House of Commons - Liaison

Select Committee on Liaison Second Report

4 Financial reporting

41. Clear, comprehensive, accurate and timely information about the Government's revenue and expenditure is fundamental to Parliament's financial scrutiny. The problem at present is the clarity and comprehensiveness of the information provided. Parliament is not currently receiving the information required for effective financial scrutiny.

42. We emphasise that what we are calling for in this chapter is not necessarily more financial information. What is needed is better-quality financial information, more suited to the needs of Parliament and in particular to the purposes set out in paragraph 9 above.

43. Some of the problems concerning information may be remedied by the Alignment Project. Reduced complexity in the financial system should make the financial information provided easier to understand, and the Project will also address the number and types of financial document provided (possibly reducing them to two consolidated documents per year in December and June) and the language used in them. But we believe any changes need to be based on a fundamental reconsideration of the character of the financial information needed by Parliament to do its job.

44. Since scrutiny of the Government's finances is fundamental to parliamentary democracy, it is up to the House to determine what financial information it requires to do its job effectively and, if necessary, to insist on that information being provided. But we envisage a process of constructive dialogue with the Treasury over this, in the context of the Alignment Project.

The problem

45. Like the different aspects of the financial system, different aspects of financial reporting have developed to meet specific needs, without much consideration of how they relate to each other. One aspect of this is the sheer number of reporting documents, set out in Table 1 above. Another is the fact that the figures in one cannot easily be related to those in another, for reasons already discussed. But in some cases the information just happens to be presented in an unnecessarily unhelpful way.

46. The prime example of this is Supplementary Estimates. They are of great length (e.g. 536 pages for the 2007-08 Winter Supplementary Estimates).[25] The problem is not only that they lack a useful table of contents, index or logical principle of arrangement (such as alphabetical). More seriously, while they show changes in particular sub-heads, it is extremely hard to deduce the significance of these changes and virtually no indication is given of the reasons for the changes. Estimates Memoranda for select committees were introduced in 2004 to explain the changes and how they related to spending limits and departmental targets, and have been a welcome innovation, though in our Report of 2006 we sought to ensure that Departments made them more consistently helpful.[26] In October 2007 the Treasury issued new guidance on Estimates Memoranda which may result in improved quality.[27] Nevertheless, in practice select committees rely heavily on the Committee Office Scrutiny Unit to explain the significance of Supplementary Estimates.

47. There is a more basic reason why some current financial reporting is not helpful for scrutiny, which is that it exists primarily for the purposes of financial control or audit. This sort of information is essential, and effective processes of financial control and audit are fundamental, but it is not the only information needed for scrutiny.

What is needed

48. We set out here the principles which we believe should underlie the Government's financial reporting to Parliament:

it should include the sort of information which a Department's managers, including ministers, use to monitor the Department's performance, rather than just financial control and audit information;

it should enable an overall view of planned expenditure;

it should highlight the significant information, especially major changes within years or from one year to another (since these are usually what is politically significant) and substantial underspends and overspends, rather than cocooning such information in a mass of detail;

it should present information in such a way that it can be related to objectives and eventually to what has been achieved by spending the money (with commentary in due course on the relationship between the planned and actual outcomes);

it should identify key risks in relation to the Department's budget and objectives;

it should present information graphically where this would make it easier to understand;

it should be provided in time for select committees to scrutinise it before decisions are taken on it by the House;

it should use plain English as far as possible; and

it should provide the information needed to assess the quality of financial management.

49. On that basis, the budget for a Department would provide the following at the start of the period covered:

a clear view of the overall budget and its allocation, including any control totals such as administrative costs;
costs presented by objective;
information on trends (this is already provided, but could possibly be presented as graphs);
planned outputs and targets;
unit costs of key activities and outputs where identifiable, with benchmarking if possible;
highlighting of significant changes from the previous years and anything unusual, with explanations;
identification of key risks; and
explanatory notes comparable to the better Estimates Memoranda, drawn up in accordance with clear guidelines.

Most of these requirements also apply to budgets for the Government as a whole.

50. Subsequently, for the period covered by the budget, Departments should provide the following information:

changes in the budget within the year, identifying the sources of funding for any additional expenditure;

variances during the year from planned spending profiles (beyond a defined threshold such as 10% or a particular sum), covering under-spends as well as over-spends,[28] perhaps quarterly; and
outturn information which can be clearly related to the earlier plans, with explanations where necessary (which would require some Departments to improve their own financial information systems).[29]

51. Clear definitions of what must be reported, and consistency between Departments, will be essential. In all cases the commentary is as important as the numbers.

52. In addition, Members should be able to examine how Departments manage their finances, so as to be able to assess the effectiveness of that financial management and to question managers within Departments from a position of knowledge. We recommend that each Department publish an annual statement in plain English about its internal financial planning processes and control mechanisms. We note that the annual audit and inspection letters sent by the Audit Commission to local authorities are published,[30] and we recommend that the management letters provided to Departments by the National Audit Office identifying areas of significant weakness in financial control be published by Departments.

53. It would of course be inappropriate in 2008 to regard financial control and reporting as a primarily paper-based process. The fact that it is not may offer new opportunities. We believe that Departments should move towards a system where data in their electronic management accounting and information systems are accessible to Members and Members are able to interrogate that data.

Information on revenue

54. On the tax side, we believe that, in addition to what is currently provided, the House should receive:

the forecasts which ministers receive of revenue profiled monthly over the year, which would make it possible to examine whether revenues from particular tax streams were as planned in each month;

monthly outturn data on individual tax streams (monthly information is made public on the ONS website and annual information in the HMRC Trust Statement, but such data could be made more easily available);

monthly information on the variance between plans and outturn (this information is currently available only on an annual basis); and

information on the costs and administrative burden for taxpayers of each tax stream, to supplement data currently produced annually (in HM Revenue & Customs' Autumn Performance Report) on ratios of revenue to cost.

55. We urge the Government to make more consistent use of the Pre-Budget Report as a means of consultation about its revenue-raising plans.[31]

Other types of information

56. Scrutiny of Private Finance Initiative (PFI) schemes is difficult because contracts are regarded as commercially confidential, and select committees have tended to avoid inquiring into them in the expectation that the necessary information will not be forthcoming. Claims of confidentiality can also be a problem as regards financial information on other projects, such as large IT projects. However, we note that the UK Information Commissioner and the Information Tribunal have rejected arguments that contracts between a public authority and a commercial organisation are necessarily wholly exempt from disclosure as commercially confidential and ruled that such contracts should be disclosed in response to Freedom of Information requests unless there would be prejudice to the commercial interests of one of the parties,[32] and that Scotland's Information Commissioner has ordered the disclosure of most of the terms of a PFI contract.[33] Special arrangements are made for the NAO to see information about PFI schemes on a confidential basis, and we recommend that provisions similar to those relating to the NAO be made in PFI contracts to enable the Government to pass information to select committees. It is inherent in the House's right to control expenditure that the House and select committees should have access to sufficient information about PFI contracts to make possible an assessment of whether they offer value for money, of the extent to which public bodies are locked into long-term commitments and of the extent to which risk is transferred to the private sector or retained within the public sector.

57. Similar considerations apply to Efficiency Reviews, in which the efficiencies achieved by Departments under the Gershon programme are assessed. These are regarded as confidential, but we welcome the fact that the Government has been willing recently to let select committees see these in confidence.

58. It need hardly be said that the quality and availability of financial information from Departments' associated public bodies and other recipients of public money should be as good as that from Departments themselves. We received some information, for example in respect of the Culture, Media and Sport Committee, concerning problems in obtaining financial information. A code of practice for Non-Departmental Public Bodies would be worthwhile in due course, based on the standards set for Departments.

Language

59. We welcome the fact that the Alignment Project will examine the language used in the financial information provided to Parliament with the aim of making it more easily comprehensible. We emphasise the importance we attach to this, and our willingness to depart from established terms if replacing them promotes clarity and understanding and does not create new uncertainties.

Conclusion

60. We believe improved financial information combined with increased scrutiny by select committees would be a powerful influence in raising the quality of Departments' financial management. Select committees, the House and the Treasury have a common interest here.

61. We have called in this chapter for a major overhaul of the financial information provided to Parliament and the principles underlying it, in accordance with the aims set out in paragraph 9 above and with the aim of improving the quality of financial information rather than necessarily increasing its quantity. We recognise that much detailed work will be needed on this, and that it will take time, depending partly on the progress of the Treasury's Alignment Project. We invite the Treasury to enter into dialogue with us about how our proposals should be implemented, and suggest that testing them first on a single Department or several Departments may be the best way forward.

25 HC 29 (2007-08). For shortcomings, and recent improvements, in Departmental Annual Reports, see the Committee Office Scrutiny Unit's review of the 2007 Reports (www.parliament.uk/parliamentary_committees/scrutinyunit/reviewofdr2007.cfm). Back

26 Liaison Committee, Third Report of 2005-06, Estimates Memoranda, HC 1685 Back

27 HM Treasury, Supply Estimates: a Guidance Manual (Oct 2007), Annex 6.F Back

28 See National Audit Office, Managing Financial Resources to Deliver Better Public Services, HC 240 (2007-08), para 4.10, for lack of scrutiny of under-spends. Back

29 Ibid., para 3.7 Back

30 www.audit-commission.gov.uk/asl/lg2007.asp Back

31 See Treasury Committee, Second Report of 2007-08, The 2007 Pre-Budget Report, HC 54, paras 74-6; Treasury Committee, Seventh Special Report of 2007-08, The 2007 Pre-Budget Report: Government Response to the Committee's Second Report of Session 2007-08, HC 429, p.10. Back