Victorian Auditor-General’s report
9 February 2011

Acquittal Report Annex C:
Public Hospitals
Audit summary
This annex sets out the results of the audits of 112 entities comprising 87 public hospitals and 25 associated entities. An assessment is also made of the financial sustainability of public hospitals. 
Results of audits
Independent audit opinions add credibility to financial reports by providing assurance that the information is reliable. 
Parliament can have confidence in the financial reporting by public hospitals because all 112 entities have finalised their 30 June 2010 financial reports and received clear opinions. 
Quality of financial reporting 
The quality of financial reporting can be measured by the timeliness and accuracy of the preparation and finalisation of the financial report.
The financial reporting processes at public hospitals were generally adequate. However, further improvement could be achieved by developing a financial report preparation plan, preparing shell financial statements, conducting materiality assessments and adopting rigorous analytical reviews on the financial report.
With respect to timeliness, the average time taken to finalise financial statements improved substantially reducing from 10.0 weeks in 2008–09 to 7.9 weeks in 2009–10. Given the improved time frames achieved in 2009–10, public hospitals should maintain this momentum of earlier reporting.
Financial sustainability
Financial sustainability analysis has been provided for the 87 public hospitals.
To be financially sustainable, public hospitals need the capacity to meet current and future expenditure as it falls due. They should also be able to absorb foreseeable changes and risks materialising, without significantly changing their revenue and expenditure policies.
Insight into the financial sustainability of public hospitals is obtained from an analysis of five financial sustainability indicators over a five-year trend period. The results of these indicators should be considered in the context of the environment in which these hospitals operate.
The four core indicators used are underlying result, liquidity, self-financing and capital replacement. These indicators reflect each public hospitals funding and expenditure policies, and indicate whether these policies are sustainable.
A fifth indicator has been adopted for public hospitals which measures the average number of days cash available. This is a short-term indicator to show the level of unrestricted cash a public hospital has available to cover operating cash outflows.
A summary of the five-year average financial sustainability results for each public hospital category is provided in Figure A. 
Figure A
2009–10 financial sustainability risk assessment – public hospitals
Category	High	Medium	Low	
Public Hospitals				
Metropolitan	11	7	–	
Regional	8	7	–	
Rural	7	35	12	
Total	26	49	12	
Source: Victorian Auditor-General's Office.
Our financial sustainability assessment is that 26 public hospitals were high risk at 30 June 2010 (28 in 2008–09). This arises most commonly because they were generating insufficient cash to be able to adequately fund their operations. 
In 2009–10, 69 public hospitals recorded a negative underlying result compared to 39 in 2008–09. This was due to higher depreciation charges in 2009–10 as a result of the revaluation of hospital buildings at the end of 2008–09.
Prudent financial management practice is that at least one month’s operating cash outflows be available as unrestricted cash holdings, consistent with the departmental funding model. On average the metropolitan and regional hospitals were not able to fund their operations for more than 22 and 27 days respectively, as at 30 June 2010.
Consistent with this outcome and our liquidity risk assessment, the Department of Health concluded that 30 public hospitals in 2009–10 (31 in 2008–09), did not comply with the going concern test in the Australian accounting standards. Those hospital boards were provided with a letter of comfort outlining that the department would provide adequate cash flows to enable them to meet their financial obligations up to September 2011, should this be required.
Over the five-year period, public hospitals have consistently had a self-financing ratio of less than 10 per cent, indicating they cannot effectively replace their assets over the long term using income generated by their operations. Under these circumstances there is a greater reliance on the provision of additional government funding for asset renewal and replacement.
The ability of public hospitals to generate a sufficient surplus from operations to be able to fund their operations, asset replacement and new asset acquisition depends largely on the funding policies established by the Department of Health and on each hospital’s expenditure management and revenue maximisation practices. 
The financial sustainability indicators used in this report highlight trends that need to be monitored. A core consideration is that capital grant funding is allocated strategically across the sector rather than progressively to each public hospital. However, public hospitals are governed by boards which are accountable for financial management and performance. This situation blurs public hospital boards’ accountability for governance and performance and can impact operational performance.
Recommendation
Number	Recommendation	Page	
1.	Public hospitals should adopt the shortened annual reporting time frames achieved for the 2009–10 reporting cycle as the standard for future reporting cycles.	8	

Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Department of Health and named public hospitals with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments, however, are included in Appendix C.