APPENDIX 3
Supplementary Memorandum submitted by
the Permanent Under-Secretary of State, Ministry of Defence on
the Army Pay Disbursement Suspense Account
1996-97 APPROPRIATION ACCOUNTS: CLASS 1—MINISTRY
OF DEFENCE (PAC 97-98/279)
1. The Chairman of the Committee asked (Q188)
for an analysis of the causes of the error on the Army Pay Disbursement
Suspense Account. This memorandum explains the background and
the work which is being conducted to identify the causes of the
debit balance.
BACKGROUND
2. The original Army Pay Disbursement Suspense
Account (PDSA) was opened in April 1988 following an internal
audit observation that the Department was not accounting for the
balances on pay accounts of soldiers paid in cash in accordance
with Government Accounting regulations.
3. Soldiers who are paid in cash rather than
through the banking system do not necessarily draw all of their
entitlement each month and so may have a credit balance on their
individual pay account. Previously, the Vote had been charged
only when pay was issued to the individuals. Internal Audit recommended
that a suspense account should be used to record the credit balances
of, individuals, thus allowing the Vote to be debited in full
at the time the pay liability occurred.
4. The intention was that, each month, an individual's
full entitlement to pay and allowances would be charged to the
Vote and credited to the PDSA. Thereafter, as the individual was
issued with cash, the PDSA would be debited until the credit was
used up. It was expected that, at any one time, some individuals
would not have drawn all their pay and allowances and so the PDSA
would always have a credit balance. In the event, however, the
suspense account was used for more than the balances of cash-paid
soldiers. Four types of transactions were being processed:
(a) the account was used to record the double
entries for Income Tax and other statutory deductions and similar
transactions when amounts were deducted before being passed on
to the Inland Revenue or other relevant recipient;
(b) advances of pay to individuals would
be debited to the account and subsequent recoveries credited,
so that the Vote was not distorted by such advances;
(c) cash payments (whether to cash-paid soldiers
or to bank-paid soldiers and officers), for instance when a unit
was on operational duty, were debited to the account. These entries
would then be cleared with a credit from the individual's pay
account. Again, the intention was to avoid the Vote being distorted
by these transactions.
(d) the originally intended recording of
credit balances for cash-paid soldiers. But even here the transactions
were made complicated when, for each month's pay run, an individual's
credit balance was transferred back to his pay account for computer
processing and the new balance, including the new month's pay,
then credited to the PDSA.
5. The assumption was that most entries would
balance automatically leaving only cash payments to be "managed".
Unfortunately, this failed to recognise not only the complexity
caused by differing time lags within the system but also that
even the more straightforward elements—statutory deductions—were
subject to adjustment. Furthermore, there was the difficulty of
the volume of transactions and visibility of the detail. Transactions
arose in hundreds of Units but were booked by central pay offices
at which point a large number of transactions were aggregated
into a single entry.
6. The Army pay population is about a third
of a million, including regular officers and soldiers, Gurkhas,
TA and Reserves. For each individual there will normally be a
monthly pay transaction and various statutory deductions. There
is also a variety of around 30 allowances, 100 rates of additional
pay and 19 main types of charges which may be processed. There
are currently some 8,000 regular soldiers who do not have a bank
account and are paid in cash—generally because they are
new trainees or have had problems in managing their financial
affairs. There are also 2,300 cash-paid Gurkhas. Millions of transactions,
amounting to £500 million per month (i.e., £250 million
in/£250 million out), flowed through the PDSA and a single
process total could potentially aggregate many hundred thousands
of items.
7. That the account was not reconcilable was
recognised very early on. In 1989 the NAO observed that the then
account holder (Command Pay Office at UK Land Forces) could not
reconcile it. At this point CPO UKLF made clear to users the requirement
for them to certify the correctness of bookings they were making
to the account. The certification was also extended to include
greater detail of outstanding bookings which had been processed
by them but which had not yet appeared on the MOD Ledger. The
account operated within what were considered at the time to be
expected tolerances and, as had been expected, the account stayed
in credit, though it was recognised that formal reconciliation
in accordance with Government Accounting was not being carried
out. Efforts were made at various times to reconcile it and to
gain greater visibility of detail (without which reconciliation
could not be achieved). As part of that process, separate suspense
accounts for income tax and ERNIC were opened in 1992-93.
8. Various methods were tried to resolve the
difficulties with the account. Some transactions were taken out
of the account, new desk instructions were issued, restrictions
on booking clerk use introduced and a reconciliation method (subsequently
found to be flawed) devised. An organisational change led to the
account being closed in 1996 but the replacement account suffered
from the same problems.
9. Since 1997 two major pieces of work have
been put in hand:
(a) from August 1997, a major restructuring
project (See paragraphs 11 and 12 below);
(b) from February 1998, a full scale audit
investigation. This is building on work carried out in smaller
scale investigations in 1997. The greater visibility provided
by the restructuring, during which the component parts of PDSA
have been broken out, has been an essential precursor to this
work.
THE CAUSES
OF ERROR
IN PDSA
10. The account continues to show debit balances
and it is clear that the causes of all the problems have not yet
been identified. Nevertheless successive studies, confirmed by
the recent investigation, have identified the following:
(a) Rejected Transactions. Computer
processing may reject an entry which the program detects as incorrect.
This could be as simple as a missing digit in the service number
or an individual's name being incorrectly spelt. If this was the
case, the computer would reject the entry and print an error notification.
It was possible however for the error subsequently to be corrected
but the resultant accounting action to be completed incorrectly
leaving a balance in the PDSA.
(b) Timing problems. Reconciliation
of transactions was made more difficult by timing differences.
The various transactions might not be reported to the suspense
account holder until the middle of the second month after the
original transaction. For example, if a soldier received a cash
payment in the first half of the month, this would be captured
during the monthly processing of pay. This would book a credit
to PDSA, via the MOD Ledger, which would then be notified to the
suspense account holder in the middle of the following month.
The debit to the PDSA however would be processed by the
Unit, batched up with many other transactions at the end of the
month and booked to the MOD Ledger during the following month.
This would not be reported to the suspense account holder until
the middle of the second month after the original transaction.
Such timing differences made it impossible to match individual
debits and credits.
(c) Incorrect use. A small number
of unrelated errors from different users have been identified.
Payments might be debited to PDSA and the counter credit incorrectly
made to the Vote or, perhaps, to another suspense account. Such
errors would leave a debit on the PDSA which would never be cleared.
(d) Lack of visibility and control.
When Units make cash payments they keep Unit level records and
report the transaction both through the Ledger process (which
leads to a debit to PDSA) and through the central pay computer
process (which leads to a debit to the individual pay account
and a credit to PDSA). Only at Unit level has there been visibility
of individual transaction detail of both credits and debits. This
visibility is then lost as aggregated bookings are made subsequently
in the process.
RESTRUCTURING PROJECT
11. All these problems are being addressed in
this project, specifically:
(a) The original four main functions set
out at paragraph 4 above (double entries, pay advances, cash payments
and credit balances) have been divided into separate accounts
leaving only the cash payments in the Cash Issues Suspense Account
which has replaced the PDSA with effect from 1 April this year.
(b) The double entries and account balances
are now held in suspense accounts operated by the Armed Forces
Personnel Administration Agency (Worthy Down) (AFPAA(WD)). This
is a major step forward in aligning responsibility and accountability
for processes within the account. AFPAA(WD) control the bookings
to these accounts and it is right that they should control these
general suspense accounts. These accounts can be reconciled.
(c) The advances of pay are now controlled
through a separate general suspense account with the Army Personnel
Centre in Glasgow. This is reconcilable by line entry item.
12. Although there have been no significant
process changes, all the newly opened accounts, other than that
for cash issues, can be reconciled. So it seems clear that the
errors within the old PDSA accounts were not within double entries,
credit balances or advances of pay. Other changes being introduced
in the restructuring project are:
(a) An auditable, detailed routine is being
set up to log and resolve rejected entries to ensure that they
are properly accounted for.
(b) A new computer program has been written
and is being tested to allow any errors in charges, credits and
transactions pending to be identified against the individual Unit
concerned.
(c) Enhanced business processes providing
earlier reporting from Units to Glasgow, together with IT changes
to include more detail in transmissions, will help overcome the
problems of different time lags in the system and lack of visibility
of individual transactions.
AUDIT INVESTIGATION
OF PDSA
13. Given the nature of mobility in the Army
both at Unit and individual level, Units need to retain the facility
to make cash payments. At present, however, because of that mobility
and because of the time lags in the system, transactions cannot
always be reconciled by Units. There are, nevertheless, checking
and audit visits and, although the present investigation has identified
errors at Unit level, they are not significant nor is there any
pattern of errors in particular functions or at particular locations.
14. The work of the Restructuring Project has
for the first time provided the opportunity to attempt a detailed
reconciliation of PDSA transactions. The audit will not be fully
able to reconstruct and reconcile the account over its entire
life but will identify the errors and problems that can be found
and will arrive at a closing balance for write-off. This will
also help to validate the new procedures. Although the account
has been closed the inevitable time lags in booking mean that
this work cannot be finalised for some months yet.
15. The significance of this attempt at reconciliation
is that since 1 December 1997 there is full visibility by line
entry of payslip information and errors, both cleared and pending.
This will be reconciled against Unit Imprest Account bookings.
It may also be possible to examine other erroneous charges or
credits to the account.
16. The first phase of the audit targeted areas
of suspected problems. This included validation of Unit bookings
to PDSA and involved the manual checking of some 8,900 monthly
reports. This work is now mostly complete with the current activity
concentrating on further investigation of errors. Over 92 per
cent of the reports checked have been found to be correct. The
remaining 8 per cent, are in the main minor errors, although a
single misbooking of £1.3 million in respect of Gurkha terminal
payments has been identified.
17. All of the work carried out so far will
form a platform for future audit activity. However, as the audit
moves into the second phase, the work is being widened. The next
stage in investigation is to reconstruct all transactions from
1 December 1997—31 March 1998. This should identify the
cause of the declining balance on the account. This stage will
require considerable manual effort and should be complete by the
end of July 1998. Depending on the results of this, the audit
may be extended to attempt a form of reconstruction from 1 April
1996-30 November 1997. Because of the lack of complete documentation
there cannot be a complete reconciliation by individual line entries
but it will be possible to follow up specific areas resulting
from findings in the earlier phase. The audit will continue to
search until all avenues for errors have been explored.
18. During the course of their investigation
the audit team discovered a small number of overpayments to individuals
(some £20,000 in all) and recovery action is being taken.
It is likely that there are other overpayments in the system and
the investigation work together with resolution of errors now
held in the errors database will seek to identify those. Recovery
action will be taken where possible.
Conclusions
19. It has not yet been possible to identify
the causes of all the problems with the PDSA. A number of structural
and systematic problems which inhibited the proper management
of the account have been identified and are being corrected. Although
these problems have led to a number of errors, they do not appear
to have caused the increase in the debit balance. They have, however,
until now, bedeviled attempts to investigate the account. The
detailed investigation work now in its second phase, will continue
until the Department is satisfied that the problems have been
identified and the account can be reconciled. In the meantime,
the new account opened in April 1998 reflects and benefits from
the work done during the Restructuring Project. This will allow
those managing the account to have Unit level visibility of unbooked
or rejected transactions while maintaining central management
and thus visibility of payroll processing and of the movement
of Units and individuals. The findings of the audit investigation
will continue to inform the Restructuring Project.
Permanent Under-Secretary of State
Ministry of Defence
30 April 1998
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