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SCOTTISH EXECUTIVE

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Financial Issues Advisory Group Report
 
 
4. ACCOUNTING ARRANGEMENTS
 
4.1 This section describes FlAG's conclusions in relation to the form of accounts and related performance information.
 
Resource Accounting
 
4.2 UK Government has announced that its Departments will move to a resource based system of public expenditure planning and control. The main difference between current Government accounting and resource accounting centres around the accruals basis of preparation of the accounts and the emphasis on outputs and the achievement of aims and objectives. The Government's view is that resource accounting will achieve improved management and value for money for the taxpayer by:
  • making decision-makers focus more on resources consumed and not just on cash spent;
  • treating capital and current expenditure in a way which better reflects their different economic significance; and
  • encouraging a greater emphasis on outputs and the achievement of aims and objectives. Annex F provides more information in relation to resource accounting and budgeting.
 
4.3 The timescale for the introduction of resource accounting is that the Scottish Office will produce dry-run resource accounts for 1998-99 and fully audited accounts from 1999-2000. Resource budgeting will be introduced in the year 2001-2002 for Whitehall Departments.
 
4.4 FlAG has considered whether the Scottish Parliament ought to be invited to adopt resource based accounting and budgeting and if so to what timescale.
 
4.5 At present, an "Appropriation Account" is prepared for each departtnent's budget. This covers expenditure in the financial year 1 April to 31 March compared with the estimates. It must be signed by the Accounting Officer before being submitted to the Comptroller and Auditor General with a copy to the Treasury. The purpose of the Account is to show that the expenditure accords with approvals and has been devoted to the purposes intended by Parliament.
 
4.6 Notes are appended to the Account to draw to the attention of Parliament and the Public Accounts Committee (see paragraph 6.4 below), matters bearing on the parliamentary control and to provide information about transactions covered by the Account. FlAG considered the styles and weaknesses of current formats of Accounts. On the one hand, they are reasonably easy to understand and lay persons can relate more easily to them. However, against this, they:
  • give the wrong incentives through the cash based treatment of capital ; and
  • provide no information on achievements.
 
4.7 The benefits of moving to resource accounting, as well as those mentioned in paragraph 4.2 above, also include:
  • the provision of information on total costs of operations so that costs can be related to programme outputs and outcomes;
  • no weakening in the need to control costs;
  • a clear cost being shown for cost of capital and the use of assets;
  • the provision of information on the level of liabilities and emerging liabilities; and
  • information on the assets at the disposal of managers.
 
4.8 Against this some disadvantages of moving to resource accounting might include:
  • the complexity involved; and
  • at the end of the day, the overall figures may not be significantly different from those under the cash accounting system.
 
4.9 However, the key issue is the opportunity to change management behaviour. FlAG concludes that although, technically, the Parliament could decide otherwise, the move to resource accounting seems logical and desirable. Should the Parliament not implement resource accounting it would lay itself open to criticism and, in any event, there are strong arguments in favour.
 
Resource Budgeting
 
4.10 Turning to resource budgeting, FlAG noted it would be just as important for the Scottish Parliament to implement resource budgeting as resource accounting. On the Whitehall timetable, the new Scottish Administration and MSPs would consider the first round of budgeting in cash and move to resource budgeting in the Parliament's second full year. This seems problematical and there are strong arguments for Scotland to move ahead of Whitehall to minimise disruption.
 
4.11 FlAG has looked further at the feasibility of this and there are a number of problems. As yet, Treasury has not finalised guidance on resource budgeting. There are a number of issues which came to light during the survey pilot, several of which affect Scotland which still require to be dealt with. While it is hoped that these would not lead to a fundamental change of approach, it seems unlikely guidance would be finalised in good time.
 
4.12 As well as considering the treatment in principle of expenditure under resource budgeting, it is necessary to ensure that the required financial information would be available to draw up resource-based plans. In addition, further training for staff within the Scottish Administration would be required to a very tight timescale against the background of a late decision on precisely how the system will operate.
 
4.13 Also, up until resource budgets are presented to the UK Parliament for the first time (for 2001-02) the control that is set on the aggregate of the Scottish budget will be in cash. If the Scottish Parliament is to undertake a resource budgeting exercise in 1999 (to determine allocations of the Budget to programmes for 2000-01), this will have to be drawn up in such a way that it will meet the cash control limits in operation in Westminster.
 
4.14 Having weighed the above, FlAG believes that it would not be possible to provide secure resource budgeting figures in the first year of the Parliament. This might put proper accountability to the Parliament at risk, and for that reason it would seem unwise to adopt a resource budgeting basis for the first set of accounts. Nevertheless FlAG believes that the aim should be to set down the pattern for resource budgeting as far as possible in 1999. The aim should be to utilise the form of resource budgeting documents, but substituting cash for accruals based figures. This cash based information, which would be the basis for budget approval by the Parliament and subsequent accounts, would be accompanied or supplemented in separate documents by 'shadow' figures on a true resource - ie accruals - basis, to indicate to the Parliament what those figures would look like. While not ideal, this compromise would at least help MSPs to become familiar with the documents that will be used, and this should help resource budgeting and accounting to bed down more quickly when it is fully implemented in the following year.
 
4.15 In conclusion, FIAG recommends:
  • the Scottish Parliament be invited to adopt resource accounting and budgeting;
  • resource budgeting should be implemented one year earlier than the Whitehall model as far as is practicable. This is likely to involve presenting cash figures in a resource budgeting format during the first year. The non-cash resource figures will not be binding but will be an invaluable dummy run while the binding figure for in-year control will be cash (until Whitehall implements resource budgeting for UK budgets); and
  • the Scottish Administration should provide a clear explanation, perhaps in a supporting memorandum, of how the numbers in the accounts differ from those that would have appeared in old style cash accounts and how they relate to the (cash) sum paid into the Scottish Consolidated Fund by the UK Government
 
Style and presentation of accounts
 
4.16 In relation to the style and presentation of accounts, FIAG recommends:
  • accounts should be produced to cover all Government expenditure in Scotland;
  • in addition, separate work should be undertaken to distil these into more accessible version;
  • a comparison with the previous financial year should be provided. This should be wide-ranging and cover financial and performance information;
  • performance reporting will be an important part of resource accounting; and
  • annual reports should be important and these should set out an overall commentary:
 
i. The overall budget strategy.
 
ii. The nature and objectives of each main programme.
 
iii, The outturns in previous years, including assessments of output and performance against objectives as well as financial outturns.
 
iv. The plans for the year ahead, as approved by Parliament.
 
v. The provisional plans for the two subsequent years.
 
  • FIAG recommends that separate volumes should be issued for each of the Executive's spending Departments.
 
Timing issues
 
4.17 FlAG has considered the timing of publication of financial and performance information, in the light of its recommendation that the Scottish Parliament be invited to adopt resource accounting (see paragraphs 4.14). Under the current proposals for resource accounting, the timescale for publication of the audited consolidated resource accounts depends largely on when the NHS accounts would be available. The upshot is that it is unlikely the full accounts would be available before December following the March year end. FlAG holds the strong view that it would be desirable to publish information as soon as possible while there is still public interest in the accounts. FIAG therefore recommends that until resource accounting beds in, earlier completion of accounts may not be possible but:
  • the Scottish Parliament should set a statutory deadline of 31 December by which the preceding year's accounts must be published. Departments and the Auditor General might be invited to make progress against a target;
  • Executive Agency and (Scottish) Departmental Resource Accounts should be produced at the earlier possible date, ahead of the Consolidated Resource Account; and
  • an interim report should be provided to the Parliament in May containing performance management information in relation to the financial year which will have just drawn to a close. The intention is that this information would inform the Scottish Parliament's consideration of resource allocation decisions throughout the early summer. This could be incorporated into the Annual Report that sets out the Executive's budget plans for the financial year ahead. (See paragraph 3.23.)
 

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