Technical: annual reports and accounts face major change to meet users' needs

The very last House of Commons select committee meeting before Parliament was dissolved ahead of the general election was a session of the Public Administration and Constitutional Affairs Committee (PACAC), writes Debbie Paterson. Members of the PACAC questioned Treasury officials on their review of government financial reporting.

The reason for the session was to follow up on PACAC’s reports Accounting for democracy: making sure Parliament, the people and ministers know how and why public money is spent (published in April 2017) and Accounting for democracy revisited: the government response and proposed review (published in June 2018).

The central argument of these reports was that financial information in government had four purposes:

• To maintain and ensure the House of Commons’ power over the government
• To enable the public and Parliament to assess the value for money of the delivery of public policy
• To provide a credible record that can be relied upon externally
• Internally to provide ministers and officials with the information they need to run departments.
• To meet these needs, PACAC wanted annual reports and accounts to include the cost of policies, programmes and projects. The focus of the annual report and accounts would therefore be the best interests of potential users of them – with Parliament being the main user of departmental annual reports and accounts.

As a result of these reports, the Treasury has reviewed and revised its Financial reporting manual (FReM) for 2020/21. The consultation on the revised FReM has just finished and the HFMA responded to that consultation.

This is the first phase of a two-stage review process. So, the 2020/21 FReM has been amended to introduce the new requirements, concepts and principles that preparers are expected to follow. The second phase (in 2021/22) is intended to make the FReM as user-friendly as possible.

During the select committee session, Treasury officials indicated that they expect the amendments to the FReM to result in ‘the biggest change in annual reports and accounts since 2014’. And this will call for a cultural change.

The proposed changes to the FReM focus on the front half of the annual report and accounts – the annual report. The FReM is moving from setting out the minimum requirements for the annual report to setting out best practice and making clear the requirements that must be met and those that are best practice.

Some requirements will be on a comply or explain basis – either the disclosure is made or an explanation is provided as to why it has not been made.

The performance report will have to include trend data to provide context for the user of the annual report and accounts. The only acceptable reason not to provide that data is if it is not available – then there would be an expectation that it will be collected and published in time.

The proposals are also to embed risk management in the annual report and accounts. For government departments, there will be requirements to set out progress against the single departmental plans.

Wherever possible, departments will be required to report by policy, programme or project and engage with their select committees to understand what their requirements are.

For the Department of Health and Social Care (DHSC), this will mean engaging with the Health and Social Care Committee. This aims to put the focus on outcomes rather than inputs.

The committee specifically mentioned that it would want to see the DHSC reporting against the recent announcements around building new hospitals.

Looking ahead, the Treasury is considering how annual reports and accounts are presented – currently they are hard copy with electronic versions of the print copy being available.

There may be a move towards more interactive/web-based accounts, although this will be for consideration after phase two of the FReM review.

All of this will apply to the DHSC in 2020/21 rather than NHS bodies themselves. However, because the GAM and the Foundation trust annual reporting manual (ARM) have to be consistent with the FReM, it seems likely that these changes will have an impact on NHS organisations in 2020/21 as well.

Debbie Paterson is HFMA policy and technical manager