House of Commons - Public Accounts - Appendices to the Minutes of Evidence

Select Committee on Public Accounts Appendices to the Minutes of Evidence

APPENDIX 2

Supplementary memorandum submitted by the Comptroller and Auditor General

PROGRESS ON RESOURCE ACCOUNTING

INTRODUCTION

1. In its 29th Report of 1999-2000 the Committee agreed with the Government that sufficient progress had been made on resource accounting and budgeting to proceed with implementing the Government Resources and Accounts Act 2000. Under changes made possible by the Act, the wholly cash-based system by which Parliament approves government expenditure (Supply) would be replaced from 2001-02 with one in which the Parliament votes expenditure in accruals terms (reflecting expenditure when it is incurred rather than cash is spent) as well as cash.[1] At the same time, accruals-based resource accounts would replace appropriation accounts as the means of accounting to Parliament for Supply.

2. Under the provisions of the Government Resources and Accounts Act 2000 Parliament will approve a resource-based Supply Estimate for each department. It will approve within each Estimate separate limits for current expenditure on an accrual basis—"Requests for Resource", and an overall limit on the cash to be provided from the Consolidated Fund—the "Net Cash Requirement". Departments will be accountable to Parliament against both limits. The accruals-based resource accounts prepared by each department will provide such accountability. The reliability of resource accounts is therefore key to Parliamentary control.

3. The Government has taken a staged approach to the implementation of these changes. In the period 1998-2001 there were three years of "parallel running", with departments producing resource accounts in addition to their cash-based appropriation accounts. For:

— 1998-99, departments produced non-statutory, unpublished, "dry run" resource accounts;

— 1999-2000, most departments produced resource accounts on a statutory basis, directed by the Treasury under the Exchequer and Audit Departments Act 1921 and laid before Parliament; and

— 2000-01 all departments will produce resource accounts directed by Treasury under the 1921 Act and again laid before Parliament.

From 2001-02 the Government Resources and Accounts Act 2000 takes effect. Appropriation accounts will be discontinued and all departments will be required directly by the Act to prepare resource accounts as their primary mechanism for accounting to Parliament for Supply.

4. In giving its agreement the Committee noted the results of a "dry-run" for 1998-99 in which all departments had prepared unpublished resource accounts. These accounts were not laid before the House of Commons but each was made available to the relevant departmental select committees and subjected to an informal but full audit examination by the National Audit Office. They found that 30 of a total of 52 resource accounts for that year would have attracted a qualified audit opinion of varying degrees of significance from the Comptroller and Auditor General.[2] An explanation of the nature of the qualified audit opinions used by the Comptroller and Auditor General is at Annex A (Ev 26). The Committee therefore recognised that there remained risks to be addressed if the project was to be implemented successfully. They looked to the Treasury to ensure that safeguards proposed to address the risks were applied rigorously and that the risks were managed so as to ensure that full accountability to Parliament is maintained under the new system from 2001-02.[3] They also noted that, unless resource estimates and accounts formed the bedrock of financial management in departments, much of their value would be lost.[4]

5. The Committee accordingly asked the Treasury to provide three reports—on the action plans of departments for remedying deficiencies in their 1998-99 accounts, on the outcome of the 1999-2000 accounts, and on departments' use of management information systems. In response the Treasury has provided three memorandums.[5]

6. This note analyses the information provided and the conclusions the Treasury have reached. It assesses them in the light of the Comptroller and Auditor General's audit of departments' resource accounts for 1999-2000 and the concerns expressed previously by the Committee. Part 1 of this note deals with progress on the resource accounts, Part 2 analyses the memorandum that the Treasury have provided on the use of management information by departments, and Part 3 suggests issues that the Committee might wish to take forward with the Treasury.

PART 1

SAFEGUARDS FOR THE TRANSITION TO RESOURCE BASED SUPPLY

7. The Committee concluded that for departments that received a qualified opinion on their 1998-99 dry-run accounts the Treasury needed to continue to monitor progress closely and to see that departments addressed fully the areas of risks identified during the dry-run. The Committee noted that the Treasury had told them that they were quite clear what the problems were, that they could see the time scale in each case for resolving them, and that they were going to monitor against precise targets. The Committee therefore expected the Treasury to:

— ensure that departments had actions plans that fully identified, as appropriate, the staffing, training and systems problems that faced departments and the actions necessary to resolve these problems before 2001-02;

— provide the Committee with a summary and analysis for each of these action plans by Autumn 2000; and

TREASURY MEMORANDUM ON DEPARTMENTAL ACTIONS PLANS

8. On 19 December 2000 the Treasury provided the Committee with a memorandum on departmental action plans.[7] This covered all departments that would have receive a qualified opinion on the 1998-99 dry-run resource accounts. It included a summary of the action plans for each of the 26 departments.[8]

9. The memorandum noted that the Permanent Secretary to the Treasury had written to all Accounting Officers emphasising the importance the Treasury attached to addressing successfully the remaining difficulties. The Treasury had liased closely with departments in the course of the production of 1999-2000 accounts with the aim of ensuring that departments maintained the progress set out in the action plans. On the plans themselves the Treasury made the following observations:

Systems and processes

Staffing

Training

Accounting Policy issues

10. Overall the Treasury expected that significant improvement would be evident in the accounts for 1999-2000 and still further for 2000-01. However it noted that for a very few departments the action plans stated that some problems might not be resolved for 2001-02. The Treasury would watch developments in these departments particularly closely.

TREASURY MEMORANDUM ON OUTCOME OF THE 1999-2000 ACCOUNTS

11. As requested by the Committee the Treasury also provided, on 20 April 2001, a further memorandum on the quality of departments' resource accounts for 1999-2000.[9] In general it confirmed the expectations expressed in their December 2000 memorandum. The memorandum:

— noted that the Comptroller and Auditor General had qualified 12 accounts for 1999-2000 in contrast with 30 for the 1998-99 dry-run, and observed that this was a significant improvement;

— summarised the reasons for each of the qualified opinions; and

— provided updated information on the progress that the 12 departments expected to make.

12. Although the Treasury had given all of the 49 departments a statutory direction to prepare resource accounts for 1999-2000, after consultation with the National Audit Office they subsequently gave a dispensation from the direction to 10 of them. [10]The effect was to relieve those departments from the statutory requirement to render a signed account to the Comptroller and Auditor General for audit by the statutory deadline of 30 November 2000. The details of the specific circumstances relating to each department are provided in the Treasury's memorandum. [11]Dispensations were given where departments were unable to meet the submission deadline and needed significant additional time to try to improve the quality of their accounts. The Treasury set an administrative timetable which allowed such departments an additional two months to prepare their accounts.

13. The action taken by the Treasury to provide dispensations from accounts directions accorded with the Committee's view that there was little advantage and some potential difficulty in the issue of directions to departments that had fully demonstrated the capacity to produce resource accounts of an auditable standard. [12]

14. By agreement with the Treasury the National Audit Office nevertheless conducted a full audit on these non-statutory accounts and the Comptroller and Auditor General has provided an audit opinion and report on them. They have also been laid (as Government Command Papers rather than House of Commons papers) to ensure that Parliament is provided with a full set of departments' resource accounts for 1999-2000.

DEPARTMENTAL ACTION PLANS AND PROSPECTS FOR 2000-01 AND 2001-02

15. In their April 2001 memorandum (Ev 95-110, Appendix 5), the Treasury summarised for each of the 12 departments the reasons underlying the qualified audit opinion on their accounts for 1999-2000. They included information on the actions that each of the departments expected to make for 2000-01 and 2001-02 to tackle these issues.

— Three departments indicated that their accounting problems were likely to be resolved in time for the 2000-01 accounts:

— Department of the Environment, Transport and the Regions (now superseded by the Department for Transport, Local Government and the Regions).

— HM Treasury.

— Cabinet Office.

One department expected to resolve its problems by the 2001-02 accounts:

— Treasury Solicitors Department.

Four departments set out the improvements they expected to achieve. Although they did not indicate clearly when they expected their problems to be fully resolved, it appears possible from the nature of the audit qualification for 1999-2000 (in each case, a scope limitation) that this might be wholly or largely achieved by 2000-01:

— Department of Health.

— Lord Chancellor's Department.

— Forestry Commission.

— Security and Intelligence Agencies.

Two departments suggested that their problems will not be resolved until 2002-03 or later:

— Ministry of Defence.

— Department of Social Security (now superseded by the Department for Work and Pensions).

Two departments also set out their expected progress but did not indicate when they expected their problems to be fully resolved. In these cases, the nature of the 1999-2000 audit opinion (in both cases, a disclaimer) casts doubt on whether this can be achieved by 2001-02:

— Ministry of Agriculture Fisheries and Food (now superseded by the Department for Environment, Food and Rural Affairs).

— Home Office.

16. The Treasury noted that: "for a number of bodies some major challenges remain, although action plans are in place to resolve them". They said that they were aware of various risks and constraints, but concluded that the safeguards referred to in the Committee's Report had ensured that the process as a whole had not been affected.

NATIONAL AUDIT OFFICE OBSERVATIONS ON PERFORMANCE AND PROGRESS

17. The reduction in the number of resource accounts attracting a qualified audit opinion from 30 in 1998-99 to 12 in 1999-2000 represents very significant progress. It is within the range of 9-15 accounts that the Treasury said that they expected would be qualified when giving evidence to the Committee on 7 June 2000. It also generally accords with departments' expectations as originally expressed in their actions Plans. [13]It is clear that many departments made very substantial efforts to improve the quality of their resource accounts, particularly those which attracted qualification in 1998-99. A full list of departmental resource accounts showing the nature of their audit opinions for 1998-99 and 1999-2000 is at Annex B, (Ev 26-34). In summary, and taking into account the actions and expectations reported in the Treasury's memorandum. [14]

— All but two of these, the Ministry of Agriculture, Fisheries and Food, and the Home Office, made significant progress over their performance in 1998-99.

— Two of the departments, the Ministry of Defence and the Department of Social Security, indicated that they expected their accounts for 2001-02 to be qualified. However, they have both previously identified the key problems and set in place actions plans. Their progress appears to remain on track.

— Of the remainder of the 12 departments, the Department of Health, the Lord Chancellors Department, the Forestry Commission and the Security and Intelligence Agencies all made progress, but none of these indicated clearly when they expected to have fully resolved their accounting problems.

18. The audit opinions on the dry-run accounts for 1998-99 of the Ministry of Agriculture Fisheries and Food and the Home Office were that they did not give a true and fair view (an "adverse" opinion). For the 1999-2000 accounts in both cases I disclaimed (that is, did not give) an audit opinion, because there was so much uncertainty in the accounts that I was unable to express an audit view. The situation has therefore deteriorated compared to 1998-99 (see Annex A, (Ev 26) which sets out the various forms of audit opinion).

19. In my Report on the resource accounts of the Ministry of Agriculture, Fisheries and Food for 1999-2000 I noted significant areas where there was a lack of audit evidence to support the data in the accounts. These included the value of information technology assets; the amounts reported as Supply drawn from the Consolidated Fund; the balances on certain property-related suspense accounts; the completeness of amounts capitalised as fixed assets and the question as to whether the balance reported as owing from the European Union at the beginning of the financial year was arrived at in accordance with the declared accounting policy. There were also significant errors, for example, the failure to deal properly with transactions and balances between the department and its agencies; the valuation of certain land and buildings; the omission of some property assets and errors in the Cash Flow Statement.

20. In the Treasury's memorandum the Ministry nonetheless expected that the steps currently in hand would enable substantial progress to be made on the systems and procedures underlying all the outstanding issues, and that these would be reflected in the preparation of the 2000-01 accounts. They aimed to continue progress so that the accounts for 2001-02 were "fully compliant".

21. My Report on the resource accounts of the Home Office for 1999-2000 identified inconsistencies between the primary financial statements and the notes regarding the reported cash movements; a lack of reconciliation of the resource accounts to the department's appropriation account; an unsupported "correcting" item; errors and omissions in balances brought forward at the beginning of the financial year; the double counting of certain expenditure; a lack of evidence to support amounts reported for certain fixed assets and to show that the relevant accounting standard had been properly applied; errors in the apportionment of operating costs to Schedule 5—the "Statement of Resources by Departmental Aim and Objective"; and failure to recognise grants payable in the manner required by the Resource Accounting Manual.

22. The Home Office have not indicated clearly, in the Treasury memorandum, when their problems will be resolved.

23. In my reports on these accounts and some others that also attracted a qualified audit opinion I stressed the need to:

— ensure that sufficient appropriately skilled staff were available (Cabinet Office, Home Office, Treasury Solicitor's Department, Ministry of Agriculture Fisheries and Food, HM Treasury);

— carry out proper quality control procedures on the accounts before submission for audit (Cabinet Office, Home Office, Ministry of Agriculture, Fisheries and Food, HM Treasury);

— put in robust procedures to support the preparation of resource accounts Home Office, Treasury Solicitors Department, Ministry of Agriculture Fisheries and Food, and HM Treasury).

The progress that these departments achieve is therefore likely to depend at least in part on how well their action plans deal with these issues.

TIMELINESS AND QUALITY OF ACCOUNTS

24. Of the 10 accounts for 1999-2000 for which the Treasury granted a dispensation and allowed two additional months beyond the statutory deadline of 30 November 2000 to prepare, eight subsequently received a qualified audit opinion. They included the accounts of the Ministry of Agriculture Fisheries and Food and the Home Office. The two that received an unqualified opinion were the Northern Ireland Office and the Cabinet Office's Principal Civil Service Pension Scheme.

25. Many departments, including many whose accounts received an unqualified audit opinion as well as those whose accounts were qualified, failed to render their accounts by the statutory deadline of 30 November 2000. By then I had received only 22 signed resource accounts out of the total of 49. Of the remaining 27, 10 had received a dispensation allowing an additional two months for preparation. The other 17 were received late but were nonetheless certified in time to be laid before the House of Commons by the statutory deadline of 31 January 2001. Many departments had therefore failed to respond adequately to the Committee's conclusion that departments needed to find and rectify the causes of delay in rendering their resource accounts. [16](In my General Report for 1999-2000 I reported not only on this but on the continued lateness of many departments in also rendering appropriate accounts or my audit.) [17]

26. Departments had to prepare appropriation accounts as well as resource accounts for 1999-2000. This will remain the case for a further year, until appropriation accounts are discontinued from 2001-02. This short term parallel running may have contributed to the delays for 1999-2000. Nonetheless, the lateness in rendering resource accounts still suggests that many departments were too reliant on post year-end accounting adjustments to create their financial statements and did not have robust in-year accruals—based systems. It also suggests that staffing was insufficient to pull the accounts together promptly and properly and that senior management were not engaged sufficiently in the process. There is a risk that if departments are pressed to meet the statutory deadline for rendering their accounts for audit, and do not have the necessary systems or staffing, some of their accounts—including those that for 1999-2000 were unqualified—might in future attract a qualified audit opinion.

27. As this deadline of 30 November approaches for the 2000-01 accounts there are indications that more departments will meet it than did in 2000, But the signs are that not all will do so. It therefore remains vital for future accountability that any such departments fully recognise the causes of delay and remedy them. There are also some signs from interim audit work that fewer accounts for 2000-01 may receive a qualified audit opinion than did so for 1999-2000. The outcome will however depend on the quality of the accounts when they are received. Final conclusions must of course await the completion of the audits later this year or early next, depending on when the accounts are received.

CONCLUSIONS ON PROGRESS ON RESOURCE ACCOUNTING

28. Overall, the results for the 1999-2000 resource accounts—the first to be formally prepared—were a considerable improvement over the 1998-1999 dry-run. And there are some signs of some further improvement for the 2000-01 accounts. However, the pressure needs to be maintained if the transition is to remain on track. In detail:

— The results of the 1999-2000 accounts were in line with the expectations expressed by the Treasury in giving evidence to the Committee for its 29th Report of 1999-2000. To that extent the Treasury have managed the risks within those expectations.

— In some of my reports on the 12 qualified accounts for 1999-2000 I stressed the need for sufficient, appropriately skilled staff; robust procedures for preparing the accounts and effective senior management review of financial information.

Unless due attention is given to these points departments' expectations of improvement may not be forthcoming.

— In two cases, the Ministry of Agriculture Fisheries and Food (now superseded by the Department for Environment, Food and Rural Affairs) and the Home Office, there is particular concern over progress. The Committee may wish to consider seeking further information from the departments as to how they are addressing this.

— The timeliness in rendering signed accounts for 1999-2000 for audit was poor. Although there are some signs that this may be improved on for 2000-01, it remains to be seen whether all departments will meet the November deadline. Any failure to meet the deadline this year will increase the risk that, if problems emerge from the audit, they will not be resolved ahead of the statutory deadline for laying before Parliament on 31 January. Qualified opinions could therefore be necessary.

PART 2

MANAGEMENT INFORMATION SYSTEMS

29. The Committee also sought from the Treasury a detailed analysis of the use departments were making of their management information systems. The Committee noted that unless resource estimates and accounts formed the bedrock of financial management in departments, much of their value would be lost; "sound management accounts should be part and parcel of departmental systems".[20]

30. The Treasury provided its analysis of department's management information systems in a memorandum to the Committee on 15 December 2000. [21]They considered that on the basis of returns submitted by departments there was "mainly a good story to tell across the board". They said that:

— sound management information systems were generally in place in departments or were in the process of being implemented;

— effective use was being made of the information provided by the systems in terms of helping ensure that departmental businesses was carried more efficiently; and

— significant benefits were being derived from the information.

31. The memorandum said that such benefits include improvements in budgeting and planning, fixed asset and working capital management, and the costing of outputs. It also acknowledged, however, that such examples of good practice might not be uniform across departments, and that the Treasury would continue to monitor departments' progress in developing suitable management information systems as part of its modernising government agenda.

NATIONAL AUDIT OFFICE ANALYSIS OF MANAGEMENT INFORMATION

32. The National Audit Office's analysis of the departmental information contained in the Treasury's memorandum found that most departments are already using their new financial information systems to improve and develop their budgetary control and for external reporting. In other areas of financial management, such as using accrual information to support better decision making, the practices in departments are less well developed and departments are only just beginning to appreciate the full potential of the information systems now available to them. At the beginning of this year The Treasury produced a guide for Departments to assist them in assessing the extent to which they are exploiting the benefits available to them through the implementation of accruals accounts. [22]The guide identified the following areas which departments could use to benchmark their performance.

Planning and budgeting

— distinguishing between cash and resources, and focusing attention on resources;

— linking financial information to output reporting (Service Delivery Agreements and Public Service Agreements);

— analysing expenditure by objectives and relating it to departmental priorities;

— making a clear link between targets and resource allocation;

Decision making

— ensuring that accruals-based, financial information is available throughout the year and is not limited to the production of the annual accounts;

— presenting options and making decisions on a resource rather than cash cost basis;

— making decisions on new investments that recognise fully the interest cost of capital and capital consumption;

— costing alternative methods of programme delivery;

— monitoring and management of working capital (levels of cash, debtors, creditors and stocks) and fixed assets;

Internal control and reporting

— in year monitoring of resource as well as cash consumption;

— management board focus on resource based information for planning and control;

— gaining assurance on internal financial controls and other aspects of corporate governance; and

External reporting and feedback

— achieving timely accounts for Parliament, that earn an unqualified audit opinion and represent "best practice".

The Treasury have refined and re issued this guidance and have supplemented it with a booklet of practical examples of "better decision taking". They have also issued summary and detailed guides for analysing the information that resource accounts provide, to help departments identify ways in which financial management and accounting information can be used and the benefits achieved. [23]

CONCLUSIONS ON MANAGEMENT INFORMATION SYSTEMS

33. The Treasury rightly note the areas in which departments are making effective use of management information and have provided useful guidance to help them do more. The overall test, however, is whether departments are routinely preparing and using, as appropriate, accruals-based resource information as well as cash figures in planning and taking decisions and then in controlling and monitoring their implementation. That is the change that lies at the heart of the resource accounting and budgeting initiative and that is the fundamental change in departmental management that the Committee has previously looked to see achieved. For departments that are achieving it, external financial reporting through resource accounts will be very largely an extension of that process. The timeliness and quality of departments' resource accounts therefore reflects, at least in part, the quality of their management information systems. Departments that have been unable to prepare timely or reliable resource accounts are therefore likely also to need to develop further their management information systems.

34. All departments, and those mentioned above in particular, therefore need to take steps to ensure that they have the systems to deliver timely management information, sufficient staff who are trained to make the best use of it and senior management who are fully engaged in the processes. The Treasury have undertaken to monitor departments' progress and this will be important to ensure that improvements are made where necessary. In the longer term, the results of a project for identifying "best practice" in the use of accruals accounting information, which is under consideration by the Public Audit Forum, may offer further examples on which departments can draw.

PART 3

THE WAY FORWARD

35. With regard to the progress on resource accounting examined in Part 1 of this note, the outcome of the 1999-2000 accounts shows that it is in line with the Treasury's targets. There are also signs of some further improvement in the accounts for 2000-01, although the outcome awaits the completion of my audits. Against that, further complications have been introduced for 2001-02—the first year in which resource accounts fully replace appropriation accounts. These are the extensive transfers of responsibilities between some departments and the creation of new departments with significantly re-arranged portfolios. These may have accounting consequences that add to the difficulties that some departments face. The Committee may therefore wish to seek further assurance from the Treasury that its future monitoring will address the remaining risks identified in my conclusions (paragraph 28), including the points that I have made in my reports on the 1999-2000 accounts regarding staffing, systems and management review. They may also want to focus on the timeliness of accounts, to establish how it may be improved without unacceptable risks to quality.

36. On management information systems dealt with in Part 2 of this note, the Committee may want to seek assurances about the timeliness of management information and enquire further into its uses, in the light of the conclusions at paragraph 33.

37. Key points the Committee may wish to clarify with the Treasury are therefore whether and how:

— in the light of my reports on the 1999-2000 accounts, the Treasury are satisfied that the action plans of departments that received qualified audit opinions are sufficient for remedying their problems, and how they intend to ensure that plans are fully implemented;

— they are clear about when each department now expects to have resolved its problems and which departments they consider are likely to attract a qualified audit opinion for 2000-01;

— they envisage taking any special measures for departments that are unable to achieve unqualified audit opinions for 2000-01;

— the Treasury are going to address the widespread and persistent lack of timeliness in delivering accounts for audit, falling short of accountability requirements that Parliament has prescribed in Statute;

— they are confident that in future departments will be able to deliver a final, signed, version of the account for audit by the statutory deadline of 30 November following the year end;

— they are confident that timeliness can be improved by departments without risk to the quality and reliability of accounts and that there are sufficient skills at senior staffing levels to conduct an effective review of the accounts prior to their presentation for audit;

— they can reconcile the amount of time devoted after the year end by some departments to preparing their accounts, with a view that such departments have had reliable, up to date, management information available during the course of the year; and

— they are satisfied that departments are exploiting fully the additional financial management information that should now be available to them to support better decision making, and what further role the Treasury have in maximising the benefits derived from the introduction of resource accounting and budgeting.

38. The Committee may, in addition, wish me to provide, once the audits are complete, further observations on the outcome of the 2000-01 accounts and to comment on any other matters that may affect the transition.

Sir John Bourn

Comptroller and Auditor General

National Audit Office

October 2001

1 29th Report of the Committee of Public Accounts (HC 556, Session 1999-2000), para 6. Back

2 29th Report of the Committee of Public Accounts (HC 556, Session 1999-2000); and Ev 26-35, Appendix 2, Annexes A and B. Back

3 29th Report of the Committee of Public Accounts (HC 556, Session 1999-2000), para 6. Back

4 ibid, para 7 (vi). Back

5 Ev 35-63, Appendix 3; Ev 63-96, Appendix 4; Ev 96-111, Appendix 5. Back

6 29th Report of the Committee of Public Accounts (HC 556, Session), paras 7 (vii), (viii). Back

7 Ev 35-63, Appendix 3. Back

8 Of the 30 departments reported on for 1998-99, the three Security and Intelligence Agencies-then treated separately-are dealt with in 1999-2000 as a single consolidated entity; the Health and Safety Executive is consolidated in the accounts of DETR; and OFGAS merged with OFFER to form OFGEM, resulting in 26 departments being tracked for 1999-2000. Back