Resource Accounting and Budgeting in Government

Transcription

1 NATIONAL AUDIT OFFICE REPORT BY THE COMPTROLLER AND AUDITOR GENERAL Resource Accounting and Budgeting in Government ORDEREDBY THEHOUSEOFCOMMONS TOBEPRINTED ZOJANUARY1995 LONDON: HMSO HC 123 Session Pubished 25 January 1995 f5.45 NET

2 RESOURCE ACCOUNTING AND BUDGETNG IN GOVERNMENT This report has been prepared under Section 6 of the Nationa Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn Comptroer and Auditor Genera Nationa Audit Office 19 January 1995 The Comptroer and Auditor Genera is the head of the Nationa Audit Office empoying some 800 staff. He, and the NAO, are totay independent of Government. He certifies the accounts of a Government departments and a wide range of other pubic sector bodies; and he has statutory authority to report to Pariament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

3 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT Contents Introduction Resource accounting Resource budgeting Summary of concusions A. Financia reporting to Pariament: Concusions and recommendations from previous Committees of Pubic Accounts and Treasury and Civi Service Committees 18

4 RESOURCEACCOLJNTINGANDBUDGETINGINGOVERNMENT Report Introduction Cm2626 Background 1 In Juy 1994 the Treasury pubished a Green Paper Better Accounting for the Taxpayer s Money: Resource Accounting and Budgeting in Government which announced proposas for: resource accounting, whereby from centra government dcpartmcnts produce and pubish accruas-based reso~ce accounts to suppement their current cash-based accounts; and resource budgeting, under which the pubic expenditure panning process, and the Suppy process through which Pariament grants ega authority for much of government spending, might both be changed to an accruas basis sometime eary in the next century. 2 The Green Paper sought views on resource accounting proposas and indicated that the Treasury woud consut Pariament and others on how resource budgeting might be impemented. The consutation period wi ast unti 31 January 1995 and the Government wi pubish its detaied proposas for resource budgeting as soon as possibe thereafter. Cm2627 PAC 25th Report of TCSC 3rd Report of TCSC 3rd Specia Report of The Government s proposas represent the most important reform of centra government accounting and budgeting arrangements since Gadstone s reforms of the mid-19th century. They mark a significant change in the way departments account and manage and shoud be seen aongside the Government s pans, in the Juy 1994 White Paper The Civi Service: Continuity and Change, to achieve greater efficiency by deegating powers to departments and giving centra departments a more strategic roe. The proposas may aso bring radica changes in the format of Estimates and Appropriation Accounts, with far-reaching consequences for the form of Pariamentary authority over departmenta expenditure. 4 The Green Paper was issued shorty after Pariament had considered separate Treasury proposas to revise the format of the Estimates, and therefore the Appropriation Accounts. Both the Committee of Pubic Accounts and the Treasury and Civi Service Committee expressed reservations about these proposas, and wanted to see them in the context of the imminent Green Paper. In response, the Treasury deferred their changes for one year, and have since been encouraging departments to discuss the format of the Estimates with their reevant departmenta seect committees. The Treasury returned to Pariament in eary 1995 with further proposas, in the ight of those discussions and their further work on resource accounting and budgeting, with the aim of revising the Estimates from

5 BBSODBCE ACCOUNTING AND B DGENG IN GOVBBNMENT Purpose of this report 5 The Comptroer and Auditor Genera has, in recent years, reported severa times on government s financia reporting to Pariament. The Committee of pubic Accounts, and the Treasury and Civi Service Committee, aso have a ong-standing interest in the nature, form and content of government Rnancia reporting. In recent years, the two Committees have reported on these matters on severa occasions (see Appendix A). This report puts the Government s proposed changes witbin the context of the Committees earier interest and comments on the Government s proposas, especiay in those areas where the Green Paper asks for views. PAC 18th Report of In their 18th report of , the Committee of Pubic Accounts aid out what they considered shoud be the main objectives of government financia reporting:. providing Pariament, and departmenta Seect Committees in particuar, with information which is reiabe and sufecient as the basis for examination of departments performance in carrying out poicies, functions, programmes and projects;. providing Pariament with information which is reiabe and sutficient as the basis for its consideration and approva of the eves of finance voted to services in the Appropriation Act (and the baance of aocation between services);. ensuring department s accountabty by demonstrating their stewardship of the money voted by Pariament; and. providing Pariament systematicay with information on performance which is reiabe as an assm-ance of the economy, efficiency and effectiveness with which departments are operating services and as the basis for seective enquiries. 7 This report focuses on whether the Green Paper proposas further these objectives. It aso touches briefy on the extent to which resource accounts shoud hep improve departments and Treasury s IInanciaI management. 8 Debate over the form and content of pubic sector RmmcIaI reporting is not confined to the United Kingdom. In drawing up the report note has been taken of internationa deveopments in this area. In particuar the experience of countries that have aready reformed their reporting and budgeting arrangements aong simiar ines (most notaby New ZeaIand) has been examined, and aso the recommendations of internationa bodies on standards for government Rnancia reporting. 9 This report examines the Government s pans for resource accountmg (paragraphs , and reviews the possibe impications of resource budgeting (paragraphs 45-66). 2

6 RESOUBCEACCOUNTNGANDBUDGEThGINCO"ERNMENT Resource accounting 10 The Green Paper uses the term resource accounting to cover: a set of accruas-based techniques for accounting and reporting on the expenditure of UK centra government; and a framework for anaysing expenditure by departmenta objectives, reated to outputs wherever possibe. Accruas accounting 11 At present, government departments account on a cash basis, and moneys are brought to account at the time they are paid or received. This accounting convention is consistent with the arrangements whereby Pariament votes government departments suppy of funds in cash and with the Government s cash basis for panning. It is not necessariy the most informative way of presenting financia information however. With cash accounting, there is no requirement to match expenditure with revenues for the period to which they reate, and capita spending is brought to account whoy in the year in which the capita purchase or disposa is made. Cash-based accounts aso ack any framework for accounting for assets and iabiities: once an asset is acquired, it effectivey disappears from the accounts. 12 Accruas accounting, on the other hand, is a method of accounting which records expenditure and income in the accounting period to which they reate, incuding spreading the cost of capita items across their usefu ives. It aso introduces the concept of the Baance Sheet, which provides a snapshot of the assets, iabiities and net worth of an organisation at a given point in time. 13 Accruas accounting has aready been adopted in most other parts of the pubic sector incuding the Nationa Heath Service, nationaised industries and oca authorities. Within centra government itsef, departmenta executive agencies and most executive non-deparhnenta pubic bodies aso account on an accruas basis. The Green Paper now proposes to appy accruas accounting to centra government departments for the first time. 14 The introduction of accruas-based accounting shoud bring benefits for departmenta management and, most ikey, better accountabiity to Pariament. Whist departments wi have to incur additiona costs to deveop and impement new accounting systems, accruas accounting woud: provide a better picture of the true cost of departments activities, by taking into account a reevant costs incuding the use of assets, the costs of capita and non-cash costs, and reating these more directy to any revenues generated by those activities. For many years, departments have produced unaudited and informa memorandum trading accounts to show the true cost of many activities where this was needed (for exampe, to demonstrate that fees recovered the fu cost of providing a service). They do so by taking cash figures and 3

7 RESOLRCEACCODNTINGANDBUDGXINGINGOVEBNMENT suppementing them by various adjustments and estimates. Under resource accounting, such information shoud be more readiy avaiabe, and derive directy from the department s accounting systems. The difference between cash and tie cost wi be most marked for activities where there are arge asset hodings, acquisitions or disposas: or where there are significant disruptions to the pattern of income and expenditure such that one of them fas into a different accounting period.. improve stewardship and accounting for assets and Iiabiitics, by virtue of departments having to draw up a baance sheet for the first time. Government departments have aways been required to maintain inventories of assets, athough these were not vaued. And since 1993, the Treasury have encouraged departments to pubish information on the vaue and make-up of their asset hodings, athough few have done so. At present, departmenta Appropriation Accounts provide no detais of asset use or hoding. Resource accounting wi require that departmenta assets are vaued, recorded, charged for and reported. This discipine shoud promote and faciitate good stewardship on behaf of departments, both to justify their use of assets and their retention. Simiar arguments appy to iabiities. PAC 8th Report of In addition, the Committee of Pubic Accounts have caed for improved information on departments hodings, depoyment, stewardship and contro of assets, for exampe in their 8th report of The proposed reforms shoud go a ong way to provide the improved information the Committee sought. 15 In the first instance, most of these benefits wi accrue to departments themseves and to the Treasury in their roe as the financia managers of government. Improved information on costs and assets wi encourage better stewardship and better decision-making. However, this improved information shoud aso faciitate better financia reporting to Pariament, if this information is made avaiabe to them in a suitabe form. Matching resources to objectives and outputs 16 A second feature of resource accounting is the attempt to match resources used to departmenta objectives, reating them to outputs wherever possibe. The Treasury currenty propose that departments wi be required to produce and pubish as part of their accounts: a schedue showing the cost of resources consumed, by main objectives; and. a schedue anaysing output and performance against each main objective. 4

8 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT 17 These proposas mark a continuation of a trend which has been evident over many years:. since 1982, and the Financia Management Initiative, departments have been encouraged to produce better information on the objectives, outputs, and performance of their activities and functions to hep them manage their resources better and to improve reporting on their performance; PAC 8th Report of , PAC 18th Report of The Committee of Pubic Accounts has consistenty sought improved information for Pariament on departments ams and objectives and inks with actua performance and outturn. An increasing voume of such information has been introduced into departmenta annua reports, athough it is not yet comprehensive and is of variabe quaity; departmenta executive agencies are required to pubish in their annua report information on their financia performance, efficiency and effectiveness, and to measure their performance against the targets set by that parent department; and Pariament has aso expressed a preference to see Estimates, and therefore Appropriation Accounts, in a form whereby expenditure is shown against the objectives or objects of expenditure (for exampe, fisheries protection, or the roads programme) rather than the subjects of expenditure (for exampe, pay or computers or stationery). In many current Estimates and Accounts, expenditure is aready brigaded in this way, athough by structuring the Estimate around the major programmes of expenditure rather than by direct reference to the objectives of expenditure. 18 The accounting statements suggested by Treasury woud for the first time provide a systematic and consistent presentation of the objectives of departmenta expenditure and of departments achievements against those objectives, No doubt, some departments wi be more successfu than others at providing such information. And some departments wi have greater difficuty in deveoping meaningfu measures of output and achievement. Nonetheess, the integration of performance information with financia statements woud hep standardise their presentation, provide a stronger incentive to come up with measures, strengthen the inkages between cost and performance information, and hep Pariament focus on cost and achievement. Setting accounting poicies and standards 19 To meet the objectives in paragraph 6, financia statements need to be produced within a set of principes and rues which ensure that information is presented in a consistent manner which is understandabe and meets the needs of the users of the statements. For exampe, in the private sector, companies are required to prepare accounts in accordance with accounting standards which aim to ensure that the accounts provide a true and fair view of their financia performance and standing. Without such a framework, financia statements are open to manipuation and can misead rather than inform their users. Such a framework is more important for accruas accounts, which require the preparer

9 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT to make more judgements and estimates than is the case for cash accounts. Standards are necessary to govern these judgements and to provide an agreed benchmark against which the auditor can examine them; and so that the reader of the accounts can know the basis on which they have been prepared. 20 The Green Paper proposes that the resource accounts shoud foow UK Generay Accepted Accounting Practice, which the Treasury define as the accounting and discosure requirements of the Companies Act 1985 and accounting standards (issued or adopted by the Accounting Standards Board) suppemented by accumuated professiona judgement. This body of practice and standards is aimed primariy at the private sector. Government poicy is to require the accruas accounts of pubic sector bodies to compy with these requirements, except where in the particuar circumstances of the pubic sector bodies concerned the Government considers them to be inappropriate or others to be more appropriate. 21 The Green Paper recognises that this body of practice may need to be suppemented to deveop a framework particuary suited to the requirements of centra government. This mirrors the position in other parts of the pubic and not-for-profit sector, where Generay Accepted Accounting Practice is suppemented by specific requirements for that sector. The Treasury pan to produce a resource accounting reference manua, for use by a departments. So that this manua meets the needs of the preparers and auditors of inancia statements, the Treasury intend that it wi point out departures from Generay Accepted Accounting Practice and spe out the underying principes and purposes of government financia reporting. 22 Where there are departures from or additions to Generay Accepted Accounting Practice, there is the question of how any accounting requirements pecuiar to centra government shoud be determined. It woud be inappropriate for those responsibe for preparing financia statements to have the soe responsibiity for deciding on the standards such statements shoud foow. 23 Ceary the Treasury shoud have a major roe in the deveopment of accounting requirements specific to centra government. However, Pariament and other users of the accounts, auditors and professiona bodieshoud aso pay a part in the setting of these requirements. And, since such accounts may become the means of demonstrating that departments have compied with the Appropriation Act, it is particuary important that Pariament shoud have a say. In Canada, the United States and Austraia, the arrangements provide for an independent body to oversee and approve cenira government accounting standards. 24 In addition, the Treasury shoud continue to seek Pariament s agreement to accounting standards and practices for centra government, which by tradition they have done by consuting the Committee of Pubic Accounts and the Treasury and Civi Service Committee. 6

10 RESOURCEACCOUNnNGANDBUDGETINGINGOVERNMENT 25 The Green Paper sought views on some specific and technica accounting issues, such as capita charging, accounting for government s ong term iabiities such as pensions, and the vauation of miitary, heritage and infrastructure assets.. The Nationa Audit Office are discussing these issues, and other more detaied accounting matters, with the Treasury. Boundaries of resource accounts 26 The Treasury propose that the reporting entity (that is, the accounting boundary) for resource accounts wi be broady defmed as the department and the responsibiities of the Principa Accounting Officer. Each departmenta resource account wi therefore encompass the core department. together with the associated Next Steps Agencies and Trading Funds. However, it wi excude other organisations with cose financia and operationa inks to the department, in particuar non-departmenta pubic bodies. The coverage of resource accounts wi not extend to centra accounts such as the Consoidated Fund and the Nationa Loans Fund. 27 The Treasury propose to excude non-departmenta pubic bodies from resource accounts because they are constitutionay independent from their sponsoring department. There woud aso be practica diikuties in consoidating accounting information from the arge number and range of bodies invoved, some of which wi not have the requisite accounting systems to provide accruas-based data. 28 However, non-departmenta pubic bodies are an important part of centra government, and hande a considerabe proportion of the moneys voted by Pariament to departments. They in torn may pass on this funding to other bodies. For exampe, of the E3 biion voted to the Department for Education, about g7 biion is actuay spent by non-departmenta pubic bodies. 29 The activities of non-departmenta pubic bodies are ceary inked to departmenta aims, much of their income comes from their sponsoring department, they may hod substantia assets purchased from government funds, and the sponsoring department often exercises a signihcant iniuence over their activities and management. They may incur iabiities which the taxpayer may have to meet eventuay, even where the body has imited iabiity. 30 Thus, if the assets, iabiities and operations of non-departmenta bodies are excuded from departmenta resource accounts, the accounts wi need to identify ceary the bodies sponsored by the department and incude reevant information about them. The notes to the accounts shoud discose, as a mnhnum, the extent to which those bodies reied upon income from the department - both in absoute terms and as a proportion of their tota income - and what has been achieved with such expenditure. In this way, the departmenta resource account wi provide, for Pariament and others, a more compete picture of departments expenditures and activities and a cearer ink through to the accounts of these sponsored bodies. 7

11 RESOURCEACCOUNTNGANDBUDGETNGINGOVERNMENT Whoe government accounts 31 The Government does not favour producing a singe account which consoidates or aggregates individua departmenta resource accounts. A simpe consoidation aong these ines may be of itte vaue, given that these individua accounts are narrowy drawn. Furthermore it is not cear that such a consoidation woud resut in a meaningfu accounting entity, since it woud not equate to or represent any of the usua bases for describing government activity, that is centra government, genera government, or the wider pubic sector. PAC 8th Report of However, there is pubic and Pariamentary interest in whoe government accounts bringing together the income and expenditure, and assets and iabiities of centra government. This might be done by buiding on the information currenty contained in the Nationa Loans Fund Accounts, the Consoidated Fund Account and supporting statements, Athough there woud be no particuar benefits for departments themseves, an audited consoidated account on an accruas basis woud aow the pubic and Pariament to see ceary how taxes have been spent, and the assets and the iabiities hed on their behaf by centra government. Some countries, for exampe New Zeaand and Canada, aready produce such accounts and others, for exampe the United States and Austraia, are considering the potentia benefits. 33 There may be practica difficuties in producing such an account at this stage. Departments and Treasury wi be fuy occupied for the next few years with impementing resource accounts. Nevertheess, whoe government accounts shoud be considered once resource accounting has been impemented. Format of accounts 34 For resource accounts to be of benefit to Pariament, it wi he essentia that they provide the information Pariament needs in a format which is cear and ogica. However, resource accounts cannot be expected to provide a the information Pariament needs: much of the supporting detai, especiay detaied data and commentary on objectives and performance, wi be found in the departmenta annua report. Nonetheess, resource accounts shoud provide a financia overview, key information, and pointers to the reevant sections of the annua report. 35 The Green Paper proposes that departmenta resource accounts shoud comprise five statements and supporting notes:. three standard financia statements, referred to as schedues A-C, which foow cosey the presentation prescribed for companies - an operating cost statement, baance sheet and cash fow statement; and. two suppementary statements a main objectives anaysis (schedue D) which wi be compusory, and an output and performance anaysis (schedue E) which departments wi be strongy encouraged but not required to produce. 8

12 RESOURCEACCOUNTNG.4NDBUDGETNGINGOVERNMENT 36 Taken together these five statements go a ong way towards meeting the needs of Pariament: - schedues A and D together provide information on how money is spent and the purposes for which it was spent;. schedue B shows departmenta asset hodings, and Pariament s accumuated investment in departments; schedue C shows how activity has been financed, and in particuar wi provide the basis for reconciiation to the amount drawn from Voted sums; and. schedue E shows departments performance against objectives. 37 To make the statements understandabe the exampes given in the Green Paper are in a highy summarised form. The Treasury recognise that supporting detai wi need to be incuded in the notes to the accounts. Some further detai wi be required on the face of the statements. In particuar: + the statements shoud distinguish between the activities of the core department and its agencies, particuary as the resource account wi most ikey be the ony account for the core department; agencies and trading funds shoud continue to provide separate annua reports and accounts, since it woud be difftcut to convey sufficient information about each agency, many of which wi be major undertakings in their own right, within the confines of a departmenta resource account; and. athough the eventua reationship between resource accounts and Appropriation Accounts has not been made cear, it woud be sensibe to begin from the premiss that resource accounts shoud distinguish ceary those figures which were voted by Pariament. Whist the specimen schedues in the Green Paper give a broad indication of what resource accounts wi show, it woud nonetheess be hepfu to Pariament and to others if the Treasury were to produce a fu set of resource accounts for a singe department, if necessary using fictitious data, as soon as possibe. This woud hep assure Pariament that the accounts wi convey a the information they wish to see, in a format they can understand. Scope of the audit 38 The Green Paper proposes that resource accounts shoud be audited, and that the Comptroer and Auditor Genera shoud carry out this audit on behaf of Pariament. This refects the importance of resource accounts to pubic and Pariamentary accountabiity, and the constitutiona roe of the Comptroer and Auditor Genera as Pariament s auditor. 9

13 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT 39 The Operating Cost Statement, Cash Fow and Baance Sheet are standard financia statements akin to those used in the private sector and for many pubic bodies which foow commercia accounting standards. It shoud be possibe to give resource accounts a norma true and fair opinion, once appropriate requirements for government accounting have been deveoped. As is currenty the case with Appropriation Accounts, this opinion woud need to be suppemented by an expicit statement on the reguarity of transactions, confming that they are in compiance with egisation, Pariamentary, Treasury and other reevant authorities. 40 Schedue D provides a breakdown of a department s expenditure against its main objectives, and as such is critica to a fu understanding of performance and stewardship. The schedue aso provides the most direct ink to the purposes of expenditure, the basis on which Pariament votes funds. For Pariament to have independent assurance that departments have used moneys voted to them for the purposes intended, this schedue shoud be covered by the Comptroer and Auditor Genera s audit opinion. 41 Schedue E to each resource account wi show the department s performance against some key output targets, both financia and non-financia. At present, departments performance targets and achievement are incuded in their annua reports but these are not independenty vaidated. 42 The introduction of resource accounts provides the opportunity for Pariament to consider whether they woud wecome some externa vaidation of departmenta performance data. There are a number of considerations:. athough not a departmenta programmes and activities end themseves to simpe quantification of performance, the ast 15 years have seen great improvements in pubic sector performance measurement and the coverage and quaity of performance data. And departments shoud be abe to draw on the progress aready made, for exampe by executive agencies and the NHS. Resource accounting shoud bring further improvements in performance measurement; performance data have become increasingy important to Pariament s oversight of departments, and the new Schedue E wi be crucia to Pariament in gaining a cear and high eve understanding of what has been achieved with departmenta resources and voted moneys. As performance data increases in importance and its presentation becomes more systematic - which shoud be evident by when resource accounts are pubished for the first time - the case for vaidation becomes stronger; the Nationa Audit Office aready have access to departments performance data and can review its reevance and accuracy, within the scope of their vaue for money examinations; and PAC 8th Report of as the Committee of Pubic Accounts have aready recommended, it woud be desirabe to estabish ground rues to govern the admissibiiy of performance data, for exampe as to consistency, so that pubic bodies cannot pick and choose 10

14 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT between performance indicators from one year to another; as to reevance, so that Pariament can quicky see that performance information Is centra to a body s activities; and as to reiabiity, so that Pariament can be assured that performance data is materiay accurate. Initiay, departments might find it difficut to produce performance data to a standard which coud earn a forma audit opinion of the sort which appies to the main financia accounts. Such an opinion shoud be achievabe, however, as the quaity of departments performance information continues to improve. Dry run accounts and audit 43 The Treasury propose that departments wi prepare unpubished accounts in , and that these accounts wi be audited by the Comptroer and Auditor Genera. The first set of audited and pubished accounts woud be for the year Dry run accounts and audit in wi be a very sensibe step. The Nationa Audit Office s experience of Next Steps agencies has proved that a dry run audit can be of immense assistance to both departments and auditors, to hep ensure that accounting systems are capabe of producing auditabe accounts and that new accounts wi not automaticay attract an adverse audit opinion. The Nationa Audit Office are aready providing advice and assistance to departments, and if individua departments wish to bring forward their dry run, the Office wi hep them meet a faster timetabe. Resource budgeting Introduction 45 The Green Paper uses the term resource budgeting to cover the extension of resource accounting principes and practices into the processes by which pubic expenditure is panned and controed (the Pubic Expenditure Survey) and by which moneys are voted by and accounted to Pariament (the Suppy procedures). If carried forward, resource budgeting may require changes to the egisation reating to Suppy procedures and the Estimates and Appropriation Accounts. 46 This report concentrates on the potentia impications of resource budgeting on Suppy procedures, the prime vehice for Pariamentary contro and accountabiity, rather than the Pubic Expenditure Survey, which is an interna mechanism of contro within government. 47 The Green Paper provides no detais as to how a resource based Suppy system might operate. Instead, the Government invites suggestions and the Treasury intend to come forward with further proposas after the consutation period has finished at the end of January The Comptroer and Auditor Genera wi provide further and more specific comments to Pariament after those detaied proposas are pubished. It is possibe to provide genera comments at this stage, however, having regard to the objectives of financia reporting to Pariament described in paragraph 6. These are set out overeaf. 11

15 RESOJRCEACCOJNTNGANDBUDGETINGINGOVERNMENT Resource-based Suppy 48 It woud be possibe for departments to adopt resource accounting without changing any Pubic Expenditure Survey or Suppy procedures. The Green Paper recognises too that it woud be technicay possibe to run the Pubic Expenditure Survey on a resource basis and to maintain the Suppy system in cash terms. However, the Government beieves that there is a strong argument for Pariamentary systems of voting expenditure to be cosey aigned wtb the government s own systems for panning, controing and accounting. 49 Running the systems on the same basis, with a resource-based Suppy process, coud: provide a stronger ink between the basis of Pariamentary approva and the way departments budget and manage their affairs; and avoid the need for departments to run two sets of accounts and two contro systems: one for intra-government contro and one for Pariament. However, the fu impications of such a change for Pariament wi need to be considered after the Treasury produce more detaied proposas. Existing Suppy procedures 50 Pariament wi want to consider carefuy whether the detaied proposas which the Treasury bring forward preserve Pariamentary contro and authority The purposes of expenditure 51 It is a feature of Pariamentary authority that Pariament approves expenditure for speciik purposes and that a sum appropriated to a specific service cannot be used for another service. Each Estimate presented to Pariament is divided into two parts: Part I specifies the services and purposes for which the Estimate is presented (the ambit of the Vote). Part I of the Estimate, which together with the tota of Appropriations in Aid in the Part II Summary is reproduced in the Appropriation Act, is of prime Importance since it provides the statutory description in that Act of the purpose for which the Suppy is granted: and Part II shows the subheads under which the Treasury requires the expenditure to be accounted for; and provides forma information on individua services for Pariament s scrutiny. Treasury may exercise their powers of virement as to the aocation of grant between the various subheads of the service in question. 52 Under these arrangements, it is necessary to have a cear description of the services to be covered by an Estimate, in order that there may be no question whether the exercise of virement in any given case is or is not in accordance 12

16 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT with the terms of the Pariamentary grant (as expressed in the Appropriation Act) or with the intentions of Pariament (as deduced from the terms of Part II of the Estimates). 53 This feature can aso be seen in respect of new services. Where departments require funds for a new service not covered by the ambit of the Vote, they must present a Suppementary Estimate to seek new Pariamentary authority for this expenditure, even if the new service can be accommodated within existing voted sums. Pariament has previousy expressed a wish for services which are arge or nove or contentious or which, whie sma at the outset, invove heavy iabiities in future years, to be brought to their attention in this way. Appendix A to PAC 25th Report of It wiu be essentia that under any new arrangements Pariament votes moneys for purposes which are evident on the face of the Estimates and accounts, and that Treasury exercise discretion to vire between services so ong as they are consistent with those purposes. Under the Treasury s current proposas for simpified Estimates, their powers of virement woud be exercised at a higher eve than at present: departments woud ony need to obtain Treasury approva to vire provision between Estimates ines (broady equivaent to Sections in the current Estimates) or into running costs, rather than between Subheads as they do at present. 55 However, at present many departments have more than one Vote. The number of Votes is expected to fa in , horn 163 to around 130, when departments wi be permitted to mix cash-imited and non cash-imited expenditure on a singe Vote. In addition, the advent of one resource account per department coud be accompanied by one Vote per department, reducing the number of Votes to around Depending upon the detaied arrangements, Pariamentary authority coud be exercised at a higher eve than at present, in 60 arge bocks of votabe expenditure, compared with the current 165. This wi give departments greater freedom to manage within their voted totas. And new arrangements on virement (see paragraph 54) wi mean that departments wi have fewer occasions on which they must return to the Treasury for virement approva. 57 This woud represent a radica shift in the eve of Pariamentary and Treasury authority and in the degree of deegation to departments. Pariament wi wish to consider whether they woud be content to exercise their authority at Vote eve, particuary if there is a move to one Vote per department, or woud prefer to contro major components of departmenta pans - for exampe, by voting the main programme totas currenty shown at Section eve within each Vote in the current Estimates, or Estimate ines in the new format now proposed by Treasury.

17 RESOURCE ACCOIMTTNG AND BUDGETING IN GOVERNMENT Voted sums must not be exceeded 58 Departments cannot exceed the sums authorised in the Appropriation Act without seeking Pariamentary authority in one of two ways: if known in advance, departments are required to present a Revised or Suppementary Estimate for the additiona provision; or otherwise, departments must present an Excess Vote to Pariament which is authorised in a subsequent Appropriation Act. In this case, the departmenta Appropriation Account incudes a report by the Comptroer and Auditor Genera on the reasons for the excess. 59 There is considerabe room for discussion and debate about whether Pariamentary authority shoud focus on voting resources or cash under a resource budgeting system. But whichever is adopted, the new arrangements shoud preserve the principe that there shoud he a imit to the resources or cash authorised by Pariament, and that departments must return to Pariament for further authority, wherever possibe in advance. And they shoud recognise the greater incidence of judgements and approximations in resource budgets and accounts when compared with cash, and ensure that it is possibe to match what Pariament has voted with what departments have accounted for. 60 At present, one feature of Pariament s pacing of hnits on expenditure is that it not ony authorises the net amount of expenditure on a Vote hut aso the amount of receipts it can raise to off-set against costs, thereby controing gross expenditure. These offsetting receipts are known as appropriations-in-aid. Income raised in excess of the amounts authorised has to be surrendered to the Consoidated Fund. This is an important contro, since it ensures that departments may not raise and dispose of arge sums of money without the authority of Pariament. Pariament wi wish to see that this principe is carried forward into the new arrangements. Annuaity 61 Under current Suppy rues, the sums authorised by Pariament are ony avaiabe in the fmancia year for which they are appropriated. The Estimates show ony the cash sums expected to come in course of payment during the year to which they reate, and moneys remaining unused by departments at the end of the year have to be surrendered to the Consoidated fund. 62 Annua appropriation ensures that departmenta expenditure is subject to reguar Pariamentary review and authorisation. The strict appication of annuaity to Suppy has been criticised as the cause of inefficient panning, particuary of ong-term projects and end-year spending sprees to use up unspent funds. Since 1983 Treasury have operated a number of schemes to aow departments to carry forward underspends to subsequent years, to provide departments with fexibiity, but ony in stricty dened circumstances. The Treasury now operate 100 per cent end year fexibiity in respect of running

18 RESOURCEACCOUNTINGANDBUDGETINGINGOVERNMENT costs. However, fu annua Pariamentary authority has been maintained by the requirement for departments to incude in the subsequent year s Estimate any money carried forward in this way. 63 Pariament wi wish to consider whether the Treasury s proposas for resource budgeting wi entai further adjustments in the appication of annuaity in order to secure Improved arrangements. Any changes must of course he consistent with Pariament s overa authority. The way forward 64 Existing procedures were designed or evoved for a cash-based system of Suppy. A we-designed resource or accruas-based system of Suppy coud in principe provide equivaent, or possiby, higher eves of Pariamentary oversight. The Green Paper makes cear that the Treasury have no intention of osing sight of cash, and that they wi exercise a cash management function, abeit at a higher eve than at present. If the Treasury can deveop a workahe system of cash and resource contro for their own and departments use, it shoud be possibe to use this as the basis for an effective system of Pariamentary Suppy. 65 The Green Paper does not provide sufficient detai to judge whether this wi be the case. The Paper puts forward the possibiity that Estimates under a resource-based system might be based on the resource accounting formats outined in the Paper. However, it is not cear which parts of these formats woud constitute information for Pariament and which parts the House woud he asked formay to vote on and appear in the Appropriation Act. The Treasury s more detaied proposas wi need to make this cear. 66 One of the difficuties for Pariament has been to track expenditure from one document to another, particuary between the Estimates and departmenta annua reports, athough there have been significant improvements in articuating the inkages between them, and one aim of the current proposas for Estimates reform is to simpify these inkages. There are basic difficuties in current mode, however, in that each departmenta annua report in February is both prospective (to justify the Estimate) and retrospective (to refect on past performance), and it is separate from both the Estimates and the Appropriation Accounts to which it reates. The introduction of resource budgeting woud provide an opportunity to reappraise the options for financia reporting by departments. One option woud be to move to:. a departmenta pan in February containing a resource budget incuding the Estimates; and. an annua departmenta report in October containing the resource account and Appropriation Account. This woud aow the pan to focus on what is truy new, and on the justification for expenditure, and the annua report to be associated directy with the department s atest accounts and performance data.

19 RESO RCE.4CCOuNTING AND B DGErNG IN GOVERNMENT Summary of concusions 67 The main concusions of this report are :- from Pariament s point of view, the Green Paper proposas shoud be judged by the extent to which they provide Pariament with improved information for its consideration and approva of the sums it votes to services and its examination of departments performance in operating those services (paragraphs 5-71; On resource accounting accruas accounting shoud bring benefits for departmenta management, by providing a better picture of the true costs of their activities and by improving the accounting and stewardship of assets and iabiities (paragraph 14);. this improved information shoud aso faciitate better financia reporting to Pariament, if it is made avaiabe to them in a suitabe form (paragraph 15);. the accounting statements proposed by Treasury shoud provide a systematic and consistent presentation of the objectives of departmenta expenditure and of achievements against those objectives, as sought by previous Committees (paragraphs 17-18); the proposed resource accounting manua for departments wi incude or point out departures from Generay Accepted Accounting Practice and spe out the underying principes and purposes of government financia reporting. It woud be inappropriate for those responsibe for preparing financia statements to have the soe responsibiity for deciding on the standards such statements shoud foow (paragraphs 19-Z);. Pariament and other users of the accounts, auditors and professiona bodies shoud aso pay a part in setting these accounting requirements, and the Treasury shoud continue to seek Pariamentary agreement to changes in accounting standards and practices (paragraphs 23-24): if non-departmenta pubic bodies are excuded from departmenta resource accounts, the notes to accounts shoud identify the bodies supported by the department and the extent to which those bodies depend on departmenta funding, and what has been achieved with such expenditure (paragraphs ;. a simpe consoidation of departmenta resource accounts may be of itte vaue. But there is Pariamentary and pubic interest in a whoe government account which brings together the income and expenditure, and the assets and iabiities, of centra government. Some countries aready produce such accounts and others are considering the potentia benefits (paragraphs 31-33): 16

20 RESOURCE ACCOUNTTNG AND BUDGETING IN GOVERNMENT. the accounting statements proposed by Treasury go a ong way to meeting the needs of Pariament, but they need to distinguish the activities of the core department and its agencies; and distinguish ceary those figures voted by Pariament (paragraphs 34-37);. the Green Paper proposes that resource accounts shoud be audited by the Comptroer and Auditor Genera. Extending this audit to the statement of expenditure against main objectives woud demonstrate that funds had been spent in ine with Pariament s intentions (paragraphs 38-40); information on performance targets and achievements have become increasingy important to Pariament s consideration of Departmenta performance. As the Committee of Pubic Accounts have recommended, it wi be important to estabish ground rues to govern the admissibiity of performance data; and the Comptroer and Auditor Genera coud assist in deivering this objective (paragraphs ; the Treasury s intention that there wi be a dry run account and audit before the first year of pubished accounts is wecome. The Nationa Audit Office are aready providing advice and assistance to departments, and if individua departments wish to bring forward their dry run, the Office wi hep them meet a faster timetabe (paragraphs 43-44); On resource budgeting. there woud be potentia advantage in aigning Pariament s procedures for voting and scrutinising expenditure with the government s own systems for panning, controing and accounting for their expenditure. However, Pariamentary consideration wi need to await Treasury s more detaied proposas (paragraphs 48-49);. any new system of Suppy shoud preserve the fundamenta principes of the existing system - that Pariament votes money for purposes which are evident on the face of the Estimates and accounts; that Pariament paces imits on sums that can be spent, both gross and net; and that there shoud be contros over unused funds or resources at the end of each year (paragraphs 50-63);. the Green Paper makes cear that the Treasury wi contro both cash and resources used by departments, athough cash contro wi be at a higher eve than hitherto. It must therefore be possibe to devise simiar Pariamentary contros over cash and resources, at the same or a higher eve than exercised by Treasury (paragraph 64);. the reforms offer the opportunity to rationaise financia reporting to Pariament. One option woud be to move to two key documents - a departmenta pan containing a resource budget incuding the Estimates, and an annua departmenta report containing the resource account and Appropriation Account (paragraph 66). 17

21 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT Appendix A Financia reporting to Pariament: Concusions and recommendations from previous Committees of Pubic Accounts and Treasury and Civi Service Committees Committees of Pubic Accounts Report Fbtancia Reporting to Pariament (6th Report of , HC 98) Main concusions and recommendations The Committee took evidence on the Comptroer and Auditor Generas report Financia Reporting to Pariament (HC576 of ). The Committee caed for improved information on the aims and objectives of departmenta expenditure, and for this information being adequatey inked with out-turn information. It aso caed for improved information on the depoyment stewardship and contro of departmenta assets. They aso suggested that Appropriation Accounts shoud be incuded within Departmenta Annua Reports. On the Pubic Expenditure Survey, the Committee caed for an independent audit-based assurance that procedures operate in a satisfactory way. On the Estimates, the Committee noted that itwoud be wiing to accept ess detai if information of greater vaue was incuded. It caed for Pariamentary approva of Suppy to be based more directy on more informative Estimates pubished earier, or in some other document taiored more specificay to Pariaments needs. Financia Reporting to Pariament (16th Report of , HG 354) Centra Funds and Accountabiity and the Exchange Equaisation Account (8th Report of , HC 267) Financia Reporting to Pariament: Changes in the Format of the Suppy Estfmates (25th Report of , HC 386) The Committee caed for continued improvements in the amount and quaity of information on the aims, objectives and performance of departments, and for improvement in the Treasury s accounting and reporting framework. The Committee considered two memoranda from the Comptroer and Auditor Genera. On Whoe Government Accounts, the Comm ktee caed for a cearer and more informative presentation of the reationships between the Centra Funds and the Centra Government Borrowing Requirement Foowing a memorandum by the Comptroer and Auditor Genera, the Committee noted that Pariamentary scrutiny of government spending pans coud be impaired if aignment of information in Estimates and Departmenta Annua Reports was uncear, if important detai was ost from the Estimates or if the current eve of detai provided by Vote subheads was ost. 18

22 RESOURCE ACCOUNTING AND BUDGETING IN GOVERNMENT Treasury and Civi Service Committees Ft!+pWt The Form of the Estimates (6th Report of , HC 325) Efficiency and Effectiveness in the Civi Service (3rd Report of , HC 236) The Structure and Form of Financia Documents presented to Pariament (Znd, 7th & 1Mh Reports of , HC & 544) Financia Reporting to Pariament (6th Report of , HC 614) The Form of the Estimates; The Government s Response to Me Third Report from the Committee. (3rd Report of , HC 192; 3rd Specia Report of , HC 441) Main concusions and recommendations The Committee noted that any reform of Pariamentary procedures wim the object of exercising a more satisfactory contro of Suppy woud require Estimates to be presented in a form that Pariament wants. On financia reporting, the Committee caed for departments to account for the resources used and resuts achieved in reation to objectives and targets. On the Estimates, the Committee caed for more detaied information on targets and outputs. On the Estimates, the Committee caed for a redesign of the documents to enabe their information content to be ceary distinguished from their roe as instruments for operating Pariamentary Suppy procedures. On Me Estimates. the Committee caed for cear aignment with the Departmenta Annua Reports and for the atter to contain a summary of the reevant Estimates. The Committee no@d the principe that it is a duty of Government to ensure that Pariament is provided with data so that it can propery exercise its oversight and contro functions even though this may invove Government in compiing and providing data which is not stricty required for the Governmetis own purposes. On the Estimates, the Committee was unwiing to authorise further diminution in the amount of information contained in the Estimates uness there was certainty that aternative arrangements for the presentation of this information were satisfactory. 19