Health NHS Trust discloses this report or anypart thereof, it shall ensure that any disclaimer which PwC has included or may subsequently wish to include inthe information is reproduced in full in any copies disclosed.

©2011 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers toPricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the contextrequires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separateand independent legal entity.

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