Government response
The Government welcomes the Defence Committee's Inquiry
into the MOD's Annual Report and Accounts for 2011-12, published
on 7 March 2013. We welcome the detailed work the Committee has
undertaken and their comments on the main points of the Inquiry.
This Memorandum sets out our response to each of
the Committee's conclusions and recommendations. The Committee's
text is in bold and the Government's response is in plain text.
Paragraph numbers refer to the Committee's report.
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)
The MOD rejects this criticism. The problems giving
rise to these qualifications are deep-rooted and cannot be resolved
immediately. We have clear plans in place to remove the qualification
on inventory. The logistics process is complex, and stretches
across 28 countries and deployed operations. To remove the qualification
in a sustainable way requires significant changes to business
processes and the upgrade and replacement of many legacy systems
over several years—a programme which is funded and underway.
The NAO has been positive about progress to date, commending the
way in which the Department has responded to previous recommendations
and acknowledging that it has adopted a strategy to address these
issues.
The MOD has made progress in establishing and implementing
inventory and capital spares impairment reviews. However, the
NAO have indicated that at this stage of the audit this work is
unlikely to be sufficient to enable removal of the qualification
from the FY12/13 accounts. We remain focussed on building on the
progress made, addressing the outstanding actions and emergent
NAO findings with the goal of having the qualification removed
as soon as practical.
For IFRIC 4, work is underway on a study to identify
significant contracts which have the potential to fall within
scope of IFRIC 4. We will complete an assessment of the potential
manpower and external cost implications for its application. The
study will report its findings by the end of September 2013, which
will include the timescales for completing the rest of the work.
CDM's remuneration in 2011-12 included an allowance
for which the Department had not obtained the necessary approval
from the Chief Secretary to the Treasury. The sums involved are
not material to the overall defence budget and cover £21,000
in the year in question. Following a review the Department withdrew
the request for retrospective approval and, ultimately, no payments
were made in 2012/13. We have now resolved this matter and are
confident that we will not be qualified on it again.
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 201011, 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)
The Annual Report and Accounts for 2012/13 will include
clearer explanations of the indicators.
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)
We are pleased that the HCDC has recognised the value
of this facility to carry money over from one year into the next.
It allows us greater flexibility to spend money when it can be
of most benefit to Defence, rather than rushing to spend it before
the end of the Financial Year. The Treasury have agreed that we
may carry forward underspend in 2012/13 to 2013/14 and 2014/15.
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)
The Director of Financial Management Reform has a
clear mandate to improve financial management information, but
the historic problems are deep-rooted and the reforms will take
some time to implement in full. The first tranche of changes will
be delivered in September 2013, which will improve financial and
non-financial information for equipment and support expenditure.
September is also the programmed date for approval of an initial
gate business case for a phased implementation of a raft of further
improvements, which includes investment in data integrity, cost
modelling and systems exploitation.
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)
We expect Defence Expenditure to remain above 2%
of GDP for the duration of this Parliament. The Defence budget
for 2015/16 will be set in Spending Round 13.
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)
The SDSR reduction in civilian manpower is on track
and has not caused any unmanageable challenges. It has been identified
as one of the Department's top strategic risks and is being actively
managed by the Defence Board. Limited recruitment has continued
in order to fill key posts, and the pace of the reductions is
managed by balancing natural wastage, voluntary early release
and redundancies.
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)
We took the view that it is better to ensure that
the Statement of Financial Position is correct than to be on time.
We have an agreed timetable to deliver the Annual Report and Accounts
2012-13 before the Summer Recess.
We have made significant improvements in our financial
management in the last two years. We have balanced our budget.
We have also published our Equipment Plan for the next ten years,
which gives the Armed Forces a fully funded programme for the
equipment they need. This work is clearly having an impact, reflected
by the number of qualifications on our main financial statements
being cut in half this year, from four to two.
We acknowledge that there is further work to be done.
There are deep-rooted problems which cannot be solved quickly
or easily. We are in the third year of a five-year plan to build
upon the improvement we have already made, which has been recognised
across Government, including by the National Audit Office.
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)
MOD engages support from external advisers for a
wide range of reasons. Some of these advisers are accountancy
firms and the advice provided by them ranges from expert advice
on the accounting treatment for complex transactions through to
advice on better cost estimating. All contracts for external accountancy
are minimised in length and address the need for transfer of skills
wherever possible.
We are establishing a Finance Transformation Programme
within DE&S to recruit suitably qualified staff at a range
of grades to enhance finance skills.
MOD delivered extensive accruals training within
DE&S in 2012/13, which included lessons learned from external
reviews, and we will deliver a programme of both in-house and
external training to continue to improve skills. To develop financial
expertise, accountancy qualifications are also being reviewed
to identify the mix needed within the Department.
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)
We fully expect to publish the Annual Report and
Accounts for 2012/13 before the Summer Recess. Last year was the
first time that the Annual Report and Accounts have been published
after the Summer recess.
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)
Work is underway on a study to identify contracts
which have the potential to fall within scope of IFRIC 4. We will
complete an assessment of the potential manpower and external
cost implications for its application. The study will report its
findings by the end of September 2013, which will include the
timescales for completing the rest of the work.
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)
We have made tangible progress in the establishment
and implementation of processes covering the impairment of inventory
and capital spares. The NAO have indicated, however, that at this
stage of the audit this work is unlikely to be sufficient to have
the qualification removed for FY12/13. Further work is required
to embed the processes and ensure consistent application and we
remain focussed on these actions and emergent NAO findings to
enable removal of the qualification as soon as practical.
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)
The MOD is a diverse, dispersed and complex organisation
with a large number of technically advanced assets and capabilities.
This requires a certain base level of stock to be held in order
to respond to unexpected events such as military operations, to
mitigate long supplier lead times, to generate economies of scale
when equipments are brought into service, and to cater for volatile
operational demand. However, this only justifies such a large
inventory in part. The Department has committed itself to reducing
the value and volume of the inventory and to managing it more
effectively. The Department will challenge expenditure through
the enforcement of a rigorous control regime on Raw Materials
and Consumables, Guided Weapons, Missiles and Bombs and Capital
Spares. Purchasing will be restricted only to those items where
there is a fully justified requirement, taking into account Front
Line Command priorities and current stock levels. In addition,
the Department will continue to dispose of inventory that it does
not need, building on the £3.4 billion of inventory that
has been removed, or identified for removal, over the last two
years.
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)
The MOD has made progress in establishing and implementing
inventory and capital spares impairment reviews. We remain focussed
on building on the progress made, addressing the outstanding actions
and emergent NAO findings with the goal of having the qualification
removed as soon as practical.
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)
We have now resolved this matter and are confident
that we will not be qualified on it again.
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)
We will be making every effort to continue the recent
trend in the reduction of qualifications.
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)
We support the principle of delegating budget exchange,
and will be working out how to implement it with the TLBs as the
Delegated Model beds in over the trial period. Two options we
are exploring are exchange negotiated with the Centre, and trades
between the TLBs.
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)
The Annual Report and Accounts for 2012/13 will include
clearer explanations of the indicators. The Committee will appreciate
that much of the information used by the Board cannot be published
for reasons of national security.
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)
We fully intend to continue to publish our summary
of the Equipment Plan, and the NAO assessment of that Plan, on
an annual basis. Over time, we expect the scope of the NAO assessment
to broaden to provide further assurance of the affordability of
the Equipment Plan. The Single Integrated Capability Priority
List or "Whiteboard" is a constantly evolving list of
possible enhancements to our equipment capability. We have made
clear that such enhancements will only become part of the Equipment
Plan when we are confident that they are affordable. We will not
be publishing the SICPL or 'whiteboard'
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)
As in previous years, the Annual Report and Accounts
will publish the Net Additional Cost of Military Operations. This
is the extra that it costs to conduct military operations, over
and above the amount we spend generating the capability to do
so. We know how much we spend overall on each aspect of generating
military capability, and how much extra it costs to use that on
operations. We do not collect information on the 'full' cost of
operations because that is not useful.
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)
The Director of Financial Management Reform has a
clear mandate to improve financial management information. The
first tranche of changes will be delivered in September of this
year, which will improve financial and non-financial information
for equipment and support expenditure. September is also the programmed
date for approval of an initial gate business case for a phased
implementation of a raft of further improvements, which includes
investment in data integrity, cost modelling and systems exploitation.
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)
We expect Defence Expenditure to remain above 2%
of GDP for at least the duration of this Parliament. The Defence
budget for 2015/16 will be set in Spending Round 13. Continuing
to meet the 2% target will be a factor in these discussions.
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)
The reduction in civilian manpower is on track and
has not caused any unmanageable challenges. It has been identified
as one of the Department's top strategic risks and is being actively
managed by the Defence Board. Limited recruitment has continued
in order to fill key posts, and the pace of the reductions is
managed by balancing natural wastage, voluntary early release
and redundancies.
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