2 The MoD's resources
Audit Qualification of the Department's
2008-09 Resource Accounts
4. Last year we expressed our disappointment that
the Comptroller and Auditor General (C&AG) qualified his audit
opinion on regularity and limited the scope of his "true
and fair" audit opinion[1]
on the Department's 2007-08 Resource Accounts, largely due to
problems with the Department's new Joint Personnel Administration
(JPA) system. We recommended that steps be taken to ensure that
the problems were reconciled this year. However, the MoD's 2008-09
Resource Accounts were once again qualified by the C&AG, largely
due to continuing concerns relating to the JPA system:
- material errors in the amounts
of military specialist pay, allowances and expenses paid through
the JPA system;
- insufficient audit evidence to determine whether
the income recognised by recovering the costs of certain accommodation
and food charges from the pay of Service personnel was materially
complete; and
- insufficient audit evidence to confirm the accuracy
of Service personnel numbers in relation to the reserves for the
Royal Navy and Army.
A further concern related to assets and stock balances:
- insufficient audit evidence
to support the value of certain fixed assets and stock balances
or to confirm the existence of Bowman assets.
5. This is now the third consecutive year in which
the Department's Resource Accounts have been qualified. Giving
evidence to us in November 2008 in relation to the Annual Report
and Accounts 2007-08, the Permanent Under Secretary (PUS) to the
Department, Sir Bill Jeffrey stated:
[
] there is a good prospect, and we are working
very closely with the NAO who have been extremely helpful over
this, of getting to the point where they can give us unqualified
Accounts in this respect at the end of the current financial year.[2]
This November, Sir Bill Jeffrey told us:
As accounting officer, I would say that I take these
shortcomings very seriously. I think there is a lot of effort
going on, led by the Finance Director and Terrence Jagger, but
I myself received regular reports on progress with that. I very
much hope that although some of these issues are quite intractable,
we can get to the point where we do not face qualification of
this year's accounts.[3]
6. The Secretary of State stated that while the Department
holds auditing as a high priority, operational capability has
to be the main effort:
[
] we should try to the best of our ability
to maintain the maximum degree of openness of audit that we can
in the circumstances which we face. Precisely what would anybody
have us do: give the absolute maximum effort to our current operations
and make sure that audit is a close second to that; or would they
have us have the completion and perfection of audit come above
capability in theatre?[4]
7. It
is a cause of concern to us that the NAO found the need to qualify
the MoD's Resource Accounts for the third consecutive year, particularly
given the assurances made to the Committee by both the Secretary
of State and the Permanent Under Secretary last year. It cannot
be acceptable that the MoD continues to fail to provide accurate
and sufficient audit evidence to support their accounts, both
in relation to personnel administration and stocks and assets.
8. We agree
with the Secretary of State's assessment that capability in theatre
must be the Department's first concern. However, failing to maintain
accurate and full information on personnel and to keep track of
assets such as Bowman has the potential to threaten the long-term
capability of the Department, including operational capability.
The MoD therefore needs to take urgent action to rectify the outstanding
problems; progress made on implementing the recommendations of
the NAO is welcome, but must continue in earnest, but needs to
be increased.
THE JOINT PERSONNEL ADMINISTRATION
PROGRAMME
9. The NAO found material errors in military specialist
pay, allowances and expenses, estimating that out of £1.083
billion, £268 million was paid to individuals who were not
entitled to them or whose entitlement could not be demonstrated
by supporting evidence. Additionally, there was insufficient audit
evidence for the NAO to determine if approximately £83 million
of accommodation and food charges deducted from Service personnel
pay was materially complete.[5]
There was also insufficient audit evidence available to confirm
whether the approved Estimates, as authorised by Parliament (Votes
A), with regard to the maximum numbers of personnel maintained
for service in both the full time Armed Services and Reserves
had been exceeded in respect of the Reserves for the Royal Navy
and Army.
10. This is the second consecutive year in which
the C&AG's audit opinion on the Department's Resource Account
has been qualified because of insufficient evidence to support
payments made via the Joint Personnel Administration (JPA) system
to Service personnel. In our Report on the Department's Annual
Report and Accounts 2007-08 we concluded:
It is difficult to exaggerate the magnitude of the
failure of the Joint Personnel Administration programme. At a
time when the Department is seeking, in many cases, successfully,
to deal with areas of dissatisfaction in service personnel life,
this failure, which affects pay, entitlements and service records,
is unacceptable.[6]
11. In response to our concerns, the Government stated
that it was "addressing the National Audit Office's concerns
with urgency".[7]
Giving evidence to us on this year's Annual Report and Accounts,
Sir Bill Jeffrey commented that the problems identified last year
had been resolved, but that in doing so, the new problems in relation
to specialist pay and allowances had come to light.
For last year, we had in fact addressed largely the
problems with the JPA but the consequence was that the NAO had
better visibility of the actual payments of allowances, and they
did a sample, a relatively small sample, that suggested that in
material respects we are either over or underpaying. The vast
majority of those errors were input errors. In the sample we found
only one that suggested that fraud was a factor, but it does suggest
that we have an insufficient grip on the accuracy of these payments.[8]
12. The Secretary State acknowledged that difficulties
continued in relation to the accounts:
[the accounts were] not only qualified again, but
qualified on four counts this time. We continue to have problems
with the JPA system which working with the National Audit Office
to try to sort out. There are other issues and I would hope the
Committee would have at least a degree of sympathy, although I
do not believe that you should allow us to be in any way complacent.[9]
13. The NAO recommended the Department take the following
actions:
- establish a task force to correct
pay and personnel records systematically and undertake a formal
review of the existing levels of access to the JPA system;
- complete the review of controls begun last year
to identify those that are key and to consider if further controls
are needed;
- review the management information available to
ensure it meets the requirements of all stakeholders including
budget holders on whom the Department is relying for checks on
outturn, most notably the top level budget holders ; and
- Ensure the Department can meet its statutory
requirements for reporting to Parliament on the approved estimates
for numbers of personnel.
14. The Department reports that many of these actions
are being actively pursued; a Joint Personnel Administration Assurance
and Compliance Working Group has been established "to provide
coherence across initiatives to improve and maintain data accuracy"[10],
and various reviews of existing frameworks, training and documentation
are being undertaken under the auspices of this working group,
in addition to other activities to ensure the improvement of the
system and to address the problems identified by the NAO.[11]
15. We are concerned
that the resolution of the problems in relation to the JPA that
led to the qualification of the MoD's Resource Accounts last year
has shed light on further problems. It is of great importance
that the remaining problems with the JPA system are resolved as
quickly as possible. The MoD cannot possibly hope to manage personnel
effectively with incomplete or inaccurate information and must
ensure that any further problems that arise are dealt with immediately.
ASSETS AND STOCK BALANCES
16. The Department was also unable to provide adequate
evidence to support certain fixed asset and stock balances within
the Resource Accounts, valued at around £6.6 billion. Areas
of concern included:
- the levels of assurance over
certain inventory and stock items store principally by the Defence
Storage and Distribution Agency (DSDA);
- the levels of discrepancies reported in the annual
census exercise on MERLIN/MAESTRO[12]
assets; and
- tracking, monitoring and accounting of Bowman
assets.
17. The Department's 2008-09 Resource Accounts recorded
that the MoD's Bowman assets, which form part of a tactical communications
system providing secure radio, intercom and internet services
in a modular and fully integrated system, have a net value of
£1.3 billion, equating to approximately 35,800 radio sets.
However, the Department could not provide enough evidence to support
these figures and it was only possible to confirm the existence
of approximately 89% of Bowman assets by the end of the year.
Therefore some £155 million of assets could not be accounted
for.[13] Mr Terence Jagger,
Director Financial Management for the MoD, told the Committee:
[
] the percentage the NAO quotes, which I might
point out is a huge increase on the situation they found the previous
year, is, if you like, a snapshot in time; so on 31 March, they
took a sample and asked if we could provide evidence for those.
In fact our visibility goes up and down as radios go in and out
of theatre and in and out of the repair loop. Over the last few
months of the financial year for example we have sometimes had
visibility of a greater number than that, but then, because there
was not a single database on which they were all recorded, which
was what the NAO was looking for with evidence, the NAO could
not accept the number.[14]
18. The Secretary of State defended the need to be
flexible with Bowman radios:
[
] if a vehicle fitted with a Bowman radio
is broken in theatre for whatever reason a soldier is able to
take the Bowman radio out and keep that in theatre and the vehicle
comes back to the UK for repair, for scrapping or whatever minus
its Bowman radio, That gives us a great degree of flexibility
in theatre but, nonetheless it makes it very difficult for us
to be able to prove at any one time where each and every Bowman
radio is. So there is a tension between the audit trail and our
ability to be able to prove where some quite valuable equipment
is and the flexibility that we, for quite understandable reasons,
want to give to our troops.[15]
19. The NAO recommended the Department take the following
actions:
- analyse the reasons for the
increasing discrepancies in stock counts and introduce appropriate
additional controls to ensure that stock systems are sufficiently
robust and efficient to support operational requirement, ensure
efficient stock management and provide sufficiently accurate information
for financial reporting requirements;
- complete the stock take of Bowman equipment to
establish as accurate a record as possible and formally write
off missing equipment; and
- working with the Army and its contractor, review
the procedures for accounting for BOWMAN assets including purchases,
issues, assets in the repair loop, losses, write-offs and assets
in transit.
20. The MoD told us that separate programmes are
being undertaken to address the two areas of general asset management
and Bowman assets specifically, to be overseen by a Materiel and
Financial Accounting Board. The Department hopes that these programmes
will ensure that information regarding the location of assets,
including equipment in transit, is improved, and that stock checking
and reconciliation is undertaken effectively.[16]
21. We raised the matter of tracking Bowman assets
with representatives from the Defence industry giving oral evidence
in relation to our inquiry into Defence Equipment. Dr Sandy Wilson,
President and Managing Director, General Dynamics UK Ltd commented:
there is a raft of work already ongoing to look after
assets in the field. I do not think there is a simple answer to
this. There does need to be greater integration of the existing
systems that deal with configuration management of the platforms
in theatre, linking that to some of the ordering mechanisms that
MoD uses to call up spares when they find they need them. [
]
Fundamentally, I think there needs to be a greater level of control
applied. We have got mechanisms to help do that. When JAMES comes
along - Joint Asset Management and Engineering system - so long
as it really does have embedded in it a suitable asset tracker
and configuration management system, I think we will see some
improvement. The message I would have is accelerate rather than
delay in those programmes.[17]
22. That
the MoD could not, at a given time, account for the whereabouts
of radios worth £155 million is unacceptable. While we acknowledge
the difficulties associated with tracking assets in theatre, particularly
given the deliberately flexible nature of Bowman, the MoD cannot
afford to be complacent in this matter. The security implications
associated with losing equipment such as this are significant;
having an effective audit trail is the only way to ensure that
all radios are accounted for. We hope that the development and
roll out of the Bowman And Communication Management System (BACMS)
and Joint Asset Management and Engineering Solutions (JAMES) systems
can be achieved quickly and effectively.
23. In relation to the discrepancies identified by
the NAO in their audit of general stock counts, the Secretary
of State noted the small sample taken by the NAO:
We are working with the National Audit Office to
get a better feel for the size of the problem but it maybe looks
a little worse than it is on the sample that they took. For instance,
they took a relatively small sample and they found errors in 22
per cent of the sample. Some of those errors were pretty minor
in nature, so it is not the case that there is a 22 per cent error.
There is a 22 per cent error but some of those are very small
indeed; they are very small items.[18]
24. While
the sample taken by the NAO for its analysis is not large, it
is statistically valid. It is possible that the NAO's sample had
a higher incidence of errors than is the case overall, but it
is equally possible that the opposite could be the case. We hope
that the NAO will continue to monitor closely the MoD's management
of stock, perhaps giving consideration to undertaking a broader
analysis of this problem at some future date.
Strategy for Defence
25. On 27 October, the Secretary of State wrote to
the Chairman setting out the new "Strategy for Defence".
The aim of the document was to drive strategic decision-making
throughout the MoD by linking policy to plans, resources and programmes,
and reflecting the Defence Aim and Vision. The Strategy outlines
the following as key to the direction of the MoD:
- support to operations in Afghanistan
is now the main effort for Defence;
- the next five year period to 2014 should be the
focus for real improvement in the balance between the Department's
programme and the resources available;
- providing forces most likely to be needed for
small scale overseas contingency operations should be the focus
for resource allocation other than for Afghanistan;
- given the current force levels in Afghanistan,
ambition for contingent operations limited in the short term "to
doing what we can, whenever we can, to build our capabilities";
- conflict prevention must be pursued wherever
possible;
- the strategic management of Defence will be improved
through a new framework with this strategy at its heart;
- a culture of continuous improvement will be developed;
and
- work will be conducted in preparation for the
Defence Review, taking into account lessons learned across all
areas of the Department's work.
26. In relation to the purpose of the Strategy for
Defence, the PUS told us:
The document has a number of purposes. It is partly
the fact that we believe, and I think the Defence Secretary shares
that view, that we should use the time between now and the Defence
Review usefully and that it would benefit the Department to have
the kind of top-down direction that this document represents over
that period. The other benefit of it I would argue is that it
provides a blueprint for how we communicate with the Department
once the Defence Review has been completed.[19]
27. The Secretary of State expanded on the reasons
behind the need for such a document:
The challenge that we faced, I think, in defence
[
] was when you are so fixed in one area of the contingent
task scale, as we are in Afghanistan, the Department then needs
to try and understand what next it should focus on in order to
make best use of the remaining resources. What we have tried to
do with the strategy for Defence is to give the Department that
focus. It is an additional layer on top of Defence Strategic Guidance,
and it is much more directive than other documents that we have
had in the past. Principally though, it answers to the requirements
of the Capability Review that was done on the Department more
widely, beyond Defence Strategic Guidance which the Chairman understands
is a very highly classified document, which is not available to
everyone in the Department.[20]
28. He noted that this document was "aimed at
the period to 2014 to get us to the Strategic Defence Review"[21]
and told us that the aim was for the Green Paper to inform the
Review for the period following 2014.
29. The Department has informed us that it is undertaking
a review of its top level performance management system as part
of the pre-SDR work on Strategic Management. It hoped that a new
system would become operational in the Spring "in order to
provide a baseline of strategic performance information prior
to the Defence Review".[22]
It stated:
The outline design of the new system is based on
an assessment of the utility of the current Balanced Scorecard
and Quarterly Performance Report in the context of the challenges
faced by Defence today, including, for example, the challenges
posed by enduring current operations, and in the future, and of
a survey of other performance management systems and current academic
literature.[23]
30. It
is of course vital that the MoD identifies and ensures that all
staff are aware of and working towards its key objectives and
strategic direction. We recognise that the Strategy for Defence
is designed to respond to current and short to medium term organisational
needs but are concerned that its five year declared time table
should not pre-empt or restrict the introduction of changes that
will be identified in the Strategic Defence Review. We would expect
any organisational and other management and budgetary measures
identified as part of that Strategic Defence Review to be implemented
as soon as possible and before 2014 as required.
31. While we
welcome the Department's review of its performance management
system, we hope that the outcome of this work will feed into the
SDR and we once again emphasise that new programmes must not pre-empt
the findings of the SDR.
Capability and efficiency of the
MoD
32. The Cabinet Office published an independent Capability
Review of the MoD in 2007, assessing the Department's performance
against ten indicators in three key areas: leadership, strategy
and delivery. A number of areas were identified for improvement,
including corporate leadership, a perceived "insularity"
of the MoD from the rest of Whitehall, and the Department's human
capability. In response, the Department launched a two-year streamlining
programme to address the areas of weakness identified, including
implementing changes in the Defence Board structure, and a Head
Office streamlining programme, aiming for a reduction in the size
of Head Office of 25% by April 2010.[24]
33. A follow-up to the Capability Review was published
by the Cabinet Office in March 2009. Of the ten indicators identified
in the original Review, six were unchanged, three had improved
and one had declined (see Table 1 below). The Department's Capability
Review Implementation Plan, developed in response to the areas
identified for further improvement, commits the MoD to:
- build a stronger and more visible
corporate leadership;
- develop an overarching strategy for the department;
- redouble efforts to build capability in civil
servants;
- continue to streamline departmental head office
and improve ways of working; and
- further improve relationships across Whitehall.
Table
1: Assessment of the Department's capability for future delivery
Indicator | March 2007
| March 2009 |
Leadership
|
Set direction | Urgent development area
| Development area |
Ignite passion, pace and drive
| Well placed | Development area
|
Take responsibility for leading delivery and change
| Well placed | Well placed
|
Build capability | Development area
| Development area |
Strategy
|
Focus on Outcomes | Strong
| Strong |
Base Choice on evidence
| Well placed | Well placed
|
Build Common purpose |
Development area | Well placed
|
Delivery
|
Plan, resource and prioritise
| Development area | Development area
|
Delivery clear roles, responsibilities and business models
| Urgent development area
| Development area |
Manage performance |
Development area | Development area
|
Data Source: NAO briefing for the committee, Figure
11
34. In relation to the assessment that the Department's
capability with regard to igniting passion, pace and drive had
fallen, the Permanent Under Secretary, Sir Bill Jeffrey, commented:
I think we are addressing that capability review
finding. Against it I would set the fact that the staff survey
that we undertook in February as part of a wider Civil Service
pilot put us second out of 11 departments on the measures of staff
engagement and first on the measures that tell you whether people
are really striving to succeed in their work. [
] I am very
keen to leave our existing people, whether they are in the head
office or in DE&S or, as many of them are, right out in the
front line commands and indeed overseas, in no doubt about how
highly we value their contribution because it is pretty importance
for defence.[25]
35. In the response to our written questions, the
MoD confirmed that the Department was on track to make the target
of a 25% reduction in the size of Head Office, and stated that
reductions had been achieved "by a combination of re-deploying
approximately 250 military personnel back to front line posts,
a civilian Early Release Scheme, relocations out of Central London
and natural wastage".[26]
The Department defended the need for staff reductions and change
programmes as necessary, despite the continued pressure on the
Department from current operations:
The demands of current operations, principally in
Afghanistan but including other operations elsewhere in the world,
do present a very considerable challenge for the Department. But
we must not use that as an excuse to avoid the pursuit of programmes
intended to improve the way in which the Ministry of Defence delivers.
Indeed, it is arguably more important in these circumstances that
change programmes are vigorously pursued, so as to maximise the
investment that can be made in the front line.[27]
36. The Annual Report and Accounts also states that
the MoD is on track to deliver £2.7 billion of Value For
Money (VFM) savings by 2010-11, agreed under the Department's
Comprehensive Spending Review 2007. This target was increased
to £3.15 billion in the April 2009 budget. The MoD states
that "these savings will be sustainable, cash-releasing gains
net of implementation costs", with funds going back into
"delivering our primary objective of success on operations".[28]
At the end of the year the Department had achieved approximately
£650 million of savings. In written evidence to us, the MoD
assured us that, despite the increasing costs of equipment and
current operations, it was confident of meeting its VFM target:
The VFM delivery profile is not linear. In some cases
this is because costs are netted off up front, in other cases
it is because of the nature of the initiative. Our Autumn Performance
report stated MoD had achieved in the order of £1.2Bn of
VFM savings in the first 18 months. We are on track for delivery
of around £2.0Bn savings by the end of the current financial
year. As such we are firmly on track for delivering the original
£2.7Bn VFM target.[29]
The Department stated that further work was being
done to achieve the further £450M savings announced in the
April 2009 Budget.
37. While
improvements have been achieved, work to implement the Department's
Capability Review Implementation plan quickly and effectively
must continue, and areas of previously good performance cannot
be allowed to slip. It is vital that staff reductions and Value
For Money savings are achieved without impacting directly or indirectly
upon frontline capability and contingent readiness.
Data protection
38. In our Report on the MoD Annual Report and Accounts
2007-08 we expressed concern about the MoD's involvement in incidents
of data loss and requested "clear and full information on
progress to date in limiting or preventing such incidents in the
next Annual Report and Accounts".[30]
Following the publication of Sir Edmund Burton's report into the
loss of MoD personal data and the Cabinet Office Data Handling
review, the MoD became one of only two Departments to have enforcement
action taken against them by the Information Commissioner's Office
in 2008 for breach of Data Protection requirements.[31]
The Department must now comply with the terms of this notice,
publishing yearly progress reports. The first of these was published
in April 2009.[32]
39. The MoD was able to report "good progress"
in implementing the recommendations of the Cabinet Office Data
Handling Review, and as of 31 March 2009 had implemented 41 out
of the 51 recommendations of the Burton report. The Department
has also established a new Chief Information Officer, whose role
is to support the management of information across the Department.
According to written evidence to us, over 90% of staff have now
undertaken Protecting Information training.[33]
40. However, there were eight data related incidents
reported to the Information Commissioner's Office in 2008-09,
the details of which are listed in the Departmental Resource Accounts.
Seven of these incidents involved the loss of personal data, four
of which affected between 90 and 1200 individuals. The three other
incidents potentially affected several thousand, with the most
serious incident, the possible theft of a portable hard disk containing
sensitive personal data from secured contractor premises, estimated
as potentially affecting up to 1.7 million people. This compares
to just two, albeit high profile, incidents in 2007-08. The MoD
commented:
The figures reported in the Annual Report and Accounts
relate to losses of personal data between April 2008 and March
2009. This period straddles the publication, in June 2008, of
both Sir Edmund Burton's Report and the Cabinet Office Data Handling
Review. Publication of these reports increased awareness across
MoD of the importance of personal data and the requirement to
report incidents involving its loss. The increase in figures can
partly be attributable to this factor.
Another significant cause of an increase in figures
was the measures the Department took to implement the recommendations
of the two reports. For example conducting audits of holdings
to removable media brought to light instances where items that
may have contained personal data could no longer be accounted
for.[34]
41. The
MoD has a poor record of compliance with data protection legislation.
Whilst we are encouraged by the progress that has made in implementing
the recommendations of Sir Edmund Burton, there continue to be
too many incidents of data loss. The heightened number of incidents
reported in the last year highlights the severity of the problem
and the need for the MoD to continue to be aware of and to manage
the risks more robustly. Unless it becomes evident by the time
of the next annual report that progress has been made, we recommend
that a champion to drive this important area of policy is appointed
at ministerial level.
1 Alimitationofscopeisgivenwheretheauditorhasnotbeenabletoobtainsufficientandappropriateevidencetosupportmaterialbalancesintheaccounts.Anamountis"material"ifitsomissionormisstatementcouldaffecttheunderstandingordecisionstakenbytheuseroftheaccounts. Back
2
Defence Committee, Fifth Report of Session 2008-09, Ministry
of Defence Annual Report and Accounts 2007-08, HC 214, p 12 Back
3
Q 2 Back
4
Q 126 Back
5
National Audit Office briefing for the House of Commons Defence
Committee, October 2009, Performance of the Ministry of Defence
2008-09. Available at www.nao.org.uk Back
6
HC (2008-09) 214, p 8 Back
7
Defence Committee, Second Special Report of Session 2008-09, Ministry
of Defence Annual Report and Accounts 2007-08: Government Response
to the Committee's fifth Report of Session 2008-09, HC 534
Back
8
Q 2 Back
9
Q 113 Back
10
Ev 33 Back
11
Ev 39 Back
12
The Management of Equipment Resources, Liabilities and Information
Networks (MERLIN) is a system for tracking vehicles and the Managing
Assets for Equipment support, Transactions, Records and Occurrences
(MAESTRO) is a system for tracking deployed Army assets. Back
13
National Audit Office briefing for the House of Commons Defence
Committee, October 2009, Performance of the Ministry of Defence
2008-09, p. 50, Available at www.nao.org.uk Back
14
Q 19 Back
15
Q 116 Back
16
Ev 39 Back
17
Oral Evidence taken before the Defence Committee on 8 December
2009, HC 99-ii, Q 392 Back
18
Q 114 Back
19
Q 31 Back
20
Defence Committee, Fourth Report of Session 2009-10, Readiness
and recuperation of the Armed Forces: looking towards the Strategic
Defence Review , HC 53, Q 431 Back
21
Ibid., Q 432 Back
22
Ev 46 Back
23
Ev 46 Back
24
National Audit Office briefing for the House of Commons Defence
Committee, October 2009, Performance of the Ministry of Defence
2008-09, p 42. Available at www.nao.org.uk Back
25
Q 108 Back
26
Ev 32 Back
27
Ev 44 Back
28
Ministry of Defence, Ministry of Defence Annual Report and
Accounts 2008-09, 20 July 2009, HC 467, p 94 Back
29
Ev 44 Back
30
HC (2008-09) 214, p 18 Back
31
ICO Press Notice 25 June 2008 available at www.ico.gov.uk Back
32
Ministry of Defence, MoD Report on progress against data handling
recommendations as at 31 March 2009, 21 April 2009 Back
33
Ev 45 Back
34
Ev 44 Back
|