Conclusions and recommendations
1. For the sixth successive year, the Comptroller
and Auditor General qualified the Ministry of Defence (MoD) Accounts
for 2011-12. The qualifications were:
- non-compliance with international
reporting standards on the treatment of some contracts;
- lack of audit evidence on the valuation of inventory
(worth some £3 billion) and of capital spares (worth some
£7 billion); and
- on the regularity of the Accounts
because of the failure to obtain approval for the remuneration
package of the Chief of Defence Materiel.
The former two problems are likely to persist until,
at the very earliest, 2014-15. We believe that the repeated qualification
of the MoD accounts reflects badly on the MoD's financial management.
The MoD needs a clear plan and a timetable as to how and when
it will achieve a clear audit opinion from the C&AG. (Paragraph
74)
2. In its Annual Report and Accounts for 2011-12,
the MoD presented information on its performance in line with
changes to government-wide reporting requirements. We found that,
as in 2010-11, we and the public were less well-informed than
before 2010 11, because the information provided was less useful
and it required reference to other documents. The MoD should review
its performance reporting to identify further and more useful
information in line with that used by the Defence Board to manage
the MoD and should include an explanation of its input and impact
indicators in the Annual Report. (Paragraph 75)
3. The flexibility to carry forward unspent budget
to the following year is important for the efficient management
of MoD's expenditure, in particular, of the Equipment Plan budget.
This freedom together with the establishment of unallocated provisions,
to protect against unexpected budgetary pressures, is essential
to the maintenance of prudent behaviour by the MoD. It would be
shortsighted of the Treasury to claw back any money not spent
by the end of the year or the unallocated contingency provisions.
(Paragraph 76)
4. The work carried out by the C&AG and the
National Audit Office on the cost of operations in Afghanistan
has brought into sharp relief the poor financial and management
information in the MoD, as has the continued qualification of
the MoD's Accounts. We recommend that, as the MoD sorts out its
problems with financial accounting, it makes strenuous efforts
to improve its management information, better to manage its business.
In response to this Report, the MoD should set out its commitment
to improving its management information with a timetable for such
work. (Paragraph 77)
5. It is important that the United Kingdom meets
the NATO target of spending two per cent of the Gross Domestic
Product. The Government should ensure that defence spending does
not fall below that target. (Paragraph 78)
6. The MoD has recognised that it may not be
possible to continue to drive reductions in civil service numbers
without adversely affecting its output. We are also concerned
about the impact on the delivery of operational capability and
the reform programme. In response to this Report, the MoD should
tell us how it intends to manage the risk to its output and what
options it has in reducing staff cuts. (Paragraph 79)
MoD Resource Accounts 2011-12
7. It is unsatisfactory that the MoD was some
five months late in laying its Annual Report and Accounts for
2011-12 before Parliament. While it may have been appropriate
to delay the laying of the Accounts to ensure that the accruals
were correct, it is worrying that the problems with the accruals
in the MoD accounts "came out of the blue". (Paragraph
9)
8. The delays in producing the Annual Report
and Accounts 2011-12 reveal a worrying lack of financial expertise
within the MoD. While bringing in external accountants may have
been the only way to sort out the problems with the accruals,
the MoD should ensure that the employment of such an expensive
resource is for the shortest period possible. In response to this
Report, the MoD should set out, in some detail, its plans to ensure
that it gets the expected transfer of skills to internal MoD staff
from its employment of external accountancy staff. These plans
should include the methodology for judging that this has occurred.
(Paragraph 14)
9. Despite the assurances from the Permanent
Under Secretary, our experience of the MoD's Report and Accounts
leads us to be sceptical about the prospect of the MoD delivering
its Annual Report and Accounts 2012-13 before the Parliamentary
summer recess. (Paragraph 16)
10. While we recognise that compliance with the
International Financial Reporting Issues Committee Interpretation
4 (IFRIC 4) and International Accounting Standard 17 on leases
is more onerous for the MoD than other departments, it is important
for public transparency and proper conduct of Government business
that all departments comply with Government accounting policy.
Compliance is particularly relevant for the MoD because it enters
into many contracts for defence equipment on a non-competitive
basis. We recommend that the MoD put in place the necessary work
to ensure that the C&AG is able to give an unqualified audit
opinion in respect of IFRIC 4 by 2014-15 at the latest. In response
to this Report, the MoD should provide a plan and timetable for
completion of this work. (Paragraph 23)
11. The MoD should complete its impairment review
as quickly as possible. It should ensure that the remaining qualification
on inventory and capital spares does not extend beyond 2013-14.
(Paragraph 30)
12. We welcome the Permanent Under Secretary's
frankness in acknowledging that the problems with stock management
are of long-standing but it is now time to sort the problems out.
We recommend that the MoD implement the recommendations laid out
in the NAO Report: Managing the defence inventory. In response
to this Report, the MoD should set out how it plans to implement
the NAO's recommendations and provide us with its inventory management
plan and strategy. (Paragraph 34)
13. Being able to identify and record the condition
of inventory and assess its value is important for operational
reasons as it enables the repair and replenishment of items needed
and the disposal of those items no longer required. It is also
critical in making value for money decisions about the amount
of inventory to be purchased and held. Problems with stock control
are likely to continue until the introduction of new stock systems
in March 2014 leaving the MoD with inadequate information. We
look forward to hearing further evidence of tangible progress
in identifying, recording and assessing inventory between now
and March 2014. The MoD should also make strenuous efforts to
ensure that the agreed timetables for the required systems are
met. (Paragraph 36)
14. The failure to obtain approval for the full
remuneration package of the Chief of Defence Materiel is regrettable
and the situation should be remedied as soon as possible. The
MoD should ensure that the MoD Accounts are not qualified for
this reason in 2012-13. (Paragraph 40)
15. We welcome the reduction in the number of
qualifications by the C&AG of the MoD Accounts and the assurance
from the Permanent Under Secretary that these qualifications will
not reappear in subsequent years. (Paragraph 44)
16. We note that the Treasury has agreed to the
transfer of unspent budget to future years under the Budget Exchange
Mechanism. In response to this Report, the Government should inform
us how this facility will be delegated to budget holders. The
increased flexibility is important for the efficient management
of the MoD's expenditure, in particular, of the Equipment Plan
budget. The freedom to carry forward its underspends is essential
to the maintenance of prudent behaviour by the MoD. It would be
shortsighted of the Treasury to claw back any money not spent
by the end of the year, or the contingency provisions the MoD
has established to protect against unexpected budgetary pressures.
(Paragraph 51)
Assessing the MoD's performance
17. We recognise that the changes the MoD has
made to its reporting framework and the Annual Report and Accounts
are in line with Government-wide reporting requirements. However,
the unfortunate result is that we are less well-informed than
in the past. We recommend that the MoD review its performance
reporting to identify more useful information which can be made
available to Parliament and the public. In particular, the indicators
should be more in line with those used by the Defence Board. We
reiterate our recommendations from our Report on the Annual Report
and Accounts 2010-11 and welcome the Permanent Under Secretary's
agreement to these proposals:
- The MoD should explain the
nature of the indicators in the Annual Report and Accounts so
that a reader can understand the indicators without reference
to other documents; and
- The MoD should also provide a commentary on their
performance against these indicators.
We also recommend that the MoD re-examine its indicators,
in particular those on the performance of the Equipment Programme,
to ensure that they are rigorous and demanding. (Paragraph 60)
18. We welcome the publication of the Equipment
Plan and the associated National Audit Office work on the Plan
and we look forward to the annual publication of this information.
We continue to take a keen interest in the affordability of the
Equipment Plan. We would expect to examine the operation of the
White Board in future inquiries. (Paragraph 67)
19. We have been concerned for some time about
the MoD's reluctance to attempt to estimate the full costs of
its operations in Afghanistan, Iraq and Libya. It is true that
personnel would be paid, and equipment used, largely for training
purposes, even if the Armed Forces were not engaged in operations,
but the deployment of personnel and use of equipment brings with
it costs in terms of training opportunities cancelled or deferred
and the costs of extra wear and tear on equipment which will eventually
have to be met by the MoD. We fully realise that the MoD can only
claim additional costs from the Treasury but, surely as part of
any lessons learned exercise, the MoD should understand the total
costs of operations in Afghanistan. (Paragraph 69)
20. The work carried out by the C&AG and
the National Audit Office on the cost of operations in Afghanistan
has brought into sharp relief the poor management and financial
information in the MoD. We recommend that the MoD improves its
management and costing information. In response to this Report,
the MoD should set out its commitment to improving its management
information with a timetable for such work. (Paragraph 70)
21. We believe that it is vital that defence
spending remains at more than 2 per cent of GDP in line with the
UK's NATO commitment. We recommend that the MoD and the Treasury
ensure that defence spending does not fall below two per cent
of GDP in the next spending review. (Paragraph 71)
22. We are concerned that the output of the MoD
and the reforms needed within the MoD are at risk because of the
reductions in staff numbers required to meet the budget cuts.
We are pleased to note that the Defence Board is considering this
matter. In response to this Report, the MoD should tell us what
conclusions the Board has reached and how it intends to manage
this risk. (Paragraph 73)
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