Mr. Seamus McCarthy:

The appropriation account for Vote 39 indicates that the Health Service Executive gross expenditure for 2013 amounted to €13.87 billion. This was approximately €98 million more than provided for in the original Estimate for the Vote approved by Dáil Éireann. Approximately 10% of the amount spent was funded through a range of appropriations-in-aid of the Vote, which amounted to €1.37 billion in 2013, a shortfall of approximately €89 million compared to the amount of receipts forecast in the original Estimate. The net result was a requirement for Exchequer funding of €12.5 billion for 2013, approximately €188 million or 1.5% more than originally budgeted for. This budget overrun was met by a Supplementary Estimate in December 2013 which allocated an additional €219 million to the HSE. The €31 million unspent at the end of the year was liable for surrender.

While the overrun relative to the original Estimate in 2013 is relatively modest, it continued a pattern of such overruns that has extended over many years. In addition, the variance relative to budget is more significant in some spending and receipts areas than others. The HSE is one of a small number of Votes in respect of which a Supplementary Estimate is required annually. Notes 3 and 4 of the appropriation account provide explanations of significant variances in spending and receipts.

The Accounting Officer has included in the appropriation account a comprehensive statement on the system of internal financial control in place in the HSE. This reflects the complexity of the HSE as an organisation and the range of services and facilities it provides. I am keen to draw the committee's attention to certain key matters dealt with by the Accounting Officer in that statement. These relate to the extent to which the HSE does not comply with its own procurement procedures, based on national and EU procurement rules - I have reported separately on this matter and I will outline my findings in that regard presently; the development by the HSE of arrangements to enhance its oversight of the governance of section 38 funded agencies, a matter the committee has inquired into previously, in particular their adherence to national public pay policy; a comprehensive review by the HSE examining its compliance with tax rules - this review was ongoing when the account was being finalised and the HSE expected to settle any underpayment of tax during 2014; the non-collection of income in respect of services provided by the HSE to some nationals of other EU states who are visiting or resident in Ireland due to weaknesses in the data collection systems in respect of such cases; and measures and initiatives taken by the HSE to ensure appropriate control over medical card eligibility.

Chapter 14 deals with the issue of procurement by the HSE, in particular, the extent to which procurement is based on competitive processes that can potentially deliver significant savings to the HSE. To put the matter in context, excluding drugs paid for by the primary care reimbursement service, approximately €1.6 billion of the HSE's €14 billion expenditure relates to the procurement of goods and services directly by the HSE.

The chapter under examination today is not the first occasion on which we have reported on procurement by the HSE. Committee members may recollect that the 2010 report on the accounts of the public services contained two chapters dealing with aspects of procurement by the HSE. One dealt with procurement generally while the other examined procurement of external consultancies. These chapters were examined by the committee in June 2012.

Among the conclusions and recommendations in those chapters were that there was scope for the HSE to increase its use of procurement frameworks; procurement should be based on up-to-date contracts rather than on simply rolling over expired contracts; the HSE had not put in place an adequate system to track non-competitive procurement and, therefore, did not know the extent to which procurement was not compliant with procurement rules; and that out of a sample of 27 consultancies which cost the HSE a total of more than €41 million, the executive had tendered openly for only ten and that only ten had formal contracts or service level agreements in place to govern the procurement.

In the chapter under examination by the committee this morning, we report that non-compliance with procurement rules continued to be a significant problem within the HSE in 2013. We examined in detail a sample of 100 purchases in 2013 at six different HSE locations with a total value of €2.2 million. We found that more than one third or 36% had not been subject to appropriate procurement processes. In terms of value, these represented 47% or almost half of the value of the items examined.

The HSE is required to submit an annual report to my office and to the Department of Public Expenditure and Reform on any non-compliant procurement. The report for 2013 referred to 116 contracts valued at €17.6 million having been awarded without a competitive process. Our examination found that 31 of the 36 instances of non-competitive procurement identified should have been included in that report. In fact, only three were included. On that basis, we concluded that the HSE's internal assurance process is failing to highlighting the true level of non-compliant procurement that is occurring.

We found that, centrally, the HSE had increased the number of framework agreements in place from 52 to 83 in the three years since July 2011. However, the audit found a lack of awareness of the existence of those frameworks at the six locations visited during the audit.

The HSE has provided to the committee a copy of the management letter issued by my office following the 2013 audit of the HSE's appropriation account and annual financial statements. A draft of the letter was inadvertently released by the HSE some weeks ago. This has been mentioned previously at this committee. Normally, the management letter does not come into the public domain and, therefore, it might be helpful for me to explain the context.

The primary purpose of the letter is to formally alert management and the HSE audit committee of any matters of concern that come to our attention during the course of an audit. It does not aim to be a complete report on all control weaknesses or irregularities within the HSE. We simply could not undertake the amount of work necessary to provide such a report each year, and, in any event, the HSE's own internal audit examines and reports on the operations of HSE controls. The letter forms part of an overall feedback system to HSE management and the audit committee. We also communicate any matters of concern that arise in the course of regular meetings with management and the audit committee throughout the audit cycle. The management letter formally captures the salient issues as well as the response of management and serves as a key reference document for follow up by us in the next year's audit. Failure on the part of the HSE to address significant matters raised could result in future examination or possibly a report on the matter.

Our draft management letter for 2013 issued to HSE management on 30 September 2014. We sought HSE management's response to the points raised. I understand that while this was being compiled, the letter was inadvertently released around the beginning of March. Since then, the HSE has provided its final response on the points we raised and this is captured in the final version of the letter, which is before the committee today.

The table on screen before the committee sets out a summary of the key areas where we had findings and the priority classification we awarded these. Overall, there are 52 points in the letter. These can be conveniently categorised into 12 areas. Each of the 52 points is awarded a rating based on its perceived importance. A high rating indicates a significant weakness in the current control environment, financial management or governance that, in our view, requires immediate action by HSE management. A medium rating represents an opportunity to improve the effectiveness of the control environment, financial management or governance, and requires management attention in the near term. A low rating is a general opportunity to improve efficiency and effectiveness of the processes or controls. Further low risk issues may be identified by us. These are discussed with the relevant managers and we keep them under review.

Of the issues rated as high, a large number relate to the control over grants to outside agencies, the operations of the primary care reimbursement service and the nursing home support scheme, known as the fair deal scheme. We have highlighted many of these issues in reports in the past and in audit certificates relating to HSE financial statements.