Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



Mr Ruffley

  20. There is a serious point here. The Advisory Board has indicated that it thinks that what is within and without the boundary may have to be looked at.
  (Mr Wild) I think it will have to be looked at. It is certainly something we hope to come back to.

  21. When do you think the Advisory Board might want to re-visit this one?
  (Mr Wild) I think we will re-visit that one at least annually to see the state of development. I think we will also consider it in the context of whole of government accounts. I think in due course whole of government accounts will override that issue, that in terms of getting everything together in whole of government accounts there will be more emphasis on bringing individual things within departments. So I would see us re-visiting that and commenting on that on an annual basis. In terms of potential change, I would see that two, three or four years down the line. That is the sort of issue where we have left questions hanging. Where we have taken a view that something was inappropriate in proposals put forward, I would say in all cases the Treasury has listened and revised. I cannot think of an instance where the advice of FRAB—and FRAB is an advisory board and people question the status—has been resisted.

  22. You cannot think of one instance?
  (Mr Wild) There are still some on-going debates like the boundary issue where we monitor and debate.

  23. In respect of the boundary issue which you have helpfully talked about, was it a formal recommendation from the Advisory Board that X or Y should happen, or X or Y should be within the boundary?
  (Mr Wild) No, because the board saw the reasons why the boundary was being drawn as it was and said at this stage of development it was probably the appropriate boundary to draw but we did not believe it would continue to be for ever.

  24. Just to clarify on this point, you would expect this to be re-visited annually but the next such occasion when you would be looking to re-visit it as a board would be when? What date?
  (Mr Wild) I am not sure it will come up as a specific occasion. I think probably as we write our annual report this year, which we are just starting to do, we will be noting it. I am sure at some stage over the year we will discuss it but I do not think there is a particular trigger point that says we will discuss it at this particular point in time.

  25. Do you not think it might be a good idea to diarise something to that effect?
  (Mr Wild) I think it is sufficiently in the forefront of our minds not to need to.

  26. I say this having regard to what you said about whole of government accounts, to the extent the problem could be resolved in time, I am interested to explore first of all whether you have identified a possible problem or area of concern and I am really just trying to establish when you will be re-visiting it. You say in the course of this next year.
  (Mr Wild) I think it is more a case that we understand the reasons why they have gone for the boundary they have gone for. We will not so much re-visit the issue of the boundary as keep under review controls as they come in and see whether we are sufficiently forward with change to say, "Okay, things are now changing and we want to re-visit that issue." It is the background we will continue to monitor rather than the issue itself. That is done almost on a continuous basis.

  27. Just one final question on this. In the Standing Committee of the Bill, the view was expressed that a minister in signing off a set of departmental accounts could take the decision that some of the accounting standards that were being used in respect of his or her department were, for whatever reason, not appropriate and in those circumstances it was in debate. It was suggested that the minister would actually have the final say, that he or she would notify FRAB, that you would have the benefit of putting your views to the minister as to why this accounting standard should be followed, which the minister had decided he or she did not wish to follow. Are you not a bit worried about that? What safeguards are there that ministers, for whatever reason, whatever government, might want to play fast and loose with accounting standards?
  (Mr Wild) I have no more worry with the public sector than I do with the private sector. You refer to ministers. There are many directors of companies that do not particularly like some of our accounting standards.

  28. That is certainly right.
  (Mr Wild) And will say so vociferously before and after we produce them. As somebody who works in one of the major accountancy firms we frequently have it being said to us directly about their individual sets of accounts. They are ultimately faced with the choice of adopting a different standard and having a qualification to their accounts which will draw it to everybody's attention and the world can make up its own mind. In the private sector there is the Financial Reporting Review Panel which can take companies to court and the court can instruct companies to revise their accounts. I do not know what mechanism exists within the public sector as an equivalent but I would be surprised if a minister were not under similar pressures.

  29. You do not think there is an equivalent form of sanction in the public sector as operates in the private sector?
  (Mr Wild) No company in the private sector has ever been to court because the ultimate sanction in the private sector, and I suspect the same is true in the public sector, is publicity. A company being seen to ignore good accounting, a department being seen to ignore good accounting and do their own thing will be so heavily criticised I think it is a sanction that neither company directors nor ministers would take lightly.

  30. Just to sum up, we could expect the Advisory Board to publicise any example of a minister who said that he wanted to dump a particular standard? FRAB would be at the forefront of drawing this to the public's attention?
  (Mr Wild) I do not think it is FRAB's role.

  31. You do not think so?
  (Mr Wild) In the same way.


  32. It would be for the Comptroller and Auditor General?
  (Mr Wild) The audit report would do it. I think the press show enough interest in these things for it to happen automatically. I see FRAB in much the same role, I know it is much more an advisory board, as the Accounting Standards Board, which again does not have any role in drawing these things to anybody's attention but they do have a way of finding their way into the public domain. Certainly I do not think a qualification would be missed by the press. I am sure people would draw it to the press's attention if it was.

Mrs Blackman

  33. Just returning to the discussion you had with David Ruffley on boundary issues. I note that the Treasury is one department that has not as yet reached trigger point three. Certainly in its paper it is expected to meet that point this month. I wonder when you first raised that issue with them or flagged up that issue that the boundary was a particular problem for them that may not allow them to get to trigger point three?
  (Mr Wild) Because I am involved in a theoretical way I have no knowledge specifically on the Treasury. Certainly the boundary issue was identified right from the very start and was in the original resource accounting proposals before FRAB was ever formed. I do not know if Professor Heald or Mr Sore have any direct knowledge on the Treasury.
  (Professor Heald) I do not know any of the specific detail to which you are referring but to come back to what Mr Ruffley asked me before, the Green Paper in 1994 and the White Paper in 1995 established a narrow boundary which the government said it required for public expenditure planning purposes. At that time this Committee and the Committee of Public Accounts argued for whole of government accounts. In a sense one of the striking developments is how the move to whole of government accounts has become part of the new conventional wisdom. Essentially, one of the reasons for not pressing too hard on the general boundary issue is that there is now a Treasury project on setting up whole of government accounts. So to some extent those original debates have now passed by in time. The other point is about FRAB. FRAB was set up against the Treasury's initial hesitation because of Parliamentary pressure, so essentially FRAB came after and got its remit after the key decisions had been taken about what the boundary would be. Partly because of the way RAB has become part of the macro-fiscal agenda, there is no doubt we are moving in the direction of whole of government accounts and obviously that is a transition that will have to be managed.

  34. So realising that the boundary of accounts was an issue for them that was delaying the Treasury meeting trigger point three, did they come back to you when they realised there would be some kind of a delay?
  (Mr Wild) The Treasury has not specifically, no.

Mr Davey

  35. Mr Wild, you talked in an answer to David Ruffley about NDPBs and the boundary division which was one of the concerns of FRAB. In reading your two previous annual reports you have got many other concerns. For example, you have talked about how inflation is accounted for. Is inflation accounting your top concern or are there other concerns you would like to draw out of your work and draw to the Committee's attention?
  (Mr Wild) The inflation accounting issue is an interesting debate. A decision again that was taken before FRAB started but which I would wholeheartedly endorse is the fact that the accounting is to be done on a modified historical cost basis. It is going to include revaluations of assets. What you do lack, both in the private sector and in resource accounting, is any comparison of those movements in the asset values against general price inflation and there are various ways you can do that. What I think is the most effective way is an extremely simple calculation. I have at a number of meetings been able to do it on the back of an envelope and I once demonstrated I could do it. I got my arithmetic wrong but—

  36. Very honest!
  (Mr Wild) It is very easy for you to extract from the accounts, whether it is there or not. I think because it is a useful piece of information I would extract it from the set of accounts and put it somewhere in the accounts because again I believe in the information being there. There has been a lot of concern amongst departments that if that figure were highlighted because it is something outside the department's control they will be budgeted on a basis that they feel is outside their control and they see an inequity in that. I understand why they see that. Again I see that as a piece of information that you will build into the process. Because of the cost of those concerns and because the information is easily obtained it has been decided to delay including that information in resource accounts for the foreseeable future. FRAB had different views within the board anyway. As I say, it is information that is easy to extract so it does not concern me a great deal if it is not there. I will watch this interesting debate over a piece of information that is easily obtainable.

  37. Are there any concerns that are really quite important that you would like to remind us about?
  (Mr Wild) I do not believe so. I think most of the concerns I would say are relatively minor or have been sorted out. We had a concern about retrospection in relation to PFI accounting which now seems to have been accepted for all material PFI arrangements. There are still some that I would put at the more minor end. Something that concerns resource accounting is a lot of the corporate governance measures introduced in the private sector recently, including things like disclosure of senior officials' and ministers' remuneration arrangements, and the fact that it is concentrating on salaries and excludes benefits in kind. I was not aware there were many benefits in kind but I was surprised that had been a narrow definition. However, I see that as more of a communication issue, that the wrong words were passed over rather than a thing that is a major issue. There are still things that are procedurally being sorted out. I do not see any of those as major issues.

  38. So it is not the case that the reason none of your advice has been rejected is that you have left all the difficult issues to the last?
  (Mr Wild) Not at all; we have got into some very difficult issues. If you take something like accounting for inflation there are areas where it really does matter such as student loans where the accretion of the loan, the interest taken in on the loan is equal to the inflation. If you take that as a receipt and ignore inflation on the other side you get wrong information. In that area the effect of inflation has been built in. All the difficult issues I think have been faced. There is one again which has been an interesting case study which is what to do with non-operational heritage assets where there was a desire to try and capture information for stewardship reasons where there does not seem to be a huge interest in valuations outside departments and therefore, again, that has been put to one side. Again, I would not see it as a major issue. It is a case of seeing whether people outside the departments want that information for their management purposes.

  39. It is reassuring that you say in the establishment of accounts independent advice has been listened to throughout the process. The Committee would be very pleased with that. One of the things that came up on the Standing Committee on the Government Resources and Accounts Bill was whether a future government might seek to make changes to accounting standards and that being quite opaque and not transparent to observers. Would you like to comment on that, particularly when you said in answer to Mr Ruffley that it would not be FRAB's job to publicise these issues. Given that they can be rather obscure, how is the public going to learn about these and how are we going to ensure that the departments are not behind the scenes changing accounting standards and we do not know about it?
  (Mr Wild) I would certainly see it as FRAB's job to publicise a disagreement over an accounting standard that was introduced to resource accounting. I was saying I did not believe it was FRAB's job in respect of an individual department to effectively police the adoption of resource accounting. I would see it as FRAB's job to ensure that the standards being adopted meet the criteria that have been set for resource accounting which include the fact they should broadly follow private sector accounting except where economic differences lead to different conclusions. I would hate to think, as somebody involved in standards setting in the private sector, that the government is going to seek to start dictating accounting standards in the private sector. I would hate to think that the two would drift apart in any way. I would think it is very much FRAB's role to make sure they do not and publicise indications they were going to. I would also be very concerned if a structure were set up that set accounting standards for the public sector without regard to the structure that sets the accounting standards for the private sector, essentially the Accounting Standards Board. Even if the two structures aimed at the same answers, if they used different words people would say that was meant to be a difference between them. I think it is very, very important that we have somewhere in the whole system, private and public sector, one body independent of government designed to go for the best possible communication process. I believe we have that with the Accounting Standards Board and the whole thing should hang on that. FRAB's job is to indicate if anybody going out of line with that.

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