APPENDIX 1



Supplementary memorandum submitted by HM Treasury

RESOURCE ACCOUNTS AND BUDGETING

1. At its hearing on 7 November 2001, the Committee for Public Accounts sought evidence on progress by departments on the implementation of resource accounting and budgeting. The purpose of this note is to provide supplementary information to the Committee on: a summary of the Treasury's powers to ensure departmental resource accounts are presented in good time; proposals for how this might be further enhanced; a note on cash management and its relation to resource accounts and budgeting; and a note on the position of reserves held for the British Broadcasting Corporation.

E XISTING T REASURY P OWERS 2. The Treasury derives its powers over expenditure and accounts either from statute or from the common law. These include:

 statutory powers under the Government Resource and Accounts Act 2000 (similar to those granted to the Treasury under the Exchequer and Audit Acts 1866 and 1921) in terms of issuing accounts directions and appointment of Accounting Officers;  the administrative ability to guide and exhort: for example, by way of issuing guidance to departments in correspondence and manuals on all aspects of public spending;  the powers to approve expenditure: for example, the Treasury must approve all Estimates before being submitted to Parliament. In addition, an expenditure must be approved by the Treasury (though in much, this is delegated to departments with the agreement of the Treasury). 3. In addition, Parliament looks to the Treasury to set up and enforce the necessary procedures to make sure that money is not wasted. The efficient use of resources requires a partnership between the Treasury and the spending departments. Whilst the Treasury defines the essential elements of an adequate system to monitor and control resources, individual departments are responsible, through their Accounting Officer, to Parliament for their own expenditure.

T REASURY P OWERS O VER THE L AYING OF A CCOUNTS 4. The powers enacted in the Government Resource and Accounts Act 2000 enable the Treasury to issue directions to departments about the form and content of accounts. In addition, the Act also contains a set of deadlines, all of which have statutory force. These are:

(a) a department preparing resources accounts under S5 of the GRAA 2000 shall send them to the Comptroller and Auditor General (C&AG) not later than 30 November of the financial year following that to which the accounts relate; (b) the C&AG shall send the certified accounts and the report to the Treasury not later than 15 January of the financial year following that to which the accounts relate; and (c) the Treasury shall lay accounts and reports received before the House of Commons not later than 31 January of the financial year following that to which they relate.

5. The Treasury understands that it has no legal power to impose sanctions in the event of the certified accounts not arriving at the Treasury in time to lay them by the 31 January statutory deadline. Certainly, the Act does not allow for the imposition of any sanctions for the failure to meet any of the statutory deadlines. Section 26 of the Act provides that if the Treasury fails to lay the C&AG's Report before the House of Commons by the statutory deadline then the C&AG shall lay the report before the House of Commons as soon as possible. The Act thus seems to contemplate the possibility that the statutory deadline for laying the certified accounts and the C&AG's Report before the House of Commons will not be met and, regardless of the cause of the delay (ie, whether caused by the tardiness of a department, of the C&AG, or of the Treasury) requires that the C&AG lay the Report before the House of Commons as soon as possible. But the C&AG is an Officer of the House of Commons and the GRAA places the responsibility for preparing resource accounts and sending them to the C&AG on a department's Accounting Officer. Therefore, a failure by an Accounting Officer to ensure that the department's accounts are sent to the C&AG by the statutory deadline is, insofar as it obstructs or impedes the C&AG in the discharge of his duty (or tends to produce such a result), technically a contempt of Parliament. The Treasury is not aware of any precedent for such an offence. But, nevertheless, the PAC may require an Accounting Officer to explain why accounts have been submitted late.

6. The Treasury considers, therefore, that it can explain to Accounting Officers that a failure to meet the statutory deadline for sending accounts to the C&AG could amount to a contempt of Parliament and that the PAC could require an Accounting Officer to explain why accounts have been submitted late. It also considers that it can remind individual Accounting Officers of the continuing importance of keeping to the deadlines for sending accounts to the C&AG so that the Treasury will be able to lay the accounts before Parliament by the statutory deadline. Lastly, the Treasury considers that it would be appropriate, in the event of a department failing to meet the deadline, to ask the Principal Accounting Officer to report formally to the C&AG or the PAC setting out the reasons for this.

7. Where a department has sent its accounts to the C&AG on time but the C&AG has failed to forward the certified accounts to the Treasury by the 15 January deadline (thus impeding the Treasury's ability to lay accounts by the 31 January deadline), the Treasury considers that it may be more appropriate for such a failure to be dealt with by the House of Commons, as the C&AG is an Officer of the House.

8. The Treasury proposes to discuss the proposals in the paragraph above with NAO and departments in order to establish the form and content of such a report and to consult the PAC further on this.

9. The Treasury will continue to advise departments on resource accounts by way of written guidance to Accounting Officers and Principal Finance Officers or documented guidance, principally in Government Accounting and the Resource Accounting Manual. The Treasury consider that timely presentation of accounts is important and that shorter deadlines would improve financial management. While the resource implications of shortening deadlines have to be considered, it is the case that faster preparation of accounts will require a different profile of work throughout the year, with an emphasis on greater efficiency rather than more work. For financial statements to be prepared on a timely basis, there is a need for departments to plan effectively and manage the annual task as a project. This is particularly important for those departments which have to consolidate the accounts of a number of subsidiary bodies, or in which financial management has been fully devolved to lower levels of the organisation. Reconciliations can be performed throughout the year, rather than leaving them until after the year end, when significant effort will be required to complete the reconciliations necessary for annual financial reporting purposes. The Treasury is investigating the whole area of financial management and reporting processes to see what can be provided in terms of practical advice, specific training, specialist assistance and examples of what has been achieved.

10. The NAO's 1997 guide Resource Accounts : Preparing for Audit, notes that the NAO aims to do as much work as possible before the year end, in order to maximise audit efficiency and to keep the year-end work to a minimum, so reducing the pressure on both auditors and departments in the key months of April to July. In order for the NAO to be able to do this, departments will need to account systematically on an accruals basis, rather than by making the necessary accruals adjustments in a year-end exercise.

11. The NAO also advocates the production of interim accounts, whether half-year or quarterly, in the statutory format, which can assist in making the year-end process less onerous.

12. Experience from other countries and from within the UK public sector itself demonstrates that the accounts process can be successfully speeded up. The experience of NHS Trusts, agencies and NDPBs are examples of this. The Treasury intends to consult a number of these bodies to learn from them and to spread more widely guidance and advice based on that experience, through seminars and workshops, as well as written material.

Management of cash within government

13. The Treasury's aim, reflected in the objectives of the Debt Management Office (DMO), an Executive Agency of the Treasury which has a key operational role in this area, is to carry out the Government's debt management policy of minimising its financing costs over the long term, taking account of risk, and to manage the aggregate cash need of the Exchequer in the most cost-effective way.

14. All principal government bank accounts are held at the Bank of England. Arrangements are in place to ensure that the Exchequer benefits from balances held in these accounts, through overnight sweeping of funds, as outlined below. Government departments are required to minimise balances held in private sector banks. In 2000-01, average balances held by spending departments outside the Bank were only some £220 million.

15. Government cash flows, whether of expenditure, revenue, interest payments or borrowing are based around two central funds: the Consolidated Fund and the National Loans Fund. Like all the main central government accounts, these are held at the Bank of England. The chart annexed to this memorandum shows in simplified form how the various accounts involved in cash management relate to one another. In outline, government revenue from taxation and other sources is collected daily into the Consolidated Fund. Payments out of the Consolidated Fund to finance central government's spending are authorised by Parliament either through Supply Services or Standing Services. Virtually all of this spending is channelled through accounts held by government departments at the Office of HM Paymaster General (OPG), which in turn banks at the Bank of England.

16. The National Loans Fund (NLF) receives the proceeds of government's borrowing and also lends to authorised bodies such as public corporations and (through the Public Works Loan Board) to local authorities. The proceeds of gilt sales, net proceeds of Treasury Bill issuance and other transactions by the Debt Management Office, and deposits with National Savings are transferred to the NLF, in some cases via the Debt Management Account (DMA). Small sums are also borrowed from other external sources (eg via taxpayers purchasing certificates of tax deposit) and the NLF can also borrow in foreign currency to finance and hedge the foreign currency reserves.

17. Government bank accounts at the Bank of England are linked together in a system known as the Exchequer Pyramid, to ensure that any cash balances that remain at the end of each day are channelled into the main central government accounts to reduce the government's cash borrowing needs to a minimum. If the Consolidated Fund has a surplus at the end of the daily operation this is automatically transferred to the NLF to reduce its borrowing needs. If, on the other hand, the Consolidated Fund is in deficit, for example through outflows on the day being greater than taxation receipts, this is automatically financed by a transfer from the NLF. The NLF will then borrow overnight any remaining cash deposits held in any government accounts at the Bank of England (including the accounts held by government departments at the OPG). The overall effect of this will be a net Exchequer Pyramid surplus or deficit in the NLF.

18. The net surplus or deficit in the NLF is automatically balanced to zero each day by a transfer to or from the Debt Management Account operated by the Debt Management Office (DMO). The DMO's cash management objective is each day to balance this remaining position on the NLF. It does this by issuing Treasury Bills and by borrowing or lending in the sterling money market during the day. To achieve this objective the DMO needs reliable forecasts of each day's significant cash flows into and out of central government, and up to date monitoring information on actual cash flows as they occur. For cash management purposes the flows that matter are those which cross the boundary between the Exchequer Pyramid accounts at the Bank of England and accounts elsewhere (ie cross the outer black line of the chart annexed to this memorandum).

19. When government is a net lender on a particular day because, for instance, tax receipts exceed spending, the DMO lends the cash back out into the market. The effect is to balance up cash holdings across the banking sector because, if government has received more cash on the day than it has spent, the commercial banking sector will have an equal and opposite deficit.

20. The DMO has put arrangements in place with the Bank of England and the main settlement banks to ensure that its position is balanced at the end of each day, even when there have been very late changes in the forecast of government cash flows on the day. The DMO also maintains a small (£200 million) balance at the Bank which acts as a buffer, eg in the event of a change in the net government position following the final reconciliation of the government accounts in the Exchequer Pyramid after the end of each day.

"BBC Reserves"

21. The Department of Culture, Media and Sport is responsible for receiving and monitoring TV Licence fee receipts that are paid to the Department by collection agents, such as Consignia, acting under contract to the BBC as Licensing Authority. This money is surrendered by the Department to the Consolidated Fund; at any time, however, there will be a cash balance in DCMS' paymaster account that is awaiting surrender.

22. The implementation of RAB prompted the Department to take steps to improve cash management and minimise the amount of cash held by:

(a) taking direct control over cash management from its accounting contractor; (b) actively managing cash through better forecasting and timing of transfers; and (c) increasing the frequency of transfers to the Consolidated Fund.

Sir Andrew Likierman Head of the Government Accountancy Service Managing Director, Financial Management Reporting and Audit HM Treasury

February 2002



