Accountants and auditors have a unique opportunity to be the early warning system for companies. We may not want the responsibility to query whether our client’s business model is sustainable or even appropriate, but we, as a profession, have that responsibility nonetheless.
I say this, not as an accountant in practice, but as Finance Director of a Care Home group who spends hours every month trawling through forecast models to ensure the business is robust and sustainable; not for my own benefit, but for that of the service users. A Care business that is not financially stable cannot, in my mind, provide reliably safe care, so the question as to whether the Care business is financially sustainable is a critical one that should be thoroughly investigated by its auditors.
Personally, I’m becoming increasing worried by two factors – first, a continued lack of financial oversight by CQC over vast swathes of the Care Home sector and, secondly, what I perceive to be a lack of sustainability in the funding models of certain parts of the Care Home sector – to the extent that I fear the reaction of the media when the next care home group closes for financial reasons, potentially place residents’ safety at risk, and the accountancy profession is asked why it did not comment on the unsustainable funding structure.
Sustainability has grown in importance for CQC in its Key Lines of Enquiry (KLOEs) over recent years. In fact, CQC released guidance in January 2018 that it would be becoming increasingly strict with Care Homes that are consistently rated as ‘Requires Improvement’. Put simply, if you’re not sustainably ‘Good’, you’re not ‘Good’ enough.
There are three ‘Well-Led’ KLOEs that are important for accountants to provide their insight on:
These questions speak not only of operational matters, management input and engagement, but also financial resources, strategic insight and sustainable funding structure, the latter being areas that accountants and auditors are perhaps uniquely positioned to comment on, especially as CQC’s Market Oversight function only reviews the finances of 30% of Care Homes – these are considered to be the “difficult to replace” entities. The finances of the remaining 70% are left to the market, meaning that it is the responsibility of accountants and auditors to consider whether they are sustainable business models, potentially to help evidence that their clients are ‘Well-Led’. Personally, I’d start with the funding structure.
I hope it is not contentious to suggest that unsustainable financial structures and Care Homes do not mix; the well-publicised issues around Southern Cross and, recently, the financial plight of Four Seasons have demonstrated that an unsustainable financial structure, or excessive financial engineering without consideration of the operational risks of Care Sector businesses, places at risk the most vulnerable in our society.
Financial engineering is, for the Care Home sector, a short-term measure; with the potential exception of funding from pension funds, the majority of financial engineering products available to the Care Home sector have a 3-7-year time horizon. Even traditional High Street debt presents an element of risk to the sustainability of a Care Home, due to Credit’s ever capricious nature and top-level changes in the Lender’s desire for exposure to the Care sector. The resultant funding structures often then require optimised performance to ensure serviceability.
In my myopic view, a Care Sector business that requires consistently high occupancy and a high proportion of above average fee rates to sustain its financial structure is, ultimately, unsustainable. It is to create a finite-term funding structure within a business that has a natural near-infinite time horizon; without a significant scientific advance, humans will always get old, become frail and so require care. I suggest that introducing a time-finite funding measure into a time-infinite business increases the implicit risk of that business, potentially to the point where its sustainability could be questioned. I’m not saying that finite-term funding can’t work in Care; however, I believe that finite-term funding is more likely to be unsustainable if not structured to take account of the infinite-term nature of Care Homes, and so the risks and operational variances that naturally take place within such a business.
I have no definitive answer on how funding structures could be reviewed as sustainable in a format that is useful for a client. I leave the ultimate solution to more astute minds than my own, but encourage all those lucky enough to have Care Home clients to focus on the future sustainability of the business, not just the historic numbers, and ensure the safety of the most important stakeholders of all – the service users.
Finance Director, Blackadder Corporation Limited