Select Committee on Public Accounts Twenty-Fifth Report

2 Securing the benefits of better resource management

5. There are eight areas departments need to address if they are going to use the new resource management tools to deliver improved services and value for money.

The resource management skills of departmental boards

6. The new resource management initiatives have raised the importance of financial monitoring and decision making in departments.[10] Making the best use of the information in resource accounts and other resource management tools depends on Accounting Officers and other board members having the commitment to make the new arrangements work, as well as their having the relevant financial experience and expertise.[11] Yet it remains unclear what training board members have received in this area.[12]

Qualified finance directors

7. A recent step by the Treasury towards improving financial management in departments has been the introduction, from 1 December 2003, of a requirement for departmental boards to include a Finance Director in place of the former Principal Finance Officer role. For the first time they are either to be qualified accountants or have working for them qualified staff of sufficient stature to operate at the most senior levels.[13] Currently only 39% of departments' Finance Directors are qualified accountants,[14] in contrast to 84% of Finance Directors in the FTSE 100 companies.[15]

Matching expenditure to service need

8. Under cash accounting the requirement to spend cash budgets before the year end or else surrender unspent sums, led to increased spending by departments in the last quarter of the financial year to avoid losing money. This increased the risk of poorly focused and wasteful expenditure in the haste to beat the 31st March deadline.[16] Yet despite the introduction of the new end year flexibilities to carry forward unspent resources the pattern of end year expenditure surges still persists. In almost three quarters of departments, the bias towards spending in the last two months of the financial year has remained unchanged and in three cases this pattern has increased (Figure 2).[17] There are, however, some notable exceptions; for instance, the Highways Agency has been able, over a four year period up to and including 2002-03, to reduce its March expenditure as a proportion of total expenditure from 20% to 9%.[18]

9. The continuation of end year surges of expenditure arises for two reasons: departments still learning to use the new flexibilities; and end of year flexibility not being passed down to executive agencies or other delivery partners. In some cases this was because the partner organisation was considered to have a poor delivery record and departments wanted to keep a tighter rein on their financial management.[19]

10. In some instances departments do not have accounting systems that would enable them to record expenditure throughout the course of the year. This has resulted in them bringing some expenditure to account after the year end as a one-off accounting exercise, thereby distorting their annual expenditure profile with potentially misleading reporting of their overall performance.[20]

11. The Treasury has issued guidance for departments on the delegation of end year flexibility to agencies and non-departmental public bodies. While it continues to monitor departments' spending profiles, it does not yet fully understand why the new flexibilities have not helped reduce the problem.[21]

Reducing under and over spending

12. In its report on excess votes in 2001-02 the Committee of Public Accounts concluded that many could have been avoided if departments had done more to implement full accruals accounting, employed sufficiently skilled and trained finance staff and had considered fully the financial consequences of operational developments or decisions.[22] The Treasury discussed the reasons for the excess votes with the departments and took steps to prevent their recurrence in 2002-03.[23] Results for that year show that the number of excess votes had fallen from ten to six.[24]

13. Some 17% of departments have also identified significant underspending in their programmes since 2001-02, and capital underspending totalled £2.3 billion in 2002-03 (8.7% of the total capital budget for the year).[25] When expenditure started to grow rapidly in 2001-02 departments did not initially have the capacity to deliver ambitious investment programmes with expenditure and activity being deferred into future years.[26] The main causes of underspending were weaknesses in departments' forecasting and project management, especially in using accruals based information, as well as a poor understanding of the capacity of partners to deliver.[27] Information obtained by the Treasury on departments' investment performance as at November 2003 shows an increase in levels of planned investment and suggests an improving capability and capacity within departments to use the resources provided.[28]

Using better information on assets and liabilities

14. Under cash accounting assets such as buildings bought in previous financial years were usually treated as free goods by departments with limited account taken of their consumption in delivering services or the cost of financing them.[29] Resource accounting requires departments to produce an annual balance sheet setting out the value of their assets, and the costs associated with the reduction in their useful life, as well as the cost of financing the assets (the 'cost of capital').[30] Having to recognise these costs in their own accounts has provided departments with a strong incentive to make better use of their assets.[31] For example, capital charges of £175 million on an estate valued at £2.7 billion, have stimulated the Court Service to identify the potential to release spare capacity and make better use of under-utilised courtrooms.[32]

15. Correctly differentiating between capital expenditure, used to purchase assets that will last more than one year, and current expenditure on items such as in-year maintenance, has been an area that continues to cause difficulty for some departments, and is one of the main reasons why many resource accounts have been qualified since 1998-99.[33] The number of qualified resource accounts has, however, decreased from 30 in 1998-99 to three in 2002-03.[34]

16. As well as assets, resource accounting requires departments to account for liabilities in their balance sheets and to take responsibility for managing the associated costs and risks.[35] For example, the Department for Health has determined the full scale of future clinical negligence costs and set aside £5.2 million in 2001-02 in the form of a provision on the balance sheet to meet this liability. Better understanding and reporting of these liabilities has stimulated action to both prevent and better manage the risks to service delivery including increased use of mediation and faster processing of claims to reduce legal and other costs.[36]

Managing working capital

17. Government departments hold considerable amounts of working capital in the form of short term assets such as cash, debtors, stock and work-in-progress (£36 billion in 2001-02) and short-term liabilities such as creditors (£73 billion).[37] Under cash accounting departments did not have to account for working capital, but resource accounting requires the disclosure of such items.[38]

18. Better information on working capital has already led to improved management of these resources. For example, the Ministry of Defence has been able to significantly reduce unnecessarily high levels of stock.[39] Accruals based information enabled the Serious Fraud Office to identify the full value of its debtors, including £4 million in debts stemming from uncollected cost awards made against convicted fraudsters. This highlighted a wider failure on the part of the Court Service to collect fines and costs awards throughout the criminal justice system.[40] Following qualification of its resource accounts in 2001-02, the Serious Fraud Office has also introduced improved arrangements for forecasting and monitoring the monies it owes barristers for the work they carry out on fraud cases.[41]

Using resource based information to improve efficiency

19. To monitor and control overheads the Treasury sets each department an annual Administration Cost budget, which includes civil servants' salaries.[42] The current administrative cost information does not, however, differentiate fully between departments' expenditure on overheads and front line delivery and, as yet, resource based information is not generally widely used by departments as a means to improve and monitor efficiency, including such measures as the balance between direct costs and overheads, and productivity.[43] The Treasury is conscious of the need to develop effective measures of departmental overheads and productivity and to ensure that the additional £61 billion of resources provided to departments in Spending Review 2002 are being used to deliver improved frontline services.[44]

20. Resource accounting and budgeting provides departments with the means to improve efficiency, but it remains unclear what level of savings the Treasury and departments are planning to achieve. Departments will be required to set out detailed plans for improving efficiency and justifying the numbers of civil servants in the forthcoming Spending Review 2004. Departments' capacity to deliver improved services will inform decisions on resource allocation.[45]

Reduced administrative effort for small departments

21. Around half of all departments consider that the administrative effort involved in making requests for resources to the Treasury every second year is onerous for smaller organisations. For example, the Serious Fraud Office is a small department, with a small finance team overseeing annual expenditure of around £28.7 million and assets valued at around £2 million. Yet it has to provide the same information to fulfil the requirements of the Parliamentary Supply procedure as large departments such as the Ministry of Defence.[46] The Treasury has acknowledged the concerns of smaller departments and is currently completing a study of the burdens placed on them.[47]

10   C&AG's Report, para 2.7 Back

11   Qq 25, 49-50 Back

12   Ev 23 Back

13   HM Treasury press statement, Finance Directors for Government Departments (124/2003, 1 December 2003) Back

14   Ev 23 Back

15   Ev 25 Back

16   C&AG's Report, para 1.8 Back

17   Qq 70-75, 84, 127 Back

18   Q 72 Back

19   ibid, para 2.19 Back

20   Qq 70-71; C&AG's Report, para 2.21 Back

21   Qq 70, 84, 127 Back

22   7th Report from the Committee of Public Accounts, Excess Votes 2001-02, (HC 503, Session 2002-03)  Back

23   Qq 9-11 Back

24   Ev 23 Back

25   C&AG's Report, paras 2.25, 2.28-2.29 Back

26   Qq 76-78 Back

27   C&AG's Report, para 2.30 Back

28   Qq 76-78 Back

29   C&AG's Report, para 3 Back

30   Assets will typically include land, buildings, stock and equipment. Back

31   C&AG's Report, paras 2.31-2.34 Back

32   ibid, Figure 25 Back

33   Q 145; C&AG's Report, Figure 15 Back

34   Ev 23 Back

35   Liabilities typically represent obligations arising from a transaction or other event that has already occurred but has not yet involved the department in any payment. Back

36   37th Report from the Committee of Public Accounts Report, Handling clinical negligence claims in England (HC 280, Session 2001-02)  Back

37   C&AG's Report, Figure 5 Back

38   Q 64 Back

39   Q 62 Back

40   C&AG's Report, Figure 24 Back

41   Qq 37-42, 62-64  Back

42   Qq 5, 15-18 Back

43   C&AG's Report, para 3.24, Figure 33 Back

44   Qq 5, 15-18 Back

45   Qq 5, 15-18 Back

46   C&AG's Report, para 2.8 Back

47   Q 7 Back

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