Earnings management in NHS organisations

NHS England is one of the largest public health providers in the world. Funded primarily through taxes and public money, NHS organisations face stringent accountability regulations, often leading to engagement in earnings management to meet financial targets without compromising existing funding, management freedom, or operational structure. This thesis is divided into three separate studies. The first contributes to the understanding of NHS England’s financial structure by examining the structure of the NHS, identifying the flow of funding through the system, and exploring how this has evolved over time. The financial reports of all NHS trusts and foundation trusts operating between 2009–10 and 2021–22 are investigated.

Using financial data published by NHS consolidation organisations, this first study provides a comprehensive exploratory analysis of NHS financial statements, focusing on five key financial indicators: (1) revenues, (2) expenditures, (3) deficits or surpluses, (4) capital investments and cash flows, and (5) debt and equity. The analysis examines trends across three factors: (1) time, (2) type of organisation (trusts vs. foundation trusts), and (3) healthcare services provided. The findings suggest that NHS foundation trusts, with greater operational autonomy, can better adapt to financial pressures, leveraging commercialisation and non-NHS income generation.

The second study examines discontinuities in the distribution of earnings around break-even targets. This study finds evidence of unusually high frequencies of small surpluses, indicating towards earnings management to reach break-even targets. Additionally, there is evidence of unusually high frequencies of small earnings decreases and increases, suggesting that NHS organisations avoid significant changes in reported earnings, which could be attributed towards avoidance of changes in funding received.

The third study investigates and provides empirical evidence on the use of accrual-based and real activities earnings management in NHS organisations with respect to their financial sustainability risk ratings (FSRR). The findings indicate that the FSRR of the organisation significantly impact earnings management behaviour. Specifically, trusts with a rating of 1 (indicating significant financial risk) employ income-decreasing earnings management, whereas trusts with a rating of 2 (indicating marginal financial risk) employ income-increasing earnings management. In contrast, trusts with a rating of 3 and 4 avoid earnings management, likely to preserve their current rating. Additionally, it is found that NHS organisations with a projected marginal surplus tend to increase non-healthcare expenditures rather than operating expenditures, to avoid negatively affecting clinical performance.

This thesis contributes to the existing literature by addressing critical gaps in understanding the financial pressures faced by public health organisations. To the best of my knowledge, there have been no prior studies on earnings management behaviour in NHS trusts and foundation trusts with a more recent data sample. This study provides a detailed analysis of financial patterns in NHS organisations based on organisational type and the nature of healthcare services delivered. Furthermore, it highlights the influence of rigid financial targets, such as breakeven duties and FSRR ratings, in driving earnings management practices. This study concludes by emphasising the need for NHS England to reassess financial targets and align them more closely with the overall mission of the NHS.