Select Committee on Public Accounts Sixtieth Report


1  Failure to deliver accounts to statutory reporting timetable

1. With a complex and diverse portfolio covering immigration, offender management and the police, and an annual budget of approximately £13.5 billion,[4] the Home Office needs an effective accounting system and robust financial controls to ensure proper stewardship and accountability for public funds. The Home Office only implemented an automated accruals accounting system, using Oracle software, in 2004 despite the fact that the Government first committed in 1994 to use resource accounting and budgeting as the basis of public expenditure planning and financial reporting to Parliament. Prior to implementation, the Department had been alerted to the risks inherent in introducing its new integrated finance, human resource and procurement system (the Adelphi system). In 2001-02[5] and 2002-03,[6] the National Audit Office drew attention to the key risks which could damage successful implementation of the project. The OGC Gateway Review process also identified key risks. Many of these risks crystallised, however, when the accounting module of the new system was implemented in May 2004, causing severe difficulties (Figure 1). As a result the Home Office was unable to produce proper accounts within the statutory timetable.[7]

Figure 1: Key problems affecting accounts production encountered during Adelphi implementation
Issue Details
Delayed implementation8 Implementation was planned for 1 April 2004. Transferring balances from the old system to Adelphi encountered problems and implementation was delayed until 4 May 2005 as a result.
Failure of BACs automated payments[8] Refusal of around £380m payments and receipts necessitated manual processing.
Cleansing of suppliers' list8 Deletions were made to the suppliers list which related to bona fide suppliers and were not duplications. As a result, a large number of payments required manual processing as supplier details were no longer on the system.
Failure of expenses connection8 A large backlog of expense claims had to be cleared by manual processing.
Staff training[9] Training was not on a timely basis.


Source: Home Office, National Audit Office

2. The Department implemented standard Oracle software without major technical customisation, which significantly reduced the risks generally associated with such adaptations. The Home Office did not, however, carry out sufficient assessment of the risks, particularly in respect of audit trails, transaction history and monitoring of access to the database.[10] Without these facilities, the system was seriously compromised.[11]

3. The Home Office was unable to reconcile its bank records with its accounting records throughout the 2004-05 financial year,[12] due to difficulties in implementing the new accounting system. Bank reconciliations are a fundamental and essential control over cash to make sure that income and payments recorded in an organisation's bank account match its accounting records. Matching also provides assurance about debtor and creditor balances (amounts owed to and by the Department) and can prevent and detect fraud and error.

4. Initial attempts to reconcile the Home Office's cash at the bank with its accounting records identified a difference of £3 million which the Home Office then wrote off as administration costs without further investigation or discussion with the auditors or the Audit Committee.[13] The Department had not realised that failure to reconcile cash fully could ultimately undermine its ability to provide Parliament with fully audited accounts.[14] Further work to identify the reasons for the unreconciled amount was not done until November 2005.[15] The main cause of the difficulties were failures in the BACS[16] payments facilities, together with a lack of full implementation of the daily, weekly and monthly control processes by the team operating the cash management module.[17] The Department's inability to maintain good books and records and Home Office's failure to provide its accounts in sufficient time to enable completion of audit work resulted in the Comptroller and Auditor General being unable to reach an opinion on the truth and fairness of the Home Offices 2004-05 resource accounts, so he disclaimed an audit opinion. The result is that the Home Office cannot say with any certainty how much it spent in the year, what debts it was owed and owed to others and what assets it owns; there is no assurance that all expenditure incurred in the year by the Home Office was in line with what Parliament authorised; and financial information provided by the Home Office is unreliable. Both the current and former Permanent Secretaries apologised for this state of affairs.[18]

5. Since the introduction of resource accounting in 2001-02, the Home Office has received only one clear opinion on its financial statements, in 2003-04. In his Report on the 2002-03 Accounts, the C&AG questioned the Home Office's commitment to implement resource accounting successfully.[19] The day-to-day responsibility for production of the accounts was devolved to junior staff supported by unqualified staff, with little senior oversight. The Home Office acknowledged that it needed to address these issues and consequently commissioned a review, carried out by Ernst and Young, of the factors that led to the failure to prepare proper accounts 2004-05.[20] The Home Office has increased the number of full-time qualified accountants involved in the preparation of the financial statements from three to nine, but it also needs to make sure that the organisation as a whole is generating information of sufficient quality for them to use effectively. The Department told us that managers now have sight of all stages of the accounts production process, although it acknowledges that it has further work to do and is putting in place arrangements to improve the process for 2005-06.[21]


4   Spring Supplementary Estimates (HC 827, Session 2005-06), p 138 Back

5   C&AG's Report, Home Office Resource Accounts 2001-02 (HC 364, Session 2002-03), para 27  Back

6   C&AG's Report, Home Office Resource Accounts 2002-03 (HC 193, Session 2003-04), pp 66-67 Back

7   Q 3 Back

8   Ev 19-20 Back

9   Home Office Resource Accounts 2004-05 (HC 826, Session 2005-06), p 26, para 14 Back

10   Ev 34-37 Back

11   Home Office Resource Accounts 2004-05 (HC 826, Session 2005-06) paras 21-22 Back

12   Qq 73-74 Back

13   Ev 35, para 6.2 Back

14   Ev 19-20 Back

15   Ev 36, para 6.3 Back

16   Banks Automated Clearing System, an electronic means of making payment Back

17   Q 129 Back

18   Qq 4, 6 Back

19   Home Office Resource Accounts 2002-03 (HC 193, Session 2003-04), para 31  Back

20   Q 132 Back

21   Q 22 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 21 July 2006