Select Committee on Public Accounts Thirteenth Report


THIRTEENTH REPORT


  The Committee of Public Accounts has agreed to the following Report:—

THE FINAL ACCOUNTS OF: THE CHESSINGTON COMPUTER CENTRE, THE RECRUITMENT AND ASSESSMENT SERVICES, AND THE OCCUPATIONAL HEALTH AND SAFETY AGENCY

INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

1. In 1996 the Cabinet Office sold the following three Agencies:

  • Chessington Computer Centre, which provided a computerised service for payroll, personnel, financial accounting and other administrative services to central government, was sold in July 1996 to The Chessington Partnership Limited (TCLP), comprising a Management and Employee Buy Out (MEBO) in partnership with Integris UK and Close Investment Fund Ltd. Proceeds for the sale were £12.5 million, of which £1.25 million was deferred until 31 December 1999. An adjustment to the consideration, based on the final value of the net current assets transferred, has yet to be determined and paid to the Cabinet Office;

  • Recruitment and Assessment Services (RAS), which provided recruitment and personnel services to government departments, was sold in September 1996 to Capita Group PLC for £7.25 million; and

  • The Occupational Health and Safety Agency (OHSA), which provided advice and services to government departments on occupational health matters, was sold in September 1996 to BMI, a division of General Healthcare Group Plc, for £350,000. An adjustment to the consideration, based on the final net liabilities transferred at the date of sale, has yet to be determined and paid to the purchasers by the Cabinet Office.[1]

2. On the basis of a report by the Comptroller and Auditor General, the Committee examined the Cabinet Office on delays in the preparation of final accounts for the three Agencies sold, on deficiencies in the Agencies' accounting and asset records, and on the effectiveness of the Cabinet Office's oversight over pre and post aspects of the sale. Three key lessons stand out from these sales:

  • The need to prepare accounts in a prompt and professional manner

The statutory deadlines for submitting accounts to the Comptroller and Auditor General for audit and for laying accounts in Parliament, laid down in the Exchequer and Audit Departments Act 1921, should be regarded as the last permissible dates for such action, and not as a target to be aimed for if resources and priorities permit. It is the responsibility of management to ensure that appropriate resources are available to prepare accounts for Parliament in a timely and professional manner. We consider that the delays in preparing accounts for the three Agencies sold in 1996, such that they are still outstanding more than two years later, is a serious breach of parliamentary accountability by the Cabinet Office.

  • The importance of maintaining proper accounting and asset records

The Cabinet Office's weak accounting systems, and poor records of assets, were factors in the serious delays which have arisen in the preparation of accounts. They also increased the risk of losses for the Exchequer. In order to safeguard public money, the quality of accounting in public bodies must be high, and should have been sufficient to meet the needs of privatisation without undue additional effort. Proper financial management requires that accounting systems should be sufficiently robust to be able to support the production of financial statements at any point in the year, and not just at the year end.

  • The importance of maintaining effective oversight over pre and post aspects of the sale

The Cabinet Office were negligent in taking almost two years before they began to reconcile sums paid and collected on their behalf by two of the privatised Agencies. The basis for calculating a provision for accrued annual leave was not agreed before the sale of CCC was completed, and is now the subject of a dispute between the parties which may have to be resolved by litigation. For two of the sales, the final adjustment to the consideration receivable had still to be effected more than two years after the sales were completed. As a result of these failings the Exchequer is at risk of losing money. It is imperative that Departments take due care and attention when making disposals, whatever the size of the entity involved and whatever the timescale for the sale itself.

3. Our more specific conclusions and recommendations are as follows:

On delays in the preparation of final accounts

      (i)  In the private sector, failure to file accounts on time would lead to fines and penalties. We look to the Treasury to emphasise to Departments generally that submitting accounts beyond the deadlines imposed by statute is unacceptable (Paragraph 9).

      (ii)  The Cabinet Office admitted that they failed to give sufficiently high priority to the proper preparation of accounts for the three Agencies sold. It is the clear responsibility of management to ensure that they have appropriate resources in place to meet their statutory obligations. In advance of completing sales, Departments should take action to scope the work required to finalise the affairs of the entity sold, and ensure that they put in place the necessary resources and expertise to wind up matters in a timely and professional manner (Paragraph 10).

      (iii)  The delays in finalising these accounts have incurred additional costs for the Exchequer. The consideration receivable for two of the Agencies sold has yet to be determined, and in one case interest has been foregone on monies still due to the Cabinet Office. Additional costs have also been incurred within the Cabinet Office, and by the National Audit Office, in revisiting the accounts concerned (Paragraph 11).

      (iv)  It is essential that Accounting Officers take action to safeguard their position, and that of the Exchequer, where purchasers prepare accounts on their behalf, particularly where any further consideration payable by the purchasers is to be determined from those accounts. The Cabinet Office took action through their Internal Audit but then failed to investigate and correct the errors identified by Internal Audit's review. The Accounting Officer retains responsibility for the proper preparation of accounts even where he delegates this responsibility to the purchasers. It is therefore vital that robust contractual arrangements underpin the delegation of accounts preparation to enable the Accounting Officer to get any deficiencies remedied in a timely manner (Paragraph 12).

On deficiencies in the Agencies' accounting and asset records

      (v)  Proper attention must be paid to financial systems within central government entities to ensure that they are adequate for the purpose. We do not accept the Cabinet Office's view that systems used by Agencies whilst they are within central government can be less robust than those required when an entity is to be sold. Accounting systems and procedures within central government bodies must be of a sufficiently high standard to ensure that public money can be properly accounted for, and financial statements produced promptly, at any point in the financial year and not just at the year end. The Cabinet Office did not convince us that they had a sufficient grip of accounting matters. They need to ensure that their accounting systems and those of their remaining Agencies meet the standards expected of central government bodies. It is for parent departments to ensure that their Agencies have robust accounting systems (Paragraph 18).

      (vi)  It is unacceptable that records within OHSA were so poor that the Agency could not readily identify and collect sums owing to it, and that £86,000 was then paid to the purchaser to collect the debts, mainly from other government departments. We doubt whether this represented good value for money. Departments and other central government bodies must ensure that they maintain adequate records of monies owed to them, and take action to collect such sums promptly (Paragraph 19).

      (vii)  We are concerned that the Cabinet Office found themselves in a weak negotiating position with a third party supplier of software to CCC, due to the sale timetable and questions over whether the underlying documents supporting CCC's use of licences were wholly suitable for the purpose. As a result £100,000 was paid to the software supplier. Legal and other documentation supporting the use by central government bodies of assets or other rights owned by third parties should be regularly reviewed to ensure it is up-to-date, comprehensive and fit for purpose (Paragraph 20).

On the lack of oversight exercised by the Cabinet Office

      (viii)  The Cabinet Office agreed to a reduction in the consideration receivable for CCC, to take account of the value of accrued annual leave of staff at the sale date. However they failed to agree with the purchaser before the sale was completed the basis on which the provision was to be calculated. Advice given by the National Audit Office to do so was apparently ignored. The Cabinet Office were naïve to assume that the purchaser would agree, at some later date, to the Cabinet Office's own method of calculation. The basis of calculation is now in dispute between the parties, and there has already been a cost to the public purse through the delayed receipt of the final adjustment to the sale consideration. Further costs are likely to arise, either through the need to pursue litigation or to reach a compromise arrangement. It is essential that where provisions are to be established in determining the final consideration, the basis of calculating the provision should be agreed between the parties in advance, and be clearly set down in the sale agreement (Paragraph 32).

      (ix)  The Cabinet Office failed to convince us that no value could have been obtained from the licence given free to the privatised CCC to operate pensions software developed when CCC was within the public sector. The purchaser will benefit from windfall revenues of £1.5 million over those anticipated at the time bids for the business were submitted. There were sufficient signs at the sale date that the replacement software was in jeopardy. Provision should have been made to review the terms of the licence if revenues continued beyond the date anticipated at the time of sale (Paragraph 33).

      (x)  In the final stages of the negotiations for the sale of CCC, the Cabinet Office agreed to a reduction in the consideration for the business of £1.8 million in net present value terms, following CCC's loss of a key contract. However, the financial advisers estimated the value of the contract lost at some £200,000-£400,000 less than the reduction in consideration conceded by the Cabinet Office. The Cabinet Office did not check whether the next highest bidder might have been prepared to offer more than the reduced bid, as they had already selected their preferred bidder. The Cabinet Office were left in a weak negotiating position, since the preferred bidder was the Management and Employee Buyout team who had greater familiarity with the activities being sold than other bidders (Paragraph 34).

      (xi)  The Cabinet Office could have done more to review benchmark valuations received from their financial advisers. In the case of OHSA the final benchmark valuation was not received until after the date for submitting final bids. For CCC the benchmark range was wide (nil to £6 million) and in the event was significantly below the final bids received, which exceeded £12 million. While benchmark valuations can never be exact so wide a valuation range is of little help in assessing whether the sale will be worthwhile. Where the actual outcome varies significantly from the benchmark valuation, Departments should discuss possible reasons with financial advisers to satisfy themselves as to the soundness of the advisers' work (Paragraph 35).

      (xii)  The receipt of a final benchmark valuation for OHSA after the deadline for submission of final bids is unacceptable. We note that in the OHSA sale, advisers' fees were some £530,000 compared to an estimated cost of retaining OHSA in the public sector of £600,000. By the time the Cabinet Office received the benchmark valuation, the advisers' costs were largely sunk costs. Departments need to take particular care when evaluating the business case for the sale of a relatively small entity such as OHSA, and should include the major costs of sale such as advisers' fees. (Paragraph 36).

      (xiii)  There were other instances of insufficient oversight by the Cabinet Office. These included failing to stop automated interest payments following the sale of CCC, so sums paid over in error had to be recovered from the purchasers; and in the case of OHSA the failure to take account of lease provisions in sub-letting a property to the purchasers (Paragraph 37).



1  C&AG's Report (HC 154 of Session 1998-99), para 1 Back


 
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