For discussion
on 12 December 1997



Subhead 514 Hospital Authority

Members are invited to approve supplementary provision of $202.35 million.


The Hospital Authority (HA) has made a double repayment of an advance of $202.35 million to the Government in 1996-97.


2.We propose supplementary provision of $202.35 million in 1997-98 under Head 177 Subventions: Non-departmental Public Bodies Subhead 514 Hospital Authority in order to return the over-payment to HA in the current financial year.


3.Similar to Government's practice, HA provides salary advances to its staff below certain ranks before the Chinese New Year (CNY) every year. Each eligible employee receives an advance of either 50% or 25% of his/her monthly basic salary, and repays the advance to HA through deduction of his/her salaries in the subsequent three to six months. For 1996-97, there were about 36 700 HA employees eligible to receive the CNY advance. The total amount involved was $202.35 million. Since the HA took over the management of the public hospitals in 1991, the additional cashflow required to pay HA staff the CNY advance is first provided by Government to HA in the form of an advance.

4.Government pays HA monthly in advance the approved annual subvention in 12 disbursements. The sum of each disbursement is adjusted having regard to various relevant factors, such as opening of new services, salary adjustments, etc. The additional cashflow required for the 1997 CNY advance was included in the Government's disbursement to HA made on 4 February 1997. Since the Government's accounts operate on a cash accounting basis with recurrent expenditure approved annually and as the approved provision for subvention to HA for 1996-97 had not included the CNY advance, the established practice is for the Government to recover the sum advanced from HA before the end of the same financial year. Thus, for the 1997 CNY advance, the Government effected this recovery by netting off the amount of $202.35 million from the disbursement to HA made on 1 March 1997. The deduction was recorded in a simple entry in the payment summary for the month of March 1997 passed to HA on 24 February 1997.

5.On closing of the Government's 1996-97 accounts at the end of March 1997, officers in the Health and Welfare Bureau (HWB) and HA discussed the matter over the phone. The HWB officer was unable to trace if the CNY advance to HA had been repaid and asked the HA officer to check the HA accounts. The HA officer had mistakenly concluded that the repayment of the CNY advance had not been made. In order to effect the payment within the 1996-97 financial year and given the misunderstanding on both sides that the repayment had not been made, HA made a cheque payment of $202.35 million to the Government on 27 March 1997. In line with established practice, the sum recovered was credited to the expenditure subhead on subvention to HA. This has resulted in an underspending of the same amount under Head 177 Subhead 514 in 1996-97.

6.HA reported this double repayment to HWB on 13 June 1997. After confirming that an error has been made, HWB immediately followed up with the Director of Accounting Services and reported the incident to the Secretary for the Treasury. As the Government's final accounts for 1996-97 had been closed, it was not possible for any rectification to be made in the accounts of 1996-97.

7.In view of the seriousness of the error, the Secretary for the Treasury, after preliminary investigation, requested the Secretary for Health and Welfare, who is the Controlling Officer for the HA subvention, to investigate into the incident and to explain the measures to strengthen the financial control procedures in HWB as well as in HA to prevent similar occurrences in the future. The Secretary for Health and Welfare has submitted her investigation results and reported that the accounting procedures have been strengthened as set out in paragraphs 10 to 11 below.

8.The HA has also conducted its investigation into the incident, which includes a review by its Group Internal Audit. The HA Board, at its meeting on 2 December 1997, accepted the findings and endorsed the recommendations to improve the accounting procedures in transactions with the Government.

9.Both HWB and HA have conducted detailed investigation of the circumstances that had given rise to this incident. Bascially, it was an error made by the officers concerned who, apparently under the pressure in connection with the closing of the Government's 1996-97 accounts, had acted in good faith to effect the HA's payment before the end of the financial year. They, however, had not carried out the necessary checking of their respective financial records in a thorough enough manner. The oversight was also partly attributed to the lack of sufficient documentation on transactions between the Government and HA. As a result, both parties did not realise that the repayment of the CNY advance by HA had already been effected through a deduction made in the disbursement of subvention to HA for March 1997.

10.We have reviewed Government's and HA's internal financial control procedures and the procedures governing the disbursement of Government funds to HA. The counter-checking measures we have identified and implemented together with HA as a result of the review findings are set out below -

  1. prior to making the monthly payment of Government subvention, HWB will provide HA with a detailed financial statement setting out a breakdown of the payment and of the cumulative payment since the beginning of the financial year. HA staff of the Financial Management Section will check and sign off the statement within 24 hours confirming the correctness of the subvention payment;

  2. HWB will only effect the monthly subvention until the above reconciliation procedure has been properly performed and clearance from senior officers on payment instruction has been obtained. Before and after the issue of a payment instruction, HWB will also arrange to obtain ledger accounting financial information system (LAFIS) reports from the Director of Accounting Services to cross-check the most up to date financial position of the expenditure subhead against HWB's records;

  3. on the part of HA, all transactions concerning Government subvention and advances will be clearly analysed and recorded on the following day after the transaction has occurred. A manager of the HA's Financial Management Section will immediately clarify any unexplained exceptional items with HWB and record any amount of which the clarification is outstanding in a specific suspense account. He will report all outstanding items that cannot be clarified within seven days to senior manager level for special attention and assistance;

  4. a manager of the HA's Treasury Section will, on a regular basis, at least once every two weeks, perform on-line checking of the accounts in relation to Government subvention. This will ensure that there are no exceptional items and the specific suspense account is cleared up in a timely manner. Any exception will be brought up to the senior manager level; and

  5. although instances requiring HA's payment to HWB are rare, HA will in future ensure that all payments by cheque or bank transfer will only be made upon receipt of demand notes.

11.We believe that with the implementation of the above measures, both HWB and HA would be able to check financial information on Government subvention more efficiently and effectively, thus preventing the recurrence of similar incidents. HA has assured us and the HA Board that transactions between HA and non-Government parties are already subject to a very rigorous system of checking and control.


12.The double repayment of $202.35 million in 1996-97 by HA to the Government has not resulted in any material financial loss to either the Government or HA. This is because under the financial arrangements between Government and HA, the Government's annual grant to HA takes into full account all interest income received by HA which is derived from Government funds. However, until the full recovery of the amount, HA will have $202.35 million less in its cash balance. The HA has confirmed that this has caused no problem in the day-to-day operation of the Authority or the delivery of hospital services.

13.Subject to Members' approval of the proposal, we shall offset the supplementary provision of $202.35 million required by deleting an equivalent amount under Head 106 Miscellaneous Services Subhead 251 Additional commitments.

Health and Welfare Bureau
December 1997