Conclusions and recommendations
1 The Department has a history of significant
under-spending in recent years, exposing a culture of weak financial
stewardship, a lack of financial skills to monitor budgets effectively
and a lack of trust in its financial information.
It recognised the need to take action and set up its 'Five Star
Finance' project with a series of targets and milestones to measure
improvement. The Department has made significant progress in the
last two years towards having reliable high level financial oversight
of its business. Monthly produced Key Performance Reports now
highlight variations in spending and enable FCO to take prompt
action. The Committee notes the assurances made by FCO that following
completion of the Project, all the processes and practices will
then be embedded into 'business as usual' activities. The Department
needs to ensure completion of the Project by July 2010 and that
momentum is maintained.
2 The Committee is pleased to note that the
Department has acted upon previous recommendations made by our
predecessors on this Committee and has recruited a qualified finance
director to sit on the Board, which has had a number of positive
impacts on the Department. The benefits
include driving up skills, increasing the understanding across
the organisation of the importance of good financial management,
improving confidence in the numbers leading to better informed
decisions, and the ability to manage budgets actively and produce
better quality annual accounts on a more timely basis. The Department
should increase further the level of qualified finance staff and
monitor its progress in increasing financial awareness throughout
the organisation, especially across its global network.
3 The Department has improved its financial
management by allocating budgets before the start of the year,
with budget holders reviewing costs allocated to them and challenging
unfamiliar items. The Department should
aim to move to the next level of good practice, where mispostings
are rare and its staff become more confident in the financial
forecasts they produce.
4 The Department has not yet made effective
use of activity recording to ensure that its operations and policies
are fully costed. Although the Department
has made some progress, it should take further action to implement
a workable and effective system of costing activity in all locations
to enable it to make informed decisions about its operational
priorities in a very tight fiscal situation. The Department should
also benchmark costs and identify regional variations to help
drive efficiency, and should make its charges to other government
departments for the use of its facilities more transparent and
understandable to help encourage joined-up working overseas.
5 The Department has a history of poor forecasting
of its expected spend and also of under-spending against its budget.
After incurring a significant under-spend in 2007-08, the Department
exerted better in-year control of spending in 2008-09, so that
it spent within 1% of its budget for 'controllable' costs. Although
the Department appears now to have a good level of financial discipline
over the spending it controls within each financial year, it needs
to improve the accuracy with which it forecasts expenditure which
is harder to control, such as changes in the value of its estate.
It should identify what practical actions it could take, such
as moving forward the dates for valuation of fixed assets, so
that appropriate provision for cost movements can be made in time
for the Spring Supplementary Estimates.
6 The relative weakness of sterling in the
last year or so against foreign currencies has significantly reduced
the Department's purchasing power. The
Department has had to re-prioritise expenditure and make further
efficiency savings to stay within budget. In all, the Department
is exposed to the effects of currency fluctuations against over
120 currencies, including the US dollar, euro and yen. This is
not an issue peculiar to the Foreign and Commonwealth Office and,
with input from the Treasury, it should work alongside other departments,
such as the Ministry of Defence and Department for International
Development, to identify the most effective way to manage exchange
rate risk for the government as a whole.
7 The Committee is of the opinion that historic
residences, which are national assets, should not be sold off
for money saving reasons and was pleased to note that the Department
has no plans to do so. The Department
confirmed that it was its standard practice to make best use of
its assets, exploiting opportunities for commercial use of properties
where available. The Committee welcomes the appointment of a professionally
qualified Estates Director and looks forward to the forthcoming
C&AG's report on the Department's Estates, which is expected
to be published early in 2010.
8 The level of fraud uncovered at overseas
posts has reduced to a relatively low level because of improvements
made in the Department's financial management procedures and practices.
The Department needs to continually test the adequacy of its processes
for preventing and identifying fraud against its assessment of
the risk, recognising that the types of fraud may change over
time.
9 The Department recognises that it has not
always had a workforce that reflected the diversity of the population
of the United Kingdom. It aims through
its current recruitment policy to create a workforce which is
representative of modern Britain and monitors the diversity of
its staff by gender, ethnicity and disability. It should identify
what other data it could gather to monitor the extent to which
the social background of its employees is representative of the
wider population.
10 Robust challenge provided by suitably experienced
non-executive directors has made a positive difference to the
Department's financial management capacity.
The Department has valued the contribution that a financially
qualified non-executive director can make and, importantly, has
created a receptive environment. The Treasury should work with
all departments in encouraging them to recruit non-executive directors
with the right mix of skills to fit the needs of their business.
11 Government has not always learnt lessons
systematically by disseminating examples of good practice on financial
management across all government departments and agencies.
As part of the 'Five Star Finance' project, the Department has
demonstrated that it is keen to share good practice through the
Director General Finance's membership of the cross-Government
Finance Leadership Group, and by the Director of Finance's cross-Whitehall
Business Improvement Group. Treasury should adopt a firm leadership
role, identifying the key success factors of the Department's
programme-based approach and disseminating this good practice
across Whitehall.
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