Examination of Witnesses (Questions 1
- 19)
TUESDAY 7 MARCH 2000
PROFESSOR DAVID
HEALD, MR
KEN WILD
AND MR
VERNON SORE
Chairman
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.
Chairman
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.
| 
