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Foundations for financial control, by James Strachan

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08 July 2005

The government's strategy for service provision should help drive innovation and improvement, but it also throws up challenges for public sector financial managers unused to dealing with market forces

What lies ahead for public services in Labour's historic third term? The aim at least is clear: delivery on the promises of significant improvement. To achieve this, three key means have been chosen — a mixed provider economy, devolution and choice.

These innovations raise the stakes significantly. For they inject new freedoms, complexity and risk into delivery. And it is evident that some of the existing systems of public sector financial management will struggle to cope.

To fulfil the government's ambitions, financial management will have to be made more robust to cope with these new pressures. Independently assessed, evidence-based, rapidly derived judgements on value for money will be at a premium.

I believe the successful introduction of more market lubricants into public services will help drive innovation and improvement. This, in turn, can thankfully open the way for long overdue deregulation. However, there is a counterbalancing need for more stringent and more timely financial management to be in place.

NHS foundation trusts are an example of this, but in the NHS there is certainly no cause for complacency. We have already seen what were well-managed trusts struggle after achieving FT status. Bradford is the best-known example but there are others.

FTs operate in a more commercial environment than NHS hospitals did before. They need real-time information about comparative costs and treasury management skills that have not traditionally been a feature of hospital administration. They will have different, and possibly more confrontational, relationships with their commissioning primary care trusts. And in due course both FTs and PCTs may be involved in mergers and acquisitions.

The way in which this model might be extended to schools and other parts of the public sector is becoming clearer. We are already seeing arm's- length management organisations behaving more like housing associations than the council housing departments from which they emerged.

All of this takes place against a backdrop of renewed emphasis on value for money, in part because increases in spending on public services are likely to slow from 2008. There will then be even more pressure on public services to show they are delivering better value for money.

Comprehensive Performance Assessment is evolving to reflect these new realities. Our revised methodology, CPA — the harder test, is devised specifically as a catalyst for continuous improvement. It also reflects how expectations about public services have changed. And it puts a very deliberate emphasis on value for money.

However, as we move to a public sector characterised in particular by a mixed economy of provision, we will need a regulatory system to match. This will require more radical changes than simply clustering inspectorates. But the prime need for stronger financial management will remain.

Public Finance's editor, Mike Thatcher, argued in his leader on June 17 that if financial management is as important as I say, then surely the finance director, or Section 151 officer, should be on a local authority's top management team. We could do worse than include it in the revised CPA criteria, he declared.

My answer to that is that financial management should be very high among the priorities of every local authority. But this is a team effort, not just an individual one. Boards and top management are ultimately responsible and must create an appropriate culture of collective ownership.

So, tempting as it is to insist under the new CPA structure that the finance manager has a seat at the top table, I believe that in practice this would be too prescriptive.

Perhaps unsurprisingly, we have discovered a marked correlation between excellent service provision and first-class financial management. Financial management is an essential element of good corporate governance. It forms part of the foundations of an organisation and it underpins the delivery of high-quality services and improvement. It also underpins accountability to stakeholders for the stewardship and use of resources. Good financial management might not be visible, but the absence of it becomes noticeable very quickly.

Our preferred route for improved financial management is our new Code of Audit Practice in both local government and the NHS. This, for the first time, requires auditors to reach explicit, scored judgements about the value for money being provided by the bodies we audit. In addition, we are strongly endorsing the self-assessment yardsticks set out in CIPFA's excellent Financial Management Model. Both underscore the simple but compelling message that financial management is vital.

James Strachan is chair of the Audit Commission

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