07 December 2007
When the Home Office accounts were disclaimed by the National Audit Office, it was symptomatic of a wider malaise. The only cure was a complete turnround in the way the department handled its finances. Peter Kane tells it like it was
What a difference two years makes: on October 8, unqualified Home Office accounts for 2006/07 were laid in the House of Commons. No-one noticed. There were no media reports.
This was in stark contrast to the response the 2004/05 accounts received when they were published on February 1, 2006. Then the Home Office faced unprecedented criticism from the National Audit Office and the national press after the NAO disclaimed the accounts on the grounds that they were not in a fit enough state to form an opinion on.
In uncharacteristically blunt language, NAO head Sir John Bourn said that book-keeping at the department was 'severely deficient' and that it had failed to maintain proper books and records. Edward Leigh, chair of the Commons Public Accounts Committee, said that 'such failings must never be repeated'.
For a department already facing severe criticism, the resulting newspaper headlines not only damaged its reputation for financial competence, but were also seen as the symbol of a wider malaise.
That is why permanent secretary Sir David Normington, who had been confronted with the disclaimer on the accounts just days after his arrival at the Home Office in January 2006, told his staff following this year's successful outcome: 'I've never been so excited about signing off accounts before.'
It was an important milestone in the turnaround of the department's handling of its finances. But, perhaps even more importantly, it was also hard evidence of the success of the department's wider reform plans, which have been focused on getting the basics right and building the foundations for long-term success.
So what were some of the main factors in this successful turnaround and what lessons might be of interest to other public services?
First, the department faced up to the full extent of the problem. When first confronted with the possibility of a disclaimer on its 2004/05 accounts early in 2006, it would have been tempting to resist and cast around for others to blame. A hoary old favourite was to blame 'the system', as the department had faced several teething problems following the transfer to a new Oracle IT system, known locally as Adelphi.
But the Home Office commissioned an independent review, carried out by Ernst & Young, to signal to our own staff and the NAO that we were determined to get to the bottom of the problems.
The review, completed in six weeks, confirmed that technical issues had indeed played a part in the problems, but that other factors were more critical. These included the degree of business readiness, culture and capability and the priority given to financial reporting. It was a clear message that radical change was needed, not tinkering at the edges.
Second, a guiding coalition for change was created. The new Home Office finance leadership – headed by financial and commercial director general Helen Kilpatrick and myself – together with the permanent secretary, committed ourselves to giving the highest priority to removing the disclaimer on the accounts.
A PAC hearing in April 2006 provided an early public opportunity for Normington to underline the importance he attached to it and to set a public ambition that the 2006/07 accounts would be unqualified. This has been sustained over the past two years, as he and the board have received regular reports on progress. He has intervened at critical points to help remove obstacles to our goal.
Third, a clear vision was set out. Top-level leadership has played a key role in guiding the coalition, but it would not have been able to move forward without winning the 'hearts and minds' of finance staff in the centre and in businesses across the department. At one level, the vision was simple: deliver a clean set of accounts within two years and pre-recess (July) sign-off within three.
But this had to be underpinned by a more inspirational message: one that stressed the sense of pride that would follow from delivering a high-quality product and embedding a strong financial management culture. And that made it clear we were not interested in simply putting on sticking plaster or creating a quick fix.
Consistently repeating these messages at critical stages of the turnaround, particularly when the going got tough, stiffened the resolve of staff to persevere, even when it was hard to see any tangible signs of progress.
Fourth, a credible plan was produced, with the right resources to deliver. Faced with endemic problems on a number of fronts and a shortage of qualified staff, it was critical that we prioritised activities and applied our resources flexibly to where they could achieve maximum impact. Creating a programme management office – in partnership with Ernst & Young – signalled a new rigour, with a strong focus on ensuring we hit some of our early milestones to build the confidence of the team and our key stakeholders.
And, as we did so, we ensured that we took a little time out to celebrate the 'early wins', which did a power of good in sustaining morale. We also had to constantly juggle resources to ensure that we did not neglect the work stream – the financial improvement strategy – designed to tackle some of the underlying control and data issues, critical to the longer-term improvement agenda. At several points it did have to take the back seat – to ensure we kept on track with the accounts production – but we recovered lost ground and it is now increasingly part of our mainstream business.
Fifth, robust governance arrangements were put in place. Regular reporting to an internal steering group, chaired by Kilpatrick, helped to keep the recovery on track, working closely with our external partner.
A new assurance board, with senior representation from the NAO, Treasury and Home Office audit committee, was also established. It kept us on our mettle and grounded, when there might have been a danger of over-confidence over the eventual outcome.
More important, it contributed to a maturing in our relationship with these main stakeholders, building mutual confidence, respect and a sense of common endeavour, without compromising the independence and rigour of the NAO's audit.
Sixth, the department built on success. Avoiding a repeat of the disclaimer on the 2005/06 accounts was the first big test of the turnaround and, although this was in doubt until fairly close to the wire, it was achieved in November 2006. The NAO auditor general acknowledged that the accounts were a significant step forward for the Home Office and the finance team felt an enormous sense of pride.
There were two areas in which the accounts were qualified and the NAO pointed out that several major challenges remained, particularly in strengthening the underlying controls. Normington recognised this last December when he told the Commons home affairs select committee that: 'The 2005/06 accounts were a step forward, but underlying problems remained.' In other words, this was a stepping stone, not an end in itself.
The foot has not been taken off the pedal since last December. But we have moved on from crisis management to mainstreaming accounts production and improvement activity. As word of our progress spread, we were able to bring new people into the team more easily, including head of accounts Amanda McFeeters, who has a strong track record of successful turnaround.
Areas of work previously undertaken by our external partners were successfully handed over, following a systematic approach to knowledge transfers. By July 2007, with the transition completed, the team had the confidence and capability to drive towards the finishing line in September.
There were still a few nerve-wracking moments before we finally reached the point on September 27 when Normington signed off unqualified 2006/07 accounts, prior to the laying in the House.
This was a special moment for the finance team and wider Home Office – one that we really feared might not be possible less than two years ago. It is a tribute to the hard work of the team, to the high-level commitment to improvement and to our stakeholders.
Of course, big tests remain. We are pleased, but we are not declaring victory. We are now aiming to sign off the 2007/08 accounts by next July and that will mean further improvements to the quality and timeliness of our data handling and our basic processes. We are busy setting up a new agency and, like everyone else, we must take on board the implications of International Financial Reporting Standards.
We are also implementing a new financial management delivery plan. A priority is embedding compliant financial management in every part of the Home Office. So life will not be dull.
Looking back, what are the lessons? Being bolder earlier – moving to a new structure, with some new people – could have accelerated the recovery. Communicating again and again, walking the floor to encourage more junior staff, was crucial. But not enough time was initially available to spread the message to the wider parts of the business, whose support would be critical to success.
Drawing on the support of our external partner was crucial but retaining in-house leadership and accountability has been vital. And avoiding the 'dependence' trap has now given us the confidence to take the next step towards excellence.
And, finally, do not lose sight of the bigger picture. Clean accounts and data quality are important. But managing the money, putting resources to where they will do most good, and sticking to budgets are also vital. It might surprise you, given some of the news coverage, to hear that the Home Office has managed to live within its budget throughout this period, delivered on its Gershon efficiency target 15 months ahead of schedule, reduced its head count, as promised, by more than 2,000, and is on track to meet its main Public Service Agreement targets.
But whoever said that good news made for a good headline?
Peter Kane is director of performance and finance at the Home Office
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