House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Ninth Report

THE RESTRUCTURING OF HMSO

52. The restructuring programme undertaken by HMSO, implemented ahead of and during the privatisation process, had an important impact on the privatisation. It aimed to reduce overhead costs and improve the commercial focus of the business, involved the creation of 14 new business units from the three that existed previously, and included the devolution of accounting systems to the new units. It was badly executed, resulted in a progressive loss of management and financial control and led to severe difficulties in the reconciliation of inter-business unit accounts. The National Publishing Group have largely reversed the restructuring, sorting out the difficulties that they inherited.[52]

53. We asked the Office of Public Service whether it was logical for HMSO's management to take the existing units and divide them into 14. The Office of Public Service told us that the decision to split the business into 14 business units was taken on consultancy advice in 1994. The decision was predicated on the business's track record which at the time showed a steady state business, declining in real terms but continuing to be profitable. In their view the restructuring could well have been sensible.[53]

54. We questioned whether it was logical to allow each new unit to develop their own accounting systems. The Office of Public Service told us that this was unsatisfactory and that the unresolved problems arising out of this affected the price achieved.[54]

55. In November 1995, as a consequence of the restructuring programme, the National Audit Office commissioned a report from Ernst & Young into HMSO's financial controls and, in particular, the risks to internal controls arising from the organisational changes. This highlighted a number of problems.[55] The Office of Public Service told us that they had not known about the Ernst & Young work and did not know about the problems that the firm had found in the business's financial reporting systems.[56]

56. We asked why it was only when the Office of Public Service received the draft accounts for 1995 that they realised the chaos that existed and whether, prior to that point, they had any sense from the business's internal financial and management information of the true extent of the problems. The Office of Public Service told us they had been aware of some of the weaknesses in the management and financial control of the business but had not realised their true extent in the early stages of the sale process. It was not until January or February 1996 that significant problems with the accounting systems began to manifest themselves. Prior to the start of the restructuring programme the business's accounting arrangements had been perfectly adequate.[57]

57. The Director within HMSO with responsibility for the privatisation considered that it would have been difficult but not impossible to stop the implementation of the restructuring programme in September 1995.[58] We asked the Office of Public Service why the restructuring had not been stopped. They told us that by January 1996 when significant problems began to appear the restructuring was virtually complete and there was no question of going back at that stage.[59]

58. During the due diligence process bidders were worried about HMSO's internal financial and management controls as exemplified by the business's inability to correct unreconciled balances of some £19 million.[60] We asked why this had happened. The Office of Public Service told us that the £19 million was a gross figure representing all the unmatched balances, both positive and negative. The accountancy firm, Binder Hamlyn, who were the reporting accountants for the sale undertook an exercise which eventually resulted in the imbalance being reduced to £482,000 as shown in the C&AG's Report.[61]

59. HMSO's management could not identify the costs of the restructuring since they did not prepare specific budgets or keep records of the costs incurred. We asked the Office of Public Service whether they agreed with the National Audit Office's recommendation that budgets should have been established and costs fully recorded.[62] The Office of Public Service told us that they considered that the recommendation implied that the restructuring programme was part of a self-contained set of decisions, whereas in fact it was part of a wider commercialisation programme. One of the main elements of this had been the devolution of power to the heads of the 14 business units. The costs of the redundancy programme were budgeted for and accounted for separately but other costs associated with the restructuring, such as new information technology equipment, were built into other budgets but were not separately identified.[63]

Conclusions

60. The Office of Public Service failed to find out about the adverse impact of the implementation of HMSO's restructuring programme on its accounting systems until it was too late to take remedial action. As vendor they should, in our view, have taken a close interest in how the restructuring programme was being progressed because such an activity can have important consequences for the effective operation of a business and its appeal to bidders.

61. A vendor should know the costs and benefits of any restructuring proposals. We are critical of HMSO's management for not setting budgets or recording the costs of the restructuring programme, and the Office of Public Service for not insisting that they were drawn up. We consider that setting a budget for such an exercise is an integral part of good management, providing an effective check upon upward cost pressures which often arise, for example, because of unforeseen problems requiring changes to plans.



© Parliamentary copyright 1998	Prepared 9 July 1998