Ripples of dismay will spread throughout the National Health Service at the news that the District Auditor has referred the Oxford Radcliffe Hospitals NHS Trust to the Secretary of State for Health for its failure to break even over the past five years, and for producing a forecast that it will not recover the losses in 2009-10.

By law, the health trust must recoup any losses within five years. However, the trust has agreed with the Strategic Health Authority to pay back a debt accumulated in 2005/6 and 2006/7 over seven years instead of five.

In a letter to the trust, District Auditor Phil Sharman says: “I have a duty under the Audit Commission Act 1998 to refer any matter to the Secretary of State if I have a reason to believe that the trust, or an officer of the trust, is about to make, or has made, a decision involving unlawful expenditure, or is about to take, or has taken, unlawful action likely to cause a loss or deficiency.”

He adds: “I have referred a matter to the Secretary of State under section 19(b) of the Audit Commission Act 1998 in relation to the forecast failure to achieve the required financial breakeven duty over a five-year period.

“I have reason to believe that the forecast breach of duty to break even taking one year with another would be unlawful and the resulting deficit would be the loss.”

Here is a dilemma indeed for Health Secretary Andy Burnham. On the one hand, the temptation to use delegated powers to allow the seven-year payback period will be great (taking attention away from how the trust got into debt in the first place); on the other, NHS trusts throughout the country would wonder why the Oxford hospitals were being allowed more favourable terms than they.

All this comes at a time when top management at the trust is undergoing change. In June this year, chief executive Trevor Campbell Davis anounced that he was leaving his £189,000-a-year job to take up a position in international healthcare. His announcement was immediately followed by the resignation of finance director Chris Hurst, to become national finance director for health and social care in Wales.

Mr Hurst is now acting chief executive at the Oxford Radcliffe Trust until his departure for Wales in the autumn. An interim finance director, Jo Farrar, has been brought in from NHS London.

I asked Mr Hurst if the District Auditor’s referral to the Secretary of State could lead to a nightmare scenario, with Mr Burnham demanding that the trust trim its finances still more drastically than it has already done to meet the five year break-even deadline.

Could this mean that Oxford hospitals will have to make cuts over and above those widely expected as a result of the changed financial climate?

Mr Hurst said: “The Secretary of State I am sure has the legal powers, but it won’t happen that way, I can assure you.

“In effect, the South Central Strategic Health Authority (SCSHA) is the regional branch of the Department of Health and it has agreed the seven-year plan.

“And on the level playing field argument, it is not that we have been let off anything. We are having to make large surplusses when the the finances were only designed to produce modest ones.”

He added: “We do not expect any further action.”

A spokesman for the Department of Health said: “We would expect a recovery plan to show how they will address thebreak-even failure.”

The story of how the trust got into such heavy debt in the first place takes us back to 2005/06 and 2006/7, when it ran up a £26m deficit. This arose, in the words of deputy finance director Simon Lazurus, “because the trust was asked by the South Central Strategic Health Authority (SCSHA) to help with the overall Oxfordshire health economy position by accepting reduced income from the Primary Care Trust.”

Mr Hurst explained further: “When the 2008/09 accounts were audited, the District Auditor noted we had not met the duty in four years and, as he was able to confirm that our budget for 2009/10 — which had been agreed by the board in March 2009 — only provides for a £2.4m surplus, he could accurately conclude that we would not meet the duty within the statutory five-year period (ie by the end of this year).

“He is required to bring this fact to the attention of the Secretary of State in issuing the audit opinion.”

He added: “We will be nibbling away at this problem for years to come, but in general terms the District Auditor makes it clear that he has no other concerns about the trust, and has given us a ‘score’ that means we are ‘consistently above minimum standards — performing well’.

“Another reason the Secretary of State will not pursue this is that all agree that the future is more important than the past and we are now living in a new economic climate — which may involve further cuts.”

He said that many NHS trusts had suffered in the past through being forced to accept a far too low tariff for specialist services, but that the Oxford Radcliffe NHS Trust had suffered less from this cause than others such as the Mental Health Trust, Acute Hospital Trust, or the Learning Disability Trust.

Some say another inherent problem with the Oxford Radcliffe NHS Trust is that the Oxfordshire catchment area is comparatively small (and comparatively healthy too, receiving 18 per cent less per head of population than the average) but nevertheless has to support a tertiary hospital supplying specialist needs.

But the question hangs in the air: how will the trust face up the future now that both its chief executive and finance director are leaving at a time of crisis?

Mr Hurst said: “These things tend to happen. The non-executive team remains.”