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Government fails on financial planning: Why we need more accountants

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11th Sep 2008
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The Public Accounts Committee has released a crushing indictment of civil service financial incompetence in its 43rd report of session. Robert Tollast outlines some of its findings.

The publication of this week’s Public Accounts Committee (PAC) report, 'Managing financial resources to deliver better public services', confirms what many fear about the financial skill of those in government. At times almost embarrassing to read, the report outlines the long fumble toward what is optimistically called 'world class accounting' in the public sector.

The findings show an uncoordinated attempt since 2006 to whip non-finance civil servants into shape with a course entitled 'Financial skills for all', which has had a very poor take up. Instead, department staff make do with largely discredited internal courses, and the word which crops up grimly in the report is "mandatory". Much of what our civil service is supposed to learn, we read, is not mandatory, and this goes to the very top of our biggest departments.

Yes, minister

Take the MOD. Fancy being the financial director of one of the biggest departments? Iraq and Afghanistan aside, it’s an interesting time for a suitably qualified candidate, because, well, there is no financially qualified director. Trevor Woolley, 'financial director' of the MOD was the best man the MOD could find. It was left to Nick Macpherson, the brow-beaten Permanent Secretary to the Treasury to explain this and many other embarrassing findings to the PAC, in what amounted to a prolonged, tragi-comic grilling.

The Committee’s report says public expenditure will hit £678bn by the end of 2011, with a £30bn target in value-for-money savings across all departments by that date.

But it looks like an avalanche of change will be needed to achieve that. For example, according to the report, only 41% of departments’ policy proposals always included a full financial appraisal, and only 20% based policy decisions on a thorough assessment of their financial implications.

To consider how serious this is, take DEFRA, the Department for Environment, Food and Rural Affairs. There are about 9,000 core personnel in this small department and as with many other government departments, ultimate managerial responsiblity lies with the permanent secretary - the 'budget holder'. Yet under government protocol, effective from February 2008, financial management matters are not automatically included in the performance assessment criteria for budget holders.

When the Committee questioned a deflated Macpherson on this, he seemed at a loss to explain and could only say he was "surprised". Going over the report, one is are confronted again and again with a process whereby people with questionable financial literacy advise unqualified politicians. The blinkered leading the blind?

Macpherson may stress that efficiency objectives exist, but as the PAC clearly pointed out, the senior civil service’s 'Framework for Change', says finance will not be a mandatory element.

Conservative MP and Committee member MP Richard Bacon was baffled. "If you are serious about making finance integral to what we do," he said, "then surely it should be a mandatory element for the whole senior civil service. It follows as night follows day."

Your vote may count, but your MPs can't

Rewind three years to a 2005 report by the Economic and Social Research Council (ESRC), which interviewed a large number of local government committee members and MPs across the UK. It found that, "the complexity of government accounting means its features need to be taught to elected representatives." But sadly, it concluded, "there is little evidence of interest or inclination to do so."

The ESRC’s findings showed that a poor grasp of the running of business and accounting can lead to our politicians being divorced from the electorate. The less experience MPs have, the more dependent they are on questionable advice. A break-down of MPs by professional qualification shows precisely how much spending power we entrust to the financially ignorant. In the Commons there are 645 MPs and those who hold membership of ICAEW, ACCA, CIMA, CIPFA, or ICAS number a not so grand... 12. Much less than the number of lawyers, for example.

With all this in mind, it appears the Treasury’s drive to get financial standards in government to 'world class' levels may not even get out of the starting blocks. What’s worse, even when accountancy skills are made mandatory, pass rates are worryingly low. It may now be compulsory for all non-finance civil servants to obtain basic financial knowledge as a professional skill for government, but since the 'Financial Skills For All' course launched in 2006, 44% of departments had no staff completing the first tier of the course.

Arguably, this Treasury imperative only compounds this problem. It takes the onus off our elected representatives, and is being clumsily handled on a number of levels.

Justine Greening (ACA), Shadow Economic Secretary and Conservative MP for Putney, is one of the few accountants in the Commons. Ironic, then, that she should spend so much of her efforts improving the financial literacy of children through initiatives like the Associate Parliamentary Group on Business, Finance and Accountancy, when there is so much work that could be done with the grown-ups.

Alan Duncan, Shadow Minister for Business Enterprise and Regulatory Reform, has also pointed out the sorry trend that politicians are increasingly being drawn from fields which offer very few business credentials. Yet a spokesperson for Duncan's office said there was "no policy" on attracting more individuals with business background or accounting knowledge to his party.

As desirable as it may be to have more accountant politicians, however, this may be curtailed by the nature of what makes a politician, as Chas Roy Choudhry, head of tax at the ACCA suggests.

"Accountants stay accountants," he says. "They tend to be less politically minded than the other fields."

Until that changes, parliament's numeracy problems will probably continue, no matter who you vote for.

Key findings:

  • Only 28% of departments carried out a monthly analysis of expenditure by operational target
  • Less than half of departments produce their in year reports on consistently accurate information
  • One department, the Office of Fair Trading was found to never make thorough financial assessment of its policy
  • Treasury control of departments unspent budget at the end of the year has damaged their incentive to save
  • 19% of Departments managing a total of £23bn rated themselves as weak at managing their balance sheet.
  • Departments will need much more reliable information of unit costs in key areas to gauge if expenditure is reasonable and if they are delivering quality service
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    Replies (5)

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    avatar
    By PhillipIRosslee
    06th Oct 2008 19:38

    Public Sector measures of Performance should be same or similar
    I can see a strong argument to overhaul Accounting Standards so that the same standards and conventions are used to record and measure performance in both the Public sector and the Private sector. This will in the long term encourage more accountability and understanding by those responsible. Also the Public sector should be encouraged to measure value and benefit created on a similar basis to that employed in the Private sector. This will encourage better management of limited resources. It is all too easy for our Political masters when finances are short to tap the taxpayer (After all Politicians only have to face electorate every 4 or 5 years, not annually at every AGM as the Board do for our large plc's) for more cash or borrow. I am all for our politicians being elected for shorter periods so they are encouraged to manage the taxpayers resources more responsibly.

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    avatar
    By User deleted
    03rd Oct 2008 17:07

    But what qualification?
    Speaking as an ICAEW member working in the public sector, I find that even qualified accountants amongst my colleagues are out of touch with the world. As has been mentioned below, the SORPs issued by CIPFA have as much relationship with UKGAAP as my dog has with a budgie.

    Something as basic as understanding the difference between depreciation and repaying borrowing used to fund an asset seems too challenging for some.

    Plus, it seems impossible to pick up a piece of legislation to do with finance and apply it to the organisation's activities without a written guidance from CIPFA. Reading the legislation - nah, we don't do that.

    So let's not get carried away with the idea that just getting letters after the name improves financial understanding.

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    avatar
    By PhillipIRosslee
    13th Sep 2008 08:51

    The Questionabale Competence of our Political Masters
    No wonder our political masters are incapable of making any sensible financial decisions or understand why we have budgets to manage the economy and spending by the state. All spin and no substance seems to be the order of the day in managing financial affairs of the state.

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    avatar
    By billgilcom
    13th Sep 2008 01:00

    Why?
    would we need accountants preparing figures that wouldn't tell us anything meaningful anyway
    regards
    [email protected]

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    avatar
    By indiajack
    12th Sep 2008 14:08

    Public Sector Account
    I was surprised to find that the public sector considered embedded derivatives to be an accounting construct without any legal enforcability and as such not to be treated in the manner of other derivatives.

    This is reflected in the SORP by CIPFA.

    It is certainly out of step with commercil reality, especially if the public sector wishes to engage in PPP initiatives. The commercial companies in the venture will be reporting the embedded derivtives as required by FRS 25, 26 and 29 but the public sector will be ignoring this and give a different view.

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