Examination of witnesses (Questions 1
- 19)
WEDNESDAY 1 APRIL 1998
MR J MORTIMER,
Treasury Officer of Accounts, further examined.
Chairman
1. This afternoon we are considering the
Comptroller and Auditor General's qualification of and report
on the Intervention Board's 1996-97 Appropriation Account. I should
first like to start by welcoming Mr Trevelyan and his colleagues.
Would you introduce your colleagues for the benefit of the Committee?
(Mr Trevelyan) This is Graham Jenkins who is my
Finance Director and Bob Bryant who is my Chief Accountant.
2. The C&AG's report shows that you
have not been able to account properly to Parliament for your
financial affairs. Other accounts are affected, including one
to the European Commission. Can you explain why you have allowed
this unacceptable state of affairs to come into being?
(Mr Trevelyan) Yes, Chairman. We have been under
pressure for many years to introduce a higher standard of accounting
in the Intervention Board. It has been a matter of concern to
the NAO and indeed to ourselves that rising standards of accounting
are required and in our particular situation we account in three
different directions: we account to Parliament under the Appropriation
Account; we account to the European Community for FEOGA expenditure
on a different year base, but that is also a cash account; we
account also to Parliament under the accruals accounting under
which executive agencies are required to account. All of those
have in the past been done as separate exercises using the same
information but not in any way an integrated exercise and particularly
not on the basis of an electronic accounting system. We have for
many years been moving towards an integrated accounting system
involving the gradual modernisation and computerisation of our
accounts; phases 1, 2 and 3 are all referred to in the report
and what we have just completed is phase 3, which is the complete
integration of our accounts so that on the basis of each transaction
reports can be made into whichever accounts we are seeking to
report on at any one time, whether it is the Appropriation Account,
whether it is the FEOGA account or whether it is the agency account,
the accruals account. In each stage it is fair to say we have
had difficulties in computerisation. We have attempted to learn
the lessons from the different phases and we took very extensive
measures when we moved to phase 3, which meant the abandonment
of all the supporting accounting systems which we had been running
in parallel up until then. We felt we had adopted good quality
project management. We felt we had the best external advice available
to ourselves, but in this event it is fair to say we were disappointed.
The package which we had introduced on 1 May 1996 soon began to
show very considerable operating difficulties. As the Comptroller
and Auditor General instances, by the second and third months
it was taking 40 hours to process one day's transactions on the
payment side. I do not claim it in any way in mitigation, but
it should be remembered that the volumes of transactions which
we were undertaking did rise very steeply in the summer of 1996
which was our implementation year as we implemented all the BSE
support schemes. The volume of transactions went in certain months
from 3,000 or 4,000 monthly into the 30,000 and 40,000. Our budget
was very substantially increased by Parliament under the special
BSE measures and that clearly did not help. Nonetheless, the basic
background is system errors which we felt that we ought to have
been able to identify before the system went into place. We felt
we had identified the main ones and cured them before implementation
but we were disappointed and the system under-performed from an
early date in the May, June, July, 1996. We have effectively been
catching up since that date.
3. The C&AG's report makes a pretty
sorry tale. The C&AG's report, in paragraphs 7, 11 and 12,
records that there was over £30 million in your 1996-97 accounts
which could not be identified. This is a staggering amount of
money, particularly for receipts you cannot identify. Does this
disturbing lack of control mean that you cannot be sure of having
recovered all that is due to you?
(Mr Trevelyan) No, it does not. Since this report
was written we have identified all of the £23.7 million which
is identified in paragraph 7, the matching which was required
between receipts and expenditure has taken place and the other
main areas of concern, certainly the concern in paragraph 12,
the £500,000, have also been matched. We have some work still
to do in the cash security suspense account area and that is now
our main priority. Two out of the three issues are fully resolved
and one we have now to resolve.
4. After last week I am tempted to ask whether
you have been showing your accounts to the Ministry of Defence
but we will move on without that. Paragraphs 22 and 23 of the
C&AG's report refer to the risks if you did not run your old
and new systems in parallel and to the extensive testing which
you carried out to minimise those risks. In the event you ran
into very serious problems. Why?
(Mr Trevelyan) My introduction may have been rather
too long but I tried to cover the point that there were unexpected
software difficulties as we ran the new system. It was clearly
a risk not to run the two systems in parallel, but we felt that
running the two systems in parallel would not have been beneficial.
We would have had to match two entirely incompatible systems and
spend a great deal of extra money in implementation and almost
certainly it would not have worked. What we were looking at was
a system where we took a measure of risk in going straight over
to the new system but we felt at the time the risk was worthwhile.
5. If I may say so, your opening remarks,
if I can summarise them down to a sentence, were that you got
bad advice from your consultants and the people you employed.
Is that the depth of the analysis? Is that the extent of your
explanation?
(Mr Trevelyan) No, it is not. Paragraph 30 of
the report identifies management failings on our side and I acknowledge
those entirely. As I understand it from my researches into this
area, when a new system is introduced in the commercial sector,
it is extremely tightly managed to ensure that no erroneous postings
are made. This is one of the characteristics of this system, that
it makes a great number of postings in different parts of the
system and they then have to be reconciled and put in the right
place and it has to be extremely tightly managed. We acknowledged,
in accepting Sir John Bourn's report, that we had not done that
to the necessary degree.
6. Paragraph 23 of the report says that
you went live with the new system on 1 May 1996 in the knowledge
that a number of problems remained to be resolved. Why did you
take that risky step?
(Mr Trevelyan) The problems we faced on 1 May
1996 related to reports which we would need to have out of the
system for accounting purposes later in the year. Since we were
under great operational pressure, and this is where the BSE issue
does raise its head, we were faced with a massive increase in
the number of payments we needed, we knew that the old system
we had was not adequate for the purpose. We were faced with the
knowledge that some of the reports we needed to complete our accounts
as the year ends approached were not available to us at the beginning
of the year. What we felt at the time, however, was that they
would be available to us when the time came, but we were wrong.
7. Let me test another management decision.
The general ledger system introduced under phase 1 of your accounts
project was replaced only three and a half years later by phase
3. Just as an aside, my memory of it is that that general ledger
system was seen as satisfactory by the auditors at the time. Why
did such a major component last such a short time.
(Mr Trevelyan) Mr Bryant was present throughout
all the phases as Chief Accountant and he may be best placed to
answer that.
(Mr Bryant) Briefly, the general ledger was the
core of the system which we would implement first and we would
then implement the remainder of the system over the phases. It
took considerably longer to implement it than was originally planned
and we took a review at that time in conjunction with an IS strategy
review to see whether to continue with the progressive development
was the right course of action. We concluded that it was not the
right course of action to continue because it would have taken
considerably longer to implement a phased implementation rather
than a single step implementation. What we did was then implement
the rest of the system in one go.
8. Let us look forward rather than back
for a second. What action have you taken to resolve the shortcomings
in your management and control system and procedures and notably
in identifying receipts, reconciling balances and clearing suspense
accounts? What is your action plan from here on in?
(Mr Trevelyan) There are two aspects to this.
One is simply doing the work. One of the characteristics of the
new system is that it produces a great number of new account codes—in
the right circumstances that is an advantage in the system; it
creates account codes as it thinks appropriate. Many of those
are in fact not beneficial from our point of view so we have to
chase them all up and make the necessary linkings and make the
reconciliations which should have been done on time. That is a
very large manual task and we have a team of five contract accountants
working in the agency who have succeeded in two thirds of that
operation to date; that is in the period since the audit was made
in December. In the three months of this year we have made a great
deal of progress in that area. That team is being further strengthened
because it is our clear objective that the next set of accounts
should not suffer the same disadvantages. At the same time, the
process of matching and catching up and reconciling is not adequate
in itself because we are quite clear that the procedures which
we had in place when the system was implemented in May 1996 are
not adequate to the real difficulty of operating this new system.
We thought we had achieved an appropriate level of training but
it is also clear that that was not adequate. Finally, our organisation
internally, the interaction between the three separate but intercommunicating
units dealing with payments, with receipts and with the general
ledger, was inadequate and they both need strengthening and they
need a stronger management control and that is now in place. We
have had both reconciliation exercise and management changes in
the organisation.
9. When will it all work reliably, accurately
and on time?
(Mr Trevelyan) It is our firm intention that the
accounts for 1997-98 should be submitted within the statutory
deadline. I have to say that with some caution because the statutory
deadline is the end of November. That means that we have every
prospect of making the necessary reconciliations and in particular
the issue which is now facing us which is the cash securities
and the debtors' side which are accounted for together and continue
to cause a certain amount of difficulty to the agency. We have
every prospect of dealing with that problem, by the same procedure
of chasing up back data and making reconciliations, in the summer
months. We will then have what we sought at the beginning, which
is an integrated accounting system which does produce the accounts
from the same database and does it to time.
Mr Page
10. One of the advantages of serving on
this Committee is that we see the wheel come round and round and
round. I had the privilege of being on this Committee on 20 June
1990. Your predecessor, in response to a few humble enquiries
from myself, gave the following answers. I raised various questions
on the whole area of the report on computerisation and I said,
"Would you not describe this as a nightmare?". Your
predecessor, Mr Stapleton, said, "I would not. There have
been a few difficulties but this is certainly not a nightmare".
We then had an interesting interchange that the fact that they
had allowed the debtors to balloon by a few tens of millions was
serious but nothing really to worry about. Mr Stapleton concluded
in response to my questions, "Could I take this opportunity
to say we have accepted all the recommendations in paragraph 3.18,
most of which have been standard practice since we took over the
responsibility for our own computer development". Life was
going to be fine in just a few months time. Now we have this report
in front of us today which makes very unhappy reading. Would you
describe this report as a nightmare?
(Mr Trevelyan) I think some of my staff have been
living a nightmare, certainly in the period since May 1996. It
has been extremely difficult to make all the reconciliations required
with the understanding of the system which we had at the beginning.
That is why we drafted in extra staff, particularly extra accountants.
We have a permanent staff of five accountants.
11. I do not want to interrupt and be rude
but do you not regard this report as a nightmare?
(Mr Trevelyan) No, I do not, but there are differences
and I am not simply treading in the steps of my predecessor. The
first thing is that all the operations of the agency are going
forward as we expected. All our receipts and our payments have
been made, and Sir John recorded this in his press notice in announcing
the report, in accordance with Parliament's wishes. There are
neither large and untended areas of debtors, nor, as was the situation
in the late 1980s when we had our problems on the export refunds,
are there large numbers of creditors out there who are waiting
for payments from the agency. We have made payments broadly to
time and that has been in the context of the BSE issue which multiplied
many times the level of our interventions with the agriculture
industry. That side of it is better than it was in 1989. We are
quite clearly disappointed in our performance in terms of bringing
the books to account, which is the technical requirement which
I do not wish to minimise in any way.
12. It is obvious that you and I are going
to have to disagree on what constitutes a glorious success and
an horrendous failure. This falls more into the category of an
horrendous failure and a nightmare. Having one's accounts qualified
is a serious reprimand for any accounting officer. I recognise
the difficulties you have been through but the wheel has turned
round. As you do not regard it as a nightmare, can I take you
to paragraph 19 where we find there is a minor overrun on the
cost. It was to have been £2.65 million and I see it is £6.6
million. This is a slight increase in the percentage costs which
were anticipated. How do you feel the responsibility for this
lies? Is it due to staff inexperience? Is it to do with the number
of interfaces or is it just the complexity of the new system?
(Mr Trevelyan) Paragraph 19 refers to phases 1
and 2 of the exercise, where there were substantial cost overruns
and also the performance was not as we would have wished. Mr Jenkins
has the cost details. Is the question about what the elements
were of the cost overrun or what we feel about the cost overrun?
The cost overrun is something we clearly seek to avoid and I do
not think it would be right to interpret my remarks as claiming
either phases 1 and 2 or phase 3 a success. We quite clearly have
failed and we have failed both our agency and Parliament. The
issue for us is where we go from here.
(Mr Jenkins) The increase was largely the result
of extra consultancy time because of the extended period. That
accounted for some one third of the overrun of some £4 million.
We also decided and felt at the time that there was need for additional
consultancy support to help with the user training. Our own staff
were inexperienced in this matter. I was not there at the time
but I understand that we were introducing a fairly new concept,
the fourth generation computer software which was quoted as fairly
new not just for the agency but generally speaking. Our own staff
did not have all the experience so we had to use consultancy for
that element as well. The cost differences, whilst they have been
taken from published sources, include in the higher figure of
£6.6 million, IB staff costs of over £1 million as well,
which the original figure did not include. One has to take that
element into account as well.
13. The point I was wanting to get to was
the staff inexperience and the cost of getting the staff up to
speed which is so often under-estimated by Government departments
when they go down this particular route. It is horrendously expensive
which is not generally appreciated. May I take you on to paragraph
22 where we see that the decision was made not to run it in parallel
but "This approach carried a number of risks which the Intervention
Board sought to minimise by using extensive testing". What
was the estimated cost of trying to run it in parallel and what
were the costs of doing the testing?
(Mr Trevelyan) We believed that the cost of parallel
running the new system for an extended period would have been
that our dedicated staff in that area would have needed to be
approximately 50 per cent more than we otherwise would have had;
our technical support, that is the consultant support, would have
had to be approximately double. Where we were looking at technical
development of £2.5 million, we would have been in £4
or £5 million simply for running the two systems in parallel.
14. May I take you to paragraphs 26 and
27? There were problems with this integrated accountancy system
and that has been identified by the Intervention Board's own internal
unit in the reports which came out in March, June and October
1997 and in the Comptroller and Auditor General's reports. Yet
it was not until October that year, 1997, that external consultants
were engaged to help finalise some of the procedures and system
changes. Why was there that long delay before they were brought
in?
(Mr Trevelyan) There is a problem and I acknowledge
what is a regrettable delay in that appointment but we were seeking
the best way forward and we were seeking help down a number of
channels. It was not until October 1997 that we resolved on the
contract accountant team.
(Mr Jenkins) It is fair to say that there was
not inaction in those earlier months. After going live we did
have a pool of staff who had some initial training and we removed
staff from lower priority activities to higher priority activities.
We also gave substantial overtime and in discussing resources
with the staff and the consultants we had previously employed,
it was felt that these changes would be sufficient. That occurred
in the first few months. As the months developed, we realised
that more activity was necessary and regrettably I was looking
for a central control unit for some considerable number of months
before the person could be employed. That is to be regretted but
certainly we anticipated the need from about March 1997 and by
October 1997 we managed to get a separate control unit looking
at these issues which coincided with the appointment of the contractors.[1]
15. Could you say who were your original
consultants and who your new ones, the ones who have rescued the
day?
(Mr Jenkins) I assume that is in order. The consultants
who helped us with the phase 3 were KPMG and we have continued
with their employment in the latest phases. However, the accounting
consultants we are now employing are independents.
16. Independent individuals.
(Mr Jenkins) Indeed.
(Mr Trevelyan) They are directly under our employment.
We still retain KPMG on a consultancy basis to advise on their
best deployment.
Maria Eagle
17. Mr Trevelyan, you are the accounting
officer here.
(Mr Trevelyan) Yes.
18. Apart from having your hand in the till,
which nobody is alleging, could you think of anything worse for
an accounting officer than to have his accounts qualified?
(Mr Trevelyan) That is an exercise of imagination
which I would not really like to enter into. I have to say that
the accounting officer traditionally is both the head of operations
of the organisation and the head of the accounting process. That
is the essential compromise in the Civil Service, that the chief
executive or the permanent secretary who is responsible for the
actions of the agency has also to be responsible for the accounting.
There has to be a point where all lines meet and it is in the
accounting officer. It clearly would have been highly regrettable,
in the middle of the BSE crisis, if we could not have made the
payments and arranged the slaughter programme and so on.
19. You are the accounting officer though,
are you not? You are responsible for bringing in the accounts,
making sure your money is spent as Parliament intended it to be
spent. You have a personal responsibility for that, do you not?
(Mr Trevelyan) Yes.
1 Note by witness: Contractors, not consultants,
were appointed. Back
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