Examination of Witnesses (Questions 1-19)
8 SEPTEMBER 2004
MR JOHN
HUNTER, MR
DAVID THOMSON,
MR ALAN
SHANNON, MR
DEREK BAKER
AND MR
JOHN DEERY
Q1 Chairman: I mentioned to Committee
members earlier on that we have got members from the offices of
the Department of Finance and Personnel and the Department for
Social Development. A lot of our questions will cross reference.
Please feel free to intervene, to swap chairs, to do whatever
is necessary to make sure the Committee gets the answers it requires.
I half apologise for starting off on a critical point, but feel
as if we may need to, in as much that in evidence to the Committee
of Public Accounts in February 2004, the Comptroller and Auditor
General for Northern Ireland said: "Our departments are struggling
to produce resource accounts, they have not yet incorporated them
fully into their decision-making process". A significant
number of departments received negative audit opinions on their
resource accounts for both 2001-02 and 2002-03. This all appears
to add up to poor financial management in Northern Ireland departments
and the DFP's role in overseeing the introduction of resource
accounting has been rather less than satisfactory. It is rather
damning commentary. I am bound to ask, do you agree?
Mr Hunter: I think it falls to
me, Chairman, to kick off in respect of that particular issue,
given my role within DFP. We would accept that there have been
difficulties in the implementation of resource accounting across
Northern Ireland departments. A number of those difficulties have
been common throughout the United Kingdom; lack of appropriate
financial skills, difficulties over management information systems
and also peculiarly to Northern Ireland, the introduction of the
devolved administration, which coincided with the preparations
for the introduction of resource accounting, when six departments
overnight became 11. The difficulties that perhaps are best illustrated
by my own department, which had to draw on five accounting systems
to produce its first consolidated accounts because in terms of
our organisation we would amalgamate five different parts of the
departments. That was a significant organisational and logistical
problem that we had to overcome. We have, I believe, made progress
over the last couple of years, in terms of developing our resource
accounting skills and not least in producing the resource accounts
both on time and to an improved quality. That is not to say we
have cracked all the problems that exist, there are a number that
we still have to address, not least the management information
systems which are still cash-based. We might talk later on about
our new accounting services programme and its significance in
terms of developing the information base which would enable us
to capitalise further on resource accounting. Perhaps I could
conclude an introductory remark by saying that the C&AG did
note, in that same report, there was a clear improvement in both
quality and timeliness in respect of 2002-03 over 2001-02. He
felt the problem with producing good quality accounts on time
had been solved. The qualifications which remain within a number
of the accounts—although fewer in the second year of resource
accounting compared with the first—were problems sometimes
of a technical kind; others were problems which would have existed
whether or not we moved into the resource accounting field.
Q2 Chairman: To be clear, you said that
the poor performance was not just in respect of Northern Ireland
departments, you said there was poor performance elsewhere.
Mr Hunter: I said there were difficulties
in introducing it across the UK. We had similar difficulties to
those in some Whitehall departments.
Q3 Chairman: Would you accept that within
the Northern Ireland departments there was a particular problem?
Mr Hunter: Yes. I think that was
associated with the introduction of devolution. That was a unique
issue as far as Northern Ireland was concerned. It meant that
we only had one dry run at resource accounts compared with two
in Great Britain.
Q4 Chairman: So the Committee can be
clear about the areas identified as major weaknesses, these were
monitoring expenditure against budgets, applying correct accounting
treatment, arriving at robust estimates, and capturing accurate
debtor and creditor balances. Those are the ones that were highlighted
by the C&AG. How are you going to go about addressing those
specific areas of weaknesses?
Mr Hunter: A number of those relate
to the information base that we are working from, which is still
largely cash based, as I said. It means that when we come to complete
the resource accounts at the year end, we have to translate the
cash-based information into resource based terms. We have a
major investment programme on the way—the Accounting
Services Programme—which is designed to provide the information
that we need, both the financial management monitoring and indeed
accounting purposes in a format which will enable us to better
manage departments' resources, to post information more quickly
and to complete the accounts more quickly.
Q5 Reverend Smyth: You did say that this
was spread throughout Great Britain, would you accept an allegation
that Northern Ireland was lagging behind most of Great Britain
in that sort of resource management?
Mr Hunter: The position, as we
understand it, is uneven across Great Britain. Some departments
have information systems which are of a form which enables them
rapidly to use the information from resource accounting techniques;
others—like ourselves—have had to develop new management
information systems. Compared with the former, we would be behind,
compared with the latter, I believe our progress is consistent
with theirs.
Q6 Reverend Smyth: Are there any particular
circumstances in Northern Ireland which actively require DFP to
make specific accounting or financial management provisions because
the DFP follows the Treasury in London step-by-step?
Mr Hunter: If I could kick off
the answer and then I will pass over to my colleague David Thomson.
Basically, we would follow the Treasury step-by-step, assuming
that developments in the Treasury are consistent with what we
require and our needs in Northern Ireland, which is 99% of the
time. There may be organisational differences that we have to
take into account in translating treasury guidance for Northern
Ireland purposes.
Mr Thomson: Chairman, maybe I
could just add to that. There are some things that are specifically
different in Northern Ireland. The Northern Ireland departments
are clearly much smaller than the GB departments. On the other
hand, their scope is much wider, particularly in the fact that
they have a lot of activities that are over here in local government
and not in mainstream government departments, such as local roads.
Also, we have a water industry in public ownership in Northern
Ireland. Those are issues that were not addressed by Whitehall
departments, therefore, we had to develop our own accounting policies
for things like local roads, the water industry, infrastructure
and a number of unique things in Northern Ireland departments
which we had to address which were not being addressed elsewhere.
Q7 Reverend Smyth: That has been going
on for a long time, has it not? That has nothing to do with the
recent devolution?
Mr Thomson: No, they were to do
with recent policies that were put in commercial accounting, like,
how do you account for a road network and how do you account for
a water industry. Those sorts of issues had to be addressed along
with all of the activity that was going on in devolution.
Q8 Reverend Smyth: Have you found the
answer for that for the future?
Mr Thomson: Yes, we do have accounting
policies sorted. The other two issues that we are addressing are
one, the systems and two, people skills. We have strategies in
place for both of those.
Q9 Reverend Smyth: We recognise that
the Treasury, for example, had a long lead-in time for the introduction
of resource accounts, including the provision of training and
of course resource budgeting with a dry-run. Earlier on, Mr Hunter
referred to the fact that there was only one dry-run, but the
Treasury suggested that dry-run was as far back as 1999. The devolution
was coming in 1998. What had been happening in interim period?
Mr Thomson: We were in line with
the Treasury right up to 1999. We were having the same training.
We had the same informal procedures. We sat on the Treasury Committees.
Then devolution occurred in 1999 and, as Mr Hunter has said, that
meant we had to split the six departments and reallocate the budgets,
the assets and everything right across 11 new departments. That
became the priority for the finance people in those new 11 departments
because it was very important that mainstream accounting and budgeting
was maintained. We put our resource into sorting the devolution
issues out rather than proceeding with resource accounting. We
did not have the number of dry-runs that they did in Whitehall.
We sorted out the devolution issues and, having sorted those out,
we then came back but it meant that we lost some time. I think
we have now largely caught up, but we are certainly a bit behind
Whitehall.
Q10 Reverend Smyth: What help and support
was provided by the Treasury to your department?
Mr Thomson: We have open access
to the Treasury. I have a lot of contact with my Treasury colleagues.
We have all the documentation and all the guidance. Our Treasury
colleagues are often over in Northern Ireland providing training.
Any information we want from the Treasury, they give us.
Q11 Reverend Smyth: Are all departments
now just through DFP?
Mr Thomson: They are through DFP
initially, but we will cascade it down to departments.
Mr Hunter: We do take the Treasury's
guidance on resource accounting. We adopt their manual for Northern
Ireland purposes. We follow their guidance in respect of accounting
officer letters. We follow their guidance in respect of central
government accounts and whole of government accounts. We have
consulted them on the accounting issues that Mr Thomson mentioned
surrounding those issues peculiar to Northern Ireland: the roads,
water and the policies associated with accounting for those assets,
so we have a close relationship. I believe our guidance is totally
consistent with the guidance the Treasury has issued in Whitehall.
Q12 Reverend Smyth: Mr Thomson mentioned
a question of the water and the roads, which are Stormont administrative
rather than local government issues in Northern Ireland. Would
you be in a position to tell us what other departments, for example
over here, were having similar difficulties that you were having
as distinct from those two spheres?
Mr Hunter: I am not sure.
Mr Thomson: I think there were
lots. The one that obviously comes to my mind is the Ministry
of Defence. The MoD had huge issues in determining how to account
for everything from warships to missiles. I know from talking
to my Treasury colleagues that a lot of time and effort was involved
in that. We do not have that read-across, so that is something
which occurred in Whitehall that did not have an impact in Northern
Ireland. I am sure there are a lot of other examples as well.
Reverend Smyth: I appreciate that answer
because some of us are never too sure about procurement in defence
anyway.
Q13 Chairman: Could I just check back
because Mr Hunter, you said that, by and by you follow the Treasury
in London step-by-step and Mr Thomson quite rightly outlined to
us several areas within Northern Ireland that are more difficult
to apply those provisions to. Given that, as a devolved administration,
you have got the power to set the financial reporting framework
and any other related financial policy, this is not a case where
the tools do not fit the task in hand?
Mr Hunter: I think over the years
there has been a very close relationship. We sought to use, as
far as possible, the Treasury's tools. The circumstances in which
we had to adapt those tools in Northern Ireland are relatively
small in number and do not generally exercise a great deal of
policy time. The radical nature of resource accounting did throw
up particular examples where we needed to explore issues and perhaps
contributed in the process to the development of national policy
because as the process is cascaded throughout local government,
perhaps some of the learning in Northern Ireland experience will
cascade down.
Q14 Mr Bailey: Given that the DFP's own
accounts were qualified in the financial year 2001-02 and as a
result of weak financial management and "misunderstanding
of new resource budgeting and accounting requirements", would
you not agree that you have a credibility problem? How do you
expect other departments to take your role of improving financial
management within the Northern Ireland departments seriously?
Mr Hunter: I admit to embarrassment
over the 2001-02 accounts, but I believe the position was rectified
in that we had a clean bill of health for 2002-03 and therefore
it rectified the deficiencies which the C&AG had identified
in the previous financial year.
Mr Thomson: I do not think, Chairman,
that there is embarrassment in that, we were all having to work
our way through this together. One of the advantages of the Northern
Ireland system is that we do work closely together. There
is a lot of inter-departmental discussion. We have inter-departmental
groupings and we knew what the respective difficulties in the
respective departments were. I think there was an understanding
across departments that, yes, there were difficulties across the
piece, including the DFP as a department.
Q15 Chairman: There was an over-spend
in that particular year, was there not?
Mr Thomson: Yes.
Q16 Chairman: That was in terms of DETI
and DARD spending £4.5 million over their budget and DFP
was £4.78 million over its budget?
Mr Thomson: Yes.
Q17 Mr Bailey: Can you just explain why
DFP was £4.78 million over budget. What was the single reason,
if there was one, and what was it?
Mr Hunter: We might need to give
you a written response to that particular question. My recollection
is that some of it was a technical accounting issue.
Mr Thomson: It is a move to resource
accounting because under cash accounting, as in an appropriation
account, it was the cash you spent. The cash you spent is fairly
easily controlled. Under resource accounting, there are lots of
non-cash issues coming through. Quite often those do not materialise
or cannot be quantified until the end of the year. If your systems
are not totally up to speed to produce those figures during the
year, it can come up and bite you at the end of the year and it
was largely those non-cash and other resource accounting entries.
People talk as if they are technical, but they are not, they are
costs in another sense. They are the sorts of issues that were
not being addressed under cash accounting. That is just a learning
thing.
Q18 Mr Bailey: Can you give us a simple
example?
Mr Thomson: Depreciation never
appeared in cash accounts. We have "cost of capital"
where you have to charge 3½% of your asset base; that did
not appear on cash accounting. You have to make provisions for
a liability that might occur that you know is going to occur.
You do not have that under cash accounting. An impairment of an
asset, where a valuation goes down and suddenly an asset you thought
was worth 10 million, the valuers are now saying it is worth nine
million, so there is a million pound hit that comes through at
the end of year. It is those sorts of issues that are causing
the challenges under resource accounting.
Q19 Mr McGrady: I am very tempted to
pursue the questions which you have just answered in terms of
the provision of accounts of resource asset bases. It is not exactly
rocket science and many small businesses have been doing it for
centuries. In your introduction, Mr Hunter, you mentioned the
new accounting service programme and you indicated that you might
like to expand on that further on in this hearing. We will give
you that opportunity to do that now and also to confirm that that
accounting service programme is ready for rolling out and to what
extent is it ready for rolling out in 2006?
Mr Hunter: Yes. 2006 is an important
year because it is the year in which the Treasury is aiming to
ensure the completion of accounts by July 2006, bringing it forward
from the current date of 31 January. Our current accounts are
presented by the 15 November of the previous year, so we have
a slight lead over the GB situation. However, in order to complete
in accordance with the Treasury timetable of July 2006, we need
to have a far better financial management information system which
we can draw on in order to ensure early closure. The stage we
are at in respect of this better financial management system is
that we have issued an invitation to negotiate with three bidders
having explored the system with a range of potential bidders.
They have been asked to provide responses to the invitation to
negotiate by 8 October and it is our intention that we will let
the contract to the preferred bidder on the basis of the best
and final offer by March 2005. This will involve establishing
a shared service centre which will bring together—in a back
office function essentially—the finance staff across the
11 departments, providing an opportunity for substantial rationalisation
and standardisation of function using an information system, which
would be common across all 11 departments. Establishing that and
rolling out the new management information system we think will
take from April 2006 through to March 2008. We hope that we will
begin from 2006-07 to be able to produce the accounts more speedily.
Whether we will be able to meet the July date you mentioned remains
in doubt as we complete the tendering process in respect of the
new information system. David is the senior responsible officer
for this project.
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