Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. The difference with the Accounting Standards Board is that the Accounting Standards Board directs the private sector on how to draw up their accounts. The FRAB only advise and the Treasury directs accounting standards. There is a very distinct difference there and that was why I was keen and delighted to hear you say that you would draw attention to the fact that the Treasury was adopting an accounting standard you did not believe was correct. Would you like to comment on that?
  (Mr Wild) When I was saying we would draw attention I was meaning purely the policing of resource accounting itself and those standards. If resource accounting took a different approach to the private sector we would draw attention to that in our report. I do not believe the process in the private sector is that different in that the Accounting Standards Board has no ability to direct companies to follow accounting standards; it issues them. It is accepted wisdom that those standards form the basis of "true and fair" and therefore if you do not follow the standards you will get a qualification which says your accounts are not true and fair. The link is still an indirect one. I think the same will happen in the public sector. The FRAB has no power over companies on the standards which the companies seek to adopt or to get a qualification.

  41. So I understand the process crystal clear, if accounting standards are not being adopted in the way you thought they ought to be adopted by the Treasury, you would issue a press release or something in your annual report. If a department is not adhering to those standards as directed by the Treasury on your recommendations you would expect the National Audit Office to pick that up?
  (Mr Wild) Yes.

Mr Plaskitt

  42. Parliament has a role in all of this.
  (Mr Wild) I think we are producing it for your benefit.

  43. That is what the objective is and what I am interested in is what Parliament will see. I have been looking at the illustrative main estimates that have been given to us, one for the Department of Social Security and the other one for MAFF. You have presumably looked at these. Do you think these are the right documents presented in the right way to help Parliament understand what they are saying?
  (Mr Wild) For my part I have concentrated more on the specimen produced which is "department yellow" in the resource accounting manual. Certainly on a quick read I believe they are following department yellow and I broadly believe it is the right information.

  44. Are you familiar with this, Professor Heald?
  (Professor Heald) I think the general answer to your question is yes, I think it is the right information. On the point about the mock estimates there is consultation going on at the moment between departmental select committees and their departments. There is one concern I have got that I would like to put to the Committee. There are now 46 departments for resource accounting purposes but the trouble is that those 46 can be described as "giants" and "minnows". Quite a lot of the 46 are relatively small regulatory-type bodies which are not important in expenditure terms however important they are in governance terms. One of the things which Parliament should look at very carefully is the fact that Requests for Resources are basically the resource accounting and budgeting equivalent to Votes. Within some of the departments I think there is a lack of clarity about what the principles are that are governing what should be a Request for Resources. There is an exchange of report and government reply in the case of the Department of the Environment, Transport and the Regions. The Department of the Environment, Transport and the Regions' mock estimate only has two Requests for Resources for a giant multi-functional department. That is done on a spending authority basis, one for the DETR main and one for support for local authorities. The Environment, Transport and Regional Affairs Committee have argued, rightly in my view, that the Request for Resources ought to have been done on a functional basis and the RfRs they propose were, first of all, housing, construction and regeneration; secondly, planning, roads and local transport; thirdly, environmental protection and water; and, fourthly, transport industries. That has been resisted by the Department. I think there is a certain amount of confusion around because there are two different issues involved. One is the point about the constitutional nature of Supply. The actual formal mechanics of Supply are largely a myth. The Government, provided it has a majority, can get through its estimates, but they are crucially important in allowing Parliament to hold the executive to account through, for example, the select committee procedure. So the idea that you can put everything into a big mass and vote it in a way that is solely managerially convenient, I think is inappropriate. In fact, the Government within the context of the Comprehensive Spending Review and the new system of DEL and AME has introduced very extensive areas of flexibility and assumptions that virement will actually be granted. One of the issues that Parliament should look at before the shadow estimates are approved is whether there are sufficiently clear principles that govern how many RfRs there are for the giant departments and what basis they are on.

  45. I know those principles are extremely important and I think it is very helpful that you have reinforced that point but what about the supply of information? The illustrative estimate for the DSS runs to about 22 pages. Frankly, it is difficult for a Member of Parliament who is not an accountant to see what the story is that it is telling us. If part of the purpose of this is to improve Parliamentary scrutiny and accountability of government to Parliament, having the means of assessing that information is an essential part of the chain. Do you think we have got that or not? You might be able to understand what it is but what about Members of Parliament?
  (Professor Heald) Very clearly one of the attractions of a cash system is that the numbers are very simple—they look simple even if they are thoroughly misleading. Certainly for people used to dealing solely with cash figures there is a very considerable re-education and training task necessary to get people familiar with the formats. But one of the points which I always like to make to people is that, with the concepts of departmental resource accounts and resource based estimates, Members of Parliament and their staffs will have to learn to look at the notes which are the crucial part of accruals based accounts as well as the front statements. But the other point is that in terms of the way that the executive will account to Parliament for expenditure there are going to be current planning documents. Instead of the existing departmental reports, there will be a forward planning document and a backward looking report document and this is very much where select committees play a crucial role in discussing with their departments what kind of information Parliament actually requires. So the formal system is partly a form of leverage on the executive. One in a sense starts with the accounts and the estimates and uses them as a basis for asking questions about policy and expenditure.
  (Mr Wild) It is an unfortunate fact of life that the world is complicated. People are always trying to get us to summarise for companies in one figure earnings per share. You cannot do it. You cannot take a complex economic entity like a bank or insurance company and summarise it in a single figure. Neither can we get things down to a single sheet of paper. It is the job of accountants—and I think we have not been particularly good at it certainly in the early part of the century—to make that information understandable, but accountants over the last decade or so have understood that and we are heavily trying to move in that direction to make that information as understandable and clear and as easy to take in as possible but the world is complicated and you cannot sum up a big economic department in simple figures. It cannot be done.
  (Mr Sore) Could I just come in here. Drawing on our experience as an institute working in the local government sphere, many members of the Committee will be very aware of what is happening in terms of best value in local government. The interesting thing is that CIPFA has been very much to the fore in producing accounting guidance for the best value initiative which, interestingly, starts to move away from a formal statement of accounts as the main vehicle of communicating with residents. The best value performance plan, which is very much more simplified than the accounts, targets the planning and reporting of an individual authority's activities, both financially and in terms of performance information. We have been quite heavily engaged in that and just this last week or so we published our best value accounting code. We are not saying local authorities should move away from producing statements of accounts produced according to accounting standards - that will always be there for accountability purposes - but we do realise that in terms of communication there needs to be some additional vehicle to give a more, if you like, straightforward view - although even the straightforward view of best value performance plans may be too complex in the first place. I just want to say also in terms of the schedules to Resource Accounts that our members said that Schedule 5 seems to be a very key statement. However, the point has been made by our members that it depends how easily you are able to tie up Schedule 5 with performance data to see the whole picture. The numbers are important, but it is the link through to other performance information that will determine in the end how useful that Schedule 5 is.

  46. Would any of you say finally that the draft documents we have got before us at the moment represent optimum clarity or do we have further to go?
  (Mr Wild) We have a lot further to go. We have a lot further to go in the private sector as well as the public sector. Strides are being made forward. I believe this is the private sector thinking which is important to the public sector that what is going to make the biggest difference is as we get further used to computerisation. The whole basis on which accounts are produced for companies and departments is wedded back to the 19th Century where the logical way you could do it was once a year with the people responsible, whether it is directors or senior officials, producing accounts and giving them to people whereas I think we will move over the next few decades to a situation where the information will be held in raw computer fields and you will use your computer to extract information in the way you find it easiest to use. I am starting to fantasise into the future. We are not at an optimum yet; I am not sure we ever will be. It certainly is a challenge for accountancy both in the public sector and private sector.

  Chairman: Thank you very much. Nigel Beard?

Mr Beard

  47. Given the complexities which have just been referred to is it likely the Treasury will still continue to control through cash? Is that not going to detract from the emphasis of resource based accounting if they do?
  (Mr Wild) I think all controls should be through cash but past and future cash as well as present cash and that is what resource accounting is about. It gives an added dimension of past and future and its impact on the current.

  48. You do not think that is going to diminish the significance of resource based accounting in departments?
  (Mr Wild) No. I think most companies are assessed in the private sector on the basis of what amounts of cash they have available in the future.

  49. When select committees examine the accounts what areas of expenditure would you advise them to concentrate on? I was thinking resource based accounting illustrates several things that have not otherwise been very transparent, the maintenance of physical assets, whether the capital expenditure ratio is adequate or not, whether assets should have been maintained or whether they should be sold off, those kind of questions, and in the private sector there are various ratios which indicate whether a company is keeping consistent with comparable companies or not. How are select committees going to use this sort of evidence in the context of a department that is very often operating in a unique area?
  (Mr Wild) I think this is one for my colleagues, who know more about the public sector. I would just come back to the point about inflation, private sector entities get measured against each other, there is a mark to measure against, I think that is the relevance of the inflation information; there is no market in the public sector to measure against so you have to measure against what is happening to the world in general, that is the inflation information. In terms of public expenditure my colleagues will know a lot more than I do.
  (Professor Heald) I would always invite people to look at where the big numbers are as a first point. Where resource accounting and budgeting will affect things is where capital becomes much more explicit. In some departments the difference between cash and accruals is actually markedly small. In other departments, for example the accounts and estimates of the Ministry of Defence, they are going to look remarkably different in future because of stocks and capital assets. Very clearly, different committees will have different concerns, there will be some areas where the concerns are about the level liabilities. There will be other committees where the concern is to see that assets are properly managed, that the assets are not being allowed to deteriorate unintentionally. One of the aspects of resource accounting and budgeting is, of course, not only depreciation but a capital charge, reflecting asset holdings. Where Parliament should be hoping and watching that improvements come is very much in the way that the Government actually manages its assets, both its existing asset holding and how it thinks about taking on more assets in the future.

  50. How will a select committee be able to judge whether a particular activity is under-capitalised?
  (Professor Heald) Given the remarkably divergent nature of government departments I do not think there is a general answer to that. My view about asset accounting and about stock accounting is that although both areas can raise difficult technical issues of judgment, where organisations do not account for their capital assets and they do not account for stock, they will neglect them over time and they will not get either sufficient managerial attention or sufficient Parliamentary attention. Essentially, the only people who can tell you whether the Ministry of Defence have too much stock of a certain type is the Ministry of Defence itself and the individual parts of the Ministry of Defence. The fact of actually making explicit the accounting values of stock and the accounting value of fixed assets, and hitting the fixed assets with a capital charge, is going to bring managerial attention to them.

  51. You are saying, it gives you the potential for getting the right answer but not necessarily the right answer?
  (Professor Heald) Yes, that is right. Accounting can only draw attention to the right question.
  (Mr Wild) Accounting is not an end in itself, it is a means for providing information on which people who understand the business, the organisation and what is happening, can apply management.
  (Mr Sore) Can I just comment on that? I think resource accounting from our members' perspective will allow more in-depth questions to be asked on current assets and current liabilities. The issue for some departments, certainly from our survey, is the ability of departmental officials to answer the questions that are raised by the better information. It is going to be somewhat different depending on departments. We know that there are some departments which do not have up-to-date debtor management systems that allows them to produce an analysed figure to show what is owed to a particular government department. If you try to get beneath that to find what is the structure of the debt, how old is the debt, how is it layered, etc, our information at the moment is that some departments would find that difficult. Our information is that there is a lot of manual intervention still going on in systems to produce information for resource accounting. If you start delving into management information, I suspect that is a whole other area where the investment needs of departments need to be quite closely looked at otherwise a certain amount of frustration will build up. The information is there on the balance sheet but to answer the questions in some instances there will be difficulty in providing an answer in sufficient detail.

  52. How would you advise committees to look at this: through the estimates or through the annual departmental report to get a clearer view of what is going on?
  (Mr Wild) They must both be equally important because one is looking to see what the department is expecting to happen, the other is looking to see how we performed against those expectations. You should not favour one against the other. That is said as a general accountant's view. I do not know if there is anything about the public sector that would draw more importance on one than the other.
  (Professor Heald) My general point would be that select committees have an impact on the department, by running over things year after year. The committees of this House who have been most successful at holding their departments to account are those who take the expenditure and estimate process seriously on a repetitive basis. There is a persistence effect. If a committee starts asking questions to the department that the department's managerial systems cannot answer and the committee goes away and forgets that question, they will not get an answer. But, if the committee keeps coming back repetitively to the same issues, clearly signals are going to go out to the manager of that department that people do not want to come and face the committee without being able to give sensible answers. Depending on what the nature of the personnel base of the department is and the nature of the spending, the answer would vary. The thing I would stress is that this is not an area where you get dramatic, sudden improvement; this is an area where you get improvement over a period of years by the committee being insistent about the kind of information it would like now and in two years' time.

  53. The issue is, when looking at the estimates given now you have a capacity to anticipate events rather than criticise them when they have happened, which is what you are doing when you look at the annual report?
  (Professor Heald) There is a technical point because one has to be very careful when talking about estimates. What resource accounting and budgeting is not doing is changing the relationship between what Parliament votes as "Supply" and the Government's expenditure system. In some departments, the Department of Social Security is an excellent example, there is a vast difference between the total expenditure of that department and what is "Supplied" because national insurance funds, for example, are not "Supplied". In some departments it would not matter too much which document you focus on but in some departments there is actually a remarkable difference between, in resource accounting terms, the net operating cost and the net resource out-turn. One of the things which I would like to have seen as part of resource accounting and budgeting is a better alignment of the Supply process and the expenditure planning process. That would only have come out of a fundamental review, a Public Finance Act on the New Zealand style, rather than the Government Resource and Accounts Bill, which is essentially a minimalist measure to get the matter through.
  (Mr Wild) You are absolutely right. You control expenditure on the basis of controlling it before it happens rather than shutting the stable door after it has all gone wrong. If your only control is in retrospect it will go wrong. You also need to look at retrospective information, both in order to give yourself the information as to how good the estimation process is, because it will never be perfect, and different departments will have different variables within them, and also whether the expenditure does take place in the way it was predicted to take place, in terms of did they spend in the way they set out to spend. You do need to look at both. The control must be forward looking, you cannot control spending retrospectively.

Mr Davey

  54. Professor Heald, you just mentioned the New Zealand Public Finance Act and the reforms to the supply process that they saw in New Zealand when they brought in resource accounting and budgeting, can you say a little bit more about the sort of reforms you think should have accompanied the introduction of resource accounting and budgeting from the parliamentary supply side?
  (Professor Heald) You were one of the participants in the Standing Committee. Until about 1996 I believed that, in fact, there was going to be a major revision. There was always that option after the 1995 White Paper, the big Bill, that actually looked at the whole wide range of things, like audit, like Supply procedures, aligning expenditure with what Parliament actually voted. However it became obvious that after about 1996 that was not going to happen.

  55. Why do you think that was?
  (Professor Heald) I do not know. My impression was that, perhaps, in the last year of the previous Government, reorganising the way that Parliament dealt with public finances was not the greatest priority the Government had in the last year of its life. Then, I suspect, the Comprehensive Spending Review took over and dominated procedures in the Treasury for the first year of the present Government.

  56. Do you think it is something that the Treasury ought to revisit?
  (Professor Heald) To some extent this is a matter for Parliament. I gave evidence to the Procedure Committee two years ago, when you were a member of the Procedure Committee, and I think essentially the initiative is going to have to come from Parliament. The fact is that the Government did not keep its promise about producing a draft Bill, leading to some acrimonious debate in the Standing Committee, and I hope that the reaction of Parliament would be that Parliament will try and take a lead in this matter.

  57. I hope you are right, but I very much doubt it. Would you help that process by commenting on whether, however detailed the resource estimates are that are put before us and however much information they contain, in many ways it is a total waste of time unless Parliamentarians and select committees have more resources and develop skills and expertise to actually understand these estimates and then have procedures to be able to vote on them?
  (Professor Heald) I think that is somewhat too broad a question for me to try to answer; it is really a matter for the internal management of the House.

  58. I will put it more simply. Would you like to see, for example, Parliament giving itself, its select committees and its members, more training, expertise and resources to be able to use these estimates?
  (Professor Heald) Yes, I think it is very important. In a sense, one of the negative sides of the proceedings on the Bill is that Parliament seems to blame the executive for Parliament's own failings in taking its Parliamentary procedure seriously. My view, having worked for select committees for the last twenty years, is that, to some extent, the problem is on the Parliament side rather than the executive side and more consistent interest from Parliament is actually what is required. The signals that Parliament gives in general are that it does not take its procedures terribly seriously.

  Chairman: I should say, the Liaison Committee produced a report last week which did try to address this issue that we have been talking about. I urge my colleagues to read it.

Mr Davey

  59. I will do.
  (Mr Sore) I was just going to say in supplement to that question that from our Institute's point of view—and you would say, "We would say this, wouldn't we"—we are a little bit concerned in terms of the proportion of qualified accountants working in central government departments in terms of the expertise that is brought to bear in some of these areas. I think it is interesting to contrast the local government situation, whereby under statute a finance director of a local authority must be a member of the CCAB accountancy body. I think that is an issue that does exercise our members. That is not to in any way take away from what has been achieved by resource accounting thus far - it has been a very great achievement as far as CIPFA is concerned. We do have a concern that if you contrast with most private sector companies, there does seem to be a general lack of qualified accountants within central government departments as a whole.
  (Mr Wild) I hear some echoes in this debate, which I am sitting listening to with interest, of what is happening with some corporate governance debates in the private sector. My impression is that the corporate governance debates in the private sector started from quite a high base, I cannot comment on it in the public sector because I do not know whether it is as high as the base in the private sector. Even within the private sector, where it came from a high base, there are some similar actions.

  Chairman: Thank you very much. Thank you all very much.

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