Exchequer and Audit Departments Act 1921

Key Reforms

A strong and effective audit by the C&AG was a key element in the government's determination after the war to re-establish financial control and accountability across the public sector as a whole. Strengthening and clarifying the responsibilities of Accounting Officers, including the pursuit of economy, needed to be accompanied by examinations and reports on how those responsibilities had been discharged in practice. It had already been recognized that there was a clear need for a post-war review of the work and staffing of the E&AD, as had been suggested in the C&AG's 1916 Memorandum and supported by the PAC. The government, the PAC, and the C&AG were united in the view that a new Act to bring the legislation up to date would improve the efficiency of audit and tighten up accountability by making specific provision for measures that had been periodically introduced to meet changing circumstances after the main scope and direction of the work was laid down in the 1866 Audit Act. Based on the June 1921 report of the special Treasury committee appointed to recommend modifications to the 1866 Audit Act,40 the Exchequer and Audit Departments Act 1921 became law in August 1921 but would operate with the continuing provisions of the 1866 legislation. The key features of the Act are outlined below with reference to the main sections of the Act.

Section 1. The principal concern identified in the Treasury committee's report was the 'literal and inelastic' requirement in s.27 of the 1866 Act that the C&AG should carry out a complete and detailed examination of the vouchers or proofs of payment supporting the charges in the appropriation accounts, except for the accounts in Schedule B to the Act, that is Army and Navy accounts, where the C&AG could carry out a test examination based on evidence of satisfactory checks by the departments themselves. A test examination had in practice been relied on for many years for all accounts, particularly during the period 1914-18 as a result of greatly increased wartime expenditures combined with staff shortages. The 1866 requirements, and related requirements of the Army and Navy Audit Act 1889, were repealed by s.1 of the 1921 Act, which gave the C&AG discretion to certify the accounts on the basis of a test examination, provided he was satisfied with the examination already carried out by the departments concerned.

The appropriation accounts for 1920-21 were the first to be presented under the new legislation, with a new form of C&AG's certificate to reflect the fact that the accounts were now being certified as correct, without qualification, on the basis of a test examination only. The C&AG, however, assured the PAC that there had been no departure from the practice of recent years and that he contemplated no relaxation in the scope of his audit.[1]

Section 2. The revenue accounts of the Inland Revenue, Customs and Excise, the Post Office, and other receivers of money payable by law into the Exchequer were examined and reported upon by the C&AG under s.33 of the 1866 Act. Section 2 of the 1921 Act provided fresh authority for this work in broadly similar terms and with the same systems-based objectives as before. More particularly, the transfer of authority from s.33 of the 1866 Act removed any Treasury power to prescribe regulations for the C&AG's conduct of the work, while s.2 of the 1921 Act made it clear that the examination should be carried out as the C&AG believed appropriate.

A complication emerged that concerned the C&AG's ability to examine some Inland Revenue tax assessments. Assessments for weekly wage earners were made by the Commissioners of Inland Revenue and all documents, therefore, were open to inspection by the C&AG. The documents relating to all other assessments of income tax, however, were the property of the General and Special Commissioners of Income Tax and were therefore confidential under the Income Tax Acts and were not open to inspection by the C&AG. This severely limited the C&AG's ability fully to discharge his responsibilities under the 1921 Act. Although the Royal Commission on Income Tax had recommended in 1920 that this anomaly should be removed by transferring the property in such assessments to the Inland Revenue, legislation introduced to deal with the problem was abandoned. The PAC's criticism of the situation was fully endorsed by the Treasury, who could only promise to put forward legislation on the subject 'when opportunity offers'.[2]

Section 3. The valuable provision of s.33 of the 1866 Audit Act, which gave the Treasury powers to direct the C&AG to audit the accounts of a range of bodies, mainly those dependent upon grants and other assistance from public funds, was replaced by a similar provision in s.3 of the 1921 Act. A Treasury Minute then reinforced this by reviewing the several types of account covered by s.3 of the new Act and certain other provisions, clarifying the broad nature of the C&AG's examination in terms that clearly indicated that the Treasury was content to leave detailed audit matters to the C&AG's discretion. The Minute also removed the audit of all grant-in-aid accounts from the scope of s.3.[3] Over time, the use of s.3 powers diminished and access to many bodies was instead secured by agreement.

Section 4. This section provided overdue statutory authority for the C&AG's longstanding and successful examinations and reports on departmental store and stock accounts.

Section 5. As already noted, the PAC had developed a close interest in the production and audit of trading and other accounts for the 'commercial' activities of departments and had pressed for these to be put on a consistent statutory basis. Section 5 of the 1921 Act widened the range of accounts to be certified and reported upon by the C&AG to include 'the income and expenditure of any shipbuilding, manufacturing, trading or commercial services conducted by departments, together with such balance sheets and statements of profits and loss and such particulars of costs as the Treasury may require'. This brought the dockyard and ordnance factory accounts within the provisions of the 1921 Act instead of the Army and Navy Audit Act 1889. The 1921 Act also provided the same rights of access for examinations of trading accounts as were provided for appropriation accounts under the 1866 Act.

The PAC returned to the subject of trading accounts in 1924 when the Committee's report continued its support for these accounts, whilst recognizing the differences in operational priorities between commercial enterprises pursuing profits and public sector bodies serving the community. The report outlined some of the intricacies of accrual accounting for the benefit of the wider parliamentary audience and pointed out a continuing lack of conformity in the forms of account, particularly for wartime services. Overall, however, their report concluded that the more recent accounts had been prepared on a uniform and coherent plan.44

An important omission from the 1921 Act was the continued absence of any mention of examinations of economy or efficiency. Although these had become an established and accepted part of the E&AD's work, supported by the PAC, they were still regarded by some as an area where the C&AG was expected to proceed cautiously and with due discretion, rather than as a firm and unequivocal right or duty supported by statutory powers. Over the coming years the C&AG would nevertheless be able to carry out value-for-money examinations despite these uncertainties, which would not be finally resolved until the National Audit Act 1983.

  • [1] PAC Third Report, 1922, HC167.
  • [2] PAC Report, 1923, para. 2. Treasury Minute, 1 November, 1923.
  • [3] Treasury Minute, 1 January 1923. Appended to PAC Report, 1923, HC 125.
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