Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Welcome. Perhaps to kick the thing off I could ask a general question and perhaps you would like to answer in turn very shortly. Are you satisfied, are you happy that the Government is moving to its targets and that we will get live running of resource accounting and budgeting for the year 2001-2002?

  (Mr Wild) My interest particularly is in the resource accounting side and I do believe that we will see good information coming out on all the information I have, but I think Professor Heald—

  2. What I am saying is will they be ready to go at the right time?
  (Mr Wild) I think Professor Heald is closer to the actual information than I am.
  (Professor Heald) Yes, I strongly hope so. This whole project started with a letter from the then Chancellor to one of your predecessors on 30 November 1993. It is obviously a very long project. I think there may be some concern at the minute in connection with trigger point three that there has been some slippage, but my knowledge is only partial and some of what I know has been acquired on a privileged basis working for this select committee and other select committees. However, nothing I have seen on that privileged basis makes me think one cannot go live in 2001-2002. In a sense Parliament is going to have to have information from the Treasury and the NAO before it can make that decision itself. I still very positively support the project and want to see it go live then.
  (Mr Wild) Mr Sore has some information that CIPFA has made available.
  (Mr Sore) We have several hundred members from our Institute working in central government and in the time available we have done a quick canvass of the views of some of them. We cannot claim they are scientific. The general impression, and from reading some of the information we have been given, is that at the moment there are 12 out of 46 departments that have not yet passed TP3. You can look at this as 75 per cent of the way there or 25 per cent still to go. Our view is, subject to those 12 departments having proper project management over the next few months, that there is no reason from discussions we have had with our members why the position should not be satisfactory and ready to go.

  Chairman: Would anybody like to come in on that? That is good news. Jim Cousins?

Mr Cousins

  3. I wonder what evidence we do have so far that resource accounting is actually making a difference in this year's Comprehensive Spending Review either in terms of analysis or focus?
  (Professor Heald) That is to some extent a question about the future and it is also a question to put to the Treasury. Essentially, the stage we are at at the moment is in fact there are dry run resource accounts for quite a lot of the 46 departments - that is now the relevant number of departments for resource accounting - but resource accounting was always the foundation stone for moving to resource budgeting. One of the things I would say in direct answer to your question is I think the Treasury would run Spending Review 2000 on a resource basis. One of the things that causes me considerable concern about the calls from the NAO and the Committee of Public Accounts for a delay is I think if there was a delay in changing Parliamentary procedures the Treasury would go ahead and run the Spending Review 2000 on a resource basis. And it would mean that the Parliamentary financial procedures become even more disconnected from the real process of decision making than they already are.

  4. I wonder if Mr Sore has got any evidence on that.
  (Mr Sore) The evidence from our limited sample is that financial managers are starting to think in terms of resource accounting in terms of coming to decisions about investment; but because the systems obviously are running in parallel at the moment it is early days and so some investment decisions are still being viewed on a cash basis, for example investments in accounting systems to support resource accounting and budgeting. One or two instances have been cited to me there where departments are still thinking in cash terms rather than in resource accounting terms.
  (Mr Wild) I see this very much from the private sector looking in and therefore see it in an independent way. It is a theoretical answer rather than knowing what is happening on the ground, but I think what is happening with the introduction of resource accounting is that you are improving significantly the type of information that is available. It is rather like going from two dimensional to three dimensional information. Over a period of time I believe that improvement in information must lead to the ability to make better decisions. Obviously the decisions depend on the people making them but it will put you in a better position to make decisions. There will be a learning process while the new information is understood and assimilated on how to use it but the fact you are improving information must long term lead to improvement.

  5. Finally in terms of where the impact of resource accounting is being felt, what indication is there of either tensions within departments in terms of refocusing activities or possibly between departments, particularly where some of the broader objectives that the departments are working to are in fact shared and crossed between departments?
  (Mr Sore) The only comment I can make on that is in the context of a move towards more performance information. We have had views expressed to us that, where objectives cross departments, that the traditional reporting lines through accounting officers do sometimes cause some tensions as to where ultimate responsibility lies, and the short answer is that there is a shared responsibility now for a lot of government objectives. So I think there does need to be some clarification of how departments work together and how reporting lines go in terms of clarifying that.

  6. Could I just ask you on that particular point, which is an interesting one, how are people going about trying to clarify that? Who do they go to?
  (Mr Sore) I am afraid I do not have any information about that from our brief survey but I can go back and clarify that issue and any others the Committee raises that I am not in a position to answer at the moment.

  Chairman: Thank you very much. Nigel Beard?

Mr Beard

  7. In terms of the readiness to go ahead in 2001, which everybody seems to be agreed is a reasonable expectation, what would have to go wrong now to warrant you saying it really is not in a position to go ahead? In other words, what are the criteria you are using to determine whether things are moving adequately to meet the deadline?
  (Professor Heald) In response to concerns two years ago the Treasury established in public a trigger point strategy with trigger points one, two, three and four. On trigger point three, which was essentially the dry run resource accounts, most are now done but there clearly are problems about some that are not complete or some which are subject to qualification. The next one for May 2000 is to put to Parliament mock resource estimates for 2000-2001. I have in fact been a critic of the Treasury in the sense I thought the process was, if anything, too slow and I was worried about the difficulty of maintaining public and professional support for such a long time. For me to want to say now that we should delay I would want convincing evidence that the problems that have been encountered on the dry run resource accounts are problems because there is a failure of accounting systems, for example, and not problems because one has stock valuation problems, difficulties with conforming to SSAP9, the standard about stock valuation. When a department like the Ministry of Defence has not had asset valuation for fixed assets and has not accounted for stock, one would not be surprised to find that there were difficulties in that area. This is essentially why one has a period of shadow running. One should not shout "Disaster is nigh" when the problems that are arising are problems that one recognises would be a feature of moving towards a much more demanding accounting system. The direct answer to your question is I would only want to see delay if it is very clear that the accounting systems were not working and departments were not capable of producing resource accounts to run live in 2001-2002. One must remember, of course, that cash appropriation accounts themselves get qualified so the fact that the Department of Social Security gets its dry run resource accounts qualified - given the fact it had cash account qualifications in the past - is no surprise. Essentially, I want to see the project seriously off course before I would want to agree to a delay.


  8. But it is not?
  (Professor Heald) From what I know and, as I stress, my knowledge is partial and subject to what I have learned on the basis of Parliamentary privilege, there is nothing to suggest to me that it is off course.
  (Mr Wild) As an outsider I would put it in much more basic terms. I see resource accounting as increasing both the quantity and quality of the information available. I would say the thing that would delay going ahead is if a change in systems had such a catastrophic effect of failure that you lost the existing information. As long as you still have that (which resource accounting is designed to provide) you always have the default of going back to that information if for some reason you have some doubt about the quality of the new information that is coming out in addition. So unless your systems are going to catastrophically fail and you lose the old information I would not stop the process.

Mr Kidney

  9. Mr Wild, you mentioned the difficulty of moving, as you described it, from two dimensional accounts to three dimensional accounts and the Treasury Memorandum mentions the difficulty departments have had with producing dry run resource accounts and cash based accounts this year. I am interested in the decision by the Treasury to put the costs of depreciation and provisions into the annually managed expenditure for the next three years rather than inside the departmental expenditure limits. Does that continue the pain of making the changeover or is it a sensible arrangement?
  (Mr Wild) To a certain extent I am the wrong person to ask that question to in that I think the important thing is that that information be presented clearly. How you build the budgeting on it which a little bit dictates how you present the information I think is outside my experience or my knowledge. I do not think whether anybody—
  (Professor Heald) That is essentially a technical point about how to run the Spending Review in 2000 and that is very much a question that you should put to the Treasury. But I think my understanding of it is that, because in a sense the system is new and one does not have a historical run of figures, it has been felt sensible in the context of a three year planning system that departments will find it difficult to forecast definitively and be held to numbers for non-cash items for three years ahead. Hence only for the Spending Review 2000 is that separation in the expenditure plans and the estimates between the mainstream DEL and the non-cash DEL going to be done. It seems a sensible adjustment recognising the fact that the system is new.

Mr Davey

  10. To follow up David Kidney's question, does that not show how poorly this whole thing has been managed in that we are at this point where we are coming to Spending Review 2000, all this work has been done over this period of years and we are not going to be able to use it for a three year planning process. Is that not a huge shame that we have now separated the accounts, we have now got this information but the budgeting and planning for the next three years in the public sector is not going to be able to use that information? That seems to me a real shame.
  (Professor Heald) I do not take the same implication that you seem to take. Essentially, one is not saying one is not going to use the information. When resource accounting and budgeting started that was in the context of a three year public expenditure survey with plans being rolled every year. In the context that we have now of periodic Comprehensive Spending Reviews where departments have been asked to sign up for three years ahead, it does seem perfectly sensible to say it might be more difficult to forecast what those numbers are. I do not see the implication that it means the project is being badly managed. The implication seems to be that these are items where we have no experience of running the system on that basis and departments with big assets like Environment, Transport and the Regions or the Ministry of Defence might find it difficult to be sure what those figures are three years ahead and that is a manifestation of a new system, not a manifestation of running the project badly. Essentially, that is more of an issue about the running of the expenditure control system which is much more a Treasury prerogative but which has sensibly been reflected in the format of the resource estimates that will go to Parliament.
  (Mr Wild) I think it is an important feature of any budgeting system, whether in the public or private sector, that there is a degree of certainty given to the person that is holding the budgets, therefore I think you need to establish some strict rules about the way you do your budgeting. You will, however, draw on whatever information is available when you assess those people; you will not purely assess them in the light of those strict rules set at the start. I would be very disappointed if I felt the information coming out of the system was going to be ignored. There may be delays in building it into certain budgeting processes.

  11. One of the key benefits we were told from this whole system was that public sector managers were going to have to look at the way they managed their capital holdings in the public sector more efficiently and focus in on that. In the last few years departments have been given some freedom about how they could divest themselves of assets and spend those proceeds at the three per cent of annual expenditure. We have seen very few departments taking that up. We have seen a few lawnmowers sold here and a few horses sold there but very little actually done. Does that experience not go in tandem with what we are seeing with putting all the resource elements into the annually managed expenditure items to the extent we are not seeing public sector managers rising to the challenge of this new information to manage their capital holdings and that that cultural change is not happening?
  (Mr Sore) From the point of view of our members, members who are in positions of management responsibility realise that depreciation will come into their departmental expenditure limits and they are beginning to think that way. From our perspective, from CIPFA's point of view, resource accounting is a huge task and I think we see it has gone quite a long way down the road but, as you point out, there are a lot of cultural and behavioural issues that need to be addressed in a very intensive programme. That is on- going. That is one of the issues that has come back to us. We have a commercial arm, IPF, as part of our Institute who have done some training, quite a lot within several government departments to try to start getting these messages across. Our view at the moment is one on the timing, the fact that people are unwilling to take decisions.
  (Mr Wild) You are right that that is exactly the sort of thing resource accounting is designed to fix. As a taxpayer I am deeply concerned that it should be fixed. As somebody who has seen this sort of change happening in other organisations, I am not surprised that it takes a period of time. I have some limited experience, again as a private sector observer in the process of what happened with local authorities as they moved on to private sector accounting essentially through the same process over a 20-year period now and it takes a number of years. So it does not surprise me that it has taken that time. The cultural change that Mr Sore is referring to is not an easy thing to achieve. I do believe that improved information will make it happen and people will look at that information and challenge those departments on that information. You cannot do it until you have got the information.

Mr Ruffley

  12. Mr Wild, a couple of questions about the Financial Reporting Advisory Board. How often does it meet?
  (Mr Wild) I suppose it probably meets about six times a year. It very much tends to be driven by how much there is on the agenda and we tend to set a meeting or two in advance. Over the last few weeks we have certainly met twice this year already. I will have a look back at my diary. Two or three times this year. We are a little bit at a key point as we come up to finalising manual adjustments and things.

  13. What is the FRAB's current set of concerns in what you are talking about at the moment?
  (Mr Wild) It has largely been changing accounting standards, making sure that those were fully implemented in the manual and implementation issues as they come up. I would say relatively minor adjustments to the manual and the large changes are coming from changes to accounting standards.

  14. Are there any examples where you have made recommendations on changes to the accounting standards for them to be put into the manual or incorporated into the RAB process which have not been accepted by the Treasury? If so, could you give some examples?
  (Mr Wild) There are areas where we would like to re-visit the position. An example there is boundaries where only certain non-departmental public bodies and agencies that fall under departments are included within the boundary of what that department will be reporting. Coming from the private sector I would view the test as control and therefore I would see those going in, although I quite understand why the boundaries have been drawn as they are.

  15. Could you give examples?
  (Mr Wild) In terms of specific NDPBs and agencies, no. It has been a general principle. We have been told that certain NDPBs and agencies do fall outside the boundary.

  16. You have been told certain have fallen outside the boundary?
  (Mr Wild) Yes.

  17. I think I can infer from what you are saying, wearing your private sector hat from your private sector experience, that you think they probably should be within the boundary. What are those?
  (Mr Wild) My starting point would be to say I think they have been in the boundary. The reason the boundary has been drawn as it has been is one of the ways expenditure has been controlled. It was thought better to separate that information; I would see that information coming together at some stage but as that is also tied up with whole of government accounts the thing is not going to work fully until you have whole of government accounts.

  18. The problem from what we can discern is the control test. Can you explain more about that.
  (Mr Wild) The concern would be that a department has a degree of control over the NDPB, and yet it is treated as a completely separate entity which is not within the department's accounts. It has produced separate accounts that are viewed separately. That is something that FRAB decided was probably sensible at this point but we would like to re-visit. We certainly did not raise objections but we noted it in report as something we would want to come back to.

  19. I am interested why you cannot give examples. You say it is a general principle but what non-departmental public bodies—
  (Mr Wild) I cannot give any examples because I am very much a private sector man and my eyes tend to glaze over when they quote the names. I do not know if either of my colleagues—

  Chairman: That is at least honest.

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