Letter from Sir John Gieve KCB to the
Chairman of the Committee
Dear Mr Leigh
You have asked me to appear before the PAC next
week on the Home Office Accounts for 2004-05. I though it might
be helpful to the Committee if I set out briefly in advance my
understanding of what went wrong.
First I should say that, as the Permanent Secretary
until December, it was my responsibility to ensure that the Home
Office kept proper accounts and submitted them in good time for
audit to the Comptroller and Auditor General. I apologise to you,
and through you to Parliament, for our failure to do that last
year.
The C&AG's Report sets out the reasons for
his decision to qualify the accounts. In short the problems arose
with the Home Office's departmental accounting systems and particularly
in key reconciliations in the books relating to the central department
(rather the Prison Service, Probation Service or other agencies).
These fed through into the consolidated accounts for the whole
departmental group. In examining what went wrong, I think there
are two main questions:
1. What were the initial problems in 2004-05
that led to difficulties in drawing up the accounts at the end
of the year;
2. Why didn't our wider control systems
identify how serious these difficulties were in good time for
remedial actions?
The C&AG's Report describes some of the problems we encountered
in switching to a new accounting system in 2004-05. So far as
I can tell there is nothing wrong with the new system itself;
it offers greater efficiency, better management information and
financial control. It is a standard Oracle product which was configured
to fit the Home Office with the minimum of changes. I gather that
the latest Gateway review of the projects (which includes HR and
procurement as well as accounting modules) is positive. However,
the transfer to a new system always carries risks and, in this
case, these were compounded by four problems:
(a) In order to give extra time to test the system, we
decided to delay the move to a new system from April 2004, at
the start of the financial year, to May. Therefore, in addition
to transferring the starting balances from the 2003-04 accounts
onto the new system, staff needed to transfer the movements in
the accounts in April on the old system, on to the new Adelphi
system. This led to significant errors and omissions.
(b) There was a failure in the link to the national BACS
payments system through which the Home Office, like most employers,
pays its staff and makes other regular payments. This led to the
refusal of a large number of payment orders which registered in
the accounts as payments and receipts (the total amounts were
£380 million and the removal of that sum from both sides
of the ledger accounts for a substantial part of the £946
million gross adjustments noted in the C&AG's Report). Accounts
staff had to process many thousands of payments manually.
(c) We took advantage of the change in the system to cut
back our list of suppliers for example by excluding those who
had not been used recently; in practice we over-cleansed the database
(reducing it from 44,000 to less than 10,000); as a result a large
number of payments had to be made manually by accounts staff.
(d) A failure in the connection between the system used
by staff to claim expenses and Adelphi led to a large backlog
of expenses claims which had to be cleared manually.
Dealing with these difficulties gave the staff less time
to concentrate on the normal accounting processes. They were faced
with the task not just of operating the new system in steady state
but simultaneously of making substantial corrections to the past
records. This proved beyond them and, as the C&AG notes, some
of their attempts to put matters right led to further errors in
the accounts. The accounts branch's capacity to deal with the
problems was reduced in October 2004 when its experienced manager,
who had managed the improvement over the previous years from heavily
qualified accounts to a clean audit in 2003-04, moved to a new
post; his replacement was less familiar with the staff, the accounts
and the systems. The bank accounts were not fully reconciled during
the year and the underlying difficulties were then compounded
by the use of an inexperienced team to draw up the draft accounts.
As a result the September draft of the Consolidated Accounts was,
as the C&AG reports, full of errors.
The fact that we, like many other organisations, ran into
difficulties in transferring to a new accounting system is not
particularly surprising. Why didn't we spot how serious the difficulties
were in time to put matters right?
The simple answer is that both the line managers and the
other cross checks did identify the problems but persistently
underestimated how serious they were and how much work was needed
to put them right. In effect, they judged that these were teething
difficulties with a new system which would be overcome before
the accounts had to be submitted. Extra resources were put into
the accounts branch but they were not enough to complete the repair
work which, as became clear in the autumn of last year, required
a systematic check through hundreds of thousands of book entries.
The fact that the staff working on the accounts were in Liverpool
while the senior managers were in London made it less easy for
the latter to assess the situation. In addition they were no doubt
encouraged by the fact that the 2003-04 accounts received an unqualified
audit opinion after many years of qualifications. The fact that
the process of preparing the accounts had run right up to the
end of the allowed timescale in previous years meant that the
delays in closing the accounts in 2005 did not itself ring great
alarm bells.
While it is primarily a line management responsibility, the
Home Office has a number of cross checks to pick up failure in
controls and systems: in particular internal audit, external audit,
internal project management reports and external OGC Gateway reviews.
In April 2005, the Home Office was also subject to a Treasury
review of financial management which reported positive progress
and did not flag concerns over the accounts.
Internal audit reviewed the new accounting system in December
2004/January 2005 and noted that the performance of key reconciliations
was not being carried out properly. A remedial plan was drawn
up by management who asked internal audit to carry out a follow
up review in March/April. The results of both reviews were reported
to the April Audit Committee. The follow up review noted that
a further software fix was required to reconcile the bank account
fully but concluded that, `the majority of the proposed actions
had been completed and good progress had been made in resolving
these issues to a satisfactory conclusion. A further follow up
visit is proposed for autumn 2005.'
At its meeting on 14 July, the Audit Committee was told that
there had been delays in finishing the 2004-05 resource accounts
for the core Home Office but that the, "situation should
be resolved within the next couple of weeks and should not delay
the NAO with the audit." The NAO, which is represented at
these meetings, confirmed that, "the audit work had started
and although there had been some slippage it was not causing any
real concern."
External audit is not responsible for producing the accounts
but an NAO team work regularly in the Home Office, attend the
Audit Committee and have regular meetings with the Finance Director
and other senior managers . If they had believed that there were
fundamental problems with the 2004-05 accounts they would have
alerted the Home Office to them. They raised concerns in October
2005 following the receipt of the flawed draft accounts. Even
then both they and the finance ream hoped it would be possible
to correct the errors in time for the statutory deadline in January
(indeed the NAO concluded that it would not be possible to produce
an unqualified opinion only in mid-January). The situation was
explained and discussed in the November Audit Committee after
which the C&AG wrote to warn me formally that he might have
to qualify the accounts.
The Adelphi programme was subject to four OGC Gateway reviews
including two before the signing of the contract in 2003, one
before the decision to implement the accounting modules in 2004,
and one to a follow up on benefit realisation in early 2006. These
reviews did not identify anything calling for the project to be
halted and the recommendations that were made were acted upon.
Project management reports on all the Home Office's main
projects are submitted each month to the Home Office Board so
there were regular reports on Adelphi—the project to replace
our financial and HR systems. These reports were based on material
considered by the Adelphi Programme Board. Through 2004 and 2005
they focused on a number of difficulties in implementing the HR
and procurement modules but did not report fundamental difficulties
on the accounting modules once those had gone live in 2004. Indeed,
as late as 12 October 2005, a report I had commissioned, and which
had been cleared with the relevant managers, stated badly, "a
full year's accounts were produced on Adelphi for 2005-05 and
these will not be qualified."
As a result, it became clear to the Board, the chair of the
Audit Committee and to me that there remained serious flaws in
our accounts for 2004-05 only in late October 2005, right up against
the deadline for submitting the signed accounts to the C&AG.
Both the Department and the NAO worked hard to retrieve the position
and new draft accounts were produced by 14 December with supporting
papers by 16 December but in January the NAO concluded that they
did not have enough time to carry out the checks they thought
necessary before the statutory deadline.
I know that the Home Office and the NAO have done a great
deal since then to try to ensure that the cash reconciliations
are completed, the balance sheet as at 31 March 2005 is validated
and thus that the problems in the 2004-05 accounts do not carry
forward into those for 2005-06.
Sir John Gieve KCB
23 April 2006
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