Ministry of Defence Annual Report and Accounts 2008-09 - Defence Committee Contents


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
IndicatorMarch 2007 March 2009
Leadership
Set directionUrgent development area Development area
Ignite passion, pace and drive Well placedDevelopment area
Take responsibility for leading delivery and change Well placedWell placed
Build capabilityDevelopment area Development area
Strategy
Focus on OutcomesStrong Strong
Base Choice on evidence Well placedWell placed
Build Common purpose Development areaWell placed
Delivery
Plan, resource and prioritise Development areaDevelopment area
Delivery clear roles, responsibilities and business models Urgent development area Development area
Manage performance Development areaDevelopment 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


 
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