The cause of all the fuss is the standard FRS12, covering provisions for potential liabilities. It was issued in December 1997 and came into effect for all accounts ending after March 1999 - at least for the private sector. In the NHS it was belatedly realised that the new standard would pose problems in terms of clinical negligence. In the existing pre-FRS12 system, provisions are only made for clinical negligence cases where there is a greater than 50% chance of the case reaching settlement. A lower probability and the health body treats the case as a contingent liability. A note is made on the accounts, but there is no impact on the income and expenditure account. Under the new rules provisions are made for all cases but with a value proportional to the probability of settlement. In the NHS, not only would the standard demand that new clinical negligence claims should be given the revised treatment, but the service's estimated 15,000 outstanding claims would also need to be reviewed. Recognising this, the Treasury has agreed with the NHS Executive that implementation of the standard should be deferred for a year in the NHS in England. And while it is understood that this is good enough for individual health bodies' external auditors, the NAO has so far refused to rule out qualification on the grounds that failure to implement FRS12 means the consolidated accounts do not give a true and fair view of the financial position. Qualification would be a cruel blow for the NHS Executive, particularly if the audited accounts of trusts and health authorities, due at the Executive at the end of this month, extend the unqualified run to five years. Before the four-year record started, the NHS had not managed a single year with a clean bill of financial health for all trusts and health authorities. According to Philip Gutcher, finance director of Newham Community NHS Trust and a member of the Healthcare Financial Management Association's accounting and standards committee, the NHS wants to comply with the FRS12 guidance on provisions. 'But the Treasury has recognised the particular difficulties in the service of applying the standard to clinical negligence. And given that the postponement has government approval, it would be unfortunate if the NAO chose to qualify the accounts.' Accountancy Age understands that an analysis of the clinical negligence figures by the NHS Executive indicates the impact on the NHS deficit would be minimal. This, it believes, makes a strong case for the 1998/1999 accounts representing a true and fair view, even without FRS12 being applied. The NAO says it is too early for it to comment as it has yet to receive draft accounts for 1998/1999. And while it says it is fully aware of the issue, a spokesman said 'we are reserving our position on this'. The NHS also faces another battle with auditors over the standard once it has been implemented. The NAO believes the potential liability from incidents not yet known about, called IBNRs (incurred but not reported) in the NHS, should be quantified and included as a provision. While it accepts that individual health bodies may not be able to predict unreported incidents, it argues that the NHS should be able to put a figure to the likely cost of IBNRs for the service as a whole. The NHS has so far argued that there is not enough information to do this. And as being able to estimate the value of future obligations is one of the conditions of FRS12, the NHS Executive believes IBNRs do not need to be included. A complicated system of discounting negligence claims is also currently being used in England, which, CIPFA believes, is inappropriate given the uncertainty surrounding the estimated liabilities. Health bodies in both Scotland and Wales have complied with FRS12 in their 1998/1999 accounts, both using a simpler method. And although CIPFA says the scale of operations is much smaller, lessons could be learnt.
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