Conclusions and recommendations
1. Departments have been successful in improving
their resource management, but a lack of financial management
skills amongst non-finance staff is a barrier to further progress.
The Professional Skills for Government Framework includes a standard
covering financial management core skills. Departments should
require senior and middle managers to demonstrate in their annual
appraisals how they meet the standard, and, where enhancement
of skills is needed, provide access to appropriate training.
2. The quality, timeliness and completeness
of resource information provided to departmental boards needs
to improve in order that boards can make better informed decisions.
More than half of departments still report financial and operational
performance information to the board separately. Departments should
produce integrated information and present it with 10 working
days of the month end, as recommended by HM Treasury, and in a
format which enables decision makers to understand how much is
being spent on which programmes and with what effect.
3. Only 41% of departments' policy proposals
always included a full financial appraisal and only 20% based
policy decisions on a thorough assessment of their financial implications.
In order to strengthen departments' focus on value for money,
each policy proposal submitted to Ministers and board members
should include a full assessment of its financial implications.
4. Between 2002-03 and 2006-07, total underspending
in excess of 5% of budgets by all departments amounted to £1.8
billion. Underspending can be consistent
with good financial management where it reflects a decision to
carry forward efficiency savings. Consistent underspending can,
however, reflect unnecessary levels of contingency preventing
resources from being used on higher priority programmes. Whenever
practicable, departmental boards should validate resource requirements
by linking them to planned levels of activity and intended outputs.
5. Since our last Report departments have
not significantly improved the reliability of their forecasting
and in-year monitoring of expenditure.
Some departments continue to produce forecasts that vary significantly
from the actual expenditure incurred only a few months later.
Where this is a consistent occurrence, the underlying causes need
to be identified and an improvement plan developed, progress against
which should be regularly reviewed by the departmental board.
6. The flexibility to carry forward unspent
funds from one year to another may no longer incentivise departments
to manage their budgets in a way that represents optimum value
for money. The Treasury has exercised
greater control over the amounts departments can use from unspent
balances brought forward from previous years. Some departments
consider that an unintended consequence of this is that there
are now insufficient incentives to avoid wasteful spending of
excess funds towards the end of the financial year. HM Treasury
needs to communicate with departments earlier and more clearly
about how much spending from previous years departments can use.
7. 19% of departments, collectively managing
assets of £23 billion, rated themselves as weak at managing
their balance sheet. Boards should review
their departmental balance sheet at least quarterly and seek assurance
as to how cost effectively significant assets, such as land, building
and equipment, are being utilised.
8. Non-executive directors have helped improve
standards of financial management, but require more support from
departments. The independent challenge
which non-executive directors can provide depends on them having
a clearly defined role and being well supported by departments
so that they have sufficiently detailed knowledge of their operations.
HM Treasury should assess how well departments have developed
clearly defined roles for the non-executive directors on their
boards, and consider how the Corporate Governance Code can be
refreshed to more effectively support non-executive directors
to challenge and support departmental activity.
9. The full potential to improve value for
money will only be realised if departments have a better understanding
of the costs of delivering their key services.
Collectively, departments must secure £30 billion of value
for money savings by 2011. If this target is to be achieved, departments
will need to have much more reliable information on the unit costs
of key outputs to gauge whether costs are reasonable and commensurate
with the quality of service delivered.
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