Report - PAC Report on Financial Management - 17 February 2020

Recurring Themes: Financial Management

Public Accounts Committee (PAC)

17 February 2020 P.A.C.1/2020

Contents

Section 1 - Public Accounts Committee Membership ....................................................... 3 Section 2 - Chair's Foreword ............................................................................................... 4 Section 3 - Key Findings and Recommendations .............................................................. 6 Section 4 - Terms of Reference and Background .............................................................. 9 Terms of Reference for Review of Recurring Themes ................................................ 9

Terms of Reference for Review of Financial Management ....................................... 10 Section 5 - Introduction ...................................................................................................... 10 Section 6 - Implementation of Financial Management Restructuring ............................ 13 Quarterly Hearing with the Chief Executive – 23 September 2019 ........................... 13 Project and Programme Management ...................................................................... 13

Five Case Model ....................................................................................................... 14 External Consultants – Costs and Benefits ............................................................... 15 Organisational Learning ............................................................................................ 16

Zero-Based Budgeting .............................................................................................. 17 Efficiencies ................................................................................................................ 18

Public Finances (Jersey) Law 2019 .......................................................................... 18 IT ............................................................................................................................... 19

Risks ......................................................................................................................... 20 Modular Approach to Projects ................................................................................... 21

Faster Closing of Accounts ....................................................................................... 22 Accountability of Accountable Officers ...................................................................... 23 Section 7 - Conclusion and Next Steps ............................................................................ 25 Appendix A .......................................................................................................................... 26

Section 1 - Public Accounts Committee Membership

Senator Sarah Ferguson, Chair PAC   Connétable John Le Bailly, Vice-Chair PAC

Deputy Inna Gardiner   Deputy Rowland Huelin

Non-States Members (independently appointed): Mr Adrian Lane

Mr Tim Rogers

Ms Moz Scott

Section 2 - Chair's Foreword

The Public Accounts Committee highlighted the need to improve Financial Management within the  States,  following  on  from  the  Review  of  Financial Management undertaken  by the Comptroller and Auditor General (C&AG) in April 2015. Since then, it has figured high on the list of legacy issues to be dealt with by the Treasury. It is therefore heartening to note in the latest C&AG's Financial Management and Internal Control Report (September 2019), that she is pleased with the improvements in Financial Management made by the Executive, following her recommendations. However, the scale of change being attempted within the Finance Function is unprecedented.

Although  the  PAC  welcomed  proposals  for  improvement  and  restructuring  of  financial management, as set out in the plans and Target Operating Model (TOM) proposed by the Chief Executive, the PAC wanted to understand how the TOM translates into action to bring about the necessary improvements and overcome barriers to implementation. It also wanted to ascertain what the Chief Executive and senior officers have achieved so far – and how that is objectively measured.

The PAC has held quarterly hearings with the Chief Executive and other senior management team members. This report is based in the main on two quarterly hearings and private briefings by the Treasurer and the Chief Executive in the latter half of 2019. It recognises that the implementation of the financial management restructuring is only just underway, with the Public Finances Manual underpinning the Public Finances (Jersey) Law 2019 coming into force on 1 January 2020. Furthermore, the Government Plan has only recently been approved by the States Assembly, however the PAC is cognisant of the need to keep the public informed of its ongoing scrutiny and its findings.

Although many new improvements have been made, the previous Comptroller and Auditor General pointed out that key constitutional legislation comprising, amongst others, the Public Finances (Jersey) Law 2019, Employment of States of Jersey Employees Law 2005 and the States of Jersey Law 2005, need to be reviewed and amended as appropriate to ensure clear, consistent comprehensive and unambiguous accountabilities and that they work seamlessly together.

The Public Accounts Committee intends to include a review in its work programme for 2020.

Senator Sarah Ferguson

Chair, Public Accounts Committee

Section 3 - Key Findings and Recommendations

FINDING 1

The scale of change being attempted within the Finance Function is unprecedented. Whilst significant progress has been made, there is an opportunity to improve the formality of programme management to ensure that outcomes are delivered as expected and on time.

RECOMMENDATION 1

The Chief Executive should ensure the programme office is fully established within the Chief Operating Office and following best practice programme management disciplines.

RECOMMENDATION 2

The Treasurer should create clarity about the interim and end-states for the Finance Function, how and when progress will be measured.

RECOMMENDATION 3

The Chief Executive should ensure that programme reporting adopted by the Chief Operating Office (COO) has a full picture of the costs associated with delivery and that cost/benefit tracking is robust.

FINDING 2

The use of external resources to supplement the skills, experience and level of resources directly employed by the Government is a sensible approach.

RECOMMENDATION 4

The Treasurer and Chief Executive should establish clear parameters for the circumstances in which external resources will be acquired and the preferred sources for this, and establish clear targets for the long-term level of external resources brought in.

FINDING 3

The cultural change required to deliver the transformation and modernisation programme that aims to deliver accessible, digital information for staff and public across the finance function, is substantial, both within Treasury & Exchequer and more widely with budget holders.

RECOMMENDATION 5

The Chief Executive and Treasurer should establish standards for financial management for all budget holders and follow up on compliance with these as part of formal appraisals.

FINDING 4

The lack of zero-basing of departmental budgets, combined with historic defensiveness by embedded finance teams and poor controls across Government, undermines the confidence that money is being spent efficiently and effectively.

RECOMMENDATION 6

The Treasurer should accelerate consideration of zero-based budget reviews, based on materiality and feed the results of the reviews into the Government Plan process.

FINDING 5

The PAC recognises the Executive's desire to continuously improve the process of planning savings and its wish to do this by reference to the removal of waste and duplication rather than a broad brush percentage cut. Effective identification of waste has a significant overlap with the proposed approach to zero-based budgeting.

FINDING 6

The PAC welcomes the recognition of workforce demography and the intent to plan for this over the medium term. It encourages linking this thinking about replacement of the workforce and training, with the thinking about where external resources will be required in the medium term, in a consolidated People/Resource plan for the Government.

FINDING 7

The Committee finds that the move to a principles-based approach in the Public Finances Manual (PFM), combined with a programme of cultural alignment appears sensible.

RECOMMENDATION 7

The Treasurer should ensure that requests for exemptions or waivers against the new PFM are escalated to the appropriate level and visibility is given to the Executive as to the volume and value of such exemptions and waivers being approved.

FINDING 8

The PAC remains concerned at the level of manual intervention required for everyday financial transactions and associated inefficiency and control weaknesses. It is supportive of the need to invest substantial sums of public money in modernisation of the systems and controls, to drive efficiency and reduce the risk of loss. The approach to managing this on a modular basis appears sensible, given failures in large scale implementation in the past and the rapidly developing technological capabilities of system vendors.

RECOMMENDATION 8

Government should be transparent about the total investment which it is believed will be required for financial transformation and the replacement of the outdated systems, and the medium term impact on public expenditure to finance this beyond the current Government Plan period. The benefits of this spend should be considered in the broadest sense and made clear as part of the business case.

FINDING 9

The Committee is unclear what justification there is for urging an earlier close of the 2019 States Accounts.

RECOMMENDATION 9

Given the findings of the PwC Report to Those Charged with Governance on the 2018 Accounts', the Treasurer and the Chief Executive should set out a detailed justification in relation to faster closing of the year end accounts.

FINDING 10

There is a statutory obligation on each of the Directors General and the associated Accounting Officers (AOs), to provide the Chief Executive with a full report, which shows that they have discharged their responsibilities, as outlined in the accounting officer letter that is issued at the beginning of the year. This exchange of letters, together with the supporting processes and linking of this to the newly-implemented performance management process is welcomed.

RECOMMENDATION 10

The Chief Executive should ensure that sufficient independent scrutiny is performed of the supporting evidence for accountability letters, even if this is conducted in private, and that the overall position following this exercise is made public

Section 4 - Terms of Reference and Background

1. The Chief Executive and the Treasurer have pledged to work together to ensure that there is a restructure of finance departments within Treasury and individual Ministerial departments, so that highly trained and skilled staff undertake more strategy work and fewer transactional processes. The recent introduction of the Public Finances (Jersey) Law 2019[1], which will work in conjunction with a published and live' online Public Finances Manual (PFM) are welcomed as major steps towards the finance function transformation. The PAC has held public hearings with senior officers and received documentation and private briefings regarding progress. This report will present the progress made and the steps to be taken.

Terms of Reference for Review of Financial Management

2. The review will establish and report to the States on –

1. which, if any, of the C&AG's recommendations relating to financial management have not been accepted in full and the reason/s for non or partial acceptance;
2. the action plans produced by relevant parties in response to the C&AG's and PAC recommendations in reports between 2015 and 2019;
3. progress on the implementation of recommendations against action plans/TOM;
4. what was preventing States departments from implementing necessary changes, or establishing a clear timetable and milestones against which to measure progress; and
5. implications and conclusions arising from the above.

Section 5 - Introduction

1. The Public Accounts Committee has undertaken scrutiny of the progress made by the Executive in implementing improvements to financial management. Wide-ranging legislation has been introduced, including the Public Finances (Jersey) Law 2019[2], which will work in conjunction with a published and live' online Public Finances Manual

(PFM). This replaces Financial Directions  (FDs) which the PAC considered were insufficiently principles-based. The Public Finances (Jersey) Law 2019 imposes duties on the Principal Accountable Officer (for the Government of Jersey) and Accountable

Officers (for Non-Ministerial Departments) for securing propriety, regularity, economy, efficiency and effectiveness in the use of resources.

2. The Chief Executive and the Treasurer have pledged to work together to ensure that there is a restructure of finance departments, both individual and corporate. Although the PAC welcomed proposals for improvement and restructuring of financial management, as set out in the plans and Target Operating Model (TOM) proposed by the Chief Executive, the PAC wanted to understand how the TOM translates into action to bring about the necessary improvements and overcome barriers to implementation. It also wanted to ascertain what the Chief Executive and senior officers have achieved so far – and how that is objectively measured.
3. The PAC has held quarterly hearings with the Chief Executive and other senior management team members. This report is based in the main on two quarterly hearings and private briefings by the Treasurer and the Chief Executive. It recognises that the comments below are based on a limited evidence base, and that the implementation of the financial management restructuring is only just underway, however it has attempted to give appropriate weight to the evidence before it. It is also cognisant of the need to keep the public informed of its findings.
4. As early as March 2018[3], the Chief Executive of the Government of Jersey had identified 45 recommendations related to Financial Management, and subsequently advised of the Government's priorities:

• Enhance the contribution of finance staff through shift to strategic decision support;

• Faster reporting (of States Annual Accounts);

• Strengthen linkages between finances and performance objectives; and

• Undertake zero-based budgeting in many areas.

5. The PAC noted a snapshot of the progress made on the Comptroller and Auditor General's (C&AG) recommendations in relation to Financial Management and requested examples of ongoing work in relation to the following:

C&AG - Review of Financial Management[4] (2015):

• Recommendation 10 - Develop a plan for enhancing the contribution of financial professionals across the organisation, focussing on strategic level input and support for non-financial managers, including moving line management of all finance staff to Treasury and Resources;

• Recommendation 19 - Over the cycle of the new Medium Term Financial Plan[5] (MTFP), undertake a comprehensive programme of zero-based budget reviews;

• C&AG - Review of Financial Management (2016)[6];

• Recommendation 11 - Reduce the time period for reporting performance against budget at both departmental and corporate level;

• C&AG - Private Patient Income: Health and Social Services Department - Follow- up[7] (2017); and

• Recommendation 7 - Establish and regularly report financial KPIs which clearly demonstrate the link between current performance and business objectives in a way which enables at a glance' understanding of the position.

6. At the 23 September 2019 public hearing, the Chief Executive reassured the PAC that he had taken the recommendations seriously and presented a table showing a sample of the ongoing work, below[8]:

7. Following that hearing, the PAC was presented with samples of the live' tracker' database,  which  is  maintained  by  the  Chief  of  Staff  and  others  in  the  Senior Management Team, and charts the progress made in implementing recommendations made by the PAC and C&AG.[9] A snapshot of the tracker is reproduced overleaf.

8. The PAC was pleased to be reassured by the Chief of Staff (at a later public hearing), that, in respect of financial management, all of the C&AG and PAC reports went to the Executive Management Team (EMT) and the CSB (Corporate Strategy Board). She added:

"The learning from not just the recommendations but the reports, also go to the Council  of  Ministers,  where  I  present  the  C&AG's  recommendations  and  the responsible officer then discusses with C.O.M. (Council of Ministers) what they are going to do."[10]

Section 6 - Implementation of Financial Management Restructuring

Quarterly Hearing with Chief Executive 23 September 2019

1. On 23 September 2019, the PAC conducted a public hearing[11] to follow-up on Financial Management changes by the Government. It heard evidence from the Chief Executive of the Government of Jersey, the Treasurer of the States, the Director of Risk and Audit and the Head of Financial Governance. The C&AG had recently published her follow-up report on  Financial Management and Internal Control[12]  to which the PAC made reference. The C&AG identified significant progress in financial management, which the PAC was pleased to note, but had also reported on a number of areas where improvements are yet to be fully embedded or are outstanding. The PAC received an Executive Response to the C&AG's Report on 31 October 2019, accepting all recommendations, reproduced in full at Appendix A of this report.
2. The PAC concurred with the C&AG that there were a number of strands to the changes being made within financial management across the States departments, which could be quite confusing. The PAC asked the Treasurer to define them clearly and simply. The Treasurer advised that it was "the most significant period of sustained and large-scale change I have seen in 20 years". The PAC also acknowledged that scrutiny of policy relating to Financial Management was taking place by the Corporate Services Scrutiny Panel (CSSP)[13] which included, amongst other things:

1. To consider, in the light of the 2016-2019 MTFP[14] and Transition Report[15], how the treatment of contingencies/reserves, or any other areas of non-routine proposals have evolved in respect of the Government Plan 2020;
2. To identify the variances from budget of the MTFP 2016-2019/Transition Report, and any lessons learnt and to consider any effect upon the Government Plan 2020.[16]

The PAC has not pursued these ongoing policy matters in this report and has instead concentrated on the progress made by the Executive in implementing improvements to financial management.

3. When asked what the principal achievements in financial management had been to date, the Chief Executive referred to a series of significant changes in the Machinery of Government (Miscellaneous Amendments) (Jersey) Law 2018, accounting responsibility, establishment of enterprise risk management system, change to financial processes, introduction of business partnering, a faster close (of accounts), and the centralisation of the finance function.[17]

Project and Programme Management

4. The PAC wanted to understand how the Executive would use programme management to ensure delivery of the Finance Transformation Project. The Treasurer confirmed that the Finance Transformation Project had been fully incorporated within the Treasury and Exchequer Department and that the newly formed senior leadership team would have a single  view  going  forward  in  terms  of  monitoring  progress  with  regards  to transformation', which in his view should provide better co-ordination and successful delivery.[18]

5. When asked how he could ensure value for money for the Finance Transformation Project, the Treasurer told the PAC that there were a range of ways in which the department resourced the transformation projects:

"  using  local  base  but  in  particular  internal  resources  wherever  possible,  but supplementing that with external support. The plan overall is to use external support and consultants  where  we  do  not  have  the  capability  or  we  do  not  have  the  recent experience. Or, bluntly in some cases, where we do not have the capacity."[19]

5 Case Model

6. The Treasurer said value for money could be assured by following up the initial review of the National Audit Office (NAO) Financial Maturity Model[20] with a further assessment after the replacement for the finance system and the Chief Executive added that all projects would be subject to the normal challenge, i.e. the "5 case model".[21] The PAC recalled that this model is an approach recommended by HM Treasury, amongst others, for developing business cases and comprises five key dimensions: strategic, economic, commercial, financial and management. The purpose of each of the five cases is to address specific questions and provide evidence to satisfy the approver or funder.

FINDING 1

The  scale  of  change  being  attempted  within  the  Finance  Function  is unprecedented. Whilst  significant  progress  has  been  made,  there  is  an opportunity to improve the formality of programme management to ensure that outcomes are delivered as expected, on time.

RECOMMENDATION 1

The Chief Executive should ensure the programme office is fully established within the Chief Operating Office (COO) and following best practice programme management disciplines.

7. The PAC followed up its enquiry into improved arrangements for business cases at the public hearing of 9 December 2019,[22] with the Chief Executive and Treasurer of the States. The Treasurer explained that training had been undertaken across the Treasury and Exchequer in respect of the 5-case model and a team had been established within the department to specifically look at business cases and investment appraisal. He told the PAC this would provide a centre of excellence and an element of training for finance business partners and others who are preparing business cases. He added that the benefit of this and additional scrutiny of investment appraisals would be:

" more challenge going into the process that we have in awarding funding, also going through in terms of those business cases that pass muster in order to go into a Government Plan, but also on the other side of that, you have people articulating and challenging themselves as to why funding is necessary or why they are delivering a project.". [23]

8. The PAC was pleased to see the progress on making better business cases for funding projects  and  programmes  but  wants  to  ensure  that  there  are  clear,  measurable outcomes for the delivery of a better Finance function such as Key Performance Indicators (KPIs) and a comprehensive performance management framework in place. The Director General for Strategic Policy, Performance and Population (SPPP) in the public hearing of 9 December 2019, assured the PAC that tangible progress on KPIs and the measurement framework throughout departments would be seen by the first quarter of 2020.[24] The PAC will want to see evidence of what outcomes the Executive are targeting, and the levels achieved. It recommends that the Executive clarify how and when progress will be measured, and will be monitoring this closely.

RECOMMENDATION 2

The Treasurer should clarify interim and end-states for the Finance Function, and how and when progress will be measured.

RECOMMENDATION 3

The Chief Executive should ensure programme reporting adopted by the COO has a full picture of the costs associated with delivery and that cost/benefit tracking is robust.

External consultants - costs and benefits

9. At the earlier public hearing of 23 September 2019, the Treasurer advised that, to September 2019, external costs[25], were approximately £200,000 on financial maturity work, £600,000 on preparation of the new Public Finances (Jersey) Law, and £700,000 on restructuring departments. He admitted, though, that it was more difficult to assess internal' department costs of the departmental restructure.[26] The PAC queried the reliance on external consultants and interim managers to ensure delivery but the Treasurer commented that there were a range of ways in which transformation projects were resourced, using, "internal resources wherever possible, but supplementing that with external support". He added that the department was "weaning ourselves gradually from reliance on our partners".[27] However, he advised that there was no intention to completely remove external challenge and input, as it brings a valuable perspective to the workforce.

FINDING 2

The use of external resource to supplement the skills, experience and level of resource directly employed by the Government is a sensible approach.

RECOMMENDATION 4

The Treasurer and Chief Executive should establish clear parameters for the circumstances in which external resource will be acquired and the preferred

sources for this, and establish clear targets for the long-term level of external resources brought in.

Organisational learning

10. In its previous reports, the PAC identified a lack of organisational learning; to which silo working contributed throughout Government departments. The Committee was keen to learn how corporate learning in respect of the changes to financial management would be applied across the wider organisation. It asked the Chief Executive and the Treasurer, at its meeting of 23 September 2019, how well the Directors-General were equipped to deal with financial matters as non-finance managers. The Treasurer advised that the restructuring of the department included matching the (transactional) skills of the current staff with the (strategic) skills needed to run the future finance function.[28] Having commented on the coaching programme which commenced in 2018, he advised that the key priority of 2020 would be to develop the capability and training strategy "from a finance perspective", but also to train non-financial managers. However he did accept that:

"The organisation is still too reliant upon the people in my team to do the job of a budget holder" [29]

11. The Chief Executive assured the Committee that ownership for delivery of these ambitious financial programmes would be embedded outside of the Treasury and Exchequer, by way of the Team Jersey programme, the use of bitesize modules' around accountability and a strong performance management framework for an appraisal system. He told the PAC that there were now very clear accountabilities and financial management responsibilities at senior management level, but also for budget holder level, and this would become embedded' in 2020.
12. The PAC considered that there have been substantial improvements in the flexibility of Government financial planning and its integration across multiple departments. At its follow up public hearing of 9 December 2019, the PAC noted that there is further work to do to build out the supporting frameworks, including the linkage of critical output Key Performance Indicators (KPIs) to the financial inputs required. The PAC was keen to understand how departments were engaging with the process and the Director General (SPPP), told the Committee:

"We have developed an approach that should deliver us both a national performance management framework, so how is Jersey doingand also one that articulates how the public sector contributes to how the Island is doing across the organisation What you will see in January is the upper layer of the performance framework, so what you will see is the outcomes layer, the top layer, and the top layer is benchmarkable because it is aligned with the O.E.C.D. (Organisation for Economic Co-operation and Development) Better Life Index, which you can look at to see how Jersey is doing"[30]

13. The PAC agrees with the Treasurer, that the cultural shift' had been enhanced by the single finance function, and concluded that budgets should be set more efficiently, across the States departments, with a more corporate view. It considered that all budget holders should be competent in financial management, and that this could be achieved

by establishing a set of standards for financial management as an integral part of the performance framework. The budget holder's appraisals would include a review of compliance with those standards.

FINDING 3

The cultural change required to deliver the transformation and modernisation programme that aims to deliver accessible, digital information for staff and public across the finance function, is substantial, both within Treasury & Exchequer and more widely with budget holders.

RECOMMENDATION 5

The  Executive  and  Treasurer  should  establish  standards  for  financial management for all budget holders and follow up on compliance with these as part of formal appraisals.

Zero based budgeting

14. The PAC noted that little progress has been made by the Executive on developing targeted zero-based budgeting' (ZBB) (a method of budgeting in which all expenses must be justified and approved for each new financial period, analysing needs and costs of each function within the organisation and allocating funds accordingly, regardless of how much money has previously been budgeted for it). At its public hearing of 23 September 2019, the PAC asked the Chief Executive what measures would be put in place to improve internal scrutiny of expenditure and implement zero-based budgeting. The Treasurer advised that the changes to the structure of the organisation required the Accountable Officers (AOs) who report into the Principal Accountable Officer (PAO), to "justify existing spend and the economy efficiency and effectiveness of that spend", and that the single finance function and the introduction of other cross-department cutting would allow for further efficiencies. He agreed that:  

"zero-based budgeting will provide the opportunity and a set of tools which hopefully everyone will understand and, therefore, everyone will hopefully trust by which we could deliver or assess current efficiency through benchmarking and such like, and deliver further efficiencies "[31]

15. The PAC wanted to know how he proposed to effect the cultural change that would make government  departments  more  willing  to  be  challenged  externally  with  respect  to spending and the Treasurer agreed that establishing a zero-based budgeting team' should be progressed by the end of 2019:

"we need to have made progress by the end of the year in starting up the initial team for zero-based budgeting I would like that to be a combination of internal and external resources, and it will, but it will require external resource to start up the modelbut also to start those initial reviews as we look to pass the skillset to our home-grown talent"

FINDING 4

the  lack  of  zero-basing  of  departmental  budgets,  combined  with  historic defensiveness  by  embedded  finance  teams  and  poor  controls  across Government, undermines the confidence that money is being spent efficiently and effectively.

RECOMMENDATION 6

The Treasurer should accelerate consideration of zero-based budget reviews, based on materiality and feed the results of the reviews into the Government Plan process.

Efficiencies

16. The PAC wanted to know how the Chief Executive and Treasurer were planning to complete the identification of efficiencies stated in the Government Plan.
17. The Treasurer stated that the set of efficiencies would be ongoing rather than a one- off', although investment in IT would contribute significantly. He added that other opportunities in the meantime included zero-based budgeting and looking at savings in 2021 and 2022.[32] The Chief Executive agreed that although there would be an initial investment needed in the finance transformation programme such as interim support and IT systems, this would be gradually recovered by improved working. He told the Committee:

"we are looking at the areas where we have got duplication, looking at where we have built cost into our systems and activity which could be stripped out without harming frontline services or making people redundant our demographics in the workforce mean we have quite an ageing workforce in the public services." [33]

FINDING 5

The PAC recognises the Executive's desire to continuously improve the process of planning savings and its wish to do this by reference to the removal of waste and duplication rather than a broad brush percentage cut. Effective identification of waste has a significant overlap with the proposed approach to zero-based budgeting.

FINDING 6

The PAC welcomes the recognition of workforce demography and the intent to plan for this over the medium term. It encourages linking this thinking about replacement of the workforce and training, with the thinking about where external resources will be required in the medium term, in a consolidated People/Resource plan for the Government.

Public Finances (Jersey) Law 2019

18. The PAC wanted to understand the process for developing the Public Finances Law and accompanying Public Finance Manual (PFM), and more importantly, what could be learned from errors made. It pressed the Treasurer on what had been learnt in the process and he accepted that that there had been, with KPMG external support, blurred' roles between "those who were leading the project and project management". He told the PAC at the public hearing in September 2019 that he would have liked more time to develop the programme and would adopt a more structured approach going forward but, notwithstanding that, an entire reorganisation for finance had often led to people having competing pressures:

"But those who led it were the right people, with expertise [built up] over a period of time [and] experience of the organisation"[34]

19. The C&AG and PAC have welcomed the new Law and the supporting Public Finance Manual (PFM), which is now available online and replaced the often cumbersome Financial Directions on 1 January 2020. The Treasurer had commented at the public hearing of 23 September 2019 that the old financial directions were so prescriptive and detailed that exemptions were the rule. The expectation with fewer hard rules was that requests for exemptions become genuinely exceptional' The PAC recalled that the Public Finances Law prescribes the mandatory elements that must be complied with by all States Bodies to:

• implement and maintain appropriate financial management practices; and

• achieve a consistent standard of accountability and financial reporting.

20. The Public Finance Manual (PFM) represents an integral part of the Jersey Financial Compliance  Framework,  which  in  turn  provides  assurance  that  departments  have implemented appropriate systems to ensure compliance with the Public Finances Law and  that  they  have  done  so  through  effective,  efficient  and  responsible  financial management of public resources.[35]
21. The PAC was satisfied that the online PFM would be founded on sound principles of financial management rather than the voluminous and rigid Financial Directions. This, coupled with the strong performance management framework for an appraisal system, clear accountabilities and financial management responsibilities at senior management level should ensure a stronger financial management culture. However, the PAC agrees with the C&AG that cultural change takes time and the changes are yet to be firmly embedded.[36] Accordingly it will chart progress on the implementation of these initiatives throughout 2020.  

FINDING 7

The Committee is pleased with the move to a principles-based approach in the Public Finances Manual, combined with steps to reinforce a culture of collective responsibility for corporate financial management.

RECOMMENDATION 7

The Treasurer should ensure that requests for exemptions or waivers against the new PFM are escalated to the appropriate level and visibility is given to the Executive as to the volume and value of such exemptions and waivers being approved.

IT

22. The C&AG has identified[37] limited progress with the development of a new accounting system for the States and reliance on non-system controls such as end-user computing. The Committee asked what progress has been made with the business case for rationalising the data run from separate systems to the accounting ledgers. The Chief Executive agreed, at the 23 September public hearing that:

"The manual transfer of data is quite significant and was pointed out in the due diligence report by the number of adjustments that have to be made. In the normal course of events, those would be a minimum. We have numbers that far exceed anything that you would see in other places because the systems do not talk to each other."[38]

23. The PAC noted at the September 2019 public hearing that there had been extensive work in looking at how the IT systems might be replaced. The PAC agrees that the need to replace the outdated IT systems to provide better financial processes is overdue but it is aware it will be a large, multi stranded undertaking. It wanted to understand how the Executive planned to keep such a large programme on target. The Treasurer of the States stated:  

" we might use someone else's system and run our finances off that Or we have our own systems developed, whether it be a complete system or 'a best of breeds.' We will look at the components that will speak to each other but choose the best that suit for the management of people compared to the module for running finance."

24. At the public hearing of 23 September 2019, the Treasurer advised that the requests were in the Government Plan[39] for the capital cost and initial revenue costs arising. He anticipated a 20% saving in the finance team, which equated to circa £2 million per year, plus "some cashable savings in IT, the same sort of level"  [40] The Chief Executive advised, however, that significant investment was needed:

"the original assessment – (we need) to bring the States up to where it should be (probably) four times the amount [requested] for the organisation to deliver on time and for us to be able to afford in this Government Plan period. Such is the paucity of our IT infrastructure, we have a real, real long-term requirement to look at significant investment going forward"[41]

25. When pressed on how long-term the investment might be, he told the Committee:

" the long-term investment is probably required over a 10-, 15-year period[technology] is going to change so dramatically that one of the reasons why we have taken a prudent approach is to let us see where we go"

He emphasised:

"It is absolutely critical that this programme keeps to time without the transformation in our IT we are limited to the extent we can improve financial management", and as well as having data in one place, the improved systems would:

" allow us to rid ourselves of our over-reliance on spreadsheets being able to look at the data directly rather than having to hope that the last guy who was working on [it] put the right number in the table to ensure that the forecast was right I cannot over- exaggerate the extent to which there is manual intervention every time someone asks us a question"[42]

Risks

26. The PAC wanted to understand the level of risk if IT systems were not replaced. At the September 2019 quarterly hearing with the Chief Executive and the Treasurer, the Treasurer reiterated the potential to reduce fraud and error; improve the control environment and improve cyber security. The Committee also noted in R.91/2019, the report on further information on additional revenue expenditure and capital and major projects expenditure in the Government Plan, that if the expenditure on integrated IT delivery was not forthcoming, the following risks had been identified[43].

• Any new departmental initiatives requiring central IT support would not be initiated

• New and ongoing change would not be controlled under a central governance framework and an appropriate evidence base for decision making would not be available to the Ministers or Executives

• The risks identified from poor delivery of previous programmes would not be mitigated, as recommended by the C&AG

• Some departmental IT programmes that did not impact central IT would be allowed to continue but would be uncoordinated and would have limited support once embedded

• Interim cyber security improvements would not be progressed – again, not mitigating the number one GoJ Corporate risk

• (Finance) transformation activities would halt.

27. The Committee noted that the Treasurer and the Chief Executive could not provide at this stage an estimate of the operational costs or risk of loss arising from fraud and error. It concluded that it would like to understand the extent of losses which Government believes is suffered – either directly through fraud, or indirectly through lost revenue or wasted rework – as a result of the system deficiencies that exist.

Modular approach to projects

28. Having noted that mistakes had previously been made in terms of project management, the PAC was reassured to note that R.91/2019[44] demonstrated the Executive's modular approach', whereby projects would be advanced on an individual level rather than an expensive one-size fits all' approach which could cost millions of pounds and yet be redundant or out of date by the time the IT systems overhaul project was completed. The PAC noted the description of the projects within R.91, such as Delivering Effective Financial Management', to ensure that effective financial planning is integrated with strategic and corporate planning at all levels.[45] It also noted Modernisation and Digital'– enhanced capabilities projects which cover the following main areas:

• Cyber security - addresses the prevention, monitoring detection of the cyber threat in the operational space and the project delivery environment.

• Records Management - ensures that the Government of Jersey is compliant with Record Management Requirements.

• Data Management - covers two main aspects. It ensures legal compliance and protection of data and it also looks to ensure data flows better across government to create a more seamless, end to end customer service.[46]

29. The PAC is supportive of the strategy to monitor financial and non-financial performance together to drive efficiency and effectiveness. It also accepted that, whilst a separate business case to replace the outdated financial systems is produced, better financial management across the organisation should support the wider drive for efficiency, as well as reducing financial risks and generally improving decision making. The PAC will continue to hold the Executive to account on this approach and seek reassurance that the individual and total investment required will be advised in a transparent way.

FINDING 8

The PAC remains concerned at the level of manual intervention required for everyday  financial  transactions  and  associated  inefficiency  and  control weaknesses. It is supportive of the need to invest substantial sums of public money in modernisation of the systems and controls, to drive efficiency and reduce the risk of loss. The approach to managing this on a modular basis appears sensible, given failures in large scale implementation in the past and the rapidly developing technological capabilities of system vendors.

RECOMMENDATION 8

Government should be transparent about the total investment which it is believed will be required and the medium-term impact on public expenditure to finance this beyond the current government plan period. The benefits of this spend should be considered in the broadest sense and made clear as part of the business case.

Faster Closing of Accounts

30. Given  that  the  Chief  Executive  cited  a  faster  close  (of  accounts)  as  a  principal achievement to date, the PAC was mindful of the extra costs incurred by PWC, the external auditors appointed by the C&AG, at the close of the 2018 States accounts.[47] It wanted to explore whether potential additional costs and associated risks (such as an impact on audit quality of a faster year-end close, or the change of the States auditors from  PWC  to  Deloitte  for  the  2019  accounts),  had  been  fully  considered  by  the Executive.[48] It recalled that the legal deadline for the signing off of the year-end accounts was by May the following year, however PWC had been encouraged by the Government to issue their opinion on the 2018 accounts by the end of March 2019 (they were signed off in April 2019) and the Chief Executive wanted the new auditors, Deloittes, to work to a similar timetable.
31. The PAC held separate private briefings with PWC, Deloitte and the Risk and Audit Committee Chair, and was satisfied that the risks were under consideration. The PAC noted that throughout the 2018 Faster Close project, a Finance team created and managed a register of detailed operational risks, which was presented to the Risk and Audit Committee (RAC) Chair. However, it was also aware that PWC had issued a report to Those Charged with Governance on the 2018 accounts', which included the view that the States should not seek to advance the timetable further for the preparation of the 2019 accounts.[49] The PAC is keen to know if a response, either by the Risk and Audit Committee (RAC) or the Executive, had been issued[50] and will be following up on this with the Chief Executive in its quarterly hearing in March 2020.

32. The PAC emphasises that consideration should be given on whether the intangible benefits arising from an earlier close justify potential additional costs. Additional costs may arise from weaknesses in the arrangements for the preparation of the accounts and errors in the accounts submitted for the auditors' initial review. There are significant challenges  in  obtaining  sufficient,  appropriate  evidence  to  support  the  accounts, especially where the financial systems are labour-intensive and outdated.
33. The internal evaluation of accounting policies and critical judgemental items, together with the documentation of these items in a clear way that can be tested by the external auditors, are key tasks in the accounts cycle. Having heard from the external auditors, Deloitte at a private briefing in November 2019, it was reassured that Deloitte would not sacrifice the quality of accounts in favour of the speed of closure.

FINDING 9

The Committee is unclear what justification there is for urging an earlier close of the 2019 States Accounts.

RECOMMENDATION 9

Given the findings of the PwC Report to Those Charged with Governance on the 2018 Accounts' the Executive should set out a detailed justification in relation to faster closing of the year end accounts.

Accountability of Accountable Officers

34. The Chief Executive assured the Committee that each of the Accountable Officers would be held to account:

"Each of the Accountable Officers [have] certain assurances that they have to give me back as the PAO (Principal Accountable Officer). I want to understand what that looks like. They will have to produce the evidence of that and where and how and what that means going down through the organisation and there is a transparent process behind that which gives me assurance".[51]

35. At the public hearing of 9th December 2019, the Chief Executive reiterated to the Committee that there was a statutory obligation on each of the Director Generals and the associated Accountable Officers (AOs), to provide him with a full report, which shows that they have discharged their responsibilities, as outlined in the Accountable Officer letter that was issued at the beginning of the year. These were due to him by 20th December 2019:

"I then take that forward as part of my 1-1 (meetings), and in conjunction with the Treasurer, I talk through if we have any areas where we think that there are limitations or failings in discharging the legal responsibility and fiducial requirements that you would want for good public services. So sometimes that will vary from your legal position, i.e. what is good practice versus what is a de minimis[52] position and that forms part of their performance for the year."[53]

36. The PAC challenged the Chief Executive on the process as it was concerned with the independent verification of performance claims which might be made by an Accountable Officer, especially where the actions taken were not in the Treasurer's or the Chief Executive's realm of expertise. The Chief Executive responded:

"The Treasurer has different roles and responsibilities, as laid down by law, which require (him) to be satisfied outwith the PAO on finance and certain legal obligations around that. I have to confer. The Treasurer is independent of that process. That process needs the Treasurer to be able to feel comfortable and if there are any anomalies within that, then we have a route which is clearly laid down in law that we have to follow."[54]

37. Notwithstanding that the Internal Audit officers carry out an extensive review of the Governance Statements submitted by Accountable Officers[55], the PAC considers that a random  sample  of  the  evidence  provided  by  the  AOs  could  be  investigated  and subjected to independent[56] verification, thereby making the process transparent and assuring the public that procedures and responsibilities were understood by all.

FINDING 10

There  is  a  statutory  obligation  on  each  of  the  Directors  General  and  the associated Accounting Officers (AOs), to provide the Chief Executive with a full report, which shows that they have discharged their responsibilities, as outlined in the accounting officer letter that is issued at the beginning of the year. This exchange of letters, together with the supporting processes and linking of this to the newly-implemented performance management process is welcomed.

RECOMMENDATION 10

The  Chief  Executive  should  ensure  that  sufficient  independent  scrutiny  is performed of the supporting evidence for accountability letters, and that the verification process following this exercise is made public.

Section 7 - Conclusion and Next Steps

Conclusion

The PAC was pleased to see the progress that had already been made in many areas. Whilst it has identified a number of issues for potential improvement and noted that much work is still to be done, it is clear that the Government of Jersey has now taken on board the findings of the C&AG and is beginning to address them. The PAC is supportive of the need to invest in financial management but clear that investment decisions need to be properly driven through the business case process, with clearly articulated outcomes in advance; project-managed effectively during delivery; and, measured against the original agreed outcomes in order to ensure that it delivers the expected benefits for the people of Jersey.

Next Steps

The PAC will continue monitoring progress throughout 2020 and will hold quarterly hearings with the Chief Executive throughout the coming year, as well as public and private briefings with other Accountable Officers and senior members of the Treasury Team where appropriate.  

Appendix A

Chief Executive/Director General's Response:

Review title: C&AG Review: Financial Management and Internal Control - Executive Response to PAC by 1 November 2019

Summary of response

The Chief Executive Officer and Director General of Treasury and Exchequer welcome the C&AG's report. It is pleasing that the report recognises the positive change that is taking place. All recommendations for further improvement are accepted.

As well as achieving specific targets – such as the implementation of a new Public Finances Law, preparation of a new Public Finances Manual[57], the earlier publication of the States Annual Report and Accounts and a new Risk Management Strategy – the report welcomes the work undertaken 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." Key structural changes have also been pivotal to this change, including consolidating all finance staff into Treasury and Exchequer with a new operating structure.

The report will help us further improve our financial management and internal controls, recognising further investment required. While most initiatives are already underway, an action plan will be put in place to address the recommendations made.

Action Plan

Recommendations not accepted

Recommendation  Reason for rejection None

States Greffe | Morier House | Halkett Place |St Helier | Jersey | JE1 1DD

T: +44 (0) 1534 441 020 | E: statesgreffe@gov.je | W: Statesassembly.gov.je

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[1] Public Finances (Jersey) Law 2019

[2] Public Finances (Jersey) Law 2019

[3] PAC private briefing with Chief Executive and senior management team, March 2018.

[4] C&AG Report on Review of Financial Management (2015)

[5] Superseded by the Government Plan from 1 January 2020

[6] C&AG Report on Review of Financial Management (2016)

[7] C&AG Report on Private Patient Income: Health and Social Services Department - Follow-up (2017)

[8] Although the table refers to the cycle of the new MTFP', the PAC acknowledge that the MTFP has been replaced by the Government Plan.

[9] Sent by email to PAC on 23 September 2019, by Office of Chief Executive

[10] PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[11]Transcript of public hearing 23.9.19

[12] C&AG Report on Financial Management and Internal Control 2019

[13] CSSP Government Plan Review including its design and implementation

[14] Medium Term Financial Plan Addition for 2017-2019

[15] Transition Report 2019 R.55/2018

[16] CSSP Report: Government Plan Review November 2019

[17] PAC Public Hearing with Chief Executive and Treasurer of States 23 September 2019: transcript

[18] PAC Public Hearing 23 September 2019

[19]  PAC Public Hearing 23 September 2019

[20] https://www.nao.org.uk/report/financial-management-maturity-model-4/

[21] Guide to developing a Project Business Case: Overview of the 5-case Model by HM Treasury

[22]  PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[23] PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[24]24PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[25] External costs refers to the cost of external consultants preparing an initial piece of work on the Financial Management maturity assessment – Treasurer, PAC Public Hearing 23 September 2019

[26] PAC Public Hearing 23 September 2019

[27] PAC Public Hearing 23 September 2019

[28]28PAC Public Hearing 23 September 2019

[29] PAC Public Hearing 23 September 2019

[30] PAC Public Hearing 23 September 2019

[31] PAC Public Hearing 23 September 2019

[32] PAC Public Hearing 23 September 2019

[33] PAC Public Hearing 23 September 2019

[34] PAC Public Hearing 23 September 2019

[35] From online Public Finance Manual 2 January 2020

[36] C&AG Report on Financial Management and Internal Control 19 September 2019

[37] C&AG Report on Financial Management and Internal Control 19 September 2019

[38] PAC Public Hearing 23 September 2019

[39] P.71/2019, approved after a number of amendments on 2 December 2019.

[40] PAC Public Hearing 23 September 2019

[41] PAC Public Hearing 23 September 2019

[42] PAC Public Hearing 23 September 2019

[43] P.105 of R.91/2019, further information on additional revenue expenditure and capital and major projects expenditure in the Government Plan

[44]report on further information on additional revenue expenditure and capital and major projects expenditure in the Government Plan

[45] P.115 of R.91/2019, further information on additional revenue expenditure and capital and major projects expenditure in the Government Plan

[46] P.104 of R.91, Further information on additional revenue expenditure and capital and major projects expenditure in the Government Plan

[47] Additional costs arose as PWC had planned manpower for a May year-end but deployed additional resources at a "peak period" to fulfil the earlier close. These additional costs were borne by Treasury.

[48]The PAC raised this issue with Deloitte and the RAC Chair at (separate) private briefings in November 2019, and was satisfied that the potential risks of faster closing of accounts were under consideration.

[49] Information received at a private briefing, November 2019.

[50] The Executive responded by email on 31 January 2019 that the PwC gave their view, which was based on some specific conditions that have been addressed for the 2019 Accounts. A report was provided to the RAC towards the end of last year addressing each point from the PwC report specifically'.

[51] PAC Public Hearing 23 September 2019

[52] From Latin about minimal things' – inconsequential or insignificant matters -Merriam Webster dictionary

[53] PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[54] PAC Public Hearing with Chief Executive, Treasurer of the States and others 9 December 2019

[55] comment submitted by email from Office of Chief Executive on 31 December 2019

[56] The PAC does not consider it to be within its remit to suggest which body should undertake this role.

[57] The Minister for Treasury and Resources approved the PFM at the end of December 2019, forwarded by email to the PAC on 31st December 2019, live online on 1 January 2020.