Clear Line of Sight: Accounting & Business

Posted on October 1, 2011 · Posted in Accounting & Business

Achieving proper accountability for the spending of public money is only possible if there is a commitment to do this, backed by an effective mechanism. Yet there have been serious problems in the way that Parliament holds government to account for how public money is spent.

Both the Hansard Society – a body which tries to improve the effectiveness of Parliament – and the House of Commons Treasury Select Committee have sought to enhance the financial reporting practices of government, in order to make public spending more accountable. Their efforts have been successful, with the result that the Clear Line of Sight Project is now aligning government expenditure with the Estimates approved by Parliament. The project principles are being used comprehensively for the first time in the 2011/12 financial year, with this Summer’s Estimates the first to be wholly prepared in this way.

Under the old system, there were three main ways in which public expenditure was authorized and controlled: these were in the Budget, the Estimates and in the Resource Accounts. Yet these three processes measured and reported expenditure in different ways. A third of spending allocated within budgets was not voted through in Estimates, while a third of the money included in the Estimates was not in the budgets. Capital budgets were in the Estimates, but not voted on.

There were several reasons for these discrepancies. Spending by quangos was included in departmental budgets, but the Estimates instead showed the grants paid to quangos – which may not be the same thing. Departments may hold back some of their budget in reserve and this only went into the Estimates when the department allocated it for spending. Some government spending – such as that funded by the National Insurance Fund – was not covered by the Estimates.

A further difficulty was that any unpredicted additional income could only be spent by departments if authorised by a Supplementary Estimate, as Estimates approved gross, not net, spending. By contrast, departmental budgets were set on the basis on net expenditure.

Ruth Fox, Director of the Parliament and Government Programme at the Hansard Society, argues that addressing these systemic weaknesses in financial accountability had become essential if the democratic system was to work more effectively. “One of our core areas of work is on Parliamentary scrutiny,” she explains. “Parliament has a unique constitutional role in scrutinizing financial spending and this is a fundamental pillar of the political system. It should be one of the most central parts of the role of MPs to scrutinize financial spending.”

In its 2006 report, The Fiscal Maze – Parliament, Government and Public Money, the Society concluded that MPs and select committees were prevented from properly fulfilling their role in making financial spending accountable because of the way in which spending was approved and reported upon. “One of the key things we found,” says Fox, “was that there was a lack of transparency, a lack of sufficient information and the reporting line wasn’t good. We needed greater clarity, transparency and timeliness.”

The last Government accepted this argument and in 2007 published a green paper, The Governance of Britain, in which then prime minister Gordon Brown announced the Government would introduce important changes to the system of financial reporting to Parliament. This was translated into the Clear Line of Sight Project, through which reporting would be consistent with the Government’s fiscal rules and would require financial plans, Estimates and expenditure outturns to all be prepared on the same basis. Clear Line of Sight aimed not only to improve Parliamentary scrutiny, but also the Treasury’s own control of departmental expenditure, create more effective incentives in achieving value for money and reduce the burden on departments in their financial reporting.

As government took the project forward, detailed discussions took place with the National Audit Office, the Financial Reporting Advisory Board and various Parliamentary committees – the Liaison Committee and also the Treasury and Public Accounts select committees. In addition, there were comprehensive conversations with external stakeholders. All consulted parties endorsed the objectives of Clear Line of Sight and there was eventual agreement on the detailed reporting structures to be used. Central to this was acceptance by the House of Commons Treasury Committee that Parliamentary control over expenditure totals should be on a net, not gross, basis – providing that Estimates produced on the new basis provided adequate and appropriate levels of information relating to income.

Although the legislation was brought forward by the last Labour government, it was supported on a cross-party basis and the necessary legislation – The Constitutional Reform and Governance Bill – was enacted in the ‘wash up’ period before the General Election. The coalition government has therefore been responsible for implementation and is showing equal enthusiasm for the new system.

The reforms have wide support amongst those with knowledge of the system of Parliamentary scrutiny. ACCA’s head of public sector, Gillian Fawcett, says: “The Clear Line of Sight Project is a welcome initiative and the Treasury have been working quite hard to make it a reality. This year we will see a realignment of the main Estimates together with consolidated accounts for 2010/11 and work will begin on the consolidation for 2011/12.

“This is resulting in some practical changes for departments, but they shouldn’t pose substantial problems as a number of technical issues have already been resolved.  However, there are still on-going issues with the WAG [Welsh Assembly Government] although the Treasury is working through these.

“Also, the project now sits within the Treasury’s ‘Financial Transformation Change Programme‘, which is a welcome move as it brings together financial reporting with other initiatives such as strengthening the role of finance directors in government, providing a long-term financial management strategy and introducing financial performance measures and  risk management. In my view, the programme recognises that all four areas are necessary and interdependent for improving public finances in the long-term, and is very welcome.”

The Hansard Society is also pleased with the progress being made, but says it is too soon to say with certainty that it will achieve the desired results. Dr Ruth Fox explains: “It certainly is an important improvement in the clarity of information. So select committees, government and Parliament should be talking about the same figures, where before they were often talking about different figures – so it became nigh on impossible to do proper analysis and comparisons.

“That certainly is a good step forward. The big question now is to what extent MPs and select committees will be able to use that information effectively. It’s probably too early to say on that. One key issue is still that even if information is provided, MPs must be able to understand it. There is a question over whether they have the focus and training to enable them to sufficiently understand financial matters.”

Box

Clear Line of Sight – at a glance

Project to align reporting systems for government spending

Budget, Estimates and Resource Accounts used different basis for financial reporting

Clear Line of Sight brings these together

Old system made it difficult for Parliament to hold government to account for public spending

New system brings more transparency and consistency

Alignment achieved from 2011/12 on