Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40-59)

PROFESSOR SIR ANDREW LIKIERMAN, MR DAVID LOWETH, MR CHRIS RICHARDS AND MR ADAM SHARPLES

WEDNESDAY 7 NOVEMBER 2001

  40. Yes, in terms of having a capital account essentially, and having some understanding about asset valuation and the like. Is it not the case that every rudimentary small business would be expected by the Inland Revenue, for instance, to have a clear balance sheet showing its assets as well as a trading statement showing its revenues and cash operations, and that still is not available to us here, after all these years of trying? Is it not an embarrassment when we look at the private sector?
  (Professor Sir Andrew Likierman) If I may say so, I think it is not an embarrassment. I think it has been a huge achievement for central government. These are not a collection of small businesses, these are extremely complicated activities which started from a very low base and, bluntly, in most cases are doing very well. That even applies to some departments where some part of the account is qualified. We are not talking about the whole account being nonsense, we are talking about one element being qualified in some cases. So again, these departments have achieved huge strides in this intervening time. Can I also put an answer into context here, because if you look at what is happening around the world, almost no government is producing this information from its departments.

  41. That is awful. I am glad we are better than the worst, and that is good. Obviously we are ahead of the pack, but it still is not very good in relation to normal business standards and the activities of local authorities, is it?
  (Professor Sir Andrew Likierman) Local authorities have been at this for a very long time in terms of the way in which they have been producing their accounts.

  42. Do you know why local authorities were required by Government to do proper resource accounting and the Government did not require itself to do it?
  (Professor Sir Andrew Likierman) I do not think there was any assumption that governments would do this kind of accounting until quite recently.

  43. Incidentally, I know this is early days for the learning curve and the people who are actually doing this, because they are doing it for the first time. Have you seen any evidence of people doing creative accounting, in the sense of shifting the definitions between capital and revenue so there is capitalisation of revenue to the extent that the money is not spent and that sort of thing? Do you see that emerging now?
  (Professor Sir Andrew Likierman) No, and I am completely confident that the auditors would catch such practices.

  44. But it is not completely wrong to do that, it is a grey area?
  (Professor Sir Andrew Likierman) I think that if it is a grey area, then it is by definition not creative accounting.

  45. In terms of the administrative delays in resource accounting, which does enable budgetary planning over a number of years in terms of asset management and understanding against cash, do you think those administrative delays in implementing this are actually having some real cost in terms of services, because people do not understand what they are doing and they cannot use it effectively for the good of the public service? Perhaps Mr Sharples could answer that.
  (Mr Sharples) First of all, I would like to support what Andrew said: that looking back over the history of this, I think this has to be seen as a tremendous achievement, to deliver on the project that was set out in 1994. You are quite right that central government was coming in behind local government. In fact, it is the last part of the economy effectively that was not doing accruals accounting.

  46. Yes, that is the point.
  (Mr Sharples) So to take these huge organisations, with huge and previously unmeasured balance sheets, and put them onto proper commercial accounting systems is a tremendous achievement, and that has been delivered on schedule. What we have done on the budgeting side is to introduce in two stages a budgeting arrangement which gets the best out of the information that is available from the balance sheets and the resource accounts. In stage one which was introduced in the Spending Review last year, we have started to measure in accruals terms and to capture the various elements of accruals accounts.

  47. What I am trying to get at in the question, if I may, Mr Sharples, is whether there is going to be any real, positive outcome as a result of resource accounting, in terms of administrative efficiency, knowing where your assets are and that sort of thing, in terms of people who are our constituents. If so, what sort of things? If so, does the delay mean the other side of the coin, that the public is losing out through bad administration?
  (Mr Sharples) There are indeed real benefits. A number of examples of the way in which resource accounting and budgeting is changing decision-making are set out in the documents to which Andrew referred.

  48. I have not had time to read them all.
  (Mr Sharples) No, but I hope they will prove useful after this session. I think the key thing is that this focusses the minds of managers on the real costs of the activities that are going on in the public sector. It focusses minds on the balance sheet and the capital assets.

  49. In terms of real costs, if they do not do this, how might things be better in terms of a person using the NHS system?
  (Mr Sharples) To take examples, departments for the first time, as you know, have constructed balance sheets and identified assets. In fact, we have published full details of the assets held by the government departments in the National Asset Register, with valuations for the first time. This process has encouraged departments to think about whether they need to hold those assets, whereas the benefit for the citizen, the taxpayer, is in making sure that the Government is holding only those assets it really needs and it is getting best value out of those assets.

  50. Would you accept that one of the key benefits in something like the NHS is the ability of managers to make informed decisions about things like PPP where there is a convergence of capital investment to revenues agreed for service delivery, and any delay in people or departments being able to deliver that sort of management information causes delays in forming decisions on whether to go down various sorts of investment routes? Perhaps I can ask the Professor that question.
  (Mr Sharples) I think that resource accounting and budgeting helps in those decisions, because it puts conventional capital projects on a more similar footing to a PFI project. In the old cash world, if you undertook a conventional project, the real issue was, could you get the capital funding upfront. Once you had paid for the asset, the continuing costs of holding that capital asset were something you did not have to worry about. Now PFI and conventional procurement are put on a more similar footing, the managers need to consider the continuing costs of the asset.

  51. Thank you very much, Mr Sharples. Perhaps I can ask Professor Likierman one thing about that in terms of loss of value. Am I right in saying, do you believe, that if we have not got proper resource accounting—for instance, in the Health Service—or there is a delay in it, that delays the ability of a manager to make the optimum decision on how to deliver a service, whether through, in some sense, capitalisation going through PPP or doing capital assets and that sort of thing, and that therefore is a real loss to the health consumer?
  (Professor Sir Andrew Likierman) I am no expert on Health Service accounting, but my understanding is that they use accruals as a matter of course.

  52. You mentioned that you are concerned to help everybody get up to scratch. What sanctions are you imposing? What about the six, as it were?
  (Professor Sir Andrew Likierman) There are limits to what the Treasury can do. In a sense, as I have indicated already, we cannot force people physically to produce the accounts, they have actually got to do it themselves.

  53. If they do not, if they keep failing, what is the impact—that people are sacked, or there is less money for the department, or the projects are suspended? What happens? Or do you just ask them again?
  (Professor Sir Andrew Likierman) I think the question is where the failure lies. If the problem is on the accounts themselves then the accountability is here to Parliament. If there is a problem, as a result of this failure, in planning, then clearly they are going to get less good information for planning than they should, and that must impact on their ability to get resources. So there are a number of possible sanctions relating to a number of possible dimensions.

  54. Do you think managers think that they will get less money if they do not get their act together on resource accounting? You seem to be saying that there might be some threat to future funding if they do not do that.
  (Professor Sir Andrew Likierman) My assumption would be that if a department goes into a spending round and is not able to identify very clearly what the new resource account elements are associated with that, they are at a significant disadvantage in the bargaining process.

  55. On this issue of double-running—namely, appropriation and resource accounting at the same time—do you anticipate that once we have got resource accounting up in any given example, we can get rid of resources applied to appropriation accounts, and therefore the new resource accounts should be speeded up significantly? Therefore, do you think that your ambition of three months from the end of the financial year is realistic?
  (Professor Sir Andrew Likierman) I am not correlating the relationship between the abandonment of appropriation accounts and the arrival of accounts after three months. All I am saying is that at the moment a number of departments are under very considerable strain in having to produce two sets of accounts, and the quality of the accounts, as well as the timeliness of the accounts, must improve when resource accounts alone are produced. I am quite sure about that.

  56. Obviously there is going to be a difference between different departments in terms of the level of understanding, the level of training, the level of complexity—for example, evaluating all the Foreign Office buildings around the world, various resources of the department having to do that—levels of resources being applied, the sort of incentives attached to best practice. So presumably what you are doing—correct me if I am wrong—is comparing and contrasting the different departments on all these different criteria, and then perhaps making allowances or extra resources to compensate areas which have particular hurdles to jump over. Is that correct or not?
  (Professor Sir Andrew Likierman) We have not made specific provision for departments to improve their systems. That is one effect of having this rather extended timescale. We have assumed that they will do that as part of the normal way in which they do their business. You mentioned, for example, Foreign Office assets and so on. Work has been done over a period of years, which is now shown in the departmental resource accounts, and has been reported in the National Asset Register. That has all been done on a proper basis.

  57. On that point, incidentally, as you have come back on it, is it not the case that the relative appropriation of property values around the world keeps on changing, as house prices are going up more slowly or faster in different countries and all the rest of it? When you say that it is being done, how often is that asset valuation done?
  (Mr Loweth) A formal revaluation has to be done every five years. In intervening years there should be an updating through some form of indexation, or revalution.

  58. So it could be miles out if there was a sudden surge in different countries because the oil supply is cut off, or whatever it is, and the managers' decisions on the basis of asset values, if they want to realise assets, in terms of international departments, could be way out, could they not?
  (Mr Loweth) Ideally they should be reviewing annually to see what is happening in any particular jurisdiction, to see if the particular index they have chosen is representative or not.

  59. So it is reviewed more often than every five years?
  (Mr Loweth) Yes, but there is a formal requirement for professional revaluation every five years. It may be more frequent.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 19 June 2002