Financial Management and Internal Control

Office of the Comptroller and Auditor General Financial Management and Internal Control 19 September 2019

R.121/2019

Financial Management and Internal Control

Introduction

1. Effective financial management and internal control are essential underpinnings for the delivery of economic, efficient and effective public services. Since 2014 I have issued a series of reports relating to financial management and internal control:

• Internal Audit (March 2014) and Internal Audit Follow-Up (August 2015);
• Financial Directions (August 2014);
• Financial Management – Part 1 (April 2015);
• Financial Management – Part 2 (February 2016); and
• Risk Management (September 2017).

2. Officers accepted all the recommendations in these reports and set out specific actions to implement most of them.
3. The due diligence work undertaken for the new Chief Executive echoed many of the findings and recommendations of my reports and identified that substantial action was required to implement my recommendations.
4. Following the appointment of the new Chief Executive, important legislative changes were implemented that have facilitated a more corporate approach and therefore implementation of some of my recommendations. As a result of the Machinery of Government (Miscellaneous Amendments) (Jersey) Law 2018 the Chief Executive took on the new role of Principal Accountable Officer responsible to the States Assembly for all the income and expenditure incurred by the Government.
5. The Government is implementing a wide-ranging One Government (One Gov) transformation initiative designed to modernise the delivery of public services (see Exhibit 1).

Exhibit 1: The One Gov transformation initiative

Common Strategic Policy

Team Jersey

Government Plan

Office Modernisation

Target Operating Model

Economic Framework

Public Finances Law

Finance Modernisation

Information Services and Digital

Island Communications and Engagement

Efficiencies

6. The finance modernisation initiatives have been extensive, including:

• a wide-ranging Finance Transformation Programme led by the Group Director – Finance Transformation;
• delivery of fundamental changes in risk management led by a new Director of Risk and Audit who took up post in January 2019;
• development and delivery of the Public Finances (Jersey) Law 2019 and a new Public Finances Manual; and
• faster close', bringing forward the timetable for the preparation of the States' Annual Report and Accounts.

7. Up to July 2019 external support to the finance modernisation initiatives had cost £2.91 million.
8. The Public Accounts Committee (PAC) has reported on recurring themes from its reports and is holding a series of hearings on key areas, including on financial management.

Objectives, scope and approach

9. My review was designed to complement the work of the PAC and to provide a basis for my successor to plan their work in this key area.
10. The review evaluates:
    1. the progress made in implementing agreed recommendations in the reports listed above either individually or as part of wider change projects;
    2. the extent to which the recommendations as implemented have addressed the improvement areas identified; and
    3. the adequacy of plans for the implementation of any outstanding recommendations.

12. In undertaking this review:
    1. I recognise that there have been significant structural changes and that terms used in my previous reports may no longer be appropriate. In such cases I have retained the wording of my original recommendations but added footnotes to indicate how terms should now be interpreted;
    2. except where recommendations specifically relate to Non-Ministerial Departments, I have concentrated my evaluation on the impact so far as it relates to Government Departments. I am currently undertaking a review of aspects of the operation of Non- Ministerial Departments, including elements of financial management;
    3. I have not undertaken a detailed review of wider corporate initiatives referred to in this report, such as the 'One Gov' transformation initiatives; and
    4. I have not undertaken a detailed review of the Government Plan 2020 - 2023 ('the Government Plan') or the Public Finances Manual that was being drafted at the time that I undertook my review.

12. This report is structured around the findings ofmy earlier reports (see Exhibit 2). Exhibit 2: Focus of my work

Financial Management  • Financial Management - Part 1 (April 2015)

• Financial Management - Part 2 (February 2016)

Financial Directions  • Financial Directions (August 2014)

Risk Management  • Risk Management (September 2017)

Internal Audit  •• InInteternarnal l AAuuddit it: (MFolloarch w-2u0p1(Au4) gust 2015)

13. I also make some overall observations around the management of finance modernisation.

Financial management

1. My previous reports evaluated financial management drawing on elements of the Financial Management Maturity Model published by the UK National Audit Office (see Exhibit 3). I concluded that the States needed to undertake a fundamental review of the finance function and, based on the results of this review, adopt and implement a change programme.

Exhibit 3: Elements of the Financial Management Maturity Model

Financial governance and leadership

Financial monitoring and forecasting

Financial planning

Financial and performance reporting

Source: Developed from Financial Management Maturity Model, National Audit Office, 2010

2. In response to my recommendations, the Government undertook:
   1. a Strategic Review of Finance (December 2017); and
   2. a financial maturity review (March 2018).
3. These, and the findings from my reviews, informed the scope and activities of the finance modernisation initiatives overseen by the Treasurer of the States, including those within the Finance Transformation Programme (Exhibit 4).

Exhibit 4: Finance modernisation initiatives, including the Finance Transformation Programme (FTP)

Consolidation of the finance function

Co-design and implementation of enterprise risk management

Review and redesign of key finance processes

Business case for replacement of the finance system

Public Finances Manual

Information driven decision making

Government Plan

Faster closedown

Coaching

New Public Finances Law

Part of the  Overseen by  

Key  Originally  FTP to OBC -  CSB with  

Part of FTP  part of the  oveerseen by  reports to  Outside FTP now

FTP  EMT  FTP

4. Key changes have already taken place, including the coming into force of a new Public Finances Law, preparation of a new Public Finances Manual and earlier preparation of the States' Annual Report and Accounts. The key structural change – consolidation of all finance staff into Treasury and Exchequer with a new operating structure – has been implemented.
5. However, management have recognised that the scope and nature of the change needed is substantial, will require significant resources and will take many years to implement and embed. The adoption of a consistent, unified way of working and re-engineered processes will facilitate effective planning for the implementation of a new integrated technology system. That in turn has the capacity to drive further improvements in financial management, providing high quality, real time financial information across the States as a whole to inform wider, as well as departmental, decision making.

Financial governance and leadership

6. Effective financial management requires clear oversight and leadership from the top of an organisation. I focussed on four different dimensions of financial governance and leadership (see Exhibit 5).

Exhibit 5: Financial governance and leadership: areas of focus

Financial governance and leadership

Leadership by the Board' and

Executive Team'

Systems of internal control, governance arrangements and risk management

Financial management capabilities

Training and continuous professional development

Leadership by the 'Board' and 'Executive Team'

7. Effective financial management requires structured oversight by and leadership from the top of an organisation. In the best performing organisations finance is seen as too important to be left to finance professionals alone. In my previous reports I recognised a strong silo mentality that impeded assumption of collective responsibility for financial matters at political and officer levels.
8. I am pleased that there has been real progress (see Exhibit 6). Clear steps have been taken to strengthen consideration of finance matters by both the Council of Ministers and the Executive Management Team and to emphasise the importance of working together on finance. However, cultural change takes time and the changes are yet to be firmly embedded.  

Exhibit 6: Leadership by the 'Board' and 'Executive Team': progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Systems of internal control, governance arrangements and risk management

9. Effective financial management requires appropriately designed and consistently implemented systems of internal control, governance and risk management. Previously I identified scope for:

• enhancing the provisions of the letters issued to Accounting Officers on their responsibilities for public funds; and
• amendments to accountability arrangements that are necessary in order to secure effective accountability whilst preserving the constitutional independence of bodies where independence from the Government is essential.

10. Mixed progress has been made in implementing my recommendations (see Exhibit 7). I am pleased that letters issued to Accountable Officers (posts established replacing Accounting Officers) have been strengthened. However, limited progress has been made in strengthening the accountability arrangements for those bodies where constitutional independence in the exercise of their functions is essential. This is an area that I plan to consider further in my forthcoming report on Non-Ministerial Departments. Furthermore, I am concerned that a legislative change in 2018 had the effect of weakening the operational independence of the Chief of Police, the importance of which I highlighted in my report Governance of the States of Jersey Police (March 2018).

Exhibit 7: Systems of internal control, governance arrangements and risk management: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Financial management capabilities

11. Effective financial management depends on people. It requires appropriate financial management skills at all levels of the organisation both within dedicated finance functions and more widely.
12. The building of financial management capability has been a key focus of the Finance Transformation Programme (see Exhibit 8). In particular:

• the new structure for the finance function provides an opportunity for a stronger contribution by the finance function at the strategic level and in providing support to non- financial managers; and
• there has been progress in reflecting financial management skills for finance and non- finance staff in job descriptions, competency frameworks, targets and evaluation of performance.

13. However:

• more work is required to roll-out consistent objectives for financial management to all staff; and

• embedding a strong performance management culture across the States, including effective objective setting and appraisal for all staff, will take time. As at March 2019 only 30% of staff appraisals were recorded as completed in the States' HR systems. An initiative to emphasise the importance of the performance management of individuals has been 'soft launched' with a view to increased focus in 2020.

Exhibit 8: Financial management capabilities: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Training and continuous professional development

14. Investing in people is an important element in developing an organisational culture to achieve excellence. Training and development on financial management skills is relevant for both finance staff and for non-finance staff with financial management responsibilities.
15. There have been improvements in the provision of finance training for both finance and non-finance staff (see Exhibit 9). However, training and skills development take time and the development and delivery of relevant training strategies is not yet complete.

Exhibit 9: Training and continuous professional development: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Financial planning

16. High performing organisations have effective financial planning, integrated with wider strategic and corporate planning, to support the business. My work focussed on three dimensions of financial planning (see Exhibit 10).

Exhibit 10: Financial planning: areas of focus

Financial planning

Integration with strategic and corporate planning

Robustness and streamlining of systems

Coverage to support the business

Integration with strategic and corporate planning

17. The most effective financial planning:

• is integrated with strategic and corporate planning at all levels, reflecting both plans on what is to be achieved but also plans on how it is to be achieved;
• reflects short-, medium- and long-term planning horizons; and
• produces timely information to allow budgets and forecasts to be updated.

18. I previously reported progress in this area but made wide-ranging recommendations to develop and enhance the integration of financial planning with wider planning processes.
19. Substantial progress has been evident in the preparation of the Government Plan (see Exhibit 11). However:

• work on some key elements of wider planning has yet to start or is at a very early stage, limiting the scope for clear integration of financial and non-financial planning. I highlighted the absence of an Estates Strategy in my report on Operational Land and Buildings (June 2018) and the absence of a People Strategy in my report on the Role and Operation of the States Employment Board (March 2019); and
• there has been insufficient focus on the scrutiny of existing expenditure as opposed to plans for growth. A rolling programme of zero-based budget reviews that I previously recommended has yet to commence.

Exhibit 11: Integration with strategic and corporate planning: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Robustness and streamlining of systems

20. Effective systems for financial planning should be robust, incorporating sensitivity analysis and scenario planning involving finance and non-financial managers, but also streamlined.
21. Previously I made recommendations that focussed on:

• the constraints of working to a Medium Term Financial Plan that was fixed for a period of time rather than adapting to circumstances;
• the engagement and challenge processes in developing the Medium Term Financial Plan; and
• streamlining the contents of the Medium Term Financial Plan.

22. Substantial progress has been made:

• the Medium Term Financial Plan has been replaced with a Government Plan. This means that:

• income and expenditure are systematically considered at the same time; and
• the move from a rigid expenditure plan for four years to a plan that is fixed for one year and indicative for subsequent years enhances adaptability;

• the process for the preparation of the Government Plan has involved more structured and wide-ranging challenge; and
• the Government Plan is more accessible and clearly links expenditure to strategic priorities and desired outcomes (see Exhibit 12).

23. I am, however, concerned that identification of efficiencies progressed more slowly. As a result, the Government Plan as lodged included unidentified efficiency savings.

Exhibit 12: Robustness and streamlining of systems: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Coverage to support the business

24. Effective financial planning covers all areas of the business with integration of current expenditure plans with investment programmes, treasury management, cashflow and balance sheet projections.
25. Previously, I made wide-ranging recommendations to enhance the coverage of the Medium Term Financial Plan to consider all the finances of the States with an increased focus on risk, the States' balance sheet, identification of savings and the preparation of business cases.
26. The Government Plan demonstrates significant progress in implementing my recommendations (see Exhibit 13).

Exhibit 13: Coverage to support the business: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 1 (April 2015)

Financial monitoring and forecasting

27. An essential component of financial management is effective monitoring and forecasting of financial performance. In my previous report I made recommendations on two dimensions of financial monitoring and forecasting (see Exhibit 14).

Exhibit 14: Financial monitoring and forecasting: areas of focus

Financial monitoring and forecasting

Use of financial and  Quality of financial management non-financial indicators  systems

Use of financial and non-financial indicators

28. Management of finances is about more than managing budgets: it is about managing what is achieved with the money spent. The best performing organisations set budgets for financial performance and targets for non-financial performance alongside each other. They

also monitor financial and non-financial performance in tandem. In that way they can drive efficiency and effectiveness.

29. I previously made recommendations that focussed on enhancing the integration of financial and non-financial monitoring. There has been good progress in implementing those recommendations (see Exhibit 15). However, more work is required to implement and embed new arrangements.

Exhibit 15: Use of financial and non-financial indicators: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 2 (February 2016)

Quality of financial management systems

30. High quality and accessible financial information systems contribute to effective financial management. There is an increasing trend in high performing organisations for enhancing the financial skills of non-financial managers and providing them with the tools to allow them to interrogate and use financial information themselves to promote ownership, accountability and efficiency.
31. Previously, I reported significant weaknesses in the financial management systems and made recommendations for change, including in particular reviewing the timetable and resources for the replacement of the States' main accounting system. I am pleased to see that progress has been made with the preparation of an Outline Business Case for a new finance system, a key strand of finance modernisation (see Exhibit 16). It is important to recognise that such a project is not just a technology solution: having the right culture, the right people and the right skills is essential to securing value from the investment proposed.

Exhibit 16: Quality of financial management systems: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 2 (February 2016)

Financial and performance reporting

32. Effective management requires timely and accurate reporting of financial and non-financial performance to senior management and politicians. I previously reported and made recommendations in two areas (see Exhibit 17).

Exhibit 17: Financial and performance reporting: areas of focus

Financial and performance reporting

Meeting user needs  Timeliness of internal reporting

Meeting user needs

33. Good quality financial and performance reporting systems reflect different user needs. Information should be tailored to ensure that reports are relevant and useful.
34. I made recommendations that focussed on improving reporting, in particular to secure integration of financial and non-financial reporting. While there has been some progress in this area, there is more to do, reflecting the substantial work necessary to develop non- financial reporting. In the longer term, efficient integration of financial and non-financial reporting will require investment in technology (see Exhibit 18).

Exhibit 18: Meeting user needs: progress in implementing recommendations

Source: Recommendations from Financial Management - Part 2 (February 2016)

Timeliness of internal reporting

35. Effective financial reporting in an organisation includes preparation of timely information for budget holders, managers and other decision makers.
36. I made one recommendation for improvement (see Exhibit 19).

Exhibit 19: Timeliness of internal reporting: progress in implementing recommendation

Source: Recommendations from Financial Management - Part 2 (February 2016)

Recommendations

R1  Develop and implement the changes to accountability arrangements that are necessary in

order to secure effective accountability whilst preserving constitutional independence of certain bodies, including the States of Jersey Police.

R2  Undertake a comprehensive, structured post-implementation review of the Finance

Business Partner model, with input from user departments, to ensure that the full benefits of the new model are secured.

R3  Ensure that standard objectives for financial management are set for all staff with financial

management responsibilities at each grade.

R4  Monitor the completion of staff appraisals and take prompt corrective action where

necessary.

R5  Prioritise a review of financial management training for non-financial managers.

R6 Ensure that, as part of the new corporate arrangements for monitoring the implementation

of recommendations, arrangements are put in place to facilitate reporting back to relevant Scrutiny Panels on progress in implementing recommendations that they have made.

R7 Enhance the arrangements for the scrutiny of existing expenditure, including:

• development of a programme of zero-based budget reviews; and
• ensuring that savings are identified in sufficient time that no unidentified savings are included in the Government Plan when lodged.

R8 Establish clear plans for completing the People Strategy and Estates Strategy in sufficient

time for them to be taken into account when developing the next Government Plan.

R9 Annually report on compliance with the resourcing principles.

R10 Following adoption of the Government Plan, ensure that the proposed formal review of the

preparation of and engagement around the Plan is comprehensive and completed in sufficient time to inform the next Government Plan.

R11 Reconsider the scope for budgeting for impairments.

R12 Prepare, adopt and monitor implementation of a plan to improve the quality of reporting of

non-financial information both externally and internally.

R13  Ensure that there is:

• widespread engagement on and effective challenge of the proposals for an integrated technology solution; and
• effective project management of its implementation

so that the full benefits of a significant investment are secured and risks in implementation minimised.

R14 Adopt States-wide standards for obtaining assurance on the integrity of key spreadsheets

used for accountability and decision making.

Financial Directions

1. Financial Directions, issued by the Treasurer of the States, have been a key element of the States' system of internal control. The Public Finances (Jersey) Law 2005 required the Treasurer to issue Financial Directions in some areas and permitted them to do so in other areas where necessary or expedient for the proper administration of the public finances of Jersey.
2. I reviewed and reported on Financial Directions across five areas (see Exhibit 20). Exhibit 20: Financial Directions: areas of focus

Define  • Complying with statutory requirements for Financial Directions

• Identifying other areas to be covered by Financial Directions

Develop  •• EEstastabblilishshinging parogrranramgemmeenfts or fodr eaveplopprovmael ont f Financial Directions Implement  •• IssuComingmu Finanicatningcial coDinrecttents ionosf Financial Directions

Embed  •• OvAssuersiranghtce on operation

Optimise  •• RevKnoiewwledpgrocee shssaring and lessons learnt

3. I also considered arrangements for securing compliance with Financial Directions.
4. The Public Finances (Jersey) Law 2019 replaces the Financial Directions with a Public Finances Manual (PFM) that is required to include 'directions and information with respect to the proper administration of this Law and of the public finances of Jersey'. In following up my recommendations I have therefore considered, but as highlighted in paragraph 1.11 above, not reviewed in detail the draft Public Finances Manual.

Define

5. I previously identified that finance was only one area in which there was a requirement for enforceable corporate standards clearly communicated across the States. I recommended a consistent approach covering areas such as information management and human resources management. As outlined in Exhibit 21, limited progress has been made. However, the One Gov Board has agreed to the establishment of a Director General led working group to review overall corporate governance. The group is due to report by the end of the year and its work may lead to proposals in this area.

Exhibit 21: Define: progress in implementing recommendation

Develop

6. The development of the draft PFM has been a substantial task. There has been enhanced engagement with stakeholders in developing the draft PFM. I identified areas for improvement in the draft PFM. Management have advised me these areas will be addressed in finalising the PFM (see Exhibit 22).

Exhibit 22: Define: progress in implementing recommendations

Implement

7. The implementation process for the new PFM is mainly in the hands of a single experienced officer, creating a key person' risk. This risk has, however, been reduced by the appointment of the Director of Risk and Audit who leads on financial governance. Key elements, such as quality assurance, communications and training arrangements have not been fully developed (see Exhibit 23).

Exhibit 23: Implement: progress in implementing recommendations

Embed

8. My recommendation for Accounting Officers (now Accountable Officers) to make a formal statement on compliance with Financial Directions (now the PFM) has been implemented. There is a recognition of the scope for implementation of more systems-based controls but strong cross-working between different strands of finance modernisation and successful roll-out of new systems is necessary to achieve this (see Exhibit 24).

Exhibit 24: Embed: progress in implementing recommendations

Optimise

9. I recommended a systematic annual review of Financial Directions. That recommendation was not implemented. Although the draft PFM provides for a rolling review' of the PFM, this falls short of the annual review that I recommended and that I believe is necessary to ensure its continuing relevance and appropriateness. In addition, the PFM does not specify the scope of the rolling review (see Exhibit 25).

Exhibit 25: Optimise: progress in implementing recommendation

Compliance with Financial Directions

10. I previously reported on the importance of short, principles based Financial Directions to communicate important requirements clearly and maximise the prospect for consistent compliance. I am pleased that this recommendation has been embraced in drafting the PFM: the draft PFM reduces the mandatory requirements by 82% over those contained in the Financial Directions. However, there are other recommendations that have not been fully implemented (see Exhibit 26). Going forward, a key challenge is to promote a culture of compliance so that exemptions from the mandatory requirements of the PFM are exceptional and, where agreed, justified and subject to scrutiny.

Exhibit 26: Compliance with Financial Directions: progress in implementing recommendations

Recommendations

R15  Develop and implement an overarching framework for establishing, communicating and

monitoring compliance with corporate standards in areas other than finance.

R16  Establish robust arrangements for consultation with users, including those in Non-

Ministerial Departments, on finance modernisation setting out a framework to determine:

• when consultation will take place;
• with whom it will take place;
• how it will take place; and
• how user views will be considered.

R17  Ensure that agreed management action detailed in this report is taken before finalising the

PFM.

R18  Ensure that the internet facilitates effective updating, navigation, searching and

cross-referencing before using it as the platform for the PFM.

R19  Ensure that robust training and communication plans are developed in good time for all

major finance modernisation initiatives that require engagement with users outside Treasury and Exchequer.

R20  Ensure that business cases are prepared for all exemptions to the mandatory

requirements of the PFM and, in summarised form, routinely reported to the Risk and Audit Committee.

R21  Ensure that a formal annual review of the PFM is undertaken, drawing widely on the views

of service departments and other central functions interacting with Treasury and Exchequer.

Risk Management

1. High performing organisations have effective corporate and departmental arrangements for identifying, assessing, accepting, mitigating, monitoring and escalating risks. My 2017 report identified progress in corporate arrangements for risk management but still much work to do to develop and embed effective States-wide arrangements in the areas reviewed (see Exhibit 27).

Exhibit 27: Risk management: areas reviewed

Leadership  Effective identification, and strategy  classification and mitigation

Culture

Oversight  Regular monitoring and governance  and reporting

2. Following publication of my report in September 2017, little effective progress was made in implementing my recommendations until a Director of Risk and Audit within Treasury and Exchequer took up post in January 2019. Work is underway to develop the corporate approach to risk management. Despite the engagement of some external support, capacity is stretched and risk management remains in its infancy with much to be done in all the areas that I reviewed.

Oversight and governance

3. Effective organisation-wide governance structures are necessary for effective risk management. I previously made recommendations for clear, documented clarification of roles and responsibilities.
4. New arrangements for the oversight of risk management, including the establishment of a Directorate Risk Group, have been implemented. Key governance documents relating to risk management have been reviewed: in some cases revised documents have been finalised but in some cases they remain in draft. The Risk and Audit Committee has a key role in overseeing arrangements. However, it now has insufficient members to be quorate. It is vital that new members, when appointed, have the requisite skills and knowledge to provide meaningful oversight of and challenge to arrangements for risk management (see Exhibit 28).

Exhibit 28: Oversight and governance: progress in implementing recommendations

Leadership and strategy

5. Effective risk management requires effective leadership and clear articulation of a strategy for risk management.
6. I previously identified a need to review key documents, enhance arrangements for communicating the strategy within the States and provide enhanced support to departments in implementing the strategy.
7. There has been progress but much remains to be done. There has been slippage in reviewing and redrafting key documents and there are no plans for roll-out of revised documents when agreed. In other areas, such as support for Non-Ministerial Departments, there have been some recent discussions but arrangements have yet to be formalised (see Exhibit 29).

Exhibit 29: Leadership and strategy: progress in implementing recommendations

Effective identification, classification and mitigation

8. Good governance and strategy are necessary but not sufficient for effective risk management. It also requires an appropriate, consistently applied approach to identification, classification and mitigation of risk. In 2017 I made wide-ranging recommendations on enhancing arrangements, including through peer review and training. Although action in some areas has commenced, much remains to be done. In some areas, such as capturing experiences of training on risk management and undertaking a programme of peer reviews, there are aspirations but as yet no developed plans. It will take time, effective planning and commitment to secure full implementation and embedding of my recommendations (see Exhibit 30).

Exhibit 30: Effective identification, classification and mitigation: progress in implementing recommendations

Regular monitoring and reporting

9. Effective risk management requires regular reporting against risks and mitigation, including escalation as appropriate.
10. I am pleased that some of my recommendations in this area have been implemented but it is too early for them to be embedded in ways of working. I was concerned, however, that arrangements for reporting on risks and mitigation to Ministers were not sufficiently developed. In my view, six monthly reporting to COM was insufficient for COM to provide effective oversight of risk management. I am pleased to note that management have agreed to move to quarterly reporting of risks and mitigation to COM (see Exhibit 31).

Exhibit 31: Regular monitoring and reporting: progress in implementing recommendations

Cultural change

11. In my previous report I emphasised the importance of driving cultural change so that the workforce embraced risk management as a key part of day-to-day management. Given that implementation of many of my recommendations is in progress or yet to commence, it is not possible to conclude that substantial progress has been made in this area. However, the appointment from the start of 2019 to the new post of Director of Risk and Audit provides a welcome focus for driving a message about risk management across the States (see Exhibit 32).

Exhibit 32: Cultural change: progress in implementing recommendation

Recommendations

R22  Establish a clear timetable for finalisation of key governance documents for risk

management and monitor delivery against it.

R23  Prioritise recruitment of suitably skilled and experienced members of the Risk and Audit

Committee so that it can return to quoracy as a matter of urgency.

R24  Develop, adopt and monitor implementation of a formal plan for finalising the Risk

Management Strategy, Code and associated Guidance.

R25  Finalise risk escalation arrangements for Non-Ministerial Departments.

R26  Develop, adopt and monitor implementation of mechanisms to capture and share

experience of departmental training initiatives across the States.

R27  Develop, adopt and monitor implementation of structured arrangements for peer review of

departmental risk registers.

R28  In implementing revised arrangements for risk management, focus on steps to secure

cultural change within the States' workforce to embrace risk management as an integral tool of management, including capturing and sharing of learning.

Internal Audit

1. An effective internal audit function is a key means by which an organisation gains assurance about the design and operation of its system of internal control. I originally reported in 2014 and undertook a follow-up review the subsequent year. Substantial work had been undertaken to implement my original recommendations and I made only three recommendations arising from my follow-up review. As part of this review I have focussed on evaluation of progress in implementing those three recommendations.
2. Two of my recommendations have been fully implemented. However, further work is needed to review the job descriptions for key officers to reinforce the operational independence of the statutory 'chief internal auditor' (see Exhibit 33).

Exhibit 33: Internal Audit: progress in implementing recommendations

Recommendation

R29  Review and update the job descriptions for key officers, including the Chief Executive,

Treasurer of the States, Director of Risk and Audit and Chief Internal Auditor to ensure that they adequately support the operational independence of the Chief Internal Auditor.

Management of the finance modernisation initiatives

1. My review focussed on the progress that has been made in the implementation of recommendations that I previously made. My review was not designed as a critique of the finance modernisation initiatives, including the Finance Transformation Programme. However, it is not possible to undertake a review of this nature without forming some views on the management of the initiatives in addition to the evaluation of progress in implementing my recommendations in the earlier sections of this report.
2. Firstly, in some key areas, such as risk management and financial governance, there was historically insufficient dedicated resources appropriate for the size and complexity of the States. This contributed to slow progress and meant that there was over reliance on some key individuals. The Chief Executive and the Treasurer of the States have recognised this historical underinvestment. New dedicated positions have been created and the senior posts have been filled. The investment in this area should create a more sustainable capacity to deliver ongoing improvement in these crucial areas.
3. Secondly, consistent overall arrangements were not in place for managing different elements of the finance modernisation initiatives. This is evident from comparing the approach to implementation of my recommendations on core financial management as part of the Finance Transformation Programme on the one hand and those on Financial Directions on the other. In the former, formal programme and project management arrangements were in place with significant identified external support. In the latter, project management was informal. There was heavy reliance on a small number of individual officers to implement extensive changes with limited resources at a time when posts remained unfilled in the new structure.
4. In such a situation it was not surprising that progress in implementing recommendations has been slower and plans for implementation less developed in those areas. Managing all the elements of a set of inter-related initiatives as a single programme:

• brings a consistent rigour to managing delivery with officers consistently applying project and programme management approaches;
• allows objective decisions to be made on where additional support is needed; and
• strengthens consideration of the interdependencies of different components of change, such as those relating to systems and those relating to the communication of processes to service users.

5. From April 2019 the Treasurer of the States oversaw all finance modernisation initiatives through his Senior Leadership Team. However, formal consistent arrangements for programme and project management have yet to be implemented.
6. Thirdly, there has been a lack of transparency in identifying and reporting the costs of the finance modernisation initiatives. I recognise that significant expenditure is required, including in engaging expert support, to secure the longer-term benefits of finance modernisation. Although the Government Plan identifies resources for finance modernisation and an integrated technology solution, identification of the total budget for implementation has been opaque.
7. Finally, the different circumstances and resources of Non-Ministerial Departments have not been consistently considered. These departments, for constitutional reasons, sit outside the Government of Jersey and are not accountable to Ministers. Some are very much smaller than Ministerial Departments without the same capacity or expertise, for example on risk management.

Recommendations

R30 Periodically review internal capacity and capability within Treasury and Exchequer to

sustain the delivery of key corporate activities.

R31 Implement consistent and clear arrangements for the planning, management, resourcing

and governance of all elements of finance modernisation.

R32 Establish arrangement to report transparently, consistently and on a timely basis on

finance modernisation initiatives.

R33 In implementing the other recommendations in this report and in implementing finance

modernisation, carefully consider the need to adapt the approach for Non-Ministerial Departments, including in relation to the support provided.

Conclusion

1. Effective financial management and internal control are the underpinnings of high performing organisations. I have previously reported significant scope for improvement in a series of reports. The sum effect of such improvements is designed to transform the finance function, shifting the balance of activities to those which provide insightful support to decision making (see Exhibit 34).

Exhibit 34: Shifting the balance of the finance function

Decision

support

Control Transaction processing

Decision support Control

Transaction processing

2. Progress was made in implementation in some areas, such as internal audit, but in others progress was until recently slow. The due diligence review undertaken on the appointment of the current Chief Executive echoed my findings and led to the establishment of a range of finance modernisation initiatives, including the Finance Transformation Programme.
3. Taken together, the finance transformation initiatives are a wide-ranging and ambitious programme that is seeing implementation or progress in the implementation of my recommendations at a pace that I have not previously seen. I welcome in particular:

• the steps to challenge a silo culture, including the establishment of the role of Principal Accountable Officer and strengthened consideration of finance issues at COM and EMT;
• the consolidation of the finance function into Treasury and Exchequer, driving a corporate approach and changed ways of working;
• improved links between financial and non-financial reporting in the context of the development of a Corporate Performance Framework;
• the development of clearer accountability lines for financial management;
• initial steps to reflect financial management skills in job descriptions and targets;
• improved arrangements for financial planning culminating in the Public Finances (Jersey) Law 2019 and the preparation of the Government Plan;

• work on the Outline Business Case to support the development for an integrated technology solution, replacing the current main accounting system and facilitating the integration of financial and wider performance reporting;
• the preparation of the PFM to replace the current Financial Directions. I am pleased that the PFM is a much shorter, more principles based document; and
• an enhanced focus on risk including through a renamed Risk and Audit Committee and appointment of a Director of Risk and Audit.

4. Where recommendations have yet to be implemented or fully implemented there are in many cases plans for implementation.
5. However, further investment of time and resources is needed both to implement recommendations and to embed new ways of working. In particular, management needs to focus on:

• ensuring that effective financial governance arrangements are put in place for bodies where constitutional independence is essential, building on the experience of oversight of the Independent Jersey Care Inquiry;
• securing the benefits of the new Finance Business Partner model;
• enhanced arrangements for scrutiny of existing expenditure, including commencement of a programme of zero-based budget reviews and advancing the timetable for identification of efficiency savings for the next Government Plan;
• taking stock of the experience of preparing the first Government Plan and learning the lessons for the future;
• taking forward the proposed integrated technology solution to ensure that it is 'right first time'. The cost of retro fixing, should it be necessary, can be significant. Delivering the solution requires significant investment of people and the right resources. It requires effective project management. But it also requires a continuing collective appreciation that this is not just a technology solution but something that facilitates a wider transformation in ways of working;
• structured, regular review of the operation of the PFM, to ensure that it drives cultural change where a 'must' is truly seen as mandatory; and
• developing clear plans for delivery of the necessary improvements in risk management and ensuring that sufficient resources are in place to secure delivery. The Risk and Audit Committee has an essential role in the delivery of effective risk management but to do so it requires new members to return it to quoracy and those members must collectively have the right skills and experience for the Committee to be authoritative.

6. Implementation of my recommendations requires effective management of the finance modernisation initiatives involving:

• sufficient internal capacity to sustain key corporate activities;
• integrated planning, management and governance of finance modernisation initiatives, including of the allocation of resources;
• transparent identification and reporting of the costs of finance modernisation; and
• careful consideration of the adaptations to new arrangements necessary for Non- Ministerial Departments. I am considering arrangements for finance support for Non- Ministerial Departments in a separate review that I am currently undertaking.

7. Delivery of finance modernisation cannot be seen as the responsibility of Treasury and Exchequer alone. It requires the commitment of and action by other departments, for example to:

• develop and finalise the core strategies, such as the Estates Strategy and People Strategy, that underpin corporate and financial planning; and
• strengthen people management, so that staff appraisals are consistently undertaken, skills development requirements consistently captured and a relevant training programme developed. These measures will, in time, help to reduce reliance on interim staff and contractors and the associated risks.

8. In this report I have made specific recommendations in relation to each of the four areas covered bymy previous six reviews. These recommendations replace all my earlier recommendations in those reports. Subsequent follow-up in these areas should be undertaken against the recommendations contained in this report.
9. The delivery of the recommendations in this report require collective action to:

• embrace ongoing cultural change so that individual and collective performance management and risk management are an integral part of the way of working; and
• ensure that a culture of good governance is seen as the bedrock on which successful change is built and embedded.

APPENDIX 1: Summary of Recommendations

Financial Management

R1 Develop and implement the changes to accountability arrangements that are necessary in

order to secure effective accountability whilst preserving constitutional independence of certain bodies, including the States of Jersey Police.

R2 Undertake a comprehensive, structured post-implementation review of the Finance

Business Partner model, with input from user departments, to ensure that the full benefits of the new model are secured.

R3 Ensure that standard objectives for financial management are set for all staff with financial

management responsibilities at each grade.

R4 Monitor the completion of staff appraisals and take prompt corrective action where

necessary.

R5 Prioritise a review of financial management training for non-financial managers.

R6 Ensure that, as part of the new corporate arrangements for monitoring the implementation

of recommendations, arrangements are put in place to facilitate reporting back to relevant Scrutiny Panels on progress in implementing recommendations that they have made.

R7 Enhance the arrangements for the scrutiny of existing expenditure, including:

• development of a programme of zero-based budget reviews; and
• ensuring that savings are identified in sufficient time that no unidentified savings are included in the Government Plan when lodged.

R8 Establish clear plans for completing the People Strategy and Estates Strategy in sufficient

time for them to be taken into account when developing the next Government Plan.

R9 Annually report on compliance with the resourcing principles.

R10 Following adoption of the Government Plan, ensure that the proposed formal review of the

preparation of and engagement around the Plan is comprehensive and completed in sufficient time to inform the next Government Plan.

R11 Reconsider the scope for budgeting for impairments.

R12 Prepare, adopt and monitor implementation of a plan to improve the quality of reporting of

non-financial information both externally and internally.

R13  Ensure that there is:

• widespread engagement on and effective challenge of the proposals for an integrated technology solution; and
• effective project management of its implementation

so that the full benefits of a significant investment are secured and risks in implementation minimised.

R14 Adopt States-wide standards for obtaining assurance on the integrity of key spreadsheets

used for accountability and decision making.

Financial Directions

R15 Develop and implement an overarching framework for establishing, communicating and

monitoring compliance with corporate standards in areas other than finance.

R16 Establish robust arrangements for consultation with users, including those in Non-

Ministerial Departments, on finance modernisation setting out a framework to determine:

• when consultation will take place;
• with whom it will take place;
• how it will take place; and
• how user views will be considered.

R17 Ensure that agreed management action detailed in this report is taken before finalising the

PFM.

R18 Ensure that the internet facilitates effective updating, navigation, searching and

cross-referencing before using it as the platform for the PFM.

R19  Ensure that robust training and communication plans are developed in good time for all

major finance modernisation initiatives that require engagement with users outside Treasury and Exchequer.

R20 Ensure that business cases are prepared for all exemptions to the mandatory

requirements of the PFM and, in summarised form, routinely reported to the Risk and Audit Committee.

R21 Ensure that a formal annual review of the PFM is undertaken, drawing widely on the views

of service departments and other central functions interacting with Treasury and Exchequer.

Risk Management

R22 Establish a clear timetable for finalisation of key governance documents for risk

management and monitor delivery against it.

R23 Prioritise recruitment of suitably skilled and experienced members of the Risk and Audit

Committee so that it can return to quoracy as a matter of urgency.

R24 Develop, adopt and monitor implementation of a formal plan for finalising the Risk

Management Strategy, Code and associated Guidance.

R25 Finalise risk escalation arrangements for Non-Ministerial Departments.

R26 Develop, adopt and monitor implementation of mechanisms to capture and share

experience of departmental training initiatives across the States.

R27 Develop, adopt and monitor implementation of structured arrangements for peer review of

departmental risk registers.

R28 In implementing revised arrangements for risk management, focus on steps to secure

cultural change within the States' workforce to embrace risk management as an integral tool of management, including capturing and sharing of learning.

Internal Audit

R29 Review and update the job descriptions for key officers, including the Chief Executive,

Treasurer of the States, Director of Risk and Audit and Chief Internal Auditor to ensure that they adequately support the operational independence of the Chief Internal Auditor.

Management of the finance modernisation initiatives

R30 Periodically review internal capacity and capability within Treasury and Exchequer to

sustain the delivery of key corporate activities.

R31 Implement consistent and clear arrangements for the planning, management, resourcing

and governance of all elements of finance modernisation.

R32 Establish arrangement to report transparently, consistently and on a timely basis on

finance modernisation initiatives.

R33 In implementing the other recommendations in this report and in implementing finance

modernisation, carefully consider the need to adapt the approach for Non-Ministerial Departments, including in relation to the support provided.

KAREN McCONNELL COMPTROLLER and AUDITOR GENERAL

JERSEY AUDIT OFFICE, DE CARTERET HOUSE, 7 CASTLE STREET, ST HELIER, JERSEY JE2 3BT T: 00 44 1534 716800   E: enquiries@jerseyauditoffice.je  W: www.jerseyauditoffice.je