Select Committee on Public Accounts Appendices to the Minutes of Evidence


Annex A

DepartmentPage


Notes to the Annex
Ev 66
Department of Health Ev 66
Department of the Environment, Transport and the Regions Ev 68
Office of the Rail Regulator Ev 70
Office of Water Services Ev 70
Home Office Ev 71
Charity Commission Ev 73
Lord Chancellor's Department Ev 74
Crown Prosecution Service Ev 75
Treasury Solicitor's Department Ev 76
Ministry of Defence Ev 77
Foreign and Commonwealth Office Ev 80
Department for International Development Ev 81
Office of Fair Trading Ev 82
Office of Telecommunications Ev 82
Office of Gas and Electricity Markets Ev 83
Ministry of Agriculture, Fisheries and Food Ev 84
Forestry Commission Ev 86
Department of Social Security Ev 86
HM Treasury Ev 88
Cabinet Office Ev 89
Teachers Pension Scheme Ev 90
NHS Pension Scheme Ev 91
Principal Civil Service Pension Scheme Ev 92
GCHQ Ev 93
Secret Intelligence Service Ev 94
Security Service Ev 95


Notes to the Annex

  The summary action plans are presented in a consistent format. Each plan contains three parts:

  Part 1 describes the nature of the audit opinion given on the 1998-99 dry run resource account and the main reasons for that opinion.

  Part 2 summarises the action being taken to address the problems, under the following headings:

    (i)  Systems and processes.

    (ii)  Staffing.

    (iii)  Training.

    (iv)  Accounting policy issues; and

    (v)  Other issues.

  Each heading will not be relevant to all Departments.

  Part 3 sets out when the Treasury and the Department expect the problems to be resolved. In some cases. Departments have already received their audit certificate on the 1999-2000 accounts; where this is the case, this information is included.

1.  DEPARTMENT OF HEALTH

Part 1: Nature of 1998-99 resource account opinion

Opinion: Disclaimer

Reasons for disclaimer:

  1.  The Department carried out only limited work to establish opening asset and liabilities balances. As a consequence these were uncertain and not properly supported. The uncertainty therefore impacted on related in-year movements.

  2.  The Department failed to eliminate significant intra-group transactions due to an absence of information on Health Authority balances. This uncertainty affected all the primary account schedules.

  3.  Figures in the primary account schedules did not agree to related account notes or departmental records.

  4.  The Department had not developed an adequate system to analyse expenditure to aims reported in Schedule 5.

  5.  The Department did not have a sufficiently robust system to identify core debtors and creditors. Testing revealed a number of errors and omissions.

  6.  Some documents were exposed to asbestos and could not be examined.

  7.  Audit opinions given on the underlying Health Authorities' accounts did not specifically include an assurance on the regularity of transactions in the accounts.

  8.  There were a number of account disclosure errors and omissions. This included criticism that Health Authorities' accounting did not meet the requirements of the Resource Accounting Manual (RAM) or of Financial Reporting Standards (FRSs) in some areas. HM Treasury had given temporary exemption from the requirements.

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  The Department has introduced new requirements for Health Authorities to identify intra-group activities in returns to the Department, and has strengthened its own identification procedures.

  2.  New procedures to consolidate the accounts of the Group entities, taking into account intra-group activities, have been developed and implemented.

  3.  The Department introduced new procedures to check and verify year-end debtors, creditors and accruals initially identified by staff.

  4.  More rigorous checking of data within the reporting mechanisms that produce the account has been introduced.

  5.  The Department has introduced new procedures to identify and allocate costs to aims, including use of automatic allocation tables.

(ii)  Staffing

  1.  The team responsible for production of the resource account has been strengthened by the recruitment of additional staff, and additional use of existing staff experienced in the Department's financial systems.

(iii)  Training

  1.  Additional training of staff responsible for the identification of accrual adjustments has taken place.

  2.  The Department has conducted seminars for staff with financial responsibilities throughout the Department to increase awareness of resource accounting issues and new procedures to aid recognition of accrual adjustments.

  3.  The Department has also undertaken seminars for staff involved in administration of the Department's retained estate property to ensure common valuation treatment and reconciliation of the Department's estate with transfers from Health Authorities.

(iv)  Accounting Policy Issues

  1.  Health Authorities are now required to follow new Manual for Accounts guidance, which reflects the requirements of the RAM and FRSs.

(v)  Other

  1.  The audit opinion to be expressed on Health Authority accounts includes a specific regularity assurance for 1999-2000.

  2.  From 2000-01, responsibility for the retained estate will pass from Regional Offices and be centralised within NHS Estates. This is expected to increase accuracy through the application of a common approach.

  3.  District Valuers' reports have been obtained to support property valuations.

Part 3: Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Intra-Group activities have been identified and eliminated on consolidation of Groups accounts.

  2.  The disagreement between figures in accounts schedules and supporting notes is not expected to be an issue.

  3.  The figures for assets and liabilities are now much more robust.

  4.  The Department has produced a supportable analysis of allocation of operating costs to Departmental aims.

  5.  Health Authorities have adopted accounting policies which meet the RAM and FMS requirements.

  6.  Regularity of transactions in Health Authority accounts will be covered by the audit opinion.

  The Department of Health considers it will be able to provide an auditable account, though a qualified audit opinion[31] may be given.

2000-01 accounts

  1.  Increased accuracy in accounting for the retained estate, and in valuations of assets, is expected in the 2000-01 accounts.

  2.  There will be improvements in the accuracy of the Department's Consolidated Account arising from greater familiarity with the requirements of resource accounting and budgeting and resolution of issues previously arising.

2001-02 accounts

  1.  The Department expects to see further improvements in the accuracy of the Department's Consolidated Account arising from greater familiarity with the requirements of resource accounting and budgeting, and resolution of issues previously arising.


2.  DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS[32]

Part 1: Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  The Highways Agency (HA)—The principal reasons for qualification in respect of the Highways Agency were:

    (i)  Land creditors—inadequate audit trails and insufficient support for management estimates.

    (ii)  Stock—the Agency was unable to demonstrate that stock valuation methodology was in line with accounting policy.

    (iii)  Properties held for re-sale—recent valuations were not available.

    (iv)  Assets under construction—there was no criteria to justify retention of assets under construction on the balance sheet rather than writing off to operating costs.

  2.  DETR (Central)—the main reasons for qualification were:

    (i)  Non-disclosure of opening balances in the balance sheet.

    (ii)  Valuation of QEII conference centre—the accounts valued the Centre at £109 million but a draft report from valuers received eight months after year end estimated value at £20 million.

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  The Highways Agency instigated a project—Accounts Production 2000 (AP2000)—to address all qualification issues so that unqualified accounts might be produced for 1999-2000. A dedicated project team was put in place and a very detailed project plan was developed. Progress has been monitored regularly both within the HA itself and through monthly quadrilateral meetings involving HA, DETR(C), the NAO and HM Treasury.

  2.  The HA plan does not specifically relate to accounting systems (which are being addressed separately by the Strategic Financial Management (SFM) project) but rather seeks to improve supporting processes, procedures and policies and to ensure that they are fully complied with. This is particularly relevant in the areas of lands liabilities and stocks.

  3.  For properties held for resale, the plan included a full valuation exercise.

  4.  For assets under construction, a criterion for establishing the assets to be included on the balance sheet has now been agreed with the NAO.

  5.  For DETR(C), the qualification was of a technical nature and did not impact upon the Department's ability to deliver unqualified accounts for 1999-2000. No specific Departmental Action Plan, other than plans already in hand, were therefore necessary for DETR(C).

  6.  The HA agency SFM project, and DETR(C)'s Next Generation Accounting Systems (NGAS) and Integrated Corporate Information System (ICIS) projects all aim to put new systems in place. These new systems will not only be able to deal with the demands of RAB more effectively, but will also put the respective organisations in a better position to exploit the benefits of the more sophisticated financial information that RAB provides.

(ii)  Staffing

  1.  In HA, a dedicated project team has been recruited to support AP 2000 and SFM projects. Project teams are now in place in support of DETR(C)'s NGAS and ICIS projects. External consultancy support has been brought in to supplement departmental and agency resources on the majority of these projects.

(iii)  Training

  1.  The project plan for AP2000 in HA included extensive training of the regional and operational staff involved in maintaining records impacting upon account preparation.

  2.  DETR(C) has continued with a finance training strategy targeted at giving all staff involved in financial activities (including resource accounting) training and development opportunities to bring their competencies in line with or above the requirements of their job.

Part 3: Anticipated Progress

Issues resolved by:

1999-2000 accounts

  No qualification is expected in respect of DETR(C) accounts or of the other non-HA agency elements of the accounts.

  With regard to HA there are two areas of qualification—one confirmed and one probable.

  1.  Lands creditors—initial NAO examination has revealed a high error rate in the initial calculation of lands creditors. Much effort has been put in by the agency to correct and improve the position, but there has been insufficient time to bring the huge volume of lands liability cases up to a high enough standard to avoid qualification. Work is already underway in relation to the 2000-01 accounts to ensure that qualification on this issue is avoided in the future. The NAO will qualify on this issue.

  2.  Design, Build, Finance and Operation (DBFO) balance sheet treatment in respect of Financial Reporting Standard 5—HA and the NAO have yet to reach agreement on the appropriate accounting treatment for the DBFO roads. The NAO position is that insufficient information has so far been provided, in relation to a number of concerns raised, to enable a judgement to be made. There is now insufficient time for this process to be completed for the 1999-2000 accounts, and so there is likely to be a qualification on this issue.

2000-01 accounts

  1.  The problems identified above will be resolved in time for the 2000-01 accounts.

3.  OFFICE OF THE RAIL REGULATOR

Part 1: Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  Failure to include provision for pension liability.

  2.  Discrepancy between cash flow statement and balance sheet.

Part 2: Action being taken to address the problems

(v)  Other

  1.  The reason for the omission of the provision was that the Department was still awaiting advice from the Government Actuary Department at the time of the audit. This advice has now been received and the relevant provision figure has been included within the 1999-2000 accounts.

  2.  The discrepancy between schedules was satisfactorily reconciled internally following the NAO's audit of the 1998-99 dry run resource accounts.

Part 3: Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Both issues have been resolved in time for the preparation of the 1999-2000 accounts, which have subsequently received an unqualified audit opinion from the NAO.

4.  OFFICE OF WATER SERVICES

Part 1: Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  Presentation of Schedule 1, and its relationship with the cash flow statement in Schedule 4 (OFWAT operates under a token Vote).

  2.  Although not part of the basis for qualification, the NAO's management letter also noted:

    (i)  difficulties in reconciling Schedules 1 and 4 to supporting notes in the accounts relating to income and creditors;

    (ii)  the difficulty in producing modified historic cost calculations on fixed assets from the new fixed asset system; and

    (iii)  a relatively limited knowledge amongst finance staff of resource accounting issues.

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  OFWAT uses the Sun Accounts System, which is widely used in Government and in the private sector. The Department is giving active consideration to further developing the system so as to produce accruals and prepayment information in-year to support the effective management of resources.

  2.  OFWAT has further enhanced its fixed asset system (known as HARDCAT) to simplify the production of the figures required for the financial statements and the notes to the accounts.

(ii)  Staffing

  1.  For the purpose of producing the 1999-2000 accounts, OFWAT supplemented its well qualified finance team with specialist advice from Deloitte & Touche. This will be repeated for producing the 2000-01 accounts. In addition, an evaluation is currently being completed to identifying the lessons learned from last year's experience.

(iii)  Training

  1.  As noted above, in-house skills are supplemented by external input. Lessons emerging from the evaluation of the 1999-2000 accounts process will feed into a revised training programme.

Part 3: Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The issue that led to the qualification of the 1998-99 dry run resource accounts has been resolved. OFWAT have received an unqualified opinion on their 1999-2000 accounts.

5.  HOME OFFICE

Part 1:  Nature of 1998-99 resource account opinion

Opinion:   Adverse opinion

Reasons for adverse opinion:

  1.  Tangible fixed assets—problems arose concerning reconciliation supporting evidence and PFI treatment, as well as difficulties complying with FRS 15, regarding valuation of buildings.

  2.  Intangible fixed assets—there were differences in the recording of investments as compared with the accounts of the Forensic Science Service and the Fire Service College.

  3.  Cash—the resource account figures did not agree with the Vote.

  4.  Debtors—there were a number of errors relating to debtors and prepayments, and difficulty in reconciling the figures with the underlying manual data. Moreover, there was no provision for bad debts. The Home Office was unable to comply with the requirement to mirror the spending profile of grants to reflect that of the recipient bodies.

  5.  Current liabilities—there were similar underlying data and reconciliation issues as those identified for debtors.

  6.  Provisions—the dilapidation provision for leased properties had not been fully calculated.

  7.  Capital and Reserves—the figure in the accounts did not match the general ledger.

  8.  Consolidation and presentation—

    (i)  a description of the entities within the departmental boundary was not included, and no mention is made of post balance sheet events;

    (ii)  there were discrepancies between the figures in the schedules and other parts of the accounts. No explanation had been given in Schedule 5 of the apportionment of operating costs by objectives.

    (iii)  There were errors and omissions in the Notes, including the absence of figures for the two agencies and the analysis between RFR1 and RFR2. The resource account did not reconcile with the Appropriation Account.

Part 2:  Action being taken to address the problems

(i)  Systems and Process

  1.  The Business & Accounting Strategic System (BASS), supplied by Ross Systems (UK) Ltd, operates two systems in tandem—a cash data set and accruals data set. Greater use of the accounting system (BASS) functionality is being considered during the Finance Foundation Project being undertaken by the IT suppliers, SIRUS.

  2.  A mapping document has also been developed for the Chart of Accounts and we will also rationalise the Chart of Accounts to improve data presentation.

(ii)  Staffing

  1.  Work has been supported by the reintroduction of a RAB project team, with a RAB project Manager in London and two additional accountants who have been recruited in Liverpool. Another accountant has been recruited in London as the main liaison with the Home Office Directorates. The Department is considering increasing this resource further near the year-end.

(iii)  Training

  1.  A series of courses will be delivered in 2001 to appropriate staff in the Directorates who prepare the underlying accruals data for the annual accounts. These will be combined with material on procedures that will be applied from April 2001 on an ongoing basis.

(iv)  (where applicable) Accounting Policy Issues

  1.  The application of FRS 15 is as yet unresolved and is the subject of ongoing discussions between the NAO, HM Treasury and the Department.

(v)  Other

  1.  A reconciliation has been made of the fixed assets information on BASS and on the fixed assets register, although some adjustments remain to be done.

  2.  Significant progress has been made in obtaining information on dilapidation provisions on leased properties, but there are some properties for which the information is outstanding.

  3.  A further attempt has been made to reconcile the resource account with the appropriation account, but this has not yet been successful. A workshop has been held on this issue and a further attempt will then be made to carry out the reconciliation.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  It is expected that the majority of issues relating to fixed assets, as well as current assets and liabilities, will be resolved in time for the 1999-2000 accounts.

  2.  Some improvement will be achieved in the underlying data provided by Directorates but further work in this area will still need to be done.

  3.  It is expected that a proper reconciliation of the resource account and the appropriation account will be made in time for these accounts.

2000-01 accounts

  1.  Any outstanding matters on fixed assets and current assets and liabilities will be cleared up.

  2.  The Directorate liaison accountants will validate all underlying data.

  3.  The remaining data on dilapidation provisions will be included in the accounts.

2001-02 accounts

  1.  It is possible that agreement on the application of FRS 15 might not be reached satisfactorily until the 2001-02 accounts.

6.  CHARITY COMMISSION

Part 1:  Nature of 1998-99 resource account opinion

Opinion:   Adverse opinion

Reasons for adverse opinion:

  1.  Failure to reconcile the resource account to the appropriation account, and inadequate records in support of Schedules 1 and 2.

  2.  Incorrect construction of Schedules 1 and 4, and misstatement of balances within those schedules. The statements did not reconcile.

  3.  Unsupported opening and closing balances for the General Fund Revaluation Reserve.

  4.  Unreliable values for tangible fixed assets, and incorrect accounting treatment of downward revaluation of IT equipment.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  The fixed asset database (known as Archibus) is now live, and the reporting system (Crystal Reports), which enables automatic calculation of re-lifing and revaluation will be integrated with Archibus by January 2001. A detailed procedures manual to support the training programme has been issued to users. This includes a requirement for an annual check of assets to be carried out prior to revaluation.

  2.  SunAccount is currently undergoing a programme of "housekeeping" exercises, led by our agency specialist (see Staffing comments below). This will enable the system, currently configured for cash accounting, to produce accruals accounting data as its main function, removing the need to collect and maintain the data outside the system. The Commission are also reconfiguring the system to enable better cashflow management, and easier reconciliation of capital asset expenditure with Archibus data. They are also introducing a VAT control account facility.

  3.  Whilst much of the data for the 1999-2000 accounts has necessarily been gathered outside these systems, this will not be the case for the 2000-01 accounts, thus reducing the margin for error between the systems and the accounts and providing a clearer audit trail.

(ii)  Staffing

  1.  The NAO have taken the view that greater staffing resources should have been allocated to the preparation of the account. Concurrent work and associated pressures had hindered progress on the accounts.

  2.  The Charity Commission is a small department and a careful balance must be maintained between support functions and operational front line staff. The Commission has continued to suffer recruitment and retention problems in its Finance function. Nevertheless, the Department is giving top priority to successful implementation of RAB, and ensuring that adequate resources are deployed on this work. The Department has employed a consultant experienced in Resource Accounting, an inventory specialist to address the fixed asset problems and an accounts manager/systems specialist to assist the RAB project manager.

  3.  Longer term staffing needs are to be reviewed in the New Year.

(iii)  Training

  1.  The Commission's finance functions are centralised in the London office, where most RAB activities have been focussed. Most of the Commission's budget is administrative costs, with limited capital expenditure (mainly on IT). The concept of commitments has been incorporated into day to day budget management and those involved in capital asset purchasing and management have been trained in their responsibilities and are developing their expertise. Specialists have attended various Civil Service College courses and seminars in addition to the ad hoc workshops presented by the Treasury. Appropriate staff have been gradually introduced to resource based planning and monitoring for the last two years through the Commission's internal planning process. Resource accounting and budgeting will be an integral part of financial training for managers as a result of a training needs assessment carried out with our training division. It has been formalised by inclusion in the current departmental training plan.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The Commission has produced a set of resource accounts for 1999-2000 which are currently being audited by the NAO. There should be a significant improvement in the quality of the accounts from the 1998-99 dry run accounts.

2000-01 accounts

  1.  The production of accounts will be significantly less complicated as data will be almost entirely system generated, thus reducing the opportunity for error and providing systematic documentation for the audit trail.

7.  THE LORD CHANCELLOR'S DEPARTMENT

Part 1:  Nature of 1998-99 resource account opinion

Opinion:   Qualified (Limitation in scope and disagreement)

Reasons for qualification:

  1.  The Department had adjusted its operating costs in respect of grants paid and payable to recognise them in the period in which the recipient carries out the underlying activity.

  2.  The NAO were unable to satisfy themselves that the opening creditor and accruals balances derived from manual returns provided by the courts and other budget holders were materially correct.

  3.  The Department failed to retain sufficient documentary evidence to support certain assertions in the model developed to estimate accrued expenditure in respect of its liability for criminal legal aid expenditure.

  4.  The Department had not valued its non-operational antiques.

  5.  The NAO was unable to confirm that all criminal legal aid awards and the determination of contribution orders in magistrates' courts had been made in accordance with legal aid regulations.

  6.  The Department has recognised its liability for criminal legal aid in terms of the amount due up to the closing balance sheet date. However, the NAO's view is that the Department should recognise its liability for all ingoing cases at the balance sheet date where criminal legal aid has been granted.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  The Access to Justice Act 1999 has fundamentally reformed the provision of legal aid. The part of the Act covering criminal proceedings will be commenced from 2nd April 2001. This will include a change to remove the need for a means test before legal aid can be granted. This should bring to an end the long standing qualification of the accounts under cash accounting, concerning limited evidence available to give reasonable assurance of full compliance relating to the award of criminal legal aid.

(iv)  Accounting Policy Issues

  1.  The Department was unable to comply with the Resource Accounting Manual with regard to grants payable. Discussions between the Treasury and the Department on "underlying activity" for grants paid to magistrates' courts are ongoing.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The problems relating to opening balances, documentary evidence for criminal legal aid liabilities and the accounting treatment of criminal legal aid liabilities have all been resolved in time for the 1999-2000 accounts.

  2.  The issue relating to the treatment of grants has been partially resolved and will be resolved fully following further discussions with HM Treasury.

2000-01 accounts

  1.  Work is already commissioned to value non-operational antiques and this is planned to be completed in time for the 2000-01 accounts.

2001-02 accounts

  1.  It will take time for the changes to legal aid regulations to affect payments. Consequently, a considerable amount of legal aid paid during 2001-02 will be paid on the basis of the old regulations, but the Department expects, in time, to avoid a further qualification on this issue.

8.  CROWN PROSECUTION SERVICE

Part 1:  Nature of 1998-99 resource account opinion

Opinion:   Adverse opinion

Reasons for adverse opinion:

  1.  Cost awards—failure to account for income and debtors on an accruals basis. This was mainly due to difficulties in obtaining comprehensive data from magistrates' courts on the detail of uncollected and outstanding costs awarded to the CPS.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  The CPS have improved and are continuing to improve their systems for gathering information on an accruals basis by:

    —  undertaking a complete review of all returns from magistrates' courts for 1999-2000;

    —  undertaking investigative visits to magistrates' courts to explore procedures, integrity and auditability of processes;

    —  reviewing in-house systems for recording and collating data.

    —  requesting magistrates' courts to provide detailed listings to support debtor balance; and

    —  chasing magistrates' courts from whom returns have not been received or where errors were detected.

(ii)  Staffing

  1.  The CPS has created a specialist unit to manage the implementation of resource accounting and budgeting. The posts are being filled presently.

  2.  A contract accountant will be employed to assist in the preparation of the 2000-01 accounts.

(iii)  Training

  1.  Staff in the central accounts function have completed distance learning packages in resource accounting.

  2.  Managers in the central accounts function have attended the Civil Service College in resource accounting and budgeting.

  3.  There will be ongoing training for appropriate staff in 2000-01 and 2001-02.

(iv)  Accounting Policy Issues

  1.  The NAO and CPS are currently revisiting the accounting treatment of cost awards. The CPS has no control over the collection of cost awards information or the quality of record-keeping by the magistrates' courts.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Introduction of income and debtors on an accruals basis into the accounts.

  2.  Significant improvements in the quality of the supporting data.

2000-01 accounts

  1.  Further improvements in the quality of the supporting data.

9.  TREASURY SOLICITOR'S DEPARTMENT

Part 1:  Nature of 1998-99 resource account opinion

Opinion:   Nil opinion

Reasons for nil opinion:

  1.  Lack of information concerning accruals for external services, associated with legal cases, received as at 31st March but not invoiced at that date, and absence of systems for capturing such information.

  2.  An inability to provide figures in respect of adverse costs liabilities (where the court has ordered TSD clients to meet the other side's legal costs), which are sufficiently robust to withstand audit.

  3.  The absence of accounts for the Government Property Lawyers (GPL) for 1997-98 and 1998-99.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  GPL accounts—the technical issues surrounding the preparation of accounts for GPL have been resolved and accounts for 1997-98 have been audited and published. This has enabled the 1998-99 accounts and 1999-2000 accounts to be finalised and these are currently with the NAO. As a consequence of the Government's decision that GPL should close on 30 September 1999, these will be the final accounts for the GPL, and so this will not prove a problem in future years.

  2.  Legal accruals—this is a critical matter and the Department's Accounting Officer has taken the lead in seeking to put in place a system to capture this information as at 1 March 2001, and to address the problems with previous systems which were used to prepare the 1999-2000 account. The proposed system has been discussed and, subject to NAO views, a new system will be introduced from January 2001.

  3.  The system will be manual and paper based initially, but it is expected to be replaced as the Department develops and implements a computerised Practice and Case Management System. However, this will not come fully on stream until 2002.

  4.  Adverse costs—systems are being developed to enable TSD to exert close control over adverse costs cases. These will be in place to capture the relevant information for resource accounts as at 31 March 2001. The Department is also considering changes in the method of payment, which, subject to discussion with client departments against which court orders are made, will transfer responsibility for the payment of adverse costs to those departments from 1 April 2001.

  5.  Accounting and Management Information Systems—TSD has procured a new accounting system (CFACs) which is presently being introduced. The Department has experienced some difficulties which have meant the system is not yet fully operational, but it is already capturing expenditure information. A project plan has been prepared to implement further modules with an ultimate target date of 31 March 2001.

(ii)  Staffing

  1.  Since Trigger Point 3 TSD has increased the level of accountancy expertise within the Department. The intention is to increase further these resources to ensure that the 2000-01 resource accounts are available for timely audit and that the Department's business systems are sufficiently robust to meet future demands. This will include creating a new Senior Civil Service Post of Director of Finance to oversee RAB implementation. It is expected that the current team will shortly be strengthened by two more qualified accountants on short-term contracts.

(iii)  Training

  1.  To date, TSD's training effort has been concentrated within the finance team, which was seen as the priority. This has included building on specialist skills and knowledge by strengthening the accounting base, recruiting and sponsoring a part qualified accountant and encouraging junior staff to undertake formal training in accounting (AAT or book-keeping). The Department will continue to encourage and assist others to undertake similar training and, as part of the current budgeting round, the finance team is seeking funding for continuing this process. Finance staff and other selected users have also received training on the new CFACs system and this will continue as further modules are implemented.

  2.  There remains a need to extend training on resource accounting across the Department, and a more detailed project plan is in preparation.

(iv)  Accounting Policy Issues

  1.  Apart from the issues discussed elsewhere, TSD has agreed its accounting policies with the NAO during the course of preparing the accounts for 1999-2000.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Draft accounts for TSD and its associated bodies have been delivered to the NAO and a consolidated resource account is in preparation. The Department was unable to present a final account by 30 November and has sought a derogation to enable further work to be done, for example continuing development of systems for capturing legal accruals and adverse costs liabilities information.

2000-01 accounts

  1.  It is anticipated that unqualified resource accounts will be produced for 2000-01.

2001-02 accounts

  1.  As for 2000-01.

10.  MINISTRY OF DEFENCE

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Disclaimer

Reasons for disclaimer:

  1.  Aircraft valuations—the NAO were not content that the Department had applied the agreed aircraft valuation methodology (and associated development costs) in the 1998-99 opening balance sheet.

  2.  Debtors and creditors—the NAO observed that a number of Top Level Budget-holders' (TLBs) debtor and creditor balances revealed many areas of uncertainty.

  3.  Management review and audit trails—the NAO expressed concerns regarding the adequacy of management review processes and the lack of adequate supporting information and audit trails.

  4.  Supply systems and Quartermaster General (QMG) fixed assets—the NAO expressed significant concerns with uncertain and incomplete accounting data in the Department's supply systems (eg pricing, stocktaking, capital spares and associated reconciliations) and uncertainties on QMG managed fixed assets.

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  Aircraft Valuations—an independent valuation exercise was commissioned with HVR consulting. On completion, the revised values were agreed with the NAO and subsequently, TLBs adjusted their aircraft valuations and associated development costs. These adjustments were made as prior year adjustments in the 1999-2000 opening balance sheet. The issue is now resolved. This was a prolonged and exhaustive process. The result was a significant change in the relative values of associated intangible and tangible fixed assets. The net change to the Department's balance sheet of £85 billion was £400,000.

  2.  Debtors and creditors—the observations raised related to a miscellany of processes, procedural and some systems issues in a number of TLBs. Since 1998-99, TLBs have been aware of the shortcomings and developed processes to capture more robust debtor and creditor balances. At departmental level, a "preparing for audit" training course was developed—a specific element of which covers the accounting for debtors and creditors. Awareness of the requirement to calculate robust figures which can withstand audit was raised through training and experience of the accounting and audit process. A number of the observations related to receipting and payment processes within the supply systems, where systems solutions, including a major "Purchase to Payment" (P2P) project, are being developed, but have yet to be introduced.

  3.  Management review and audit trails—a number of actions to address this issue have already been taken. The Department developed the "preparing for audit" training course with PricewaterhouseCoopers and input from the NAO. Over 600 staff have now attended this course. Best practice instructions on the audit requirement were included in the 1999-2000 resource account instructions, and an NAO paper detailing the audit requirement and providing advice on management review was circulated to all TLB Chief Accountants. TLB management boards now routinely review monthly and year end accounts, and the resource accounts timetable was modified to allow more time for management review before submission to the centre. There is also closer liaison between TLBs and the NAO which has improved the understanding of the audit (and audit trail requirements).

  4.  Supply systems and fixed assets—the Department has recognised that the significant difficulties experienced in bringing their supply systems into line with the needs of resource accounting and budgeting will take some time to resolve. The effects of these difficulties are pervasive throughout the Department's accounts. As a consequence of the Strategic Defence Review, the Defence Logistics Organisation (DLO) was formed and this provided the opportunity to converge 170 separate supply systems and take improvement work forward in a co-ordinated manner, driven from the DLO's headquarters. Given the high profile and departmental impact of the known weaknesses in this area, a Stock Accounting Management Board was established with representatives from the central RAB and internal audit teams, as well as the NAO. A team was tasked with delivering a comprehensive stock accounting improvement programme that included taking forward a number of workstreams to address the known areas of concern. This is a continuing area of activity. Work so far has included:

    —  Pricing—a best practice approach was agreed for the validation of existing prices (the DLO has some two million price records) and controls on the inputting of new prices into the central price records. This continuing work is aimed at validating the "top slice" of prices, representing some 80 per cent by value. The NAO has said that it is content with the principle of this approach. Progress during 2000 has been good and it is expected that work will be completed in time to support the 2000-01 closing balance—but there may be continuing uncertainty on consumption figures in the operating cost statement in 2000-01;

    —  Stocktaking—the Department's stocktaking processes were refocused to meet the RAB requirement for stock figures in the balance sheet to be supported by appropriate accounting arrangements. Stocktaking coverage now focuses on both stock-line and value, supported by analysis and count differences. The DLO has a target which equates to an annual coverage of 70 per cent of stock by balance sheet value and has agreed with the NAO that a statistical approach to stocktaking is sensible. It is expected that the DLO's count coverage exercise will be fully completed to support the 2000-01 resource account, and it is understood that the NAO has accepted that existing stocktaking activities are broadly sufficient, and that stocktaking will not be raised as a material issue in the C&AG's 1999-2000 audit report;

    —  Capital spares—in response to the RAB requirements for capital spares accounting, the DLO implemented accounting processes and systems aimed at producing accounting information. The DLO has been addressing validation thresholds, correct classifications, and lifting of pools. The approach to each of these has been agreed with the NAO. The DLO has now completed much of the work required and has reported that few material adjustments to the accounts have resulted. The workstream activity is due to complete by the 2000-01 closing balance;

    —  Systems reconciliations—to satisfy NAO concerns over the lack of audit trails and inadequately supported balance sheet entries, over 200 separate reconciliation points have been identified to date. A programme to assess and, where necessary, improve and document the reconciliation process is progressing well, with many of the major supply system to reconciliation system reconciliations already in place. This programme is due to be completed by 31 July 2001.

  5.  QMG fixed assets—to improve the accuracy of data held on the Army's fighting equipment register, census processes and controls have been formalised to build confidence in the data. Good progress has been made in the areas of asset valuation through the "Census 2000" process, and in reconciling the balances for capital spares. The new combined census has greatly improved the level of assurance, but some areas of uncertainty remain as to whether all recorded assets are actually held.

(ii) and (iii)  Staffing and Training

  1.  The Department has developed and implemented a comprehensive training programme to support the introduction of RAB, covering professional and vocational, general awareness, business processes and systems courses.

  2.  The Finance Training Committee (FTC) meets biannually, and is chaired at Director General level. Below the FTC, a network of training committees ensures that policy is reflected in the training course content and that both content and course structure are regularly reviewed and evaluated.

  3.  To date, some 35,000 days of RAB awareness, business process, systems and financial management training have been completed. This represents approximately 6,000 personnel trained in accounting operations, of whom 2,500 are systems trained. Around 4,500 are trained in the new planning and budgeting processes of whom around 1,800 are systems trained.

  4.  In addition to the 160 externally recruited qualified accountants, 484 staff within the Department are CCAB trained (mainly CIMA) with a further 246 in training. 210 staff have successfully completed either the ACCA Diploma in Accounting and Finance or the CIPFA Advanced Diploma in Business and Financial Management. A further 206 are studying for this. 139 staff have attained the AAT qualification, with a further 861 staff part qualified or undertaking training.

(iv)  Other issues

  1.  Financial Reporting Standard (FRS) 15—The Department was not able to comply fully with the new FRS 15 for 1999-2000, but has developed an approach for implementing it during 2000-01.

  2.  Assets in industry—the Department was not able to identify all the assets held in industry and there was a risk that the balance sheet was understated. A programme to trawl industry was implemented and returns from over 240 UK contractors were received. The information was included in the 1999-2000 balance sheet. Further work is ongoing to introduce robust and accurate processes to capture all assets in industry, and this work is expected to be completed by 31 December 2001.

  3.  The Department was not able to attribute, in Schedule 5 of the 1999-2000 resource accounts, resource figures against the main and supporting objectives identified in the 1999-2000 Public Service Agreement as required by the RAM. However, the Department has secured a dispensation from the Treasury to attribute resource outturn to the three main departmental outputs. Work is in hand to address this issue for the future.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Aircraft valuations—fully resolved.

  2.  Debtors and creditors—partly resolved. The Department expects there to be a significant improvement, reflected in the 1999-2000 audit opinion. However, there is a significant residual issues within the air environment system of the DLO. This is not expected to be fully resolved until the introduction of the P2P system.

  3.  Management review and audit trails—largely resolved. The Department expects the NAO to report very significant improvements and will only cite two specific cases where management review and audit trails have proved inadequate: validation of some Defence Housing Executive housing assets; and certain Defence Estates valuations relating to a number of specific sites which had been vacated at the time the opening balance sheet was created, with a view towards disposal. Both cases are being addressed and will be resolved by the 2000-01 accounts.

  4.  Supply systems—partly resolved for 1999-2000, but significant uncertainty remains. This is largely responsible for the disclaimed opinion on the 1999-2000 resource account. Progress made against the workstreams outlined in Part 2 has been as follows:

    —  Pricing—not fully resolved for the 1999-2000 account. Pricing of items representing over 75 per cent of the balance sheet value have been validated with workstream activity due to be completed by 31 March 2001;

    —  Stocktaking—largely resolved. The Department understands that the NAO is generally content with their stocktaking processes which are now believed to be broadly sufficient to support the physical existence of reported assets. Further statistical analysis of stocktaking data each year, required to support RAB, will be undertaken for the first time to support the 2000-01 resource account. This workstream is also due to be completed by 31 March 2001;

    —  Capital spares—partly resolved. The review of thresholds, classifications and lifing of pools has resulted in some 80 per cent by balance sheet value being validated. Workstream activity continues and is due for completion by 31 March 2001;

    —  Systems reconciliation—a programme to assess and, where necessary, improve and document the reconciliation process is progressing well, with many of the major supply system to reconciliation system reconciliations already in place. This programme is due to be completed by 31 July 2001;

    —  QMG fixed assets—partly resolved. There are remaining uncertainties (even if much improved) on the validity of certain census data which has implications for the level of uncertainty in the QMG asset figures.

2000-01 accounts

  1.  Supply systems and debtors and creditors (in the DLO) are both expected to be significantly improved by the 2000-01 closing balance. A number of DLO stock accounting workstreams (including pricing, stock taking and capital spares) will be completed by 31 March 2001. However, the problems are still likely to be material enough to result in an overall qualification of the 2000-01 audit opinion.

2001-02 accounts

  1.  All the remaining DLO stock accounting workstreams are planned to be completed by 31 March 2002. However, these improvements are unlikely to be fully effective (in terms of a positive impact on the audit opinion) until the 2002-03 resource account.

11.  FOREIGN AND COMMONWEALTH OFFICE

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  Weakness in reporting and checking procedures which were needed to ensure accuracy of core balance sheet data.

  2.  A need for greater accuracy in calculation of creditor and debtor valuations.

  3.  The lack of a fully accruals based accounting system to support the production of robust resource accounts

  4.  A need for further training to ensure that FCO staff at home and overseas fully understood the principles and disciplines of RAB.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  The Department now has more rigorous systems for overseas post reporting, management checking and review, and is implementing a better system for recording debtors and creditors.

  2.  The Department is introducing a new accounting system which is already in place at 153 overseas posts. The 2000-01 accounts will be prepared directly from this new system.

(ii)  Staffing

  1.  A team of contract accountants has been recruited to inject commercial accounting knowledge and expertise into the FCO's finance function, and to help develop the accounting systems and processes to meet resource accounting requirements.

  2.  The Department is now looking to recruit suitably qualified and experienced accountancy staff into key areas on a permanent basis.

(iii)  Training

  1.  External consultants (Accountancy Tuition Centre (ATC)) have trained over 300 FCO staff. All modules of the Department's training programme are now operative.

  2.  The Department has launched a programme of ACCA and AAT accounting diplomas, which will be undertaken by 42 staff.

  3.  ATC have provided several regional training seminars overseas.

  4.  An internal world-wide training programme was carried out in November and December 2000, focusing on resource accounting, departmental objectives, and outputs and performance. This follows a series of successful internal seminars on the FCO's new system of objectives, Public Service Agreements, Service Delivery Agreements and Technical Notes (for measuring outturn against these targets).

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Robust review of procedures has been implemented to underpin confidence in balance sheet values, including an extensive reconciliation and rationalisation of suspense account values.

2000-01 accounts

  1.  The main accounting systems will be fully RAB compliant and the accounts will be generated from this system.

2001-02 accounts

  1.  RAB responsibilities will be devolved to commands, and the Department will move to a quarterly reporting cycle for the resource accounting schedules.

  2.  A world-wide training programme on resource accounting and budgeting will be completed.

12.  DEPARTMENT FOR INTERNATIONAL DEVELOPMENT

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  Unresolved accounting policy—at which point and how certain obligations should be treated as liabilities.

Part 2:  Action being taken to address the problems

(iii)  Training

  1.  Training issues did not contribute to the qualification of the dry run resource accounts. However, since the dry run the Department has taken further action to ensure that the relevant staff are properly trained.

  2.  DFID's training strategy remains at the centre of the department's plan to raise the financial awareness of staff and to ensure that they are competent in those aspects of finance that are relevant to their work. Good progress has been made following the establishment of a Finance Training Committee. Extensive training has been give to staff in the use of new expenditure and forecasting software which is web enabled and accessible overseas. Finance staff have received initial training on preparing the resource accounting statements and will shortly receive training on bidding and managing budgets on a resource basis. An update on RAB has been presented to staff in several of DFID's main overseas offices, including India, Kenya, Tanzania, and Uganda. Finally, a network of departmental finance officers is being established who will receive more extensive training.

(iv)  Accounting Policy Issues

  1.  The outstanding issue to be resolved between the NAO and DFID was a technical issue regarding the interpretation and application of Financial Reporting Standard 12 (accounting for provisions and contingent liabilities). Essentially, this rested on whether and how certain liabilities should be include in the accounts, rather than the notes.

  2.  Although this issue related to significant sums of money, what was in question was the treatment of the liabilities, not DFID's recording of the information. It did not therefore affect DFID's ability to produce a resource account.

  3.  Following the production of the 1998-99 dry run resource accounts, further meetings have taken place between DFID and the NAO. DFID is not satisfied that they have resolved this outstanding issue.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The NAO are content with the way DFID proposes to treat the obligations in question.

13.  OFFICE OF FAIR TRADING

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  1.  A minor qualification due to an inability to produce evidence as to the value of a piece of software purchased 12 years ago.

Part 2:  Action being taken to address the problem

(v)  Other

  1.  OFT has now located the necessary records to support the valuation in the accounts and this evidence will be available for future audits.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The issue that resulted in the qualification of the 1998-99 dry run resource account has been fully resolved.

14.  OFFICE OF TELECOMMUNICATIONS

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified

Reasons for qualification:

  Although no substantive issues of concern arose, five issues were raised by the NAO:

  1.  Schedules 1 and 5 format—a definitive format properly to reflect a token vote, as OFTEL had in 1998-99, was not agreed.

  2.  A lack of resource accounting knowledge was identified.

  3.  Management review—the management review of the account and supporting schedules lacked the required rigour.

  4.  Fixed assets—the accounting treatment for downward revaluations of IT equipment did not allow for permanent diminution in value, and the indices used to revalue IT equipment were inappropriate. In addition, a small number of assets has not been properly security tagged.

  5.  Debtors/Creditors—there was no proper reconciliation between the debit and credit balances on the suspense accounts and debtors and creditors in the resource account.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  A definitive format for Schedule 5 has been agreed prior to the 1999-2000 accounts.

  2.  A review of OFTEL's accounting procedures for fixed assets was undertaken to ensure best practice and this has been implemented prior to the 1999-2000 accounts. In addition, regular asset register to nominal ledger reconciliations are being performed in anticipation of the 2000-01 accounts.

  3.  Monthly reconciliations for debtors and creditors have been introduced for the 1999-2000 account.

(ii)  Staffing

  1.  The production of resource accounts had put a great deal of pressure on OFTEL's finance team. Recruitment for an additional finance post was undertaken and the successful (fully qualified) candidate took up the post in July 2000. This has assisted the finance unit's knowledge base and the management review process and led to an improved 1999-2000 account (although the benefits will be realised more fully still in the 2000-01 accounts).

(iii)  Training

  1.  All finance staff are now either qualified accountants or are attending appropriate training courses, such as AAT and CIMA, to enhance their accruals accounting knowledge.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  All the issues leading to the qualification of the 1998-99 dry run accounts have been resolved in time for the 1999-2000 accounts.

15.  OFFICE OF GAS AND ELECTRICITY MARKETS

Part 1:  Nature of 1998-99 resource account opinion

  Note: This organisation was formed in 1999-2000 from the Office for Electricity Regulations (OFFER) and the Office of the Gas Regulator (OFGAS).

Opinion:

  1.  OFFER—Qualified (Disagreement)

  2.  OFGAS—Disclaimer

OFFER—Reasons for qualification:

  1.  Limited evidence available to support existence and completeness of the fixed asset register.

  2.  Uncertainty over debtors.

OFGAS—Reasons for disclaimer:

  1.  Limited evidence to support figures in accounts, and so the NAO was not able to form an opinion.

Part 2:  Action being taken to address the problems

(v)  Other

  1.  OFGEM's predecessor organisations OFFER and OFGAS received qualified accounts in 1998-99. OFGEM's finance team has been strengthened considerably since then (six staff are currently undertaking professional accountancy training). OFGEM completed a 1999-2000 mid-year hard close and have subsequently produced full 1999-2000 unqualified accounts.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The issues which led to a qualified opinion and a disclaimer on the accounts of OFFER and OFGAS respectively have been resolved, and the 1999-2000 accounts have received an unqualified opinion.

16.  MINISTRY OF AGRICULTURE, FISHERIES AND FOOD

Part 1: Nature of 1998-99 resource account opinion

Opinion: Adverse opinion

Reasons for adverse opinion:

  1.  Accounting for fixed assets:

    (i)  There was a disagreement over the accounting policy for asset pools;

    (ii)  The accounting treatment in respect of fixed assets was incorrect; and

    (iii)  Procedures and records were not sufficiently robust.

  2.  Treatment of debtors:

    (i)  The Department failed to follow the Resource Accounting Manual and generally accepted accounting practice (GAAP) with respect to Common Agricultural Policy (CAP) Schemes; and

    (ii)  The EU debtor balance was misstated.

  3.  Treatment of creditors:

    (i)  EU creditors were misstated and did not follow stated accounting policy; and

    (ii)  Balances and records for creditors generally were inaccurate and incomplete.

  4.  Limitations in audit scope:

    (i)  The NAO were unable to verify the existence of assets due to inadequate identification procedures;

    (ii)  There was a lack of supporting evidence for netted off debtor and creditor balances;

    (iii)  There was a lack of supporting evidence for contingent liabilities and commitments; and

    (iv)  Schedule 5 was unavailable for audit.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  Fixed Assets:

    (i)  Line managers are acting on the recommendations of an internal audit review of fixed asset recording procedures. The NAO will require a letter of representation from the Ministry on the reliability of the fixed asset amounts in the accounts and evidence of revision to the figures.

  2.  Debtors:

    (i)  The issues of EU debtors is being resolved as an accounting policy issues, alongside the issue of EU grant creditor accounting policy;

    (ii)  The VAT account is being reconciled with the aim of completion before the resource account is signed off.

  3.  Creditors:

    (i)  The Ministry is carrying out a reconciliation of accommodation accounts before the resource account is completed;

    (ii)  Further information is being collected on the completeness and accuracy of the Flood Defence Grant accrual;

    (iii)  As with debtors, the treatment of EU grant creditors is in the process of being resolved as an accounting policy issue.

  4.  Schedule 5—further information is being provided to the NAO on apportionment methodology and consistency of approach.

(ii)  Staffing

  1.  The Department has established a RAB project board, chaired by the Principal Finance Officer. An additional senior accountant has been drafted in to fill the role of RAB Project Manager.

  2.  Resource accounting policy is now integrated into the work of the Ministry's financial policy division. The division's resources include a number of qualified accountants, including the deputy head of the division.

  3.  An additional post has been established within the central finance function dedicated to the production of the accounts. The Department is filling the post presently.

  4.  The internal audit division has been commissioned to review the skills and resources needed in the finance sections of operational areas to operate resource accounting policies and procedures.

(iii)  Training

  1.  Further awareness training has been developed and delivered across all groups within the Department.

  2.  A number of candidates are aiming to achieve the AAT Diploma in government finance by 31 March 2001.

  3.  The majority of staff in key financial posts have received detailed training in resource accounting and budgeting.

  4.  Training for senior managers has been delivered to the majority of Senior Civil Service and Grade 6 staff.

(iv)  Accounting Policy Issues

  1.  The Department and the NAO will discuss the possibility of simplified rules for accruing EU grant and subsidy expenditure for the problematic schemes.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  It is hoped to satisfy audit requirements for as many of the areas listed above as possible for the 1999-2000 accounts, and much progress has been made. However, qualifications are possible in the areas listed below:

  1.  Opening balances, and their effect on the operating cost statement.

  2.  Regularity issues arising from the appropriation account.

  3.  Fixed assets (this will depend on the letter of representation and revisions to balances set out in Part 2).

  4.  Accommodation account (this will depend on the outcome of the reconciliation exercise described in Part 2).

  5.  VAT account (this will depend on the outcome of reconciliation exercise also described in Part 2).

  6.  Flood grant accrual (this will depend on completeness of further audit evidence).

  7.  Accumulated error identified by the NAO across the account (if material).

  8.  Schedule 5, (this will depend on the adequacy of further audit evidence).

2000-01 accounts

  1.  It is anticipated that all outstanding issues will have been resolved by the time of the preparation of the 2000-01 accounts.

17.  FORESTRY COMMISSION

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified.

Reasons for qualification:

  1.  Inappropriate application of the methodology for compiling Schedule 5.

  2.  Negative balance on the core department's Revaluation Reserve.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  Schedule 5—Prior to the introduction of the 1999-2000 resource accounts, the methodology was further refined and documented, and during the production of the 1999-2000 resource accounts, an exercise was carried out to update the figures used to apportion income and expenditure.

  2.  Revaluation Reserve—a negative balance was recorded on the core department's Revaluation Reserve. Subsequent investigation found that this was the result of a mis-allocation of a downward valuation of the Headquarters building. This has now been rectified.

  3.  Pension Scheme Statement—following discussions with interested parties, the Commission was advised to produce a separate pension scheme statement, which has now been done.

  4.  Geographic split—a review of the Commission's financial accounting software was undertaken to ensure that the cost centre and account code structure facilitate the production of separate sets of accounts for each country, following devolution. This has enabled the Commission to produce separate accounts for each country, for the core department, and for Forest Enterprise.

(iii)  Training

  1.  The Commission is in the process of identifying formally the delegated financial responsibilities and authority vested in staff at all levels. Financial awareness seminars are being developed to increase understanding of the finance environment and to help staff understand and meet their financial responsibilities. A revised Finance Code—which will form the basis of the awareness seminars—was issued some 18 months ago and continues to be refined and amplified.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The problem in respect of the Revaluation Reserve has now been resolved.

  2.  The NAO continue to have reservations about the level of subjectivity involved in the production of this statement but are content with the detailed processing undertaken.

2000-01 accounts

  1.  Any outstanding Schedule 5 problems will be resolved by 2000-01 if they cause difficulty in 1999-2000.

18.  DEPARTMENT OF SOCIAL SECURITY

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified

  1.  Limitations in the evidence available in support of the material debtor and creditor balances within the balance sheet. There was an absence of full balance sheet audit trail functionality, encompassing a lack of:

    (i)  complete transaction level issues data;

    (ii)  complete transaction level encashment data;

    (iii)  direct transaction level analysis of balance sheet items;

    (iv)  robust reconciliation procedures; and

    (v)  evidence to prove complete and accurate accruals data.

  2.  Irregular expenditure arising from erroneous benefit awards made by the Department and from claimant fraud and fraudulent encashment of instruments of payment. In particular:

    (i)  the level of monetary error in benefit awards, principally on Income Support and Jobseekers Allowance; and

    (ii)  the level of claimant fraud and fraudulent encashment of instruments of payment, particularly order books and girocheques.

  Note: This qualification is not new, as the cash accounts have been similarly qualified for a number of years. Qualification on these grounds is unrelated to the application of resource accounting methodology.

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  Absence of full Balance Sheet audit trail functionality:

    (i)  Encashment liabilities—the lack of complete transaction level issues and encashment data will continue until all benefit payments are made using Automated Credit Transfer (ACT) or another reconcilable method of payment. The Department's Payment Modernisation Programme aims to deliver 85 per cent of benefit payments by ACT by 2005 (and also addresses claimant fraud and fraudulent encashment of instruments of payment).

    (ii)  Overpayment debtors—the problems here are caused primarily by the reliance on standalone overpayment systems that are not accounting systems and are not automatically integrated with either the feeder benefit systems or the Programme Accounting Computer System (PACS). The Strategic Debt Solution proposes replacing these overpayments systems with a new Accounts Receivable system that interfaces with the PACS.

    (iii)  Third party creditors—the Third Party Payments (TPP) creditors system currently only supports deductions from Income Support. The NAO qualification applies to non TPP elements of the third party creditor balance. Further roll outs to TPP to cover other benefit systems and deductions are planned for October 2001.

    (iv)  Accruals and prepayments—a clerical procedure has been developed that provides the audit trail on a range of selected transactions balances.

    (v)  Reconciliation of accruals to cash balances—reconcilations between the various sets of accounting records were incorporated into the 1999-2000 accounts production process.

  2.  Irregular expenditure—

    (i)  In respect of benefit fraud, the Department is:

      —  implementing the Programme Protection Strategy (which commenced in April 1999). This emphasises preventing fraud entering the system (through training, culture change, assurance, and ongoing case management investigative activity). The strategy aims to reduce benefit losses from both fraud and error in Income Support and Jobseekers Allowance by 10 per cent by 31 March 2002, 25 per cent by 2004 and 50 per cent by 2006;

      —  undertaking Benefit Reviews by area to measure how much benefit is paid incorrectly by fraud and establish causes of incorrect payments;

      —  introducing an Order Book Control System on a nationwide basis to recall or stop order book payments; and

      —  aiming, through the Payment Modernisation Programme, to expand the use of benefit payments by ACT from 2003 to 85 per cent of benefit payments by 2005.

    (ii)  In respect of benefit error, the Department is:

      —  through the Active Case Management initiative, seeking to provide secure benefit administration by actively managing both new and ongoing claims by way of gateway and case interventions;

      —  through the Personal Details Computer System, which will be fully operational in 2001, provide a single source of customer personal details across all benefits, reducing the potential for mismatch between benefits;

      —  capturing data at the new claims stage and again at various lifestages of the claims by way of National Risk Profiling Exercises for Income Support and Jobseekers Allowance. This involves analysis of data which will enable identification of characteristics of claims that are most likely to be fraudulent or incorrect, allowing a more effective strategy for interventions to be planned; and

      —  using the new system of Decision Making and Appeals—introduced in July 1999—to simplify the way claims and appeals are processed.

(iii)  Training

  1.  Responsibility for specific elements of training has been devolved to each of the business units in the Department, and a RAB Steering Committee, chaired by the Principal Finance Officer, monitors the progress of RAB implementation, including aspects of training. Senior managers in the Department are committed to ensuring that, in the medium term, the DSS will make improvements in respect of:

    (i)  internal accounting and control procedures;

(ii)   the management information systems employed across the Department; and

(iii)  performance measurement systems and processes.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Balance Sheet audit trail functionality—the reconciliation of cash to accruals balances has been resolved.

  2.  Irregular expenditure—it is not anticipated this issue will be resolved this year.

2000-01 accounts

  1.  Balance Sheet audit trail functionality—more extensive testing of the procedure that has been developed in respect of accruals and prepayments should resolve this issue.

  2.  Irregular expenditure—it is not anticipated this issue will be resolved this year.

2001-02 accounts

  1.  Balance Sheet audit trail functionality—it is anticipated that a number of issues will not adequately be resolved until after the production of the 2001-02 accounts. These are:

    (i)  encashment liabilities—the earliest year for resolution will be 2005-06, when the Payment Modernisation Programme will deliver 85 per cent of benefit payments by ACT;

(ii)   overpayment debtors—the provisional timetable for the implementation of the Strategic Debt Solution initiative commences in 2001-02; and

(iii)  third party creditors—the roll out of other benefit systems is due to commence in 2001-02.

  2.  Irregular expenditure—again it is not anticipated that the problems in relation to irregular expenditure will have satisfactorily been resolved by 2001-02.

19.  HM TREASURY

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Adverse opinion

Reasons for adverse opinion:

  1.  The Government's holdings in the International Monetary Fund and European Investment Bank are assets of the National Loans Fund and Consolidated Fund respectively. HM Treasury excluded both assets from its resource account on the basis that they are outside the resource accounting boundary. The NAO disagreed with this view and, because of its significance in relation to the remaining parts of the Balance Sheet and Operating Cost Statement, decided that the Accounts should be given an adverse opinion.

  2.  The remaining major reason for qualification related to the fixed asset inventory records, where the NAO were unable to satisfy themselves of the accuracy of the inventory of the fixed assets and the reconciliation to the fixed assets disclosed in the balance sheet.

  3.  In addition, the NAO adjudged that debtors and creditors were materially understated, or that they were unable to confirm the balances to a material extent. There were also a number of detailed audit points about the completeness of accruals and prepayments, particularly in relation to the stock valuation of the coins held by the Royal Mint on behalf of HM Treasury.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  A detailed action plan was produced in November 1999, covering the period up to November 2000, to deal with the improvements required in the Treasury's systems. The accruals ledger has since been reorganised, corrected opening balances inserted and all accruals-based information inserted in the ledger.

  2.  A detailed inventory is planned to take place before 31 March 2001 following the office relocation that has taken place during 2000. It is planned to have an accurate inventory complete for 2000-01. Improved systems of asset recording are to be introduced before 31 March 2001. These will ensure robust internal accountability arrangements.

(ii)  Staffing

  1.  A senior project manager was appointed in October 1999 to lead the resource accounting team and a new chief accountant was appointed in June 2000. In addition two qualified accountants were recruited to provide the necessary additional support to the existing small team.

  2.  A reorganisation of the whole of the financial accounting team is being carried out on a phased basis to improve the production of management information, including the resource accounts.

(iv)  Accounting Policy Issues

  1.  The treatment of the international financial institutions mentioned above has not yet been resolved with the NAO but extensive and detailed discussions have been held since February 2000. Both the Treasury and the NAO hope to conclude these discussions soon.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The discussions over the treatment of the international financial institutions are ongoing.

  2.  The only significant issue concerning the accuracy of the 1999-2000 accounts is the fixed asset inventory.

2000-01 accounts

  1.  Following the detailed inventory it is expected that fixed assets will be able to be reconciled reliably to the department's financial records.

20.  CABINET OFFICE

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Disclaimer

Reasons for disclaimer:

  1.  The dry run financial statements, submitted for Trigger Point 3 reporting purposes, were not fully complete. There were a number of omissions, inaccuracies and disclosure errors. In particular, figures relating to Security Facilities Division (SFD) were not included.

  2.  The NAO were unable to confirm the accuracy and completeness of opening balances for debtors and creditors, as appropriate systems were not in place.

  3.  Heritage assets and antiques (to the value of £6.6 million) were excluded from the balance sheet on the grounds that they are non-operational assets. The NAO considered that these assets should be capitalised.

  4.  Tangible fixed assets were overstated by £2.9 million due to the over-valuation of a building, which was disposed of after the year end for the lower amount.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  By the time of the NAO trigger point 3 audit opinion, the Cabinet Office had already addressed many of the concerns raised. In May 2000, a greatly improved draft account for 1998-99 was submitted to the NAO, which included SFD figures, heritage assets and a revised building valuation. Additional efforts were not targeted at improving the opening balances for 1998-99, but focused on the systems and processes involved, with the emphasis on the production of the 1999-2000 resource account.

  2.  The system for identifying accruals and prepayments was improved during 1999-2000 as information was collected from management units relating to these types of transactions. A comprehensive review of supplier invoices was then carried out to identify individual items. From 1 April 2000 this process was further refined by the introduction of a data field within the accounting system, which records accruals and prepayment information throughout the year. This provided significantly improved accruals figures of the 1999-2000 resource accounts.

(ii)  Staffing

  1.  The Cabinet Office has not had difficulties in recruiting and retaining staff with suitable experience for preparing the resource accounts. The department continues to support staff studying for professional accountancy qualifications and other accountancy courses.

(iii)  Training

  1.  A programme of RAB training courses has been implemented across the department, using both internal and external facilitators. These are aimed at improving awareness and understanding of RAB at all levels within the department, with particular reference to the planning and budgeting process.

  2.  As refinements are made to the accounting system, workshops are held and guidance is issued to staff who will be affected by the changes. The finance division also has individual contact points for each management unit to handle day-to-day queries.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  All issues raised by the NAO in the trigger point 3 audit opinion have been addressed for the 1999-2000 resource accounts. The improved procedure for collecting accruals information from 1 April 2000 has revealed deficiencies in the opening balance for accruals in the 1999-2000 accounts.

  2.  Due to the difficulties in carrying out further work retrospectively, the Cabinet Office has accepted that the 1999-2000 accounts will be qualified due to uncertainty on the completeness of the opening balance for accruals.

2000-01 accounts

  1.  The new procedure introduced from 1 April 2000 to collect accruals information should ensure that there will be no material error in the opening and closing balances for accruals in the 2000-01 resource accounts. The accounts are not expected to have a qualified audit opinion.

21.  TEACHERS PENSION SCHEME

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified (Scope Limitation)

Reasons for qualification:

  1.  Limitation in the scope of the audit arising from discussions between the Treasury and the NAO on the accounting treatment of premature retirement compensation payments which were not completed until after the deadline for the production of the accounts.

Part 2:  Action being taken to address the problems

(iv)  Accounting Policy Issues

  1.  The accounts now follow the guidance on the treatment of premature retirement compensation payments and the associated liabilities in the Resource Accounting Manual.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The new accounting treatment has been adopted for the 1999-2000 accounts.

22.  NHS PENSION SCHEME

Part 1:  Nature of 1998-99 resource account opinion

Opinion:

  1.  Pension Scheme—Qualified (Scope Limitation)

  2.  Compensation Scheme—Disclaimer

Reasons for qualification/disclaimer:

  1.  Pension Scheme—the NAO were unable to establish that all contributions receivable were properly recorded in the NHS Pension Scheme resource accounts.

  2.  Compensation Scheme—the NAO were not in a position to provide an opinion on the Compensation Scheme elements of the accounts because the timing of discussions regarding the basis of accounting for Compensation Scheme payments meant that the figures required could not be made available within the necessary timescale.

Part 2:  Action being taken to address the problems

(v)  Other

  1.  The NAO are undertaking further work to establish whether contributions receivable are properly recorded in the NHS Pension Scheme accounts.

  2.  The figures for the Compensation Scheme are now available.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  Pension Scheme—the outstanding issue will be resolved on the successful completion of additional work on contributions receivable.

  2.  Compensation Scheme—the necessary figures were available in time for the 1999-2000 accounts.

2000-01 accounts

  1.  If the work described above is not successfully completed in time for the 1999-2000 accounts it is expected that this will be resolved in time for 2000-01.

23.  PRINCIPAL CIVIL SERVICE PENSION SCHEME (CABINET OFFICE)

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified (Scope Limitation)

Reasons for qualification:

  1.  The NAO and the Treasury had not been able to agree the accounting policy for compensation payments, due to a legal issue. This meant that when the audit of the dry run resource accounts began, many of the necessary figures could not be made available for audit within the required timetable. Consequently, the NAO were unable to provide an opinion that covered the compensation elements and the audit opinion was restricted to the pensions elements of the accounts.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  Changes to the Cabinet Office computerised accounting systems (CORAS) have been carried out and used to produce draft schedules 2 and 3 for 1998-99 and 1999-2000. This data is being held on a developmental database until such time as the NAO agree the structure of the scheme statements. The system will then be made fully operational.

  2.  Further changes will be required to provide monthly outturn reports and trial balances in accruals terms. These changes will take around five days to complete.

(ii)  Training

  1.  Staff in two sections of the Cabinet Office require retraining. This will be carried out by the person responsible for preparing the scheme statements.

(iii)  Accounting Policy Issues

  1.  On the legal issues, all parties concerned have now agreed that the Civil Service Pensions Division (CSP) act as agent for employers when making compensation payments. Scheme statements have, therefore, been prepared for 1998-99 and 1999-2000 using accounting principles discussed and agreed with HM Treasury. The accounting principles used in the preparation of the 1999-2000 accounts have been discussed with the Treasury and the NAO.

  2.  The NAO have undertaken to comment on the structure of the accounts as part of the audit of the 1999-2000 audit.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  All of the issues identified in Part 1 have been addressed. The audit of the 1999-2000 account is now underway.

2000-01 accounts

  1.  In the event that the action taken so far does not result in an unqualified opinion on the 1999-2000 accounts, any remaining problems are expected to be resolved in time for the 2000-01 accounts.

24.  GCHQ

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Nil opinion.

Reasons for nil opinion:

  1.  Unsubstantitated asset register.

  2.  Capitalised processes, notably construction in progress figures at year-end.

  3.  The absence of an integrated accounting system.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  GCHQ is on target to replace its existing accounting system with Oracle 11i (including Oracle Financials and Oracle Projects) by April 2001. This will give the organisation an integrated accounting system designed to support the production of resource accounts, as well as supporting the budgeting process.

  2.  The new Oracle accounting system is part of an integrated suite of systems including human resource management, project accounting and asset management functions. It is being installed by a team of GCHQ technical and change management staff and a systems integrator from industry, who are working at GCHQ alongside the financial, planning and technical staff who will be using the new system. The approach is a combined cultural, process and IT change to introduce industry standards in accounting and other management processes.

  3.  In advance of the introduction of the new Oracle system, GCHQ has designed and implemented substantially tightened and strengthened processes within its existing systems to address the NAO's Trigger Point 3 observations, in particular to capture the costs of creating and enhancing assets and to track the assets themselves. This included a major asset revaluation exercise using staff engaged from the Valuation Office, and the creation of an improved asset register.

(ii)  Staffing

  1.  Additional staff have been appointed to support asset and project accounting, and further professionally qualified staff are being appointed to support GCHQ's project and asset accounting activities.

  2.  GCHQ have access to Valuation Office resources on a call off contract basis to address specific valuation issues.

(iii)  Training

  1.  GCHQ are undertaking a significant amount of staff education about the new processes and procedures. This has involved seminars for investment and project staff, targeted messages for key staff involved in asset creation, and the expansion of the in-house accountancy programme.

  2.  Training is a major component of the programme to introduce the new Oracle system in April 2001, and this is already underway.

(iv)  Accounting Policy Issues

  1.  Outstanding accounting policy issues have been agreed and documented with the NAO, notably on the issue of software.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  GCHQ has submitted resource accounts for audit in line with the NAO's timetable. GCHQ expects to receive a qualified opinion on the 1999-2000 resource accounts, partly as a consequence of the weak opening balance position flowing from the deficiencies in the 1998-99 resource account.

  2.  Continuing problem areas are being addressed in order to make a further substantial improvement in the position for the 2000-01 accounts.

2000-01 accounts

  1.  Further improvements in both data quality and processes on assets are expected in respect of the 2000-01 accounts.

2001-02 accounts

  1.  Further improvements are expected as a result of the implementation of the new integrated accounting system in April 2001.

25.  SECRET INTELLIGENCE SERVICE (SIS)

Part 1:  Nature of 1998-99 resource account opinion

Opinion: Qualified.

Reasons for qualification:

  1.  Insufficient evidence to support the valuation of the Service's fixed assets in the opening balances as at 1 April 1998.

  2.  The permanent diminution arising from the revaluation of fixed assets was incorrectly accounted for. This affected the Operating Cost Statement (in respect of depreciation and the cost of capital charge) and presentation of the information in Schedule 5 (resource allocation by objective).

Part 2: Action being taken to address the problems

(i)  Systems and Processes

  1.  Negotiations are ongoing with Oracle Financials to resolve the systems issues in respect of the calculation of fixed assets. The Treasury is also involved. In the interim, data for the 2000-01 accounts will be prepared off-line.

  2.  SIS recognise that the capture of their accruals information requires improvement. The department intends to review finance processes and create an accounts payable section by the end of the 2000-01 financial year. This will address accruals, prepayment and creditor shortfalls.

  3.  Oracle Financials is under constant development and SIS aim to upgrade to Version 11i from April 2001. A review of standard reporting will coincide with the review of finance processes to help with the production of financial and management information.

  4.  Some progress has been made on substantiating cash balances, but the system requires further improvement. The department is currently addressing this problem and will introduce a robust set of management checks.

(ii)  Staffing

  1.  SIS continue to train existing staff in accountancy disciplines. In addition to fully qualified staff, they currently have a Stage 2 CIMA student, an ACCA finalist, and 3 AAT students.

(iii)  Training

  1.  RAB training continues throughout the department. A RAB seminar for senior managers and a series of one day training courses run in-house by ATC targeted finance staff and budget managers.

(iv)  Accounting Policy Issues

  1.  Some issues remain in respect of the consolidation of the department.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  The department expects to have a better capture of prepayments and accruals.

  2.  The issues relating to opening fixed asset balances have largely been resolved.

  3.  There is a clear audit trail in respect of fixed assets data, as the information is being produced off-line until the introduction of the new system.

  4.  The department has already produced a pension scheme statement.

2000-01 accounts

  1.  The new accounts payable unit will have been introduced, with robust management checks and documented procedures for the capture of accruals information.

  2.  Subject to progress on the Oracle upgrade, there will be an integrated system for gathering fixed asset information.

  3.  There will be improvements in consolidation procedures.

  4.  There will be improvements in management information and the integrity of Schedule 5 data.

26.  SECURITY SERVICE

Part 1: Nature of 1998-99 resource account opinion

Opinion: Qualified (Scope Limitation)

Reasons for qualification:

  1.  Insufficient evidence to support opening fixed asset valuations.

  2.  Downward revaluations on fixed assets in-year taken to the Reserves.

Part 2:  Action being taken to address the problems

(i)  Systems and Processes

  1.  A full review of fixed asset valuations was carried out by the Valuations Office, and by commercial valuers for the buildings.

  2.  Biennial asset valuation reviews will be undertaken by the Valuation Office, and one has been commissioned for January 2001.

(iv)  Accounting Policy Issues

  1.  Downward revaluations of fixed assets in-year were considered to be extraordinary, and to have shown them in the accounts would have distorted the true and fair view. Such treatment was necessitated by the Valuation Office review of the closing balance sheet at 31 March 1999.

  2.  In future, all downward revaluations, where appropriate, will be charged to the Operating Cost Statement in accordance with the Resource Accounting Manual. The action taken in respect of the 1998-99 accounts will not be repeated.

Part 3:  Anticipated Progress

Issues resolved by:

1999-2000 accounts

  1.  All issues arising from the audit of the dry run resource accounts described in Part 1 have been resolved.

HM Treasury

December 2000


31   Qualification may arise from continued uncertainty over the accuracy of opening balances used in the account and from qualified opinions given on accounts of bodies subsequently consolidated into the Department of Health resource accounts. Back

32   As Part 1, paragraph 3 points out, the qualification for the Department of the Environment, Transport and the Regions in respect of the 1998-99 dry run resource accounts did not extend to the Health and Safety Commission/Executive (HSC/E). HSC/E received a nil opinion on their accounts because it was decided after the initiation of the Trigger Point 3 process that HSE/C, a crown non-departmental public body, should be consolidated within DETR resource account. Thus the need for HSC/E to receive an audit opinion from the NAO at Trigger Point 3 was removed, and in the event none was then given. However, it is worth noting that the NAO has confirmed by letter, in November 1999, that it is satisfied that HSC/E is able to produce resource accounts, and will therefore be able to provide the necessary information for DETR to consolidate within its accounts. The accounts of the HSC/E also separately published. Back


 
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