Managing financial resources to deliver better public services

Transcription

1 Maagig fiacial resources to deliver better public services REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 240 Sessio February 2008

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Tim Burr, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 850 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 Maagig fiacial resources to deliver better public services LONDON: The Statioery Office Ordered by the House of Commos to be prited o 18 February 2008 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 240 Sessio February 2008

4 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Tim Burr Comptroller ad Auditor Geeral Natioal Audit Office 18 February 2008 The Natioal Audit Office study team cosisted of: Guy Atkis, Hedley Ayres, Nick Catley, Joh De Keyser, Simo Lee, Duca Richmod ad Howard Thompso, uder the directio of Mark Davies ad Keith Holde This report ca be foud o the Natioal Audit Office web site at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Natioal Audit Office 2008

5 contents KEY FACTS 4 SUMMARY 6 PART ONE The importace of maagig 10 fiacial resources PART TWO Developig the skills ad awareess 14 ecessary for effective fiacial resource maagemet APPENDICES 1 Methodology 36 2 Recommedatios from previous 39 PAc report 3 characteristics of world class 40 fiacial maagemet GLOSSARY 42 ENDNOTES 44 PART THREE Improvig departmets use of 21 techiques ad practices for maagig fiacial resources PART FOUR The impact of improved maagemet 28 of fiacial resources Photographs courtesy of Alamy.com

6 key FAcTS Strog fiacial maagemet capability ca help departmets to meet the challeges they face i deliverig public services. Total Maaged Expediture Cetral govermet expediture has icreased each year sice i real terms. Followig the aoucemet of the results of the 2007 Comprehesive Spedig Review, this tred is set to cotiue. billio Year Source: Natioal Audit Office, based o HM Treasury's Public Expediture White Paper for years to ad projectios cotaied i the 2007 Pre-Budget Report ad Comprehesive Spedig Review for years to All prices are at levels NOTE 1 Projected Figures. Distributio of fiacial resources across Whitehall The Departmet for Work ad Pesios, which distributes social security beefits, is resposible for the most sigificat portio of this expediture. Other major spedig departmets iclude those resposible for health, educatio ad defece. DWP Health DfES MOD DCLG HMRC DfT Home Office DTI DCMS DfID DEFRA DCA FCO Norther Irelad Office Total Maaged Expediture ( billio) Source: HM Treasury Provisioal Outtur White Paper ad HM Treasury 4 MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES

7 key facts Cetral Govermet assets Departmets also ow sigificat assets. The Miistry of Defece s military sites ad equipmet ad the Departmet for Trasport s motorway ad truk road etwork i Eglad make up a sigificat proportio of this asset base. Defece Trasport Health Trade ad Idustry Home Office Other billio Source: HM Treasury Natioal Asset Register 2007 Challege Chagig priorities: Miisters may aouce ew departmetal priorities at ay time i respose to atioal or global political developmets. Log term chages i society: Our ageig populatio, globalisatio ad climate chage will chage the eviromet i which departmets operate. Upredictable demad for services: Demad for public services is ot cosistet. It chages i respose to political, social ad ecoomic developmets. Customer satisfactio: The citize is icreasigly demadig more coveiet access to public services. Complexity of service delivery: Public service delivery ivolves a umber of bodies from the public, private ad volutary sectors. The ways that strog fiacial maagemet capability ca help It is a costat challege for all departmets to be flexible eough to reallocate their fiite resources i respose to aoucemets of ew priorities, while maitaiig high stadards of service delivery across the full rage of its activities. The respose to the icreased threat from terrorism is a example of such chagig priorities. Strog forecastig skills ad awareess of the impact of the UK s ageig populatio will icrease the likelihood that resources are allocated effectively. For example, it is estimated that the NHS i Eglad will eed to make sure it ca provide demetia services for more tha 750,000 people i 2020, compared to 560,000 i I the evet of the collapse of a major employer such as happeed to MG Rover i 2005, local demad for jobcetre services ca icrease dramatically. I such circumstaces, good fiacial plaig ad forecastig become especially importat. The delivery of iovative methods of service delivery ofte requires IT-eabled busiess chage. Project maagers ad budget holders who possess effective fiacial resource maagemet skills will be well-placed to idetify ad cotrol risks to the project timetable ad budget. The Departmet for Childre, Schools ad Families oversees the educatio of over 8 millio childre i over 25,000 schools across the coutry. Each school has its ow budget ad is resposible to oe of 150 Local Authorities. Departmetal decisio-makig requires clear ad cofidet oversight of how resources are used by these delivery parters. Maagig fiacial resources to deliver better public services 5

8 SuMMARy 1 By , cetral govermet spedig is forecast to grow to 678 billio per year. 1 This represets 11,000 for every perso i the Uited Kigdom. It is the challege for departmets to covert these resources ito public services that meet the expectatios of service users, while also providig value for moey for the taxpayer. Departmets capability to maage their fiacial resources effectively is crucial to whether they are able to succeed i meetig this challege. 2 From the smallest trasactio to the largest programme, fiacial resource maagemet is relevat to every aspect of a departmet s busiess. At oe extreme, the Departmet for Childre, Schools ad Families must uderstad how primary schools are usig their budgets to raise stadards of educatio. At the other, the Departmet must track the 45 billio allocated to its programme to rebuild or refurbish every secodary school i Eglad. 3 I additio to their curret activities, effective fiacial resource maagemet ca also help departmets meet future challeges. For istace, our ageig populatio will radically chage how fiacial resources will eed to be allocated across the public sector. It is expected the NHS i Eglad, for example, will eed to provide demetia services to more tha 750,000 by 2020, compared to 560,000 today. 2 4 This report examies how capable departmets are at maagig their fiacial resources, ad what impact efforts to improve capability have had o fiacial resource maagemet performace (Figure 1). It follows a report published by the Comptroller ad Auditor Geeral i 2003 ad a related 2004 report by the Committee of Public Accouts. 5 Overall, departmets have made visible progress i improvig the maagemet of their fiacial resources. We cosider the three key areas where departmets eed to make further progress are: Improvig the fiace skills of staff outside of the fiace departmet; Likig fiacial ad operatioal performace iformatio to improve service delivery ad achieve better value for moey; ad Improvig the reliability of forecasts of future resource eeds. 1 Improvig skills ad awareess, ad the use of techiques ad practices ca improve fiacial resource maagemet performace Skills ad awareess Progress made i establishig fiacial resource maagemet skills ad awareess across departmets Part Two. Techiques ad practices Progress made by departmets i usig advaced techiques ad practices to maage their fiacial resources effectively Part Three. Impact of progress Impact of efforts to improve fiacial resource maagemet across cetral govermet Part Four. Source: Natioal Audit Office 6 MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES

9 summary Departmets are more aware of the importace of soud maagemet of fiacial resources, but esurig staff are sufficietly skilled remais a challege 6 The icreased umber of professioal Fiace Directors o departmetal Boards has ehaced the focus o fiacial performace at seior maagemet level. I some departmets, such as the Departmet for Busiess, Eterprise ad Regularity Reform, this has bee accompaied by a departmet-wide culture which icreasigly recogises the importace of soud maagemet of fiacial resources. At preset two departmets a do ot have a qualified Fiace Director ad a further four departmets b do ot have their Fiace Director o the Board. 7 The lack of fiacial skills ad awareess amogst may o-fiace staff remais a sigificat barrier to improvig fiacial resource maagemet across govermet. With better skills, o-fiace staff are able to maage their budgets ad fulfil ay ecessary reportig requiremets more effectively. HM Treasury, workig with six major departmets, has take steps to fud the developmet of material eablig departmets to improve fiacial skills ad kowledge amog o-fiace staff. However, take up of the ew learig opportuities o offer has bee patchy ad the Cabiet Office does ot yet have a robust way of measurig the umber of civil servats who ow meet the Professioal Skills for Govermet stadard for fiacial maagemet. Departmets have implemeted accruals-based systems but could do more to evaluate the cost-effectiveess of their programmes 9 Departmets have made sigificat progress i usig accruals-based accoutig ad budgetig systems sice our previous study. This has allowed departmets to better uderstad how they are usig their fiacial resources, for example by offerig more detailed iformatio to maage their assets ad liabilities. Departmets have used this iformatio to help idetify uder-utilised assets ad to dispose of those o loger required. The public sector disposed of assets valued at 18.5 billio betwee ad agaist its objective of realisig 30 billio by Cetral govermet has cotributed 4.7 billio to this total. 10 The use of accruals-based systems, together with the impact of HM Treasury s Faster Closig Iitiative, 3 has helped departmets to improve their exteral fiacial reportig. I 2007, oly three departmets ad oe departmet pesio scheme failed to meet the summer recess target for presetig accouts to Parliamet c, whereas i 2003 oly ie departmets met the summer recess target ad six departmets failed eve to preset their accouts to the Natioal Audit Office by the statutory November deadlie. 8 Most departmets do ot routiely icorporate objectives relatig to the maagemet of fiacial resources i the performace appraisal system for either Permaet Secretaries or seior civil servats. Those departmets that regularly assess the fiacial resource maagemet skills of their seior maagers were foud to be more able to urture a culture i which the maagemet of fiacial resources is of cetral importace. a b c The two departmets that do ot curretly have a qualified Fiace Director are the Miistry of Defece ad the Crow Prosecutio Service. The Permaet Secretary of the Miistry of Defece stated to the Committee of Public Accouts o 3 December 2007 that the successor to the curret Fiace Director would be a professioally qualified accoutat. The Fiace Director of the Crow Prosecutio Service is oe year i to the Chartered Istitute of Maagemet Accoutats two-year accelerated route to qualificatio. The four departmets who have a professioally qualified Fiace Director without a place o the Board are the Departmet for Iteratioal Developmet, ad the regulators, the Office of Fair Tradig, the Office of Gas ad Electricity Markets ad the Water Services Regulatio Authority (OFWAT). The Departmet for Iteratioal Developmet s Fiace Director is represeted o the Board by the Director-Geeral for Corporate Services, although the Fiace Director is geerally preset whe the Board discusses fiacial issues. The Board also cotais two qualified fiace professioals. Although the Fiace Directors of Office of Fair Tradig, the Office of Gas ad Electricity Markets ad the Water Services Regulatio Authority (OFWAT) do ot have permaet seats o their departmetal Boards, the relatively small expediture of these departmets is geerally discussed at Board level with the Fiace Director preset. The Office of Gas ad Electricity Markets Board also has a qualified Accoutig Officer ad Chief Executive. For , the Home Office, the Departmet of Health, the Departmet of Health Pesio Scheme ad the Departmet for Eviromet, Food ad Rural Affairs failed to meet the summer recess target for presetig their accouts to Parliamet. Maagig fiacial resources to deliver better public services 7

10 summary 11 Iteral reportig has also beefited. Nearly all departmets ow have accruals-based fiacial iformatio systems, compared to aroud oe i four at time of our last report. However, progress could be made i improvig the timeliess ad accuracy of iteral reportig: Oly 39 per cet of departmets we surveyed said that their i-year reports were produced ad forwarded to the Board withi te workig days after the period ed, the stadard used by HM Treasury i assessig departmets durig their Fiacial Maagemet Reviews. At the time of our survey, the Office of Fair Tradig was able to produce limited i-year reports for its Board withi three workig days, although the Office ow produces more sophisticated i-year reports eight days after the period to which they relate. At the Miistry of Defece, while fiacial reports are available withi 17 workig days after the period ed, the Board prefers to receive reports that have bee reviewed by the Fiace Director accompaied by proposals for actio where ecessary. This exteds to 43 workig days after the period ed, the average time take to produce ad forward to the Board i-year reports. May departmets reported problems with the accuracy ad timeliess of primary data from which i-year reports o fiacial ad operatioal performace are produced. 12 Departmets could do more to lik improved fiacial maagemet iformatio to iformatio about the quality of public services beig delivered. If departmets kow exactly what has bee spet o what programmes ad to what effect, they will be better able to assess whether they are achievig value for moey ad egage more itelligetly with delivery parters. Most departmets are ot sufficietly well placed to do this as they have made limited progress i itegratig fiacial ad operatioal performace iformatio. More tha half of departmets still report fiacial ad operatioal performace iformatio to the Board separately. No Executive Directors i our workshops expressed frustratio that it is ot routie for key decisios to be based o a comprehesive assessmet of both fiacial maagemet iformatio ad data o service performace. Departmets eed to improve their forecastig capabilities 13 Departmets are beefitig from usig fiacial resource maagemet techiques to improve how their busiesses are preparig for future challeges. For example, almost all departmets ow have detailed busiess ad capital ivestmet plas. 14 However, departmets could do more to improve their forecastig capabilities. Poor forecastig ca lead to departmets exceedig their Departmetal Expediture Limits or coversely, where uaticipated uderspeds are ot idetified sufficietly early, losig the opportuity for uspet fuds to be reallocated to other key priorities. We iterviewed several Fiace Directors ad budget holders who had cocers about how well departmets forecast future resource eeds. I additio, some departmets cotiue to produce forecasts that vary sigificatly from the actual expediture the icurred oly a few moths later. Typically, these departmets sigificatly udersped agaist their forecasts. 15 Reforms to the ed of year fudig process may o loger icetivise departmets to maage their budgets i a way that represets optimum value for moey. I , uder the Ed Year Flexibility iitiative (EYF), departmets were give the flexibility to carry forward uspet fuds from oe year to aother (partial EYF was i place before this). This was iteded to reduce the tred of departmets spedig their remaiig budget wastefully i the fourth quarter of the fiacial year to safeguard their budget for subsequet years. 16 Drawdow of EYF has always bee subject to the approval of HM Treasury. I light of the tighter fiscal eviromet, HM Treasury has exercised greater cotrol over the amout departmets ca use from their balaces of uspet fudig brought forward from previous years. This has led to several departmets losig cofidece i the system. There is a risk that the system ow offers departmets isufficiet icetives to avoid wasteful spedig of excess fuds towards the ed of the fiacial year. 8 Maagig fiacial resources to deliver better public services

11 summary Recommedatios 1 Issue: The lack of fiacial skills ad awareess amogst o-fiace staff remais a sigificat barrier to improvig the maagemet of fiacial resources across govermet. If iadequately skilled, o-fiace staff will be uable to maage their budgets effectively. The Cabiet Office should work with departmets to establish how may seior civil servats ad staff at Grade 7 meet the stadard for the fiacial maagemet core skill, as laid out i the Professioal Skills for Govermet framework. Departmets should the use their staff appraisal processes to esure that all staff at Grade 7 ad above ca demostrate that they meet this stadard. HM Treasury should cotiue to provide techical expertise i the desig of traiig material. 2 Issue: Some departmets still do ot have a qualified Fiace Director at Board level despite HM Treasury s requiremet that all departmets have oe by December I our view, this risks fiacial resource maagemet beig give isufficiet professioal leadership at the very top of departmets. As a matter of urgecy, there should be a qualified Fiace Director at Board level i every departmet. 3 Issue: Seior maagers i may departmets are ot provided with the icetives to promote soud maagemet of fiacial resources. This makes it ulikely effective fiacial resource maagemet will become embedded ito departmetal cultures. Seior Maagers should be properly accoutable for their fiacial resources ad icetivised to use them efficietly ad effectively. As a first step, departmets should iclude a assessmet of their maagemet of fiacial resources withi the performace appraisal system for Permaet Secretaries ad all seior civil servats. 5 Issue: Some departmets have lost cofidece i HM Treasury allowig them to draw dow resources carried forward from oe year to the ext. This might weake icetives for departmets to avoid wasteful spedig of excess fuds at the ed of the fiacial year. HM Treasury should review the system of Ed Year Flexibility to esure that it provides the right icetives to improve departmets use of their fiacial resources. I particular, HM Treasury eeds to commuicate with departmets earlier ad more clearly about how much uderspedig from previous years departmets ca use. 6 Issue: Departmets are ot sufficietly well placed to itegrate fiacial ad operatioal performace iformatio, makig it difficult to evaluate the value for moey of their busiesses. Departmets should preset itegrated fiacial ad operatioal performace data to the Board to eable them to compare the cost of their pricipal outputs ad to improve the evidece o which they base resource allocatio decisios. 7 Issue: May departmets do ot always esure that a full assessmet of the fiacial implicatios of policy proposals is icluded i all submissios to Miisters ad Board members. I order to stregthe departmets focus o value for moey, every policy proposal submitted to Miisters ad Board members should iclude a full assessmet of its fiacial implicatios. 8 Issue: Departmets do ot always make best use of o-executive Directors. HM Treasury should assess how well departmets have developed clearly defied roles for their o-executive Directors o their Boards ad cosider how the Corporate Goverace Code ca be refreshed to eable o-executive Directors to challege ad support departmetal activity effectively. 4 Issue: Departmets could do more to improve their forecastig capabilities to esure they are adequately prepared for future challeges to deliverig public services. HM Treasury spedig teams should work with departmets to reduce the umber of departmets whose fial outtur varies by more tha five per cet agaist their fial resource Departmetal Expediture Limit ad by te per cet agaist their fial capital Departmetal Expediture Limit. Maagig fiacial resources to deliver better public services 9

12 PART ONE The importace of maagig fiacial resources Cetral govermet departmets are maagig cosiderable fiacial resources i a icreasigly challegig eviromet 1.1 The Comptroller ad Auditor Geeral s 2003 report Maagig resources to deliver better public services 4 foud that there was potetial for departmets to improve the maagemet of their fiacial resources. I particular, the report cocluded that departmets would beefit sigificatly from makig further progress i movig from cash-based to accruals-based accoutig ad budgetig systems. The Committee of Public Accouts made a similar coclusio i its report o the same subject. 5 Appedix 2 details the full recommedatios from the Committee s report. 1.2 Sice publicatio of the 2003 report, govermet spedig o public services has grow by 33 per cet to 558 billio i , ad accouts for 42 per cet of Gross Domestic Product, compared to 39 per cet i Figure 2 shows that it is forecast to cotiue to grow i real terms. 7 I additio, cetral govermet maages assets worth 441 billio. 8 Strog maagemet of these resources is cetral to esurig that departmets deliver their objectives efficietly ad effectively ad provide the taxpayer with value for moey. 2 Total Maaged Expediture has bee icreasig i real terms sice ad is projected to do so durig the ext three year spedig period billio Year Source: Natioal Audit Office, based o HM Treasury's Public Expediture White Paper for years to ad projectios cotaied i the 2007 Pre-Budget Report ad Comprehesive Spedig Review for years to All prices are at levels NOTE 1 Projected figures. 10 MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES

13 part oe 1.3 Departmets face may challeges i maagig their fiacial resources effectively, may of which are similar to those which existed i These iclude: complexity of service delivery: Public service delivery ivolves a wide rage of bodies from the public, private ad volutary sectors; chagig customer eeds: Users of public services are icreasigly demadig more coveiet access to services; upredictable demad for services: Demad for public services is ot cosistet. It chages i respose to political, social ad ecoomic developmets; log-term chages i society: Globalisatio, our ageig populatio ad climate chage all preset sigificat log-term challeges for how the public sector best uses its fiacial resources; ad chagig priorities: Miisters may aouce ew departmetal priorities at ay time i respose to atioal or global developmets. The diagram i the Key Facts sectio at the frot of this report shows i more detail how strog fiacial resource maagemet is essetial to maitaiig high stadards of service delivery i the face of these challeges. 1.4 It is ow eve more importat that departmets are able to maage fiacial resources effectively. O 9 October 2007, the Chacellor of the Exchequer aouced the results of the 2007 Comprehesive Spedig Review which sets out departmets priorities for the spedig period to For may departmets the settlemets are tighter tha i previous spedig reviews. For example, the resource Departmetal Expediture Limits for the Departmet for Work ad Pesios ad HM Reveue & Customs are plaed to be lower i tha i i omial 9 terms. The Chacellor also aouced that departmets will be expected to achieve 30 billio i value for moey savigs by 2011, o top of savigs of 21.5 billio that departmets are expected to deliver as part of the 2004 Spedig Review. 1.5 I additio, to meet the cross-cuttig ature of the challeges facig govermet today, departmets are beig expected to use their resources more collaboratively to meet policy goals. Departmets ew Public Service Agreemets reflect this. May of the 30 Public Service Agreemet targets are shared betwee departmets. Progress towards the joit targets will be greatly aided by effective maagemet of fiacial resources betwee departmets. HM Treasury has the lead resposibility for esurig soud maagemet of fiacial resources i cetral govermet 1.6 HM Treasury oversees expediture by departmets ad moitors achievemet of Public Service Agreemet targets. As part of this role, HM Treasury has a high-level objective of achievig world class stadards of fiacial maagemet i govermet. 10 HM Treasury has outlied the cocept of World Class Fiacial Maagemet i various documets icludig Maagig Public Moey 11, its maual o how to hadle public fuds of all kids, ad the framework which it used to coduct its Fiacial Maagemet Reviews of departmets (see Figure 3 overleaf). For the purposes of this report, we have codesed the rage of characteristics of world class fiacial maagemet i a table show at Appedix Some of the characteristics of world class fiacial maagemet outlied i Appedix 3 relate to developig a departmetal culture which fully recogises the importace of maagig fiacial resources. Others are focused o improvig the practical applicatio of advaced techiques; for example, brigig together fiacial ad operatioal performace iformatio. HM Treasury, alogside the Cabiet Office, has itroduced a umber of iitiatives aimed at addressig both the cultural ad the practical aspects of departmets maagemet of fiacial resources. The key iitiatives are detailed i Figure The remaider of this report is divided ito three parts: Part 2: The developmet of the skills ad awareess ecessary for effective maagemet of fiacial resources. Part 3: The extet to which departmets make effective use of more advaced techiques to improve the maagemet of their fiacial resources. Part 4: The impact of improvig fiacial resource maagemet. Maagig fiacial resources to deliver better public services 11

14 part oe 3 Key Iitiatives itroduced by HM Treasury ad Cabiet Office to improve the maagemet of fiacial resources Iitiatives ecouragig a stroger culture of fiacial resource maagemet across govermet Code of good practice o corporate goverace Maagig Public Moey Professioal Fiace Directors Fast Stream i fiace Accelerated route to a fiacial qualificatio Professioal Skills for Govermet Govermet Hudred Group Fiacial Maagemet Advisory Paels I July 2005, HM Treasury itroduced the Code, settig out the framework for the overall directio ad cotrol of departmets, agecies ad o--departmetal public bodies. Its aim is to improve goverace by focusig o resource maagemet, delivery ad risk. I October 2007, HM Treasury published Maagig Public Moey, a maual of the priciples ad key cotrols which should gover the deploymet of public fuds, replacig Govermet Accoutig. I July 2004, HM Treasury set a target that all Fiace Directors of departmets should be professioally qualified ad should have a seat o the departmetal Board by December I 2006, HM Treasury itroduced a fiace specialism to the Civil Service Fast Stream programme. Durig the programme, participats trai for a professioal accoutacy qualificatio alogside their other duties. HM Treasury has also worked with the Chartered Istitute of Public Fiace ad Accoutacy (CIPFA) ad the Chartered Istitute of Maagemet Accoutats (CIMA) to develop a course allowig seior maagers with experiece i a fiace role to accelerate their progress towards gaiig a professioal fiace qualificatio. The programme, lauched i September 2005 ad led by the Cabiet Office, icludes fiacial maagemet as oe of six core skills. The programme is desiged to improve skills at middle ad seior civil service grades. It icorporates the developmet of core fiacial maagemet competecies ad miimum stadards for fiace professioals. HM Treasury has bee ivolved i the developmet of iitiatives to improve fiace skills i cetral govermet, icludig Fiace Skills for All (see Figure 6) ad the fiace optio to the Civil Service Fast Stream (see Figure 5). Sice 2004 HM Treasury has hosted regular meetigs of Fiace Directors of the largest departmets (the Fiace Directors Workig Group) ad of all Fiace Directors to ecourage best practice. I Jue 2007, this was exteded whe HM Treasury created the Govermet Hudred Group, a etwork of seior fiace professioals from departmets, executive agecies ad o-departmetal public bodies whose aim is to exchage views, ecourage best practice ad act as a mutual support etwork. Followig a Jue 2006 coferece with fiacial maagemet advisers to govermet, HM Treasury set up the Fiacial Maagemet Advisory Paels. The Paels aim to publish their advice o best practice i Sprig Iitiatives ecouragig better practices ad techiques Three-year budgets The 2007 Comprehesive Spedig Review Ed Year Flexibility Faster Closig Resource Accoutig ad Budgetig Sice 1998 HM Treasury has allocated budgets for three-year periods 1, givig departmets greater certaity over their future fudig, ad has agreed Public Service Agreemets with departmets agaist which it may measure their performace. The 2007 Comprehesive Spedig Review brought about sigificat reform to the Public Service Agreemet Framework. The vast majority of Public Service Agreemet targets are ow shared by more tha oe departmet, although idividual departmets resposibilities are detailed i their Departmetal Strategic Objectives. As part of this iitiative, departmets are required to provide a assessmet of what it will cost to achieve these objectives. I , HM Treasury gave departmets full flexibility to carry forward uspet fuds betwee years. This was iteded to discourage departmets from usig resources towards the year-ed i a sub optimal way, where previously they would have lost ay uspet fuds i subsequet years. I 2002, HM Treasury set departmets the target of layig their resource accouts i Parliamet before the summer recess. The iitiative aimed to address the problem that accouts fialised after the mid July recess caot be laid util Parliamet has retured i October, thereby reducig their usefuless 2. I additio, i order to fialise their accouts earlier, departmets would eed to improve their i-year systems ad processes. Sice , departmets have bee required to produce resource accouts o a accruals basis, which ivolves matchig expediture to the period i which costs were icurred (rather tha paid), ad fully recogisig the cost of owig assets (such as buildigs). Budgets moved to a full Resource Accoutig ad Budgetig (RAB) basis from Previously, budgets ad accouts had simply show the amout of cash spet ad received by a departmet i a particular year. Resource accoutig ad budgetig is iteded to provide a more accurate picture of the cost of departmetal activity ad improve i-year fiacial reportig. 12 Maagig fiacial resources to deliver better public services

15 part oe 3 Key Iitiatives itroduced by HM Treasury ad Cabiet Office to improve the maagemet of fiacial resources cotiued Iitiatives ecouragig better practices ad techiques cotiued Fiacial Maagemet Reviews Better aligmet of budgets, Estimates ad accouts I 2005, HM Treasury coducted Fiacial Maagemet Reviews of all 45 cetral govermet departmets. These examied accoutability structures, plaig ad budgetig, the productio ad use of fiacial iformatio, the effectiveess ad efficiecy of the fiace fuctio ad departmets workig relatioships with HM Treasury. HM Treasury preseted a memoradum settig out the commo themes of the Reviews to the Treasury Select Committee i April 2006 HM Treasury is curretly workig o a project, aouced by the Prime Miister i the Goverace of Britai Gree Paper (Cm7170) i July 2007, desiged to achieve better aligmet betwee departmets budgets, estimates ad resource accouts. The aim is to create a sigle, coheret fiacial regime that: improves the effectiveess, efficiecy ad trasparecy of the process; ehaces accoutability to Parliamet ad the public ad uderpis the Govermet fiscal framework; icetivises good value for moey; ad supports delivery of public services. HM Treasury aims to start implemetig chages from owards, subject to resolvig legislative ad other issues. Source: HM Treasury ad the Cabiet Office NOTES 1 Oly expediture ot expected to vary sigificatly is budgeted o a three year basis. The maximum expediture allowed o this basis is kow as the Departmetal Expediture Limit. More volatile expediture, such as beefit paymets, is still budgeted each year, ad is kow as Aually Maaged Expediture. 2 For example, Professor David Heald i The implemetatio of Resource Accoutig i UK Cetral Govermet, Fiacial Accoutability ad Maagemet (May 2005) highlights how a failure to provide timely fiacial iformatio has a egative impact o public accoutability ad raises doubts about the extet to which accoutig iformatio is used for maagerial purposes. 1.9 We gathered evidece o these issues by coductig: a survey of 37 govermet departmets. A sample of the departmetal returs, icludig those of the top te spedig departmets, was reviewed by the Natioal Audit Office s Fiacial Audit Directors to esure they provided a fair assessmet of the departmets maagemet of fiacial resources; iterviews with six Fiace Directors, represetig the diversity of govermet departmets; iterviews with budget holders withi departmets; two workshops with o-executive Directors of departmets; aalysis of published data o budgets, expediture ad asset holdigs; ad examiatio of fiacial reports to departmetal Boards, departmetal risk registers, ad the memoradum o Fiacial Maagemet Reviews prepared by HM Treasury for the Treasury Select Committee i April For more details o the methodology, see Appedix 1. Maagig fiacial resources to deliver better public services 13

16 PART TWO Developig the skills ad awareess ecessary for effective fiacial resource maagemet 2.1 Figure 4 shows that maagemet of fiacial resources is the resposibility of everyoe i a departmet. I this sectio of the report, we cosider whether departmets at Board level, i the desigated fiace teams ad more geerally amogst o-fiace staff are developig the ecessary skills ad awareess for effective fiacial resource maagemet. 4 Effective fiacial resource maagemet requires actio from all parts of a departmet The Board Departmetal Boards drive the developmet of cultures i which effective maagemet of fiacial resources uderpis delivery ad performace Fiace professioals A departmet s fiace professioals help to establish departmetal cultures that value effective fiacial resource maagemet Source: Natioal Audit Office Effective maagemet of fiacial resources No-fiace staff No-fiace staff, particularly seior maagers, have sufficiet fiacial skills ad awareess to maage resources uder their cotrol effectively The presece of more qualified Fiace Directors o departmetal Boards has icreased the focus o soud maagemet of fiacial resources 2.2 I 2004, oly 39 per cet of departmetal Fiace Directors held a recogised fiace qualificatio. 12 Sir Peter Gersho s 2004 review of public sector efficiecy idetified strog fiacial maagemet as beig essetial to the efficiet use of resources ad a prerequisite to the successful delivery of major efficiecy programmes. This reflected ot oly best practice i the private sector ad wider public sector, but also the best-i-class practice that the Gersho Review saw i a small umber of departmets. As a priority, the Review recommeded that the fiacial maagemet of departmets be stregtheed by makig it a requiremet that all departmets have a professioal Fiace Director reportig to the Permaet Secretary with a seat o the departmetal Board by December All the evidece the Review team saw cofirmed that such appoitmets provided leadership of the efficiecy ageda, strog iteral challege to a departmet s busiess ad a catalyst for drivig chage. 2.3 I the 2004 Spedig Review, HM Treasury made this a requiremet with which all govermet departmets had to comply. 14 Although departmets have made good progress towards meetig this requiremet, six cetral govermet departmets still lack a professioally qualified Fiace Director at Board level. 15 These six departmets accouted for over eight per cet of total cetral govermet expediture, over 45 billio, i Of these six departmets, the Miistry of Defece is the largest, accoutig for seve per cet of total cetral govermet expediture. It appoited its Fiace Director to the Board i Jue At a recet hearig of the Committee of Public Accouts, the Permaet Secretary of the Miistry of Defece stated that the successor to the curret Fiace Director would be a professioally qualified accoutat MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES

17 part two 2.4 Most departmets regard the requiremet that they have a qualified Fiace Director o the Board as the most useful iitiative o fiacial resource maagemet to come from the cetre of govermet. It is cosidered to have sigificatly raised the profile of fiacial resource maagemet at the most seior level of the departmet. I additio, a umber of o-executive Directors described how this had raised the profile of fiacial resource maagemet o the Board ad throughout the departmet. 2.5 Sice this requiremet was set, may departmets have appoited Fiace Directors from outside cetral govermet. Budget holders i departmets where this has occurred, such as Natioal Savigs & Ivestmets, believe their appoitmet has brought about ew ad beeficial practices. For example, fiacial ad operatioal performace reports are clearer ad more cocise. No-Executive Directors at our workshops described clarity of reportig as beig crucial to their ability to digest maagemet iformatio prior to a Board meetig. Furthermore, a umber of them, i some cases possessig sigificat fiacial maagemet experiece themselves, spoke positively about the capability of the Fiace Directors with whom they work. The umber of professioally qualified staff is icreasig but recruitmet of fiace professioals to govermet remais a sigificat challege 2.6 Sice 2006, HM Treasury has collected data o qualified fiace professioals workig i govermet departmets. The total umber of qualified fiace professioals i govermet departmets, agecies ad o-departmetal public bodies has icreased from 3,656 i 2006 to 3,959 i 2007, a rise of eight per cet. The umber of seior civil servats holdig a professioal fiace qualificatio icreased by more tha 30 per cet, to 404. Furthermore the proportio of staff workig i a desigated fiace team who held a fiacial qualificatio icreased from 12.6 per cet to 14.3 percet betwee 2006 ad However, ot a sigle Permaet Secretary holds a professioal fiace qualificatio. While their role is sigificatly differet to that of Permaet Secretaries, i November 2005, a quarter of Chief Executives of FTSE 100 compaies were qualified accoutats. 17 Sice Miisters have atteded fiacial ad risk semiars orgaised by the Natioal School of Govermet HM Treasury has worked closely with CIPFA ad CIMA to develop a accelerated route for civil servats with some fiacial experiece to attai a professioal fiace qualificatio. Participats o this programme sit the same exams as other cadidates but are able to accelerate their qualificatio through exemptios from early papers based o prior kowledge. 2.8 HM Treasury is also workig with departmets to professioalise fiace i cetral govermet at etry level. I 2006 a fiace optio to the Civil Service Fast Stream was itroduced. Eightee people joied the programme i its first year. Fast Stream participats who choose to take the fiace optio trai for a recogised professioal accoutacy qualificatio from oe of the istitutes represeted o the Cosultative Committee of Accoutacy Bodies alogside their other duties. While graduates of this programme will ot be expected to sped their whole career i the fiace fuctio, HM Treasury ad Fiace Directors hope that this iitiative will breed a ew cadre of fiacially-literate geeral maagers i the civil service as well as covice some taleted staff that fiace is a attractive career path i the civil service. Figure 5 provides a example of how a participat o the programme has foud the programme to be of beefit. 5 HM Treasury has added a fiace optio to the Civil Service Fast Stream programme We spoke to a Fast Stream i fiace participat from the Departmet for Busiess, Eterprise ad Regulatory Reform, as well as a seior fiace officer from the departmet itself. Both spoke positively about their experieces of the programme. I particular, the Fast Stream participat said that a good level of fiacial uderstadig combied with policy kowledge is imperative, helpig me to effectively moitor ad aalyse the performace of a govermet departmet ad its delivery bodies. He also stated that the programme has raised awareess that a fiace-orieted career eed ot mea a career solely withi the fiace fuctio. The fiace officer from the Departmet for Busiess, Eterprise ad Regulatory Reform regarded the Fast Stream i Fiace as a importat elemet i the departmet s drive to improve fiacial skills ad awareess. Source: Natioal Audit Office Maagig fiacial resources to deliver better public services 15

18 part two 2.9 Departmets have difficulty recruitig ad retaiig qualified fiace staff. Forty per cet of Fiace Directors selected this as oe of the top three barriers to improvig the maagemet of fiacial resources. The most commo reaso give by Fiace Directors ad o- Executive Directors was the fact that departmets caot offer qualified fiace professioals the same levels of remueratio that are available elsewhere. HM Treasury, the Cabiet Office ad departmets have take steps to improve the skills ad awareess of o-fiace staff, though it is uclear how effective they have bee 2.10 It is importat for fiacial skills ad awareess to reside ot oly i the fiace team but throughout a departmet. Strog fiacial awareess amogst o-fiace staff will help to improve the quality ad timeliess with which fiacial ad operatioal reports are produced at programme or busiess uit level. This i tur will assist the fiace fuctio whe preparig reports for the whole departmet. Improved fiacial awareess will also eable o-fiace staff to realise the importace of strog fiacial resource maagemet, thereby raisig its profile i the orgaisatio I our survey of departmets, 69 per cet of departmets cited poor fiacial awareess amogst o fiace staff as oe of the three most sigificat barriers to improvig resource maagemet from a list of eight, makig it the most frequetly cited barrier. HM Treasury also idetified this as a area which requires attetio i both the summarised report of its Fiacial Maagemet Reviews ad its 2007 Aual Report I August 2005 HM Treasury commissioed cosultats FTC Kapla to coduct a review of departmets iteral fiace courses. The cosultats foud that oly the courses i the Miistry of Defece ad those offered by the Natioal School of Govermet met the required stadards for fiace as a core skill uder the Professioal Skills for Govermet programme Followig the review, HM Treasury ad the Natioal School of Govermet, i cojuctio with six of the biggest spedig departmets developed a tiered traiig programme kow as Fiace Skills for All (see Figure 6). Attedace o the programme is volutary, however, ad departmets may cotiue to provide their ow traiig courses The umber of seior civil servats ad Grade 7 staff who have registered ad completed the e learig platform, remais low. Accordig to data from the Natioal School of Govermet, i 44 per cet of departmets ot a sigle seior civil servat has completed tier 1. However, the oe departmet where more tha te per cet of seior civil servats had completed the course foud it to be useful i embeddig improved fiacial maagemet skills throughout the orgaisatio (see Case Example 1). Furthermore, two departmets, the Departmet for Work ad Pesios ad the Foreig ad Commowealth Office, have icluded Fiace Skills for All as part of their wider busiess trasformatio programmes Results of our survey ad iterviews with Fiace Directors ad budget holders show that may departmets provide their o-fiace staff with fiacial traiig. However, the stadard of these courses varies across cetral govermet departmets. Some have fiacial traiig courses itegrated ito departmet-wide fiacial maagemet chage programmes, others provide o iteral courses ad have ot show sigificat take-up of Fiace Skills for All. CASE EXAMPLE 1 Promotig fiace traiig for o-fiace staff at all levels of a orgaisatio Soo after its lauch, the Departmet for Trasport made completio of the Fiace Skills for All e-learig course madatory for Board members ad seior civil servats. By May 2007, every Board member, icludig the Permaet Secretary, had completed the course. The Departmet s survey retur shows that 88 per cet of seior civil servats had registered for the course ad 69 per cet had completed it. Budget holders that we spoke to said that the course was ot excessively burdesome ad, although they felt that they already had strog fiacial skills, they foud it useful. The Departmet s Fiace Director explaied that sposorship ad support from the top of the orgaisatio was a crucial driver for the take-up it achieved. Our survey shows that it has also had a impact lower dow the Departmet, with 27 per cet of staff at Grade 7, ad 16 per cet of staff at grades below Grade 7 havig registered for the course by May Budget holders explaied to us that this iitiative helped to make it clear that strog fiacial resource maagemet is a corporate priority. Source: Natioal Audit Office 16 Maagig fiacial resources to deliver better public services

19 part two 6 HM Treasury ad the Natioal School of Govermet have developed a tiered fiace traiig programme called Fiace Skills for All Tier 1 Tier 1 ivolves te learig modules that are completed olie. Civil servats ca check whether or ot they already have the skills taught i each module by usig the selfassessmet tool. All te modules ca be completed i less tha eight hours ad are available to staff i all cetral govermet departmets free of charge. It cost 450,000 to develop. Tier 2 Oce users traiig eeds have bee idetified, they are addressed by attedig half-day classroombased courses o each of the te modules that the user did ot complete successfully. These courses are ru by the Natioal School of Govermet. The Natioal School of Govermet has made the cotet of these courses available to departmets free of charge, to eable them to develop courses that comply with the stadards required by the Professioal Skills for Govermet programme. Tier 3 Tier 3 is a series of two-day courses desiged to exted fiacial resource maagemet skills further ad lik them to the other core skills i the Professioal Skills for Govermet programme. The courses were desiged by HM Treasury ad are ru by the cosultats FTC Kapla. Source: HM Treasury ad the Natioal School of Govermet 2.16 Some Fiace Directors stated that their reaso for ot fully edorsig Fiace Skills for All withi their departmet is that the cotet duplicated that of their ow courses. Others explaied that it does ot match the requiremets of the departmet as well as their ow courses. For example, the Fiace Director of Natioal Savigs & Ivestmets stated that, i his opiio, much of Fiace Skills for All goes beyod the requiremets of some of the people i his departmet. He iformed us that he would be coductig a gap aalysis agaist his departmet s ow eeds ad would select the most relevat elemets of the course ad build a tailored iteral traiig programme aroud them I additio to Fiace Skills for All, the Natioal School of Govermet rus two ad three day courses o fiacial maagemet that are available to all civil servats, ad which meet the requiremets of the Professioal Skills for Govermet programme I 2005 the Civil Service Maagemet Board set cetral govermet the target that 75 per cet of seior civil servats should demostrate each of the six core skills i the Cabiet Office s Professioal Skills for Govermet programme by September Fiace is oe of these core skills. The Cabiet Office origially based its assessmet of progress towards this target o self-assessmet questioaires. The last of these was coducted i April 2006 ad showed that early 70 per cet of respodets felt that they had already met the core skills criteria i fiacial maagemet. However, the Cabiet Office does ot trust the reliability of the data ad so has abadoed the self-assessmet questioaires. It is curretly workig with cosultats to create a ew strategy for evaluatig the impact of Professioal Skills for Govermet more geerally, based o sample surveys ad iterviews with practitioers to assess the impact of improvig skills upo key performace idicators of success. This work is ot yet complete. Several departmets are takig positive steps to build relatioships betwee the fiace departmet ad o-fiace areas 2.19 Our survey shows that over 70 per cet of departmets cosider the fiace team to be either strog or very strog at buildig relatioships with other areas of the departmet. However, several budget holders ad o-executive Directors suggested that fiace eeds to thik more about delivery requiremets rather tha just fiacial iformatio The survey also shows that departmets cosider that the fiace team could collaborate more effectively with other areas of the busiess, particularly Huma Resources (see Figure 7 overleaf). Twety seve per cet of departmets cosider that collaboratio betwee fiace ad Huma Resources eeds improvemet. This is a sigificatly higher proportio tha for relatioships betwee fiace ad ay other busiess fuctio. Maagig fiacial resources to deliver better public services 17

20 part two 2.21 Oly 14 per cet of departmets cosider collaboratio betwee the fiace team ad both policy ad operatioal busiess uits to be excellet. Iterviews with budget holders ad Fiace Directors revealed that icreasig both the fiacial awareess of o-fiace staff ad the fiace team s awareess of the departmet s delivery objectives would help to build more costructive relatioships betwee the two. Case Example 2 shows how two departmets, oe large ad oe relatively small, have developed these relatioships to improve mutual uderstadig betwee fiace ad o-fiace areas, ad how this has bee of beefit. Both approaches ivolve embeddig members of the fiace fuctio withi busiess uits. No-Executive Directors from departmets with embedded fiace staff i busiess uits cosider this to be oe of the mai drivers of effective resource maagemet. Fiacial resource maagemet is becomig more cetral to departmetal cultures, although more progress would be achieved if seior civil servats performace appraisals icluded criteria related to the maagemet of fiacial resources uder their cotrol 2.22 Fiacial maagemet is ot curretly cetral to orgaisatioal culture i the civil service. For example, we oted that the 2006 seior civil service survey ru by the Cabiet Office 19 asked respodets to evaluate the effectiveess of their orgaisatio across a rage of subjects, for example how well departmets maage staff performace. Noe of the questios related either to maagig fiacial resources or whether the departmet is achievig value for moey. 7 There is scope for departmets to develop further the relatioship betwee the fiace fuctio ad other areas of the departmet Procuremet Strategy teams IT Estates maagemet Policy divisios Operatioal busiess uits Huma Resources Percetage Departmets cosider collaboratio to be excellet Departmets cosider collaboratio to be adequate Departmets cosider collaboratio to eed improvemet Source: Natioal Audit Office survey 18 Maagig fiacial resources to deliver better public services

21 part two 2.23 Fiace Directors ad o-executive Directors told us that it is the departmetal Board that drives the developmet of a strog fiace culture. Those Fiace Directors who feel that they have a supportive Permaet Secretary or equivalet explaied how valuable this had bee i covicig the whole orgaisatio that strog fiacial resource maagemet was crucial to the departmet s success. CASE EXAMPLE 2 Busiess parters: Improvig both the skills of o-fiace staff, ad the fiace departmet s awareess of the busiess The Fiace Director of Natioal Savigs & Ivestmets has recetly restructured the fiace fuctio, placig fiace staff kow as busiess parters i operatioal ad project areas to act as a lik betwee fiace ad the rest of the busiess. Busiess parters support budget holders o fiacial maagemet matters ad provide o-the-job traiig for ofiace staff. For example, busiess parters have recetly focused o improvig the quality of accruals recorded at the ed of the moth. This has reduced the amout of time the fiace departmet speds correctig the iformatio it receives from the busiess ad, as a result, the Executive Maagemet Team ca ow discuss the departmet s fiacial positio eight days after the moth s ed rather tha 20 days as previously. Group Fiace: Dedicated fiacial maagemet support to budget holders The Departmet for Busiess, Eterprise ad Regulatory Reform has also take steps to itegrate fiace more closely with operatioal ad policy areas. Each of the Departmet s five mai busiess areas has a dedicated fiace team which supports budget holders o matters such as plaig, forecastig, productio of mothly ad quarterly reports ad emergig issues ad risks. These fiace teams have a overview of a sigificat but maageable portio of the departmet, ad are therefore able to idetify opportuities for reallocatio of resources withi the busiess group. A member of each busiess area s fiace team sits with idividual budget holders ad their teams to provide them with advice about day-to-day fiacial resource maagemet activities. The budget holder that we spoke to foud this particularly useful Fiace Directors, budget holders ad o-executive Directors feel that a strog fiace culture could be further developed were the Board to provide itself ad budget-holders with more accoutability for fiacial resources ad more icetives to maage them effectively. Our survey shows that departmets regard the lack of icetives as the secod most sigificat barrier to improvig resource maagemet. No-Executive Directors also sigled this issue out whe asked to explai where they felt the barriers were Permaet Secretaries are ormally the departmet s Accoutig Officer ad are ultimately accoutable for the departmet s overall performace. Maagig Public Moey, HM Treasury s guidace o ethical stewardship of resources, states that accoutig officers should esure that the orgaisatio operates effectively ad to a high stadard of probity i fiacial maagemet matters. However, fiacial matters do ot automatically feature i Permaet Secretaries performace assessmet criteria. Each Permaet Secretary defies his or her criteria i cosultatio with the Head of the Home Civil Service, the Cabiet Office ad HM Treasury. I order that resource maagemet features more promietly i the future, from the Cabiet Office is to ivolve HM Treasury earlier i the process I additio, fiacial maagemet matters are ot automatically icluded i the performace assessmet criteria for seior civil servats or budget holders. The Cabiet Office is curretly reviewig the performace assessmet framework for the seior civil service ad while it is expected that fiace will be preset withi that framework, it will ot be a madatory elemet for the whole seior civil service. However, oe departmet s budget holders iformed us that resposibilities related to fiacial maagemet are icluded i their terms of referece, while a budget holder at aother departmet iformed us that his bous depeded o how well he maaged the resources uder his cotrol. Budget holders ad the Fiace Director iformed us that this structure has bee highly beeficial. For example, it has facilitated tight budgetary cotrol durig a period i which the Departmet has a resource settlemet from HM Treasury which is reducig i real terms, ad whe a large proportio of its budget is rig-feced. Source: Natioal Audit Office Maagig fiacial resources to deliver better public services 19

22 part two Departmets have beefited from the advice ad challege provided by o-executive Directors, but more ca be doe to stregthe goverace i other areas 2.27 The majority of Fiace Directors cosider o Executive Directors to have improved stadards of fiacial resource maagemet i departmets by usig their experiece to provide robust, idepedet challege to the Board. I particular, several Fiace Directors commeted o how beeficial it was to have a o Executive Director with kowledge of fiacial resource maagemet as Chair of the Audit Committee. They stated that Audit Committees have bee more effective as a result Our survey shows that this idepedet expertise is preset i a sigificat majority of departmets: 97 per cet of Audit Committees are chaired idepedetly; ad 91 per cet of Audit Committees have at least oe member who holds a recogised accoutacy qualificatio Most o-executive Directors cosider that their role as critical fried, advisor ad cosultat to the departmet is appropriate ad eables them to be effective. However, a small umber of Fiace Directors ad o-executive Directors felt that the precise remit of o-executive Directors would beefit from greater clarificatio. Some Fiace Directors were disappoited by the lack of impact achieved by their o-executive Directors Durig our workshops, o-executive Directors agreed that they would beefit from more assistace from their departmets Iteral Audit fuctios. There was also cosesus that departmets ofte fid it difficult to recruit high calibre staff (for example Fast Stream participats) to fill iteral audit posts ad Iteral Audit does ot sufficietly address key departmetal risks. HM Treasury updated the Audit Committee Hadbook i March 2007 ad is curretly udertakig a review of Govermet Iteral Audit Stadards. The first stage of this review, which cosiders the scope for, ad implicatios of, adoptig iteratioal auditig stadards, is to be completed i March Furthermore a o-executive Director of the former Departmet for Educatio ad Skills, ad a umber of departmetal Fiace Directors stated that havig at least oe o-executive Director with a backgroud i fiace ad at least oe with detailed kowledge of the departmet s operatios worked well. 20 Maagig fiacial resources to deliver better public services

23 PART THREE Improvig departmets use of techiques ad practices for maagig fiacial resources 3.1 This part examies the extet to which departmets are makig effective use of advaced resource maagemet techiques. It examies the extet to which departmets uderstad their existig fiacial positio ad make appropriate preparatios for the future. Uderstadig the curret positio etails: Movig to accruals-based accoutig systems Itegratig reportig of fiacial ad operatioal performace iformatio Esurig i-year reportig is timely ad reliable Maagig the departmetal balace sheet effectively Exercisig effective oversight of executive agecies ad o-departmetal public bodies Preparig for the future ivolves: Drawig up robust plas ad forecasts Assessig policy proposals ad operatioal ad ivestmet decisios Maagig fiacial ad operatioal risks effectively Usig appropriate icetives to drive required behaviours Uderstadig the curret positio Departmets have made sigificat progress i movig from cash-based to accruals-based accoutig ad budgetig systems 3.2 Departmets bega to implemet accruals-based accoutig systems i i order to obtai better iformatio o how resources are beig used by uderstadig the true costs of providig services (rather tha simply what is paid out i cash) ad of owig assets. We foud i our survey that 17 departmets had implemeted accruals-based systems to a extet which offered high potetial to improve their resource maagemet compared with two i I additio the umber of departmets that had made limited progress i implemetig accruals-based systems had reduced from 33 i 2003 to three i (Figure 8). Departmets have made limited progress i reportig the comparative cost-effectiveess of each of their programmes by itegratig fiacial ad operatioal performace iformatio 3.3 By itegratig fiacial ad operatioal performace iformatio departmets will have a clearer picture of how much is beig spet o which programmes ad to what effect. Departmets cited the ability to better match iputs to outputs as oe of the four factors most likely to improve their maagemet of fiacial resources. This 8 Percetage of departmets Departmets have made good progress i implemetig accruals-based accoutig ad budgetig systems Nil Low Medium High Degree of implemetatio of accruals-based systems Source: Natioal Audit Office survey ad Natioal Audit Office report (2003), Maagig resources to deliver better public services (HC 61) MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES 21

24 part three eables them to better assess the uit costs for each key output ad so gauge the impact of switchig resources betwee priorities both i fiacial ad operatioal terms. While we foud examples of departmets who had made sigificat progress (Case Example 3), may departmets have much to do i order to produce itegrated performace reports. I respose to our survey, 57 per cet of departmets still report fiacial ad operatioal performace separately to the Board. Departmets will therefore eed to work hard to be able to comply with HM Treasury s recet requiremet that they state the cost of achievig each of their Departmetal Strategic Objectives. 21 The quality ad timeliess of i-year reportig to the Board o the fiacial ad operatioal performace of the orgaisatio remai mixed 3.4 Departmetal Boards ad seior maagemet eed prompt ad reliable iformatio regardig the fiacial ad operatioal performace of their departmet. Where adequate iformatio is ot available, departmets are uable to assess whether their resources are beig deployed effectively ad whether they are achievig value for moey i respect of the services they provide. For example, our examiatio of the work by the Departmet for Work ad Pesios to help disabled people fid a job 22 foud that the Departmet s kowledge ad uderstadig of what providers deliver is poor, largely because maagemet iformatio is of isufficiet quality. 3.5 May departmets reported problems with the accuracy ad timeliess of the primary data from which i-year reports o fiacial ad operatioal performace are produced (Figure 9). Some o-executive Directors reported that their departmets ofte experieced difficulties i obtaiig the ecessary iformatio for them to assess fiacial ad operatioal performace across the departmetal family. While govermet agecies ad o departmetal public bodies have the primary resposibility for maagig their ow fiacial resources, it is importat that these bodies report reliable high-level performace iformatio to their paret departmets promptly. These weakesses i primary data icrease the risk that key decisios regardig the use of departmetal resources may be based o flawed iformatio. 3.6 Oly 39 per cet of departmets we surveyed said that their i-year reports were produced ad forwarded to their Boards withi te workig days after the period ed, the stadard used by HM Treasury i assessig departmets durig their Fiacial Maagemet Reviews (Figure 10). At the time of our survey, the Office of Fair Tradig was able to produce limited i-year reports for its Board withi three workig days, although the Office ow produces more sophisticated i-year reports eight days after the period to which they relate. At the Miistry of Defece, while fiacial reports are available withi 17 workig days after the period ed, the Board prefers to receive reports that have bee reviewed by the Fiace Director accompaied by proposals for actio where ecessary. This exteds to 43 workig days after the period ed, the average time take to produce ad forward to the Board i-year reports. The Departmet is aimig to improve the timeliess of its fiacial reportig, but cosiders it ecessary to balace the eed for more timely iformatio agaist the sigificat ad costly chages that would be required to the Departmet s fiacial systems. No-Executive Directors reported that the primary reasos for delays i producig i-year reports were iadequate iformatio systems ad difficulties i gatherig iformatio from sposored bodies. Some felt that the delays i producig i-year reports meat they were ofte isufficietly prepared about the relevat issues by the time of the Board meetig. 3.7 While most departmets routiely report basic fiacial iformatio to the Board, may report o a umber of key aspects of orgaisatioal performace ifrequetly, if at all. For example, 84 per cet of departmets report year-todate expediture agaist budget o a mothly basis but oly 28 per cet offered a mothly aalysis of expediture by operatioal target. Without up-to-date, reliable iformatio o the relative performace of programmes it is difficult for departmets to kow how best to reallocate resources i-year to address chagig priorities. CASE EXAMPLE 3 Usig itegrated fiacial ad operatioal performace iformatio to make better resource allocatio decisios Historically, the Army Traiig ad Recruitmet Divisio achieved savigs by cuttig costs without robust iformatio regardig the impact o operatioal performace. This reflected a lack of uderstadig of the lik betwee the resources cosumed ad the services delivered. The Divisio developed a Output Costig Maagemet System to allow a ew overall pla to be developed based o services delivered as well as o resources cosumed. The System has allowed the Divisio to idetify the key cost drivers of its busiess activities. Previously it had wrogly assumed costs were always directly proportioal to umbers of traiees o each course. I additio, the Divisio is able to re allocate resources betwee programmes based o the level of services beig provided, ad to compare costs across differet programmes. The improved iformatio offered by the System led the Divisio to redesig some courses ad to revise the prices charged for others, to better reflect the cost of providig the traiig. There is also a better workig relatioship betwee fiace ad plaig staff. For example, fiace staff ow have a greater ivolvemet i the decisio-makig process. Source: Army Traiig ad Recruitmet Divisio 22 Maagig fiacial resources to deliver better public services

25 part three 3.8 A further challege for departmets is the icreasig importace of accoutig for the wider impact of its activities. For example, departmets outputs ad outcomes may have evirometal ad social costs as well as a fiacial cost. Orgaisatios such as the Accoutig for Sustaiability Project (of which the Natioal Audit Office is a member) are developig frameworks ad methodologies for such calculatios. 23 However, i our survey of govermet departmets, oly 41 per cet of departmets said that they usually gave a assessmet of the likely social, ecoomic ad evirometal impacts i submissios to Miisters or Board members for policy proposals. Some departmets eed to make further progress i maagig their assets ad liabilities 3.9 The implemetatio of accruals-based accoutig i cetral govermet required departmets to produce balace sheets. I additio the Office of Govermet Commerce required departmets to draw up property asset maagemet plas i accordace with a stadard good practice template by December ad as part of the 2007 Comprehesive Spedig Review HM Treasury has required departmets to produce asset maagemet strategies coverig the acquisitio, 9 May departmets experiece problems with timeliess ad accuracy of the data used to report their fiacial ad operatioal performace Percetage of departmets whose primary data related to various busiess areas was almost always accurate, ad whose i-year reports are ivariably produced from up-to-date data Icome Creditors Expediture Assets Operatioal Performace Data HR Data Source: Natioal Audit Office survey Percetage 10 Sixty per cet of departmets take more tha te workig days after the period ed to produce i-year fiacial reports ad forward them to their Boards Percetage of departmets HM Treasury's recommeded stadard Over 40 Number of workig days take to forward i-year fiacial reports to the Board Source: Natioal Audit Office survey Maagig fiacial resources to deliver better public services 23

26 part three maiteace, deploymet ad disposal of their asset base. 25 As a result, departmets ow have better, more detailed iformatio with which to obtai value for moey from the deploymet of their assets ad resources ad to better maage their liabilities However, i respose to our survey 19 per cet of departmets (who collectively maage assets of 23 billio) 26 rated themselves as weak at maagig their balace sheet. There is also scope for further improvemet i the reportig of balace sheet iformatio to departmetal Boards. Of the departmets who stated that iformatio o tagible assets is highly importat to their operatioal delivery, oly 35 per cet forward a balace sheet to their Board o a quarterly basis. Most departmets operate uiform fiacial performace reportig systems i respect of their executive agecies ad o departmetal public bodies but some problems remai with the timeliess ad reliability of the iformatio reported 3.11 HM Treasury idetified durig their Fiacial Maagemet Reviews that there was scope for ehacig the group focus by the Board o the overall maagemet of plas, budgets ad fiacial risks across the departmetal group. 27 Departmets have made some progress i ehacig their oversight of their executive agecies ad o-departmetal public bodies. Eighty eight per cet of those departmets that sposor such bodies report the fiacial performace of the core departmet ad all of its sposored bodies o a uiform basis. 28 This makes it easier to compare the performace of each orgaisatio However, 56 per cet of departmets reported that the primary reports produced by some executive agecies ad o-departmetal public bodies differed from the format or cotet adopted by the paret departmet, requirig maual itervetio to produce a uiform report. While this i part reflects the ature of the activities of some executive agecies ad o-departmetal public bodies ad their remit as a separate orgaisatio, there seems to be further scope for stadardisig reportig across the group i some departmets While we foud examples of departmets that had developed robust reportig arragemets i respect of their agecies ad o-departmetal public bodies (Case Example 4), some Fiace Directors ad o Executive Directors highlighted difficulties they had experieced i collectig timely, reliable performace iformatio from their sposored bodies. Some Fiace Directors ad o-executive Directors said that they foud it difficult to covice their sposored bodies of the impact that their fiacial performace had o the overall fiacial positio of the departmetal group. I cotrollig curret spedig, HM Treasury works well with departmets i a complex system of fudig 3.14 The Govermet sets policies i the cotext of two fiscal Rules; the Golde Rule ad the Sustaiable Ivestmet Rule. The Golde Rule states that over the ecoomic cycle, the Govermet borrows oly to ivest ad ot to fud curret spedig. The Sustaiable Ivestmet Rule states that et public debt as a proportio of Gross Domestic Product will be held over the ecoomic cycle at a stable ad prudet level over the ecoomic cycle. Other thigs beig equal, et debt will be maitaied below 40 per cet of Gross Domestic Product over the ecoomic cycle To esure that the Rules are ot broke, HM Treasury eforces a system of cotrols o what govermet departmets ca sped. Whe requestig resources from Parliamet, departmets must be clear about what those resources will be spet o; for example, whether it is resource expediture or capital expediture. I additio, portios of departmets budgets are rig-feced for certai govermet priorities, precludig departmets from spedig this moey o aythig else. Several CASE EXAMPLE 4 Desigig i-year reportig to improve oversight of arm s legth bodies The (the) Departmet for Educatio ad Skills revised its Corporate Performace Report to: itegrate reportig of operatioal ad fiacial performace more closely; stadardise the reportig of the performace of arms-legth bodies; ad use graphics ad summaries to make the presetatio clearer. The report cotais a stadardised page o each of the Departmet s arms-legth bodies. It sets out measures of fiacial performace together with commetary ad Red/ Amber/Gree ratigs for a rage of aspects of operatioal performace (such as achievemet of delivery targets, efficiecy, ad customer perceptio of the body). This format eables Board members to assess ad challege the overall performace of each body more easily ad so drive improvemets to their efficiecy ad effectiveess. Source: Natioal Audit Office 24 Maagig fiacial resources to deliver better public services

27 part three Fiace Directors expressed frustratio at the legth of time they sped explaiig to o-fiace staff how this cotrol eviromet works. Iterviews with budget holders also revealed that they fid this aspect of budget maagemet particularly challegig. Part of the role of departmetal expediture teams withi HM Treasury is to support departmets i this. Our survey results show that departmets value this guidace ad advice, with oly 8 per cet cosiderig that is ot at all useful HM Treasury itroduced the Combied O-lie Iformatio System (COINS) to cosolidate the previously diverse reportig requiremets they made of departmets. Most Fiace Directors iterviewed recogised HM Treasury s eed for uiform iformatio i order to maage resources across cetral govermet. To improve the accuracy of the data o the system, HM Treasury ow requires returs to be siged off by Fiace Directors i order to improve accuracy, a iitiative which Fiace Directors geerally welcomed. May departmets do ot esure that proposals for policy ad operatioal chages cotai robust fiacial iformatio 3.19 There is a risk that departmets decisio-makig processes do ot pay sufficiet attetio to value for moey issues. Oly 41 per cet of departmets stated that policy proposals forwarded to decisio-makers ivariably icluded a full fiacial appraisal. I additio, oly 20 per cet of departmets cosidered that policy decisios were ivariably based o a thorough assessmet of the fiacial implicatios The picture is similar i relatio to operatioal decisios. Oly a third of departmets stated that submissios to decisio-makers i relatio to key operatioal decisios ivariably icluded a full fiacial appraisal. Sixtee per cet of departmets cosidered that decisios based o these submissios were based o a thorough assessmet of the fiacial implicatios. Preparig for the future Departmets eed to improve the reliability of their forecasts ad develop robust future busiess plas 3.17 Several Fiace Directors highlighted the particular difficulties i preparig reliable forecasts for project expediture due to the large umber of projects that fall behid schedule or ru over budget resultig pricipally from the cotiuig shortage of project maagemet skills i cetral govermet. The difficulties facig departmets i settig reliable budgets have bee highlighted i several recet NAO reports (for example our study examiig the settig of the budget for the 2012 Olympics) The framework for the Fiacial Maagemet Reviews devised by HM Treasury suggests that i order to clearly idetify their future priorities, opportuities ad risks, departmets should aim to have a rollig three year corporate busiess pla. However, 43 per cet of departmets either had o busiess pla or, if they did, it oly covered a sigle year. Additioally, 50 per cet of departmets either had o capital ivestmet pla, or had oe that covered oly a sigle year. Developig a robust medium-term busiess pla, such as that created by St Heles Metropolita Borough Coucil (Case Example 5) ca help departmets deliver their services more efficietly ad effectively. CASE EXAMPLE 5 Likig medium-term fiacial ad operatioal delivery plaig to reduce deficits without affectig service quality St Heles Metropolita Borough Coucil itroduced a three year fiacial strategy to address ogoig budgetary problems ad the poor likage betwee fiacial plaig ad service delivery. The strategy adopted a zero-based approach, whereby all the costs of each departmet were challeged by officers from elsewhere i the Coucil ad bechmarked to those of similar local authorities. Key cost drivers were idetified for each service. The strategy clearly set out service priorities, detailed three year budgets for each service ad explicitly liked fiacial plas to operatioal performace idicators. No performace framework had previously bee used but ow the full coucil receives a quarterly report itegratig fiacial ad operatioal performace iformatio. Expediture ad service performace are cosidered together by strog ad effective coucil scrutiy committees. Sice the itroductio of the strategy, a 11 millio deficit i coucil fiaces has bee elimiated. Services stadards have also improved. The Audit Commissio curretly rate all of the services provided as beig three stars or better ad the overall Comprehesive Performace Assessmet for the Coucil is four stars. 1 Source: Natioal Audit Office summary of cotet provided by the Audit Commissio NOTE 1 Coucils are rated by the Audit Commissio agaist a scale of oe to four stars, four beig the highest ratig. Maagig fiacial resources to deliver better public services 25

28 part three Most departmets have made progress i maagig fiacial risks, but some report ifrequetly to the Board i respect of the risks idetified 3.21 Departmets idetify the key fiacial risks to their orgaisatio ad have a clear picture of the likelihood ad impact of these risks crystallisig. Most departmets (65 per cet) maitaied a discrete fiacial risk register while others operated a itegrated fiacial ad operatioal risk register i order to maage risks holistically. Most departmets usually idetified the mai fiacial ad operatioal risks whe submittig proposals for key operatioal decisios. However, 36 per cet of departmets reported to the Board i respect of their fiacial risks either aually or ot at all. Where risks are ot properly maaged the likelihood of programmes beig delivered i a effective ad efficiet maer is greatly reduced. Our report o the Rural Paymets Agecy 32 foud that better risk maagemet would have sigificatly reduced the disruptio ad distress caused by the deficiecies i the admiistratio of the EU Sigle Paymet Scheme Every departmet was able to idetify their key fiacial risks i their respose to our survey. The most commoly cited risks were difficulties i maitaiig the quality ad extet of services while stayig withi the tight Spedig Roud settlemet, lower tha expected icome (for example, from asset disposals) ad the risk to the paret departmet posed by aticipated pressures o the budget of a fuded body I our review of a sample of departmetal risk registers, we foud may departmets adoptig good practice, for example by clearly assigig each risk to a resposible ower ad idetifyig a date by which progress was required. Others quatified all risks i fiacial terms, assiged a umerical risk ratig ad routiely provided full arrative commetaries. The Departmet for Busiess, Eterprise ad Regulatory Reform maitaied a opportuities register alogside its risk register, which kept the Board aware of the prospects for exteral factors to have both positive ad egative impacts o performace. The Ed Year Flexibility arragemets have ecouraged departmets to sped moey more evely durig the year but some are losig cofidece i the scheme 3.24 Full Ed Year Flexibility (EYF) was itroduced by HM Treasury i (limited EYF was available before that). It aimed to ecourage departmets ot to sped ay remaiig budget i the last moths of the fiacial year o o-essetial items i the expectatio that they would be able to draw dow (through the supplemetary estimate system) ay uspet fuds carried forward from oe year to the ext Our aalysis of Cetral Govermet Curret Expediture (CGCE) 33 betwee ad foud that departmetal expediture was margially higher i the fial quarter i three of the four years examied although ot i the most recet year, (Figure 11). Spedig i respect of Cetral Govermet Net Ivestmet (CGNI) 34 cotiued to be disproportioately heavy i the fial quarter of the year i each of the five years from to , accoutig for 37 per cet of total spedig i Departmets are carryig forward icreasig sums from oe year to the ext uder the Ed Year Flexibility arragemets (Figure 12). The amout carried forward i respect of capital spedig at 31 March 2007 represets almost a quarter of plaed capital expediture for I some departmets the amouts carried forward as Ed Year Flexibility are so large that it is ucertai whether the amouts carried forward will ever be spet. For example the stock as at 31 March 2007 for the Departmet of Health i respect of capital was 4.5 billio compared with plaed expediture for of 5.3 billio. However, the Departmet is cofidet that it will use its reserves of Ed Year Flexibility. While capital ivestmet sice has grow from 1 billio to 4 billio i , fudig has grow eve more rapidly. With lower growth i fudig expected over future years, the Departmet believes that the accumulated Ed Year Flexibility reserves will be used to maitai the higher level of capital ivestmet. 26 Maagig fiacial resources to deliver better public services

29 part three 11 Spedig o ivestmet cotiues to be heaviest i the fourth quarter of the fiacial year Percetage of spedig Fiacial year CGCE Quarter 1 CGCE Quarter 2 CGCE Quarter 3 CGCE Quarter 4 CGNI Quarter 1 CGNI Quarter 2 CGNI Quarter 3 CGNI Quarter 4 Source: HM Treasury 12 millio 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Amouts carried forward as Ed Year Flexibility are icreasig faster for capital expediture tha resource expediture 0 Source: HM Treasury Resource Ed Year Flexibility Capital Ed Year Flexibility Cumulative Ed Year Flexibility carried forward from year to year 3.27 Drawdow of EYF has always bee subject to HM Treasury approval as part of the Supplemetary Estimates process. HM Treasury s budgetig guidace states that EYF take up will be scrutiised o the basis of eed, realism ad the wider fiscal positio. I recogitio of the tighter fiacial eviromet, HM Treasury have applied these cotrols more strictly i the last two fiacial years. There is o published guidace or fixed rule which sets out how much departmets are etitled to draw dow. Several departmetal Fiace Directors reported that the icreased ucertaity regardig how much they will be allowed to draw dow from amouts carried forward from previous years as Ed Year Flexibility has disrupted their resource maagemet plaig. I our survey 35 per cet of departmets idetified the lack of certaity regardig the amout they would be allowed to draw dow as the most sigificat barrier to their beig able to make full use of Ed Year Flexibility. However, it is importat that departmets ad HM Treasury retai cofidece i the Ed Year Flexibility system i order that uder- ad over-speds ca be properly maaged ad to disicetivise uecessary fourth quarter expediture Coversely, we foud examples of departmets who have draw dow Ed Year Flexibility durig the year to meet perceived fudig pressures but whose fial expediture was actually less tha their origial Departmetal Expediture Limit provisio set at the outset of the year. This suggests poor forecastig or i-year moitorig by some departmets. Maagig fiacial resources to deliver better public services 27

30 PART FOuR The impact of improved maagemet of fiacial resources 4.1 I Parts Two ad Three, we foud that while there is scope for further improvemet, departmets have made progress i buildig their capabilities ad applyig techiques ad practices to better maage their fiacial resources. I this Part, we cosider the impact of improvig resource maagemet i cetral govermet. I particular, we cosider the impact o: the umber ad scale of material variaces betwee actual ad forecast sped; the allocatio of resources to operatioal objectives; the efficiecy with which departmets carry out their activities; ad how well departmets report their fiacial performace exterally. Departmets have ot show sigificat improvemet i forecastig their total resource eeds 4.2 It is importat that departmets forecast reliably the resources they eed to operate their busiesses ad adjust these forecasts i-year to reflect reported performace to date ad chages i exteral circumstaces. Our examiatio of uder- ad over-spedig by departmets did ot fid evidece that departmets have sigificatly improved their forecastig ad i-year moitorig of expediture sice our 2003 study. 4.3 As Figure 13 explais, departmets obtai their resources through HM Treasury askig Parliamet for moey at the start of the fiacial year ad the revise the forecast of their requiremets durig the course of the year. To cosider how reliably departmets are able to forecast their resource requiremets, we compared their fial provisio with the amouts they actually spet for both resource ad capital expediture. Departmets fial opportuity to request supplemetary resources is through the Sprig Estimates which are preseted to Parliamet i February ad authorised by Parliamet i March, just a few weeks before the ed of the fiacial year. 4.4 Sice , fewer departmets have allowed their expediture to exceed their estimate ad so fewer departmetal aual fiacial statemets have bee qualified 35 o the grouds of a Excess Vote (see Figure 14). 4.5 Departmets have improved their forecastig of Aual Maaged Expediture 36, reducig the variace betwee their actual ad forecast expediture from 3.7 billio (2.3 per cet) i to 0.4 billio (0.2 per cet) i MANAGING FINANcIAL RESOuRcES TO DELIvER BETTER PuBLIc SERvIcES