Examination of Witnesses (Questions 40
TUESDAY 7 MARCH 2000
40. The difference with the Accounting Standards
Board is that the Accounting Standards Board directs the private
sector on how to draw up their accounts. The FRAB only advise
and the Treasury directs accounting standards. There is a very
distinct difference there and that was why I was keen and delighted
to hear you say that you would draw attention to the fact that
the Treasury was adopting an accounting standard you did not believe
was correct. Would you like to comment on that?
(Mr Wild) When I was saying we would draw attention
I was meaning purely the policing of resource accounting itself
and those standards. If resource accounting took a different approach
to the private sector we would draw attention to that in our report.
I do not believe the process in the private sector is that different
in that the Accounting Standards Board has no ability to direct
companies to follow accounting standards; it issues them. It is
accepted wisdom that those standards form the basis of "true
and fair" and therefore if you do not follow the standards
you will get a qualification which says your accounts are not
true and fair. The link is still an indirect one. I think the
same will happen in the public sector. The FRAB has no power over
companies on the standards which the companies seek to adopt or
to get a qualification.
41. So I understand the process crystal clear,
if accounting standards are not being adopted in the way you thought
they ought to be adopted by the Treasury, you would issue a press
release or something in your annual report. If a department is
not adhering to those standards as directed by the Treasury on
your recommendations you would expect the National Audit Office
to pick that up?
(Mr Wild) Yes.
42. Parliament has a role in all of this.
(Mr Wild) I think we are producing it for your benefit.
43. That is what the objective is and what I
am interested in is what Parliament will see. I have been looking
at the illustrative main estimates that have been given to us,
one for the Department of Social Security and the other one for
MAFF. You have presumably looked at these. Do you think these
are the right documents presented in the right way to help Parliament
understand what they are saying?
(Mr Wild) For my part I have concentrated more on
the specimen produced which is "department yellow" in
the resource accounting manual. Certainly on a quick read I believe
they are following department yellow and I broadly believe it
is the right information.
44. Are you familiar with this, Professor Heald?
(Professor Heald) I think the general answer to your
question is yes, I think it is the right information. On the point
about the mock estimates there is consultation going on at the
moment between departmental select committees and their departments.
There is one concern I have got that I would like to put to the
Committee. There are now 46 departments for resource accounting
purposes but the trouble is that those 46 can be described as
"giants" and "minnows". Quite a lot of the
46 are relatively small regulatory-type bodies which are not important
in expenditure terms however important they are in governance
terms. One of the things which Parliament should look at very
carefully is the fact that Requests for Resources are basically
the resource accounting and budgeting equivalent to Votes. Within
some of the departments I think there is a lack of clarity about
what the principles are that are governing what should be a Request
for Resources. There is an exchange of report and government reply
in the case of the Department of the Environment, Transport and
the Regions. The Department of the Environment, Transport and
the Regions' mock estimate only has two Requests for Resources
for a giant multi-functional department. That is done on a spending
authority basis, one for the DETR main and one for support for
local authorities. The Environment, Transport and Regional Affairs
Committee have argued, rightly in my view, that the Request for
Resources ought to have been done on a functional basis and the
RfRs they propose were, first of all, housing, construction and
regeneration; secondly, planning, roads and local transport; thirdly,
environmental protection and water; and, fourthly, transport industries.
That has been resisted by the Department. I think there is a certain
amount of confusion around because there are two different issues
involved. One is the point about the constitutional nature of
Supply. The actual formal mechanics of Supply are largely a myth.
The Government, provided it has a majority, can get through its
estimates, but they are crucially important in allowing Parliament
to hold the executive to account through, for example, the select
committee procedure. So the idea that you can put everything into
a big mass and vote it in a way that is solely managerially convenient,
I think is inappropriate. In fact, the Government within the context
of the Comprehensive Spending Review and the new system of DEL
and AME has introduced very extensive areas of flexibility and
assumptions that virement will actually be granted. One of the
issues that Parliament should look at before the shadow estimates
are approved is whether there are sufficiently clear principles
that govern how many RfRs there are for the giant departments
and what basis they are on.
45. I know those principles are extremely important
and I think it is very helpful that you have reinforced that point
but what about the supply of information? The illustrative estimate
for the DSS runs to about 22 pages. Frankly, it is difficult for
a Member of Parliament who is not an accountant to see what the
story is that it is telling us. If part of the purpose of this
is to improve Parliamentary scrutiny and accountability of government
to Parliament, having the means of assessing that information
is an essential part of the chain. Do you think we have got that
or not? You might be able to understand what it is but what about
Members of Parliament?
(Professor Heald) Very clearly one of the attractions
of a cash system is that the numbers are very simplethey
look simple even if they are thoroughly misleading. Certainly
for people used to dealing solely with cash figures there is a
very considerable re-education and training task necessary to
get people familiar with the formats. But one of the points which
I always like to make to people is that, with the concepts of
departmental resource accounts and resource based estimates, Members
of Parliament and their staffs will have to learn to look at the
notes which are the crucial part of accruals based accounts as
well as the front statements. But the other point is that in terms
of the way that the executive will account to Parliament for expenditure
there are going to be current planning documents. Instead of the
existing departmental reports, there will be a forward planning
document and a backward looking report document and this is very
much where select committees play a crucial role in discussing
with their departments what kind of information Parliament actually
requires. So the formal system is partly a form of leverage on
the executive. One in a sense starts with the accounts and the
estimates and uses them as a basis for asking questions about
policy and expenditure.
(Mr Wild) It is an unfortunate fact of life that the
world is complicated. People are always trying to get us to summarise
for companies in one figure earnings per share. You cannot do
it. You cannot take a complex economic entity like a bank or insurance
company and summarise it in a single figure. Neither can we get
things down to a single sheet of paper. It is the job of accountantsand
I think we have not been particularly good at it certainly in
the early part of the centuryto make that information understandable,
but accountants over the last decade or so have understood that
and we are heavily trying to move in that direction to make that
information as understandable and clear and as easy to take in
as possible but the world is complicated and you cannot sum up
a big economic department in simple figures. It cannot be done.
(Mr Sore) Could I just come in here. Drawing on our
experience as an institute working in the local government sphere,
many members of the Committee will be very aware of what is happening
in terms of best value in local government. The interesting thing
is that CIPFA has been very much to the fore in producing accounting
guidance for the best value initiative which, interestingly, starts
to move away from a formal statement of accounts as the main vehicle
of communicating with residents. The best value performance plan,
which is very much more simplified than the accounts, targets
the planning and reporting of an individual authority's activities,
both financially and in terms of performance information. We have
been quite heavily engaged in that and just this last week or
so we published our best value accounting code. We are not saying
local authorities should move away from producing statements of
accounts produced according to accounting standards - that will
always be there for accountability purposes - but we do realise
that in terms of communication there needs to be some additional
vehicle to give a more, if you like, straightforward view - although
even the straightforward view of best value performance plans
may be too complex in the first place. I just want to say also
in terms of the schedules to Resource Accounts that our members
said that Schedule 5 seems to be a very key statement. However,
the point has been made by our members that it depends how easily
you are able to tie up Schedule 5 with performance data to see
the whole picture. The numbers are important, but it is the link
through to other performance information that will determine in
the end how useful that Schedule 5 is.
46. Would any of you say finally that the draft
documents we have got before us at the moment represent optimum
clarity or do we have further to go?
(Mr Wild) We have a lot further to go. We have a lot
further to go in the private sector as well as the public sector.
Strides are being made forward. I believe this is the private
sector thinking which is important to the public sector that what
is going to make the biggest difference is as we get further used
to computerisation. The whole basis on which accounts are produced
for companies and departments is wedded back to the 19th Century
where the logical way you could do it was once a year with the
people responsible, whether it is directors or senior officials,
producing accounts and giving them to people whereas I think we
will move over the next few decades to a situation where the information
will be held in raw computer fields and you will use your computer
to extract information in the way you find it easiest to use.
I am starting to fantasise into the future. We are not at an optimum
yet; I am not sure we ever will be. It certainly is a challenge
for accountancy both in the public sector and private sector.
Chairman: Thank you very much. Nigel
47. Given the complexities which have just been
referred to is it likely the Treasury will still continue to control
through cash? Is that not going to detract from the emphasis of
resource based accounting if they do?
(Mr Wild) I think all controls should be through cash
but past and future cash as well as present cash and that is what
resource accounting is about. It gives an added dimension of past
and future and its impact on the current.
48. You do not think that is going to diminish
the significance of resource based accounting in departments?
(Mr Wild) No. I think most companies are assessed
in the private sector on the basis of what amounts of cash they
have available in the future.
49. When select committees examine the accounts
what areas of expenditure would you advise them to concentrate
on? I was thinking resource based accounting illustrates several
things that have not otherwise been very transparent, the maintenance
of physical assets, whether the capital expenditure ratio is adequate
or not, whether assets should have been maintained or whether
they should be sold off, those kind of questions, and in the private
sector there are various ratios which indicate whether a company
is keeping consistent with comparable companies or not. How are
select committees going to use this sort of evidence in the context
of a department that is very often operating in a unique area?
(Mr Wild) I think this is one for my colleagues, who
know more about the public sector. I would just come back to the
point about inflation, private sector entities get measured against
each other, there is a mark to measure against, I think that is
the relevance of the inflation information; there is no market
in the public sector to measure against so you have to measure
against what is happening to the world in general, that is the
inflation information. In terms of public expenditure my colleagues
will know a lot more than I do.
(Professor Heald) I would always invite people to
look at where the big numbers are as a first point. Where resource
accounting and budgeting will affect things is where capital becomes
much more explicit. In some departments the difference between
cash and accruals is actually markedly small. In other departments,
for example the accounts and estimates of the Ministry of Defence,
they are going to look remarkably different in future because
of stocks and capital assets. Very clearly, different committees
will have different concerns, there will be some areas where the
concerns are about the level liabilities. There will be other
committees where the concern is to see that assets are properly
managed, that the assets are not being allowed to deteriorate
unintentionally. One of the aspects of resource accounting and
budgeting is, of course, not only depreciation but a capital charge,
reflecting asset holdings. Where Parliament should be hoping and
watching that improvements come is very much in the way that the
Government actually manages its assets, both its existing asset
holding and how it thinks about taking on more assets in the future.
50. How will a select committee be able to judge
whether a particular activity is under-capitalised?
(Professor Heald) Given the remarkably divergent nature
of government departments I do not think there is a general answer
to that. My view about asset accounting and about stock accounting
is that although both areas can raise difficult technical issues
of judgment, where organisations do not account for their capital
assets and they do not account for stock, they will neglect them
over time and they will not get either sufficient managerial attention
or sufficient Parliamentary attention. Essentially, the only people
who can tell you whether the Ministry of Defence have too much
stock of a certain type is the Ministry of Defence itself and
the individual parts of the Ministry of Defence. The fact of actually
making explicit the accounting values of stock and the accounting
value of fixed assets, and hitting the fixed assets with a capital
charge, is going to bring managerial attention to them.
51. You are saying, it gives you the potential
for getting the right answer but not necessarily the right answer?
(Professor Heald) Yes, that is right. Accounting can
only draw attention to the right question.
(Mr Wild) Accounting is not an end in itself, it is
a means for providing information on which people who understand
the business, the organisation and what is happening, can apply
(Mr Sore) Can I just comment on that? I think resource
accounting from our members' perspective will allow more in-depth
questions to be asked on current assets and current liabilities.
The issue for some departments, certainly from our survey, is
the ability of departmental officials to answer the questions
that are raised by the better information. It is going to be somewhat
different depending on departments. We know that there are some
departments which do not have up-to-date debtor management systems
that allows them to produce an analysed figure to show what is
owed to a particular government department. If you try to get
beneath that to find what is the structure of the debt, how old
is the debt, how is it layered, etc, our information at the moment
is that some departments would find that difficult. Our information
is that there is a lot of manual intervention still going on in
systems to produce information for resource accounting. If you
start delving into management information, I suspect that is a
whole other area where the investment needs of departments need
to be quite closely looked at otherwise a certain amount of frustration
will build up. The information is there on the balance sheet but
to answer the questions in some instances there will be difficulty
in providing an answer in sufficient detail.
52. How would you advise committees to look
at this: through the estimates or through the annual departmental
report to get a clearer view of what is going on?
(Mr Wild) They must both be equally important because
one is looking to see what the department is expecting to happen,
the other is looking to see how we performed against those expectations.
You should not favour one against the other. That is said as a
general accountant's view. I do not know if there is anything
about the public sector that would draw more importance on one
than the other.
(Professor Heald) My general point would be that select
committees have an impact on the department, by running over things
year after year. The committees of this House who have been most
successful at holding their departments to account are those who
take the expenditure and estimate process seriously on a repetitive
basis. There is a persistence effect. If a committee starts asking
questions to the department that the department's managerial systems
cannot answer and the committee goes away and forgets that question,
they will not get an answer. But, if the committee keeps coming
back repetitively to the same issues, clearly signals are going
to go out to the manager of that department that people do not
want to come and face the committee without being able to give
sensible answers. Depending on what the nature of the personnel
base of the department is and the nature of the spending, the
answer would vary. The thing I would stress is that this is not
an area where you get dramatic, sudden improvement; this is an
area where you get improvement over a period of years by the committee
being insistent about the kind of information it would like now
and in two years' time.
53. The issue is, when looking at the estimates
given now you have a capacity to anticipate events rather than
criticise them when they have happened, which is what you are
doing when you look at the annual report?
(Professor Heald) There is a technical point because
one has to be very careful when talking about estimates. What
resource accounting and budgeting is not doing is changing the
relationship between what Parliament votes as "Supply"
and the Government's expenditure system. In some departments,
the Department of Social Security is an excellent example, there
is a vast difference between the total expenditure of that department
and what is "Supplied" because national insurance funds,
for example, are not "Supplied". In some departments
it would not matter too much which document you focus on but in
some departments there is actually a remarkable difference between,
in resource accounting terms, the net operating cost and the net
resource out-turn. One of the things which I would like to have
seen as part of resource accounting and budgeting is a better
alignment of the Supply process and the expenditure planning process.
That would only have come out of a fundamental review, a Public
Finance Act on the New Zealand style, rather than the Government
Resource and Accounts Bill, which is essentially a minimalist
measure to get the matter through.
(Mr Wild) You are absolutely right. You control expenditure
on the basis of controlling it before it happens rather than shutting
the stable door after it has all gone wrong. If your only control
is in retrospect it will go wrong. You also need to look at retrospective
information, both in order to give yourself the information as
to how good the estimation process is, because it will never be
perfect, and different departments will have different variables
within them, and also whether the expenditure does take place
in the way it was predicted to take place, in terms of did they
spend in the way they set out to spend. You do need to look at
both. The control must be forward looking, you cannot control
54. Professor Heald, you just mentioned the
New Zealand Public Finance Act and the reforms to the supply process
that they saw in New Zealand when they brought in resource accounting
and budgeting, can you say a little bit more about the sort of
reforms you think should have accompanied the introduction of
resource accounting and budgeting from the parliamentary supply
(Professor Heald) You were one of the participants
in the Standing Committee. Until about 1996 I believed that, in
fact, there was going to be a major revision. There was always
that option after the 1995 White Paper, the big Bill, that actually
looked at the whole wide range of things, like audit, like Supply
procedures, aligning expenditure with what Parliament actually
voted. However it became obvious that after about 1996 that was
not going to happen.
55. Why do you think that was?
(Professor Heald) I do not know. My impression was
that, perhaps, in the last year of the previous Government, reorganising
the way that Parliament dealt with public finances was not the
greatest priority the Government had in the last year of its life.
Then, I suspect, the Comprehensive Spending Review took over and
dominated procedures in the Treasury for the first year of the
56. Do you think it is something that the Treasury
ought to revisit?
(Professor Heald) To some extent this is a matter
for Parliament. I gave evidence to the Procedure Committee two
years ago, when you were a member of the Procedure Committee,
and I think essentially the initiative is going to have to come
from Parliament. The fact is that the Government did not keep
its promise about producing a draft Bill, leading to some acrimonious
debate in the Standing Committee, and I hope that the reaction
of Parliament would be that Parliament will try and take a lead
in this matter.
57. I hope you are right, but I very much doubt
it. Would you help that process by commenting on whether, however
detailed the resource estimates are that are put before us and
however much information they contain, in many ways it is a total
waste of time unless Parliamentarians and select committees have
more resources and develop skills and expertise to actually understand
these estimates and then have procedures to be able to vote on
(Professor Heald) I think that is somewhat too broad
a question for me to try to answer; it is really a matter for
the internal management of the House.
58. I will put it more simply. Would you like
to see, for example, Parliament giving itself, its select committees
and its members, more training, expertise and resources to be
able to use these estimates?
(Professor Heald) Yes, I think it is very important.
In a sense, one of the negative sides of the proceedings on the
Bill is that Parliament seems to blame the executive for Parliament's
own failings in taking its Parliamentary procedure seriously.
My view, having worked for select committees for the last twenty
years, is that, to some extent, the problem is on the Parliament
side rather than the executive side and more consistent interest
from Parliament is actually what is required. The signals that
Parliament gives in general are that it does not take its procedures
Chairman: I should say, the Liaison Committee
produced a report last week which did try to address this issue
that we have been talking about. I urge my colleagues to read
59. I will do.
(Mr Sore) I was just going to say in supplement to
that question that from our Institute's point of viewand
you would say, "We would say this, wouldn't we"we
are a little bit concerned in terms of the proportion of qualified
accountants working in central government departments in terms
of the expertise that is brought to bear in some of these areas.
I think it is interesting to contrast the local government situation,
whereby under statute a finance director of a local authority
must be a member of the CCAB accountancy body. I think that is
an issue that does exercise our members. That is not to in any
way take away from what has been achieved by resource accounting
thus far - it has been a very great achievement as far as CIPFA
is concerned. We do have a concern that if you contrast with most
private sector companies, there does seem to be a general lack
of qualified accountants within central government departments
as a whole.
(Mr Wild) I hear some echoes in this debate, which
I am sitting listening to with interest, of what is happening
with some corporate governance debates in the private sector.
My impression is that the corporate governance debates in the
private sector started from quite a high base, I cannot comment
on it in the public sector because I do not know whether it is
as high as the base in the private sector. Even within the private
sector, where it came from a high base, there are some similar
Chairman: Thank you very much. Thank
you all very much.