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Budget, accounting, control systems the UK example

Issues. Structure of responsibilitiesThe public expenditure processResource accounting and budgetingBenefits and problems with the UK systemInternal control arrangementsDevolution in the UK. 2. Structure of responsibilities. Expenditure subject to Parliamentary approvalParliament approves spending annuallyCentral responsibility for financial relations with Parliament lies with The TreasuryThe Treasury exercises administrative control over expenditureParliament does not vote money unless31387

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Budget, accounting, control systems the UK example

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    1. Noel Hepworth Chartered Institute of Public Finance and Accountancy (UK) Budget, accounting, control systems – the UK example

    2. Issues Structure of responsibilities The public expenditure process Resource accounting and budgeting Benefits and problems with the UK system Internal control arrangements Devolution in the UK

    3. Structure of responsibilities Expenditure subject to Parliamentary approval Parliament approves spending annually Central responsibility for financial relations with Parliament lies with The Treasury The Treasury exercises administrative control over expenditure Parliament does not vote money unless required by the Crown (i.e. by the Government).

    4. Structure of responsibilities Treasury administrative control covers: Managing spending reviews Presentation of estimates to Parliament Monitoring expenditure and agreed plans Improving financial management and vfm Ensuring that departmental managers take full responsibility.

    5. Structure of responsibilities - Departmental responsibilities Ministers responsible for policy issues Accounting officer responsible for financial control, vfm, risk assessment, fraud prevention. Accounting officers must ensure that: Legal and Treasury expenditure authority exists Funds used for purposes intended by Parliament Accounting officer is the top departmental official and can be required to appear before PAC

    6. Structure of responsibilities - Accounting Officer Appointed by The Treasury Required to ensure: Resources used in most efficient way Full regard is had to regularity and propriety Internal audit is established to agreed standards Proper financial procedures/accounting records Appointment of a Finance Director (formerly Principal Finance Officer).

    7. The public expenditure process Comprehensive spending reviews every two years Firm spending plans for three forward years (5 for Health and 10 for Transport and Science) Strict adherence to two fiscal rules which require borrowing only for capital and sustainability of debt – below 40% of GDP Resources flow with performance – targets and efficiency gains.

    8. The public expenditure process Public expenditure (Total Managed Expenditure - TME) divided over: Annually Managed Expenditure (AME) 43%, & Departmental Expenditure Limits (DEL) 57% AME incl. Volatile & demand led expenditure – e.g.benefits, l.g. self funded expenditure, debt interest, payts. to EU and under CAP. DEL covers other departmental expenditure i.e. that it can control, incl. grants to reg. assemblies & L.As.

    9. The public expenditure process TME divided between capital and revenue. DEL divided between administration and programme expenditure, as well as capital and revenue. Separate efficiency targets for administration from other expenditure (€30bn by 2007). Full year end flexibility to roll over funds. Some central funds retained for special purposes, e.g.innovation.

    10. The public expenditure process Public service agreements ( PSA): On PSA depends flow of funds. Set key priorities for activities Focus on outcomes. Include targets for performance, customer based as far as possible. High transparency – all published with twice yearly public reports on achievement.

    11. The public expenditure process PSAs – underlying principles: Set clear long term goals, can be cross cutting involving several depts. and agencies Result in devolved responsibility to service providers with maximum discretion Transparency through public reporting Results audited by National Audit Office and other inspection regimes.

    12. The public expenditure process PSAs: Supported by Service Delivery Agreements (SDAs) and Departmental Investment Strategies (DISs): SDAs specify how the departments targets will be achieved. DISs specify how department will invest capital to underpin service improvements

    13. The public expenditure process The links with Parliament: Concerned only with central government expenditure. Estimates converted to annual ‘supply’ estimates. Estimates debated by Parliament and may be examined in detail by a select committee. (Debate in Parliament and select committees usually on policy not administration.)

    14. Resource accounting and budgeting Accounting and budgeting use same accounting basis, i.e. accruals. Key issues: Income and expenditure included when earned or incurred rather than when cash is received or spent. Public sector accounting standards applied.

    15. Resource accounting and budgeting - key issues (cont.): Assets have to be properly recorded, valued and managed Charge is made for the cost of capital, including working capital, assets depreciated. Managers expected to manage totality of resources under their control, not just the expenditure against the budget. Clearer links between accounting and economic information.

    16. Resource accounting and budgeting - consequences Added significance to role of accountants – both numbers and roles in Government. Extensive management training required. New accounting information systems introduced. Independent (largely) accounting standard setting applied. Financial reporting on an accruals basis.

    17. Benefits and problems of UK system – benefits (1) Greater certainty over medium/longer term planning. End year flexibility reduces spending surges. Prevents easy capital savings to protect revenue spending. Existence of some central funds facilitates initiatives, e.g. to develop best practice Resource basis captures full costs of services.

    18. Benefits and problems of UK system – benefits (2) Assets are more effectively managed. PSAs result in more focus on outcomes and away from inputs. Greater emphasis on managing for improvement. Greater devolution of decision making to service providers. Greater transparency.

    19. Benefits and problems of UK system – problems (1) Too many targets, can be simplistic (now a reducing issue). Risks political micro management. Managers manage to performance measures No experience of the system under adverse economic/political conditions. Too much audit and inspection (also scale now being reviewed). Requires staff flexibility – union acceptance?

    20. Benefits and problems of UK system – problems (2) Pressure to avoid the rules by use of ‘off balance sheet’ devices such as PFI. In practice, still extensive use of cash to manage. Need still to strengthen management skills, including in strategy development, identifying the factors that can affect service delivery and effective partnerships. Use of partnerships with different institutions can reduce transparency and accountability.

    21. What caused the changes to public expenditure planning in the UK? Inadequate macroeconomic framework – annual Lack of fiscal discipline Failure to reflect the economic cycle Failure to focus resources on priorities In built bias against capital investment Success judged by inputs, not outputs or outcomes An overall need to improve value for money

    22. Internal control arrangements Finance Directors (qualified accountants), a full ‘board’ member, responsible for: Departmental resource planning and allocation process; Allocating resources in line with priorities; Ensuring regularity and propriety of expenditure and vfm is achieved; Appropriate separation of duties;

    23. Internal control arrangements Accounting and costing arrangements; Ensuring spending conforms to plans and financial liaison with Treasury; Banking arrangements and cash management; Relations with external auditor; For securing quality of internal audit. Departments & other bodies appoint Audit Committees

    24. Devolution in the UK To countries – Scotland, Wales, Northern Ireland – Scotland has limited tax power. No regional devolution in England. Local government, some discretion but within tight financial controls. Has local tax revenues (but limited), relies mainly on grant aid. New trend – involve local communities directly in decision making.

    25. Summary Major effort to achieve longer term planning; Focus on targets and performance; Management flexibility is required, therefore detailed central control abandoned; Accrual based budgeting, accounting and financial reporting adopted; Control is responsibility of management; Devolution – limited, controlled financially.

    26. Contact Details Noel.Hepworth@IPF.co.uk Phone: - CIPFA: 00 44 20 7543 5600 - IPF: 00 44 20 8667 1144 Web site: CIPFA: www.cipfa.org.uk IPF: www.ipf.co.uk

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