House of Commons - Public Accounts

Select Committee on Public Accounts Fifty-First Report

MINISTRY OF DEFENCE: APPROPRIATION ACCOUNTS 1996-97

CONTROL OVER SUSPENSE ACCOUNTS

31. The Department use suspense accounts to record transactions which either cannot be brought to account immediately (for example advances, and amounts not readily identifiable), or which are ultimately to be cleared by recovery or payment from a third party. The balances in suspense at the end of each financial year appear in the Department's Assets and Liabilities Statement which, under Government Accounting rules, is not published. With the forthcoming introduction of resource accounting the balances on suspense accounts will be included within the Department's published balance sheet.[31]

32. The Department's Army Pay Disbursement Suspense Account was originally set up to account for balances on the pay accounts of soldiers paid in cash. The function of the suspense account was subsequently extended, to account for the pay and allowances of soldiers paid through the banking system, and pay advances. Between 1988 and 1996 some £50 billion passed through the suspense account and around 500 imprest account holders could post transactions to it.[32] Throughout its eight year life the suspense account was never reconciled and the account was closed by the Department in March 1996 holding an unreconciled debit (deficit) balance of £16.3 million. In April 1996 the Department opened a successor pay disbursement suspense account which, at the end of 1996-97, held a balance of £13.9 million. Of this figure, £9.8 million could not be reconciled.[33]

33. We asked the Department why the Army Pay Disbursement Suspense Account had never been reconciled. They told us that the operation of the account had been on too ambitious a scale and had been fundamentally weak. The processes underlying the operation of the account had made it impossible for it to be reconciled.[34] But it was not the case that the Army pay and allowance system was a simple pay account: it had many more complications and was not a straightforward thing. And superimposed on this had been a whole series of changes in the organisation of the Army and in the organisation of administrative support for the Army which had served to make matters worse in relation to the pay account.[35]

34. We asked whether the second account operated on the same basis as the first, given that it had also run into the same problems. The Department replied that the successor account operated on a slightly different basis. They did not know why the first account had run into deficit but had decided to close it when the Army organisation responsible for its operation was wound-up. The intention had been to draw a clear line between the group of people responsible for the old account and those responsible for the new account. The Department suspected that the second account had run into difficulties that did not apply to the first account, and were partly due to a number of reorganisations in the Army pay organisation. They added that there was a feeling that some of the people who were handling the account were not competent to deal with it.[36]

35. The Committee questioned the Department to establish the causes of the errors in the Army pay suspense accounts which had led to the unreconcilable balances, and the action being taken by the Department to prevent a recurrence. The Department told us that, since June 1997, they had invested 7,500 man hours in seeking to establish the problems, but that they had yet to find a fundamental problem with the way in which the account had operated. [37]

36. We asked the Department to provide, to the best of their ability, an analysis of the causes of error in the Army pay suspense accounts.[38] While not identifying directly the causes of the errors, the Department's evidence subsequently provided to us did draw attention to the following four main areas of difficulty with the accounts:

(ii) reconciliation of transactions was made more difficult by timing problems which made it impossible to match individual debits and credits;

(iii) a number of errors had arisen through incorrect use being made of the account; and

(iv) a lack of visibility and control within the operation of the account.

The Department told us that all of these problems were now being addressed.[39]

37. The Committee asked the Department whether the same problems existed with the pay suspense accounts for the Royal Navy and the Royal Air Force. They told us that the Royal Air Force had 44 pay suspense accounts, and they were all reconcilable. The Royal Navy also had 44 pay suspense accounts, five of which had debit or credit balances which the Department were addressing. These accounts contained debit balances of £6.3 million and credit balances of £2 million. The Department were trying to clear all these accounts before the introduction of resource accounting and budgeting.[40]

38. Apart from those suspense accounts which are used to administer pay, during 1996-97 the Department maintained around 2,500 other suspense accounts in their main ledger, with aggregate debit and credit balances at final ledger closure for the financial year of £1,889 million and £2,239 million respectively.[41] In his report, the Comptroller and Auditor General noted that in July 1997 there were 99 suspense accounts where the account holder was reporting difficulties in reconciling balances held. There were a further 147 replies outstanding from suspense account holders, where the Department had no assurance that balances were clearly identifiable, correctly classified and explainable. His report commented, however, that work undertaken by his staff had indicated that the scale of the problems reported by Departmental staff in reconciling suspense accounts was probably understated.[42]

39. The Committee asked why the Department required so many suspense accounts. We were told that it was normal to run an organisation using suspense accounts and that it was provided for in Government Accounting. [43] In July 1997 the Department had 2,866 suspense accounts and had since closed 235 and opened another 136. They added that they were not trying consciously to reduce the number, but were trying to ensure that they were all fit for purpose and could be reconciled.[44]

40. The Department also stated that their departmental guidance required each suspense account to have an individual who acted as owner. Because of the problems described in the Comptroller and Auditor General's report, the Department had introduced procedures whereby in each budgetary area a Senior Finance Officer was required also to keep an eye on the performance of suspense accounts. Thus, a suspense account holder had to be properly authorised, was held to account for the proper operation of the suspense account and was also subject to management checks.[45] Over the last six to nine months the Department had emphasised to all Top Level Budget Holders the importance of them getting all of their suspense accounts on a proper basis by April 1998.[46]

41. At the end of March there were 95 suspense accounts out of a total of 2,705 that did not reconcile. Of that 95, the Department believed that up to 80 might require write-off action of some kind, although some writes-off would be for very small amounts. In total, the Department said, they were estimating write-off action of around £40 million, which included £19.5 million relating to the Army Pay Disbursement Suspense Account which was closed in 1996. There was also a further sum on the successor pay suspense account which would have to be included in the total figure.[47]

42. The Committee also asked whether the Department's progress in implementing resource accounting was in line with targets. We were told that progress was broadly on target and that the Department were reasonably confident about their ability to achieve implementation as planned. However, there were a number of big problems that they were tackling, including the scale of the task itself which was one of the biggest change programmes being attempted in Europe. It also involved at lot of training of staff and bringing in new people. Additionally, the Department said they had serious problems particularly in relation to those parts of the system that track spares consumption. They had, however, a strong focus at all levels in the Department on all the risks involved and were determined to succeed.[48]

Conclusions

43. The Committee note the Department's admission that the arrangements for running the Army Pay Disbursement Suspense Account were "too ambitious", and "fundamentally weak" such that the account was "impossible to reconcile". Against this background, we are concerned that the replacement account immediately ran into deficit, albeit for different reasons. We accept the Department's assurance that great efforts are now being made to resolve the underlying problems with this account. But it is unacceptable that the Department seem unable to account properly for the pay of their military employees, and that this fundamental breakdown in the Department's pay system is likely to result in a write-off of more than £19.5 million.

44. More generally, we question the extent of management attention given both locally and at the centre of the Department to the proper management of suspense accounts. This lack of focus may lead to writes-off of some £40 million in 1997-98, including those in respect of Army pay, which represents an unacceptable waste of public money. The Committee look to the Department to maintain sufficient oversight of all suspense accounts to enable regular and prompt reconciliation to be achieved. Accordingly, we recommend that the Department grip the issue of management of suspense accounts, improving the standard of control and management review, and take a much more proactive role when suspense account holders fail to submit reconciliation returns on time, or report a failure to reconcile.

45. The Department recognise they face significant problems in implementing Resource Accounts, but told us that they are determined to meet their implementation targets. We consider that a resolution of the financial management problems highlighted in this report, particularly as regards expenditure monitoring and the control of suspense accounts, must be a prerequisite to a successful introduction of Resource Accounting. We therefore urge the Department to move ahead rapidly on the issues that we have identified.

31 C&AG's report (HC 251-1 of Session 1997-98), paras 37 and 51 Back

32 ibid, para 40 Back

33 ibid, paras 41-42 Back

34 Q9 Back

35 Q11 Back

36 Q71 Back

37 Qs 52, 56 Back

38 Q188 Back

39 Evidence, Appendix 3, p25, paras 10-11 Back

40 Qs 51-52 Back

41 C&AG's report (HC 251-1 of Session 1997-98), para 37 Back

42 ibid paras 47-48 Back