Victorian Auditor-General's Report
14 November 2012
Public Hospitals: Results of the 2011–12 Audits
Audit summary
This report presents the results of our financial audits of 113 entities within the public hospital sector, comprising 87 public hospitals and 26 associated entities. It provides a detailed analysis of public hospital financial reporting, financial results, financial sustainability and internal controls. It informs Parliament about significant issues arising from the audits and complements the assurance provided through individual audit opinions included in the entities’ annual reports.
Clear audit opinions were issued on 111 public hospital and associated entities’ financial reports for the financial year-ended 30 June 2012. At 31 October 2012, the audits of two associated entities were outstanding.
Conclusion
Notwithstanding some opportunities for improvement, Parliament can have confidence in the adequacy of financial reporting and the internal controls of the entities audited.
Findings
Financial results and sustainability
The combined operating result for all hospitals improved from a deficit of $102 million in 2010–11 to a deficit of $43 million in 2011–12, predominantly due to sector-wide cost containment measures and increased government funding. 
The overall risk to financial sustainability for the public hospital sector was assessed as medium, consistent with 2010–11. Eighty of the 87 hospitals (92 per cent) had an assessment of either medium or high generally because of low cash reserves and a limited ability to fund long-term debt. In order to report as a going concern, 31 public hospitals (29 in 2010–11) relied on a ‘letter of support’ stating that the Department of Health would provide adequate cash flows to enable each hospital to meet their obligations if required. 
Hospitals remain heavily reliant on government funding to maintain their operations. The Department of Health has not acted to address aspects of the funding model that limit the ability of governing boards to make decisions around asset maintenance and replacement. As a result the ability for governing boards to fulfil their legislative responsibilities for stewardship in the sector remains limited. 
The National Health Reform Agreement which gives greater control for funding of the sector to the Commonwealth Government came into operation on 1 July 2012. The agreement has the potential to affect financial results going forward. However, the full effect is not yet certain.
Internal controls
Overall, public hospital internal controls were adequate for producing reliable, accurate and timely financial reports. Nevertheless, a number of common areas for improvement were identified. Public hospitals require adequate internal controls for financial reporting purposes to assist with the efficiency and effectiveness of their operations, and to comply with relevant laws and regulations. As part of our annual assessment of internal controls we focused on controls relating to audit committees, capital project management and self-generated revenue.
The effective structure and operation of audit committees is critical to the ongoing governance of hospitals. We found that all hospitals had a current audit committee in place. Generally, metropolitan and regional hospitals had more comprehensive charters and controls than rural hospitals. Opportunities for improvement include the regular rotation of members and maintenance of the requisite knowledge and skills of committee members. 
Capital project management procedures at public hospitals were generally adequate. However, there is opportunity to improve the use of internal audit to review capital project arrangements and to increase the practice of conducting post project evaluations to drive continuous improvement.
To assist in funding their operations, public hospitals are under increasing pressure to provide self-generated revenue from sources such as commercial diagnostic services, cafeteria services, facility fees paid by private practitioners and car parking fees. Around 95 per cent of all public hospitals generate income from non-public hospital sources. The total of this income was approximately $1.4 billion in 2011–12. Monitoring and reporting on these types of income sources was effective, however, hospitals need to develop clear policies for these revenue sources and hospital boards need to provide guidance on acceptable sources of self-generated revenue.
Recommendations
Number	Recommendation	Page	
	That public hospitals:	
1.	continue to review and further refine their financial reporting processes including the establishment of financial report preparation plans and the timely preparation of shell financial statements	13	
2.	assess policies and practices against the identified general internal control weaknesses to determine the adequacy of their controls, and whether they are operating reliably, efficiently and effectively	63	
3.	address instances of noncompliance of audit committee composition with the Minister for Finance’s Standing Directions	63	

Recommendations – continued
Number	Recommendation	Page	
	That public hospitals:	
4.	develop capital project management policies tailored to the scope and size of their capital expenditure programs and submit them to the board for approval and regular review 	63	
5.	develop policies for self-generated revenue and submit them to the board for approval and regular review	63	
6.	set and report against key capital project milestones and key performance indicators regularly to the board 	63	
7.	conduct and distribute post-project evaluations in order to facilitate improvements in processes	63	
8.	enhance use of internal audit, to review capital project and self-generated revenue policies, procedures and practices. 	63	

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 hospitals with a request for comments or submissions.
Their 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) comments and submissions, however, are included in Appendix E.