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Restoring Financial Control

In the 1920s early PAC post-war reports illustrated a number of specific areas where departmental controls had suffered during the War. For example, the C&AG's examination of the 1917-18 aerodrome construction accounts had disclosed such serious failings in the system of financial control and accounting that he had reported the situation immediately to the Treasury, and suggested that an independent body should be appointed to carry out a special inquiry. To examine these matters in detail, the Treasury set up a small expert committee whose report in August 1918 confirmed a catalogue of grave defects and recommended a series of remedial measures. The Accounting Officer later assured the PAC that almost all of these recommendations had been put into effect and that the overall position had greatly improved. The PAC noted that an important contributory factor to the failings was the inability of the Accounting Officer to ensure adequate control of expenditure as a result of gaps and uncertainties in his responsibilities, arising from the peculiar nature of the organization of the Air Ministry. The Treasury Minute fully supported the PAC's view of the seriousness of the matters disclosed, including the importance of clear Accounting Officer responsibilities.32

There were also difficulties with various trading accounts that had been set up during the war and financed from the Vote of Credit. These covered such matters as the supply and control of general food supplies and a wide range of raw materials connected with war services. Other accounts dealt with normal services such as the development of agriculture and fisheries, farm settlements, and the National Stud. Although the C&AG was not responsible for auditing and certifying the accounts, his report on the 1918-19 Vote of Credit appropriation accounts drew attention to wide variations between departments on the form of trading accounts and on accounting practices adopted for the inclusion and treatment of non-cash entries. Accountabilities between the individual bodies administering the services and the parent departments were not clear, and the Accounting Officer did not sign the accounts. Confronted with these ongoing deficiencies in the public accounts, the PAC was pleased to learn that: 'The Exchequer and Audit Department and the Treasury, working together, will attempt, during the next twelve months, to co-ordinate the various accounts kept throughout the public service, with a view to a reasonable measure of uniformity.'[1]

The PAC also suggested that one volume should be prepared for the information of Parliament, showing comprehensively the trading accounts of all departments. The Committee added, innocently or mischievously, that if the Treasury Officers of Accounts had insufficient time to devote to the question 'it might be worth considering whether they should be afforded the assistance of an outside chartered accountant'. The Treasury did not seem too concerned over the need to introduce greater uniformity, when its pursuit of post-war economy and reductions in civil service numbers meant that one of the priorities was to close down the various bodies administering these wartime services as soon as possible.[1]

In the PAC's examination of progress in 1919 a volume of trading accounts for the majority of the wartime schemes for the period to 31 March 1919 was disclosed to have been unsatisfactory and that the C&AG did not report on it. However, for the first time a volume had subsequently been published containing all departmental trading accounts and balance sheets, for both wartime services and normal services, together with a report by the C&AG. The accounts covered various periods up to 31 March 1920, in some cases from the beginning of the war. The PAC noted that the Treasury had done its best to secure uniformity in the form of accounts by issuing instructions to departments during 1921. As a result, the accounts on the whole had been presented in a comparable form, although there were still variations in accounting practices. The PAC expected these difficulties to be resolved because they regarded 'the institution and business-like compilation of these trading accounts as of the greatest importance in affording an effective instrument to bring about economies'.

The PAC noted in its 1919 report that in many cases the accounts had still not been signed by the Accounting Officers and though the accounts had been reported on by the C&AG there was no statutory enactment imposing this duty upon him nor did they bear his certificate. The PAC was fully aware that this issue had already been dealt with in the new Bill to amend the

Exchequer and Audit Departments Act, which would require the C&AG to certify and report on all trading and manufacturing accounts to the House of Commons. The Treasury Minute confirmed that the accounts would in future be signed by the Accounting Officers and submitted to and audited by the C&AG under the provisions of what had by then become the Exchequer and Audit Departments Act 1921.[3]

In this post-war period the PAC also reviewed the wider constitutional issue of the Treasury's exercise of the power of virement, which allowed it to authorize underspending on one area of a department's business to cover overspending on another, thus avoiding the need to seek a supplementary estimate or incur an excess vote. Virement was a long-standing area of concern that had been examined on many occasions by the PAC, and discussed in Parliament. It provided the government with flexibility but also infringed the House of Common's prerogatives on voting supply by anticipating the approval that would only later be sought in a subsequent Appropriation Act. The wider use of virement during the war was understandable, given the difficulties in estimating the scale and timing of expenditure, but in 1921 the PAC questioned whether it was still being used under proper control now that many of those difficulties has passed. Listing only a few of many instances of virement in the 1919-20 accounts, involving several millions of pounds, the PAC pointed out that:

it is mainly by the exercise of this power of virement that expenditure not specially provided for in the Votes of the House of Commons can be incurred with impunity in anticipation of parliamentary sanction____We think it right to call attention

to the fact that large sums are thus applied, subject to Treasury sanction, to

purposes not expressly authorized by the parliamentary grants____We view with

some alarm the recent extension of this practice, and we are of the opinion that the time has come when the Treasury should more jealously restrict the exercise of

this power____As part of the process of re-establishing parliamentary control over

expenditure, a stricter interpretation should be given to the [previous] rules.[4]

The Treasury strongly defended its use of virement and disputed some of the specific examples quoted by the PAC. Nevertheless, it added a cautiously worded assurance that:

My Lords in the exercise of the power of virement will bear in mind the views

expressed by the Committee, with which they are largely in agreement____My

Lords anticipate a progressive return to normal conditions in the accuracy of estimating and a consequent diminution of the need for virement.[5]

The post-war return to more traditional controls over appropriation and regularity meant that a number of the C&AG's reports in this period revisited well-known criticisms of failings in accounting, in compliance with rules and regulations, and the need for Treasury authority. There were also reports on losses that arose as a result of continuing post-war difficulties. For example, the abrupt drop in the demand for military supplies following the armistice left the ordnance factory at Woolwich with excess capacity and faced with having to put large numbers of employees out of work. This was addressed by breaking the normal rules and building 100 locomotive engines without any purchasers in sight. Other orders were taken on fixed prices that did not cover their costs, financing this work by the irregular use of funds voted by Parliament for other purposes. Ultimately, this 'experiment in commercial manufacture' incurred an Excess Vote of more than ?1 million. The Navy also incurred losses of ?70,000 on a scheme to lend surplus trawlers and drifters to the Ministry of Agriculture to be used on an ill-fated 'profit sharing' fishing operation to provide employment to ex-service fishermen. This too involved the irregular use of funds voted for other purposes, as did several programmes in other departments.

On the basis of a report by the C&AG, the PAC also reported in 1922 on a loss on exchange of over ?3 million because 'British troops in Bulgaria had been able, by use of the official machinery of exchange and unauthorized traffic in canteen stores, to make large profits for themselves, the official rate of exchange departing widely from the market rate.' This was not the first time that servicemen overseas had manipulated differences in exchange rates to their personal advantage. The PAC wanted steps to be taken 'to prevent such abuses by revising the official rates at shorter intervals, by limiting the right of the individual to transfer money home through official channels, or by some other means. In future it should not be possible for the official rate of exchange to be used as a source of profit at the cost of the State.' The Treasury confirmed that steps had been taken to prevent such abuses in future.38 Phoenix-like, it would arise again in similar circumstances in 1945.

In 1923, following a review of the PAC's terms of reference, the Committee took the opportunity to review the whole range of accounts coming before it. The most striking feature to emerge was the tendency in recent years towards the creation of special funds to finance new forms of government activity, particularly in relation to agriculture, unemployment, and assistance to Special Areas. With these adding to the PAC's work as well as that of the C&AG, the Committee was anxious to ensure that the preparation of accounts in these new bodies was carried out to a high standard. The Committee also turned its attention to the need for the C&AG to be appointed as the auditor of certain trust funds and welcomed Treasury confirmation that this would be done under the powers of s.3 of the Exchequer and Audit Departments Act 1921.39

  • [1] PAC Third Report, 1920, HC 182, paras 1-6. Treasury Minute, 1 December 1920.
  • [2] PAC Third Report, 1920, HC 182, paras 1-6. Treasury Minute, 1 December 1920.
  • [3] PAC Third Report, 1921, HC 212, paras 39-44. Treasury Minute, 24 November 1921.
  • [4] PAC Third Report 1921, HC 212, paras 1-8.
  • [5] Treasury Minute, 24 November 1921.
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