Examination of Witnesses (Questions 40-59)
PROFESSOR SIR
ANDREW LIKIERMAN,
MR DAVID
LOWETH, MR
CHRIS RICHARDS
AND MR
ADAM SHARPLES
WEDNESDAY 7 NOVEMBER
2001
40. Yes, in terms of having a capital account
essentially, and having some understanding about asset valuation
and the like. Is it not the case that every rudimentary small
business would be expected by the Inland Revenue, for instance,
to have a clear balance sheet showing its assets as well as a
trading statement showing its revenues and cash operations, and
that still is not available to us here, after all these years
of trying? Is it not an embarrassment when we look at the private
sector?
(Professor Sir Andrew Likierman) If I may say so,
I think it is not an embarrassment. I think it has been a huge
achievement for central government. These are not a collection
of small businesses, these are extremely complicated activities
which started from a very low base and, bluntly, in most cases
are doing very well. That even applies to some departments where
some part of the account is qualified. We are not talking about
the whole account being nonsense, we are talking about one element
being qualified in some cases. So again, these departments have
achieved huge strides in this intervening time. Can I also put
an answer into context here, because if you look at what is happening
around the world, almost no government is producing this information
from its departments.
41. That is awful. I am glad we are better than
the worst, and that is good. Obviously we are ahead of the pack,
but it still is not very good in relation to normal business standards
and the activities of local authorities, is it?
(Professor Sir Andrew Likierman) Local authorities
have been at this for a very long time in terms of the way in
which they have been producing their accounts.
42. Do you know why local authorities were required
by Government to do proper resource accounting and the Government
did not require itself to do it?
(Professor Sir Andrew Likierman) I do not think there
was any assumption that governments would do this kind of accounting
until quite recently.
43. Incidentally, I know this is early days
for the learning curve and the people who are actually doing this,
because they are doing it for the first time. Have you seen any
evidence of people doing creative accounting, in the sense of
shifting the definitions between capital and revenue so there
is capitalisation of revenue to the extent that the money is not
spent and that sort of thing? Do you see that emerging now?
(Professor Sir Andrew Likierman) No, and I am completely
confident that the auditors would catch such practices.
44. But it is not completely wrong to do that,
it is a grey area?
(Professor Sir Andrew Likierman) I think that if it
is a grey area, then it is by definition not creative accounting.
45. In terms of the administrative delays in
resource accounting, which does enable budgetary planning over
a number of years in terms of asset management and understanding
against cash, do you think those administrative delays in implementing
this are actually having some real cost in terms of services,
because people do not understand what they are doing and they
cannot use it effectively for the good of the public service?
Perhaps Mr Sharples could answer that.
(Mr Sharples) First of all, I would like to support
what Andrew said: that looking back over the history of this,
I think this has to be seen as a tremendous achievement, to deliver
on the project that was set out in 1994. You are quite right that
central government was coming in behind local government. In fact,
it is the last part of the economy effectively that was not doing
accruals accounting.
46. Yes, that is the point.
(Mr Sharples) So to take these huge organisations,
with huge and previously unmeasured balance sheets, and put them
onto proper commercial accounting systems is a tremendous achievement,
and that has been delivered on schedule. What we have done on
the budgeting side is to introduce in two stages a budgeting arrangement
which gets the best out of the information that is available from
the balance sheets and the resource accounts. In stage one which
was introduced in the Spending Review last year, we have started
to measure in accruals terms and to capture the various elements
of accruals accounts.
47. What I am trying to get at in the question,
if I may, Mr Sharples, is whether there is going to be any real,
positive outcome as a result of resource accounting, in terms
of administrative efficiency, knowing where your assets are and
that sort of thing, in terms of people who are our constituents.
If so, what sort of things? If so, does the delay mean the other
side of the coin, that the public is losing out through bad administration?
(Mr Sharples) There are indeed real benefits. A number
of examples of the way in which resource accounting and budgeting
is changing decision-making are set out in the documents to which
Andrew referred.
48. I have not had time to read them all.
(Mr Sharples) No, but I hope they will prove useful
after this session. I think the key thing is that this focusses
the minds of managers on the real costs of the activities that
are going on in the public sector. It focusses minds on the balance
sheet and the capital assets.
49. In terms of real costs, if they do not do
this, how might things be better in terms of a person using the
NHS system?
(Mr Sharples) To take examples, departments for the
first time, as you know, have constructed balance sheets and identified
assets. In fact, we have published full details of the assets
held by the government departments in the National Asset Register,
with valuations for the first time. This process has encouraged
departments to think about whether they need to hold those assets,
whereas the benefit for the citizen, the taxpayer, is in making
sure that the Government is holding only those assets it really
needs and it is getting best value out of those assets.
50. Would you accept that one of the key benefits
in something like the NHS is the ability of managers to make informed
decisions about things like PPP where there is a convergence of
capital investment to revenues agreed for service delivery, and
any delay in people or departments being able to deliver that
sort of management information causes delays in forming decisions
on whether to go down various sorts of investment routes? Perhaps
I can ask the Professor that question.
(Mr Sharples) I think that resource accounting and
budgeting helps in those decisions, because it puts conventional
capital projects on a more similar footing to a PFI project. In
the old cash world, if you undertook a conventional project, the
real issue was, could you get the capital funding upfront. Once
you had paid for the asset, the continuing costs of holding that
capital asset were something you did not have to worry about.
Now PFI and conventional procurement are put on a more similar
footing, the managers need to consider the continuing costs of
the asset.
51. Thank you very much, Mr Sharples. Perhaps
I can ask Professor Likierman one thing about that in terms of
loss of value. Am I right in saying, do you believe, that if we
have not got proper resource accounting—for instance, in
the Health Service—or there is a delay in it, that delays
the ability of a manager to make the optimum decision on how to
deliver a service, whether through, in some sense, capitalisation
going through PPP or doing capital assets and that sort of thing,
and that therefore is a real loss to the health consumer?
(Professor Sir Andrew Likierman) I am no expert on
Health Service accounting, but my understanding is that they use
accruals as a matter of course.
52. You mentioned that you are concerned to
help everybody get up to scratch. What sanctions are you imposing?
What about the six, as it were?
(Professor Sir Andrew Likierman) There are limits
to what the Treasury can do. In a sense, as I have indicated already,
we cannot force people physically to produce the accounts, they
have actually got to do it themselves.
53. If they do not, if they keep failing, what
is the impact—that people are sacked, or there is less money
for the department, or the projects are suspended? What happens?
Or do you just ask them again?
(Professor Sir Andrew Likierman) I think the question
is where the failure lies. If the problem is on the accounts themselves
then the accountability is here to Parliament. If there is a problem,
as a result of this failure, in planning, then clearly they are
going to get less good information for planning than they should,
and that must impact on their ability to get resources. So there
are a number of possible sanctions relating to a number of possible
dimensions.
54. Do you think managers think that they will
get less money if they do not get their act together on resource
accounting? You seem to be saying that there might be some threat
to future funding if they do not do that.
(Professor Sir Andrew Likierman) My assumption would
be that if a department goes into a spending round and is not
able to identify very clearly what the new resource account elements
are associated with that, they are at a significant disadvantage
in the bargaining process.
55. On this issue of double-running—namely,
appropriation and resource accounting at the same time—do
you anticipate that once we have got resource accounting up in
any given example, we can get rid of resources applied to appropriation
accounts, and therefore the new resource accounts should be speeded
up significantly? Therefore, do you think that your ambition of
three months from the end of the financial year is realistic?
(Professor Sir Andrew Likierman) I am not correlating
the relationship between the abandonment of appropriation accounts
and the arrival of accounts after three months. All I am saying
is that at the moment a number of departments are under very considerable
strain in having to produce two sets of accounts, and the quality
of the accounts, as well as the timeliness of the accounts, must
improve when resource accounts alone are produced. I am quite
sure about that.
56. Obviously there is going to be a difference
between different departments in terms of the level of understanding,
the level of training, the level of complexity—for example,
evaluating all the Foreign Office buildings around the world,
various resources of the department having to do that—levels
of resources being applied, the sort of incentives attached to
best practice. So presumably what you are doing—correct
me if I am wrong—is comparing and contrasting the different
departments on all these different criteria, and then perhaps
making allowances or extra resources to compensate areas which
have particular hurdles to jump over. Is that correct or not?
(Professor Sir Andrew Likierman) We have not made
specific provision for departments to improve their systems. That
is one effect of having this rather extended timescale. We have
assumed that they will do that as part of the normal way in which
they do their business. You mentioned, for example, Foreign Office
assets and so on. Work has been done over a period of years, which
is now shown in the departmental resource accounts, and has been
reported in the National Asset Register. That has all been done
on a proper basis.
57. On that point, incidentally, as you have
come back on it, is it not the case that the relative appropriation
of property values around the world keeps on changing, as house
prices are going up more slowly or faster in different countries
and all the rest of it? When you say that it is being done, how
often is that asset valuation done?
(Mr Loweth) A formal revaluation has to be done every
five years. In intervening years there should be an updating through
some form of indexation, or revalution.
58. So it could be miles out if there was a
sudden surge in different countries because the oil supply is
cut off, or whatever it is, and the managers' decisions on the
basis of asset values, if they want to realise assets, in terms
of international departments, could be way out, could they not?
(Mr Loweth) Ideally they should be reviewing annually
to see what is happening in any particular jurisdiction, to see
if the particular index they have chosen is representative or
not.
59. So it is reviewed more often than every
five years?
(Mr Loweth) Yes, but there is a formal requirement
for professional revaluation every five years. It may be more
frequent.
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