The Ministry of Defence’s bespoke trading entity responsible for providing equipment and support has been warned it faces parliamentary scrutiny over its accounting practices.
Meg Hillier, chair of the influential Public Accounts Committee, confirmed the move after the National Audit Office gave only a “qualified” sign off for Defence Equipment & Support’s 2015-16 accounts this week.
The NAO’s concerns centre on £434m of “private sector support” and £65m of “other programme costs” spending in the DE&S’s annual accounts, which show total net expenditure of £1.22bn for the year.
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The private sector support costs include contracts for the employment of manpower support, consultancy assistance and project management and logistics capability. The “other programme costs” include travel and subsistence, training, safety and other office running costs.
NAO head Sir Amyas Morse said DE&S’s financial systems meant it had needed to conduct a “manual analysis” of its figures to separate Ministry of Defence costs from its own in relation to PSS and the other costs.
“To remove its qualification relating to expenditure the department needs to improve how it identifies and records private sector support and other programme costs,” he said.
“The department’s ongoing improvement programme acknowledges this and it is developing financial management systems, processes and controls to record its costs to a level of accuracy needed for a clear audit opinion in future years.”
However, PAC member Anne-Marie Trevelyan said the fact that DE&S could not fully account for around £500m in spending was a “very disappointing” sign it had not “got to grips” with its financial management.
“This points to a lack of joined-up financial planning in the ministry and raises concerns about whether the department is delivering value for money across the board,” she said.
“We will not be letting this go and officials will have important questions to answer when they appear before the Public Accounts Committee in the new year.”
The PAC’s schedule for January and February 2017 now includes "The Defence Estate" and "Defence Equipment Plan" on its list of inquiry topics.
Trevor Taylor, professorial fellow in defence management at the Royal United Services Institute, said the heart of the qualification would either be missing information or poor recording on the part of the DE&S.
However, he told CSW that the NAO had raised concerns over fewer areas of DE&S spending than had been the case last year, indicating progress with the organisation’s accounting of trade and other payables figures, which had also drawn a red light last year along with PSS and “other programme costs”.
“The DE&S clearly chose to focus on the more serious issue raised last year, but it is still an embarrassment that the issues identified again this year have not been fully dealt with,” he said.
“My conclusion would be that the DE&S has only one more year to get this right if parliament is not to get seriously concerned.”
Taylor added that the relatively constant two-year ratio of PSS payments to DE&S staff costs - which were £434m and £626m respectively in 2015-16, and £440m and £644m the year before – showed the extent to which the organisation relied on external support.
Writing in the DE&S annual report this week, director general for resources Michael Bradley accepted the organisation continued “to face some of the system and process challenges that were evident in [its] first year of operation”.
“The management of the accounting boundary between the BTE and the Equipment Plan accounts requires more manual intervention than is desirable, however, progress is being made,” he said.
Bradley said work that led to the removal of the NAO qualification on the DE&S’s liabilities provided a “robust baseline” for further improvement.