Trial Introduction of Accrual Accounts

Cost accounts for the manufacturing activities of the ordnance factories and the Navy dockyards had been prepared on an accruals basis for many years and audited by the C&AG under the Army and Navy Audit Act of 1889. In 1919 it was decided that, as a trial, a departmental appropriation account prepared on the traditional cash basis should be replaced with a new form of account prepared on an accruals basis. The Army estimates for 1919-20 had therefore been presented to Parliament in a new form 'so as to show the cost of each branch of the service, each hospital and generally each main object for which expenditure is incurred, as would be done in a commercial business'.50 The choice of the Army appropriation account for the trial was clearly ambitious, given that it was by far the largest and most complex set of accounts. At the same time, the War Office's work during the war had confirmed that it could call upon also the largest number of experienced accountants and cost accountants. More particularly, the choice reflected the strong and enthusiastic belief of Sir Charles Harris, Joint Secretary of the War Office, in the virtues of accrual accounts in his career-long pursuit of economy in Army expenditure. Harris was appointed Joint Secretary to the War Office for the last four years of his service, which coincided with the period of the trial. This seems to have been a special one-off appointment in 1920 to serve alongside Sir Herbert Creedy, the existing Secretary. On Harris's retirement in 1924 the post reverted to the single occupancy of Creedy and was also renamed as Permanent Under-Secretary of State for War.

An initial suggestion for introducing accrual accounts had been made, almost in passing, in the House of Commons debate in 1917 on the need to strengthen post-war parliamentary accountability. The idea was then considered by the Select Committee of National Expenditure in 1918, which in their Seventh Report on the form of public accounts supported the progressive introduction of a new format. Introduction of accrual accounting on a trial basis in the difficult post-war conditions meant that in the first year the new system fell well short of what had been promised.51 In 1921 the PAC took evidence from the War Office and the Treasury on the merits of the new system and the advisability of extending it to other departments. The War Office contended that 'the new system, even in its limited application, had been of considerable value in improving financial control and effecting economies'. Although the War Office accepted that there had been heavy costs, approximately ?400,000, to recruit additional staff to form an entirely new Corps of Military Accountants, they hoped to reduce this in later years.

The Treasury, however, 'were not fully satisfied as to the merits of the new system, and would regard with some apprehension the probable large cost in its general extension to other departments, especially before further experience had been gained of the merits as applied to the Army'. The PAC agreed that it would be wise to await fuller experience of the results obtained from the trial scheme.[1] The PAC returned to the issue in 1923.

The PAC's 1923 inquiry examined in detail the benefits obtained from the additional information provided under the new accrual accounting system and the cost comparisons it afforded between different establishments, at home and abroad. Although the Committee noted the War Office's continuing confidence in the new system of accounting, they pointed out that the account for the year 1921-2, though a considerable advance upon its two predecessors, was in many respects incomplete and imperfect and was still in the transition stage. There were great difficulties in arriving at proper valuations of assets, with major overstatements having to be corrected. These and many other defects in the accounts detracted from its value as an accurate record and as a basis for reliable comparisons of performance. The PAC contrasted the subjectivity and scope for variation in arrangement and presentation in income and expenditure accounts with the certainty available from accounts prepared on a cash basis. With reference to the benefits of the change, the PAC found that 'it was at present impossible to arrive at any figure which will show even in a general way what administrative economies have been effected by the new system, the operation of which has been obscured by the drastic reductions which have been effected in the Army by general measures of economy'. The PAC concluded that 'it must inevitably be many years before it will be possible effectively to compare Army accounts under the new system over a period of years'. They noted that a high-level War Office committee was now considering 'how far the new form of account was likely to be useful and with what degree of elaboration it should be kept'. The related Treasury Minute confirmed that they hoped soon to receive that committee's report.[2]

In October 1923 the War Office Committee recommended continuance of the new accounts,[3] 'subject to an investigation as to the possibility of improvements and simplification with a view to economy in its working'.55 Two further committees were then set up to pursue these matters further. The PAC looked at the position again in 1924, with progress still uncertain and final decisions remaining outstanding.56 A year after Sir Charles Harris retired, the Army Council in 1925 reversed the previous War Office advocacy for accrual accounts and submitted to the PAC 'a proposal to abandon the system of Army accounting which has been in partial operation for the last six years, and to revert to Estimates and Accounts similar in form to those of other departments, prepared on a cash basis'. The proposal was the result of the Army Council's unanimous decision that 'the economies effected, or likely to be effected, by the new system when developed do not justify its cost'.

The PAC exhaustively reviewed the aims of the new accounting system, the progress made in introducing it and the results achieved. The Committee took evidence from witnesses, including, most unusually, the Secretary of State for War, over six separate sessions from July until December 1925, based on memoranda submitted by the War Office, the Treasury Officers of Account, the C&AG, and Sir Charles Harris. From the evidence given it appeared that, in addition to the high costs and delays, the technical difficulties with the reliability of information provided by the trial accrual accounting system, and the subjectivity of important figures, there were continuing problems with persuading operational staff of the value of the benefits promised. In contrast to the enthusiasm of the accountants, operational staff did not seem convinced that the new system provided information useful to their work. Sir Charles Harris had rather sorrowfully told the Committee in 1923, some three years after the project started, that:

This is the sort of information we can lay before the administrative authorities;if the administrative authorities will tell us how far this is useful it may be that we can usefully expand it in some directions and it may be that we can considerably

simplify it in others____My idea all through has been only to elaborate any feature

of the system to the extent to which it showed that it paid its way and was worthwhile.[4]

Determined to the last, and now free in a private capacity to speak against the Army Council's decision to abandon the scheme, Sir Charles Harris, together with General Sir Herbert Lawrence, Chairman of the War Office Committee that had recommended in 1923 that the trial of accrual accounting should continue, told the PAC that they personally held to the view that if it were developed 'the machine would ultimately become a potent instrument for economy'. They did acknowledge that this would require a complete, and extremely expensive, change in the Army's administrative system from the War Office downwards. The Army Council, in contrast, was satisfied that any such advantages could not be secured without changes that 'could not in the circumstances be at all commensurate with the cost of the machinery'.[5]

The PAC and the Treasury agreed, with the Treasury emphasizing particularly that:

The expense of preparing such accounts must be regarded as a factor in deciding in what cases they should be kept. My Lords do not think the Committee would desire that such accounts should be maintained for particular services, if the cost of producing them were excessive as compared with a reasonable estimate of the value of the benefits likely to accrue from their preparation.[5]

A more formal difficulty was that initial proposals for the trial scheme seem to have assumed that the new form of account was a statutorily acceptable substitute for the annual appropriation accounts required to be produced under the 1866 Audit Act. However, in the C&AG's report on the 1919-20 accounts, the first in the new form, he concluded that it was doubtful that the accounts could be regarded as appropriation accounts because they were not confined to cash receipts and expenditure actually incurred in the year concerned, as the 1866 Audit Act required. Given the uncertainty over the statutory requirements, and his own responsibilities, he had therefore certified only the cash transactions.[7] The position on the later accounts does not seem to have been satisfactorily resolved and the C&AG continued to certify the cash items only until the trial was abandoned. Arguments about the advantages and disadvantages, and uncertainties, of accrual accounting continued intermittently until the introduction of across-the-board departmental resource accounts in 2000.

An unwelcome and embarrassing development for the PAC in 1934 was the realization that, because the terms of the Standing Order under which it was appointed in 1862 referred only to appropriation accounts, there were doubts whether it had the necessary powers to examine the large numbers of other accounts it had examined on many occasions in the intervening seventy years. Some of these accounts were relatively small but others involved substantial expenditure. Although the C&AG had clear powers to examine the accounts, and they had been properly laid before Parliament, the Committee's own powers of examination, formally interpreted, were open to question. The PAC also revealed that over the last twenty-five years a significant number of other accounts had been added to the list of bodies where its powers of examination were questionable, and that the numbers were growing. The Committee said it was confident that the House of Commons would accept that until then its examination had been carried out under the usual practice of giving Select Committees wide powers to interpret their terms of reference as they saw fit. Now, in view of the number and importance of the accounts involved, the Committee asked for its Standing Order to be amended to give greater flexibility to its powers of examination by providing for it to examine 'such other accounts laid before Parliament as the Committee may think fit'. Standing Order 148 was amended accordingly in November 1934.61

  • [1] PAC Third Report, 1921, HC 212, paras 17-23. Treasury Minute, 24 November 1921.
  • [2] PAC Report, 1923, HC 125, paras 65-71. Treasury Minute, 1 November 1923.
  • [3] Cmnd 2073. 55 Cmnd 2073. 56 PAC Second Report, 1924, HC 138, paras 26-34.
  • [4] Evidence to PAC 1923 (Q. 5938).
  • [5] PAC Second Report, 1925, HC 196, paras 50-68. Treasury Minute, 1 January 1926.
  • [6] PAC Second Report, 1925, HC 196, paras 50-68. Treasury Minute, 1 January 1926.
  • [7] PAC Third Report, 1921, HC 212, para. 104.
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