Mr. Seamus McCarthy:

The HSE's financial statements for 2020 reflect the exceptional challenges faced by the organisation during the year. Total expenditure in 2020 was just over €21 billion, an increase of more than €3 billion, or 17.5%, compared with 2019. The key driver for that increased expenditure was, of course, the HSE's response to the Covid-19 pandemic. At the year end, the HSE's operating surplus for the year amounted to €200 million. In accordance with the Health Act 2004, this surplus was retained by the HSE and carried forward to 2021.

As in past years, the bulk of the HSE's funding in 2020 came in the form of Exchequer grants from the health Vote, amounting to a total of €20.5 billion, including more than €1 billion in funding for capital projects. In addition, the HSE is permitted to retain employee superannuation contributions, which amounted to around €352 million in 2020. The main other source of income for the HSE was receipts of €328 million in respect of patient charges for hospital treatment or for long-term residential care.

Just under one third of the expenditure in 2020, or €6.45 billion, related to HSE salary and pension costs. A further €5.44 billion of grant funding was allocated by the HSE to what are called the section 38 and section 39 agencies. More than one fifth of the spending, or €4.4 billion, was on various non-acute schemes, including the medical card scheme and the nursing home fair deal scheme.

In Note 1(b) to the financial statements, the HSE has disclosed estimates of the expenditure incurred in 2020 on key items directly related to dealing with the pandemic. These included purchases of personal protection equipment, PPE, additional grant funding to section 38 and 39 bodies, payments to secure access to private hospitals, additional fees paid to doctors and GP practices, and additional laboratory costs arising from Covid testing.

My report on the audit for 2020 is longer than normal. In the report, I draw the attention of users of the financial statements to a number of unusual transactions for the year, or to significant matters disclosed by the HSE. To save time, I will only briefly outline the matters here, but further detail is given in the audit report, and the relevant sections of the financial statements are cross-referenced.

The Members will recall the efforts made, especially at the commencement of the pandemic restrictions, to secure supplies of appropriate PPE. The HSE spent more than €900 million on the procurement, transport and storage of such supplies. Much of the purchasing occurred in the early months of the pandemic when demand internationally outstripped supply and prices were abnormally high. At year end, a significant amount of the material purchased - around two thirds in terms of cost - remained unused and in storage. At the request of the Minister, the HSE engaged a consultancy firm to carry out an examination of the systems and controls employed in regard to the sourcing, management and usage of PPE items in 2020. The report on that examination was being finalised around the same time as the audit. I expect there will be important lessons from that examination on the effectiveness of procurement controls and stock management on the achievement of value for money.

I draw attention to two material charges in the financial statements in regard to PPE procurement that represent losses of value. First, the HSE has recognised a charge of €64 million in respect of the anticipated obsolescence of around 2.5 million disposable protective suits that were held in stock at the year end, and which the HSE estimates will not be used within their projected shelf life. The HSE has stated that the suits were purchased when there was a shortage of more clinically appropriate gowns.

Second, the financial statements include an impairment charge of €310 million, reflecting the change in unit prices between when PPE stocks were purchased, and the year-end. This represents a 63% write-down in value in the items in store at the year-end.

The statement on internal control also discloses that advance payments of €81 million were made to ten companies with which orders were placed for the supply of ventilators. The HSE had not dealt with any of the companies previously. Some of the orders were fulfilled but following testing, the HSE decided that the ventilators it had received were not suitable for use as intended. The outstanding orders were cancelled, and refunds were sought. At the reporting date, the HSE had not received value or refunds in respect of the full amount prepaid. A provision in the amount of €42.5 million was made in this regard in the revenue income and expenditure account. My office is continuing to examine the circumstances surrounding the prepayments and the related attempts at procurement of ventilators. Depending on the outcome of that examination, I may report further on this matter in due course.

In previous years, I reported that a significant amount of the normal procurement of goods and services undertaken by the HSE appeared to be non-compliant with the relevant procurement rules. The HSE has undertaken to develop systems designed to monitor and report on this, and has made significant improvements in that regard. The statement on internal control acknowledges that non-compliance with procurement rules remains a significant issue for the HSE and discloses that the estimated rate of non-compliant procurement in 2020 was 10%. However, I concluded that this may not be properly representative of the scale of the underlying problem of non-compliant procurement due to the exceptional procurement in 2020 and residual limitations in the HSE’s estimation methodology.

The statement on internal control also discloses that significant weaknesses in internal controls at one of the executive’s hospitals resulted in an alleged payroll fraud by an individual staff member that continued over a long period. The matter has been referred to An Garda Síochána. The HSE has been rolling out a single national HR and staff records system, and work on this was a significant factor in identifying the alleged fraud. The HSE is confident that full roll-out of the system will mitigate the risk of payroll fraud in the future.

As members are aware, in May 2021, the HSE suffered a very serious ransomware attack on its ICT systems resulting in severe disruption to the delivery of services and unauthorised accessing of personal and patient data. In the statement on internal control, the HSE discloses that internal audits had previously identified weaknesses in the area of ICT security controls and sets out the steps that were being taken to address the concerns identified. Because the security breach happened after the period of account, it does not impact the financial statements for 2020. However, it did coincide with and disrupt the finalisation of the audit of those financial statements. I would like to acknowledge the exceptional effort and flexibility of the HSE’s financial team and of my own audit team in working around the disruption and in finding ways to minimise the delay in making audited financial statements available.