Select Committee on Liaison Scrutiny Unit Review Memoranda

3  Financial reporting

3.1  Background

30.  All DARs must contain a set of core tables detailing public spending, resource and capital budgets, capital employed, administration budgets and staff in post. In addition, for those departments for which expenditure can be analysed at a sub-national level, there is a new requirement to produce three tables covering constituent country and regional spending in the UK.

31.  The purpose of these core tables is to explain clearly what the department is spending its money on. As such, where appropriate the main functions of the department should have separate lines within the tables, usually grouped under the department's objectives. More generally, Treasury guidance states that:

As a matter of good practice reporting should seek to inform readers about how resources have been divided between the department's differing objectives, and bring out the links between financial performance, spending allocations and service outcomes.[5]

3.2  Presentation of financial information

32.  The presentation of financial data in the annexes of the DARs generally complies with Treasury guidance. The figures could be improved, however, with accompanying notes detailing the reasons for significant resource and capital expenditure variations. Box 8 highlights examples of absent information in the Department for Work and Pensions (DWP) and Cabinet Office (CO) reports.[6]

BOX 8: LACK OF EXPLANATION ALONGSIDE FINANCIAL TABLES

3.3  Financial management

33.  There are several significant differences between estimated outturn figures presented in departments' annual reports and actual outturn figures. While estimates are, by definition, subject to error, the magnitude of some of the variances casts doubt upon the effectiveness of departments' financial management systems. Box 9 provides examples from both 2004 and 2005 annual reports.[7]

BOX 9: VARIANCES BETWEEN DEPARTMENTS' ESTIMATES AND ACTUAL FIGURES

34.  The failure to report on, and provide explanations for, such discrepancies means that the reader is unable to determine whether they are the result of unforeseeable events or whether they highlight fundamental flaws in departments' financial management.

35.  The Treasury is currently finalising financial management reviews of each of the departments. We have suggested that committees request copies of the findings, both as a means of discovering how robust departments' systems are and in order to hold departments to any suggested improvements.

3.4  Linking expenditure to objectives

36.  There is a common failure across the DARs to adequately link expenditure to objectives, making it difficult to determine how resources relate to performance and difficult to read across to other financial documents such as the Main Estimates and Public Expenditure Statistical Analyses. It is not enough to measure a department's performance in terms of its ability to achieve PSA targets: it is important to also know at what cost the target has been met.

37.  While at the aggregate level it is possible to determine whether the department is working within its budget, at the micro level the only means of linking the cost of programmes to the benefits achieved is by reference to the core tables in the DAR. If these are not adequately detailed, the reader is unable to make a full assessment of performance. Box 10 presents the example of DEFRA.[8]

BOX 10: FAILURE TO LINK EXPENDITURE TO OBJECTIVES (DEFRA)

38.  As discussed in Section 2.1, Treasury guidance on the linking of expenditure to objectives is somewhat open to interpretation. The Scrutiny Unit therefore suggests that reporting resources by objective should be made mandatory in the core tables, and we will be entering into discussions with the Treasury on this point.

39.  Related to this failure to link expenditure to objectives, the DARs invariably fail to provide any cost-benefit analysis of initiatives entered into during the year or planned for the next twelve months. Without such analysis it is not possible to determine how these programmes support achievement of targets, nor at what cost. All departments are guilty of this to a greater or lesser degree, but Box 11 provides a number of examples from the Home Office report for illustration.[9]

BOX 11: FAILURE TO PROVIDE COST-BENEFIT ANALYSIS FOR NEW PROGRAMMES (HO)

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5   HMT, Public Expenditure System: Guidance for the Spring 2005 Departmental Reports, PES (2004) 19, 30 November 2004, para 15 Back

6   DWP, Departmental Report 2005, June 2005, Table 1; Cabinet Office, Departmental Report 2005, June 2005, Tables 5 & 6 Back

7   DEFRA, 2004 Departmental Report, p233 & 240; DEFRA, 2005 Departmental Report, p277 & 284; FCO, Departmental Report 2004, p179; FCO, Departmental Report 2005, p217; Cabinet Office, Departmental Report 2005,p57; Cabinet Office, Annual Report and Resource Accounts 2004-05, July 2005, p23 Back

8   DEFRA, Departmental Report 2005, June 2005 Back

9   Home Office, Departmental Report 2005, June 2005 Back

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Prepared 19 May 2006