Statement on Internal Control

As Accounting Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of Departmental policies, aims and objectives, set by the Department's Ministers, whilst safeguarding the public funds and Departmental assets for which I am personally responsible, in accordance with the responsibilities assigned to me in Government Accounting. The Chief of Defence Staff is responsible for the maintenance of military operational capability and for the preparation, conduct and analysis of military operations.

During the Financial Year 2002-03, the Department was divided into 11 business areas, each managed by a Top Level Budget (TLB) Holder, 5 Trading Fund Agencies and 7 Non-Departmental Public Bodies (NDPB) with delegated responsibilities. Included within the TLBs are 31 on-vote Defence Agencies whose Chief Executives are responsible for producing annual accounts which are laid before Parliament. Of the Trading Fund Agencies, the Defence Aviation Repair Agency, the Army Base Repair Organisation, the Defence Science and Technology Laboratory (DSTL), and the UK Hydrographic Office, report separately their financial results to their Ministerial Advisory Boards, and the Met Office to the UK Met Board chaired by the 2nd PUS. With the exception of the Defence Procurement Agency (DPA), responsibility for monitoring on-vote Defence Agencies' performance is within specific TLB Holder's responsibilities. The DPA reports to its Ministerial Advisory Board. Responsibility for monitoring NDPB's performance also falls within individual TLB Holders responsibilities. Statements on Internal Control are provided annually by TLB Holder's and Trading Fund Agency Chief Executives.

At the start of the year, the Department assumed responsibility for War Pensions Benefits (WPB). The WPB is administered by the Veterans Agency, the operating costs of which are part of the Central TLB. A Statement on Internal Control is provided annually by the Veterans Agency Chief Executive.

The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control has a number of dimensions (e.g. efficient organisational and budgetary structures, sound business processes, robust internal audit) but is, in particular, based on an ongoing process designed to identify and prioritise the risks to the achievement of Departmental policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically. During the year, the Department continued to develop its system of internal control to achieve compliance with requirements for central government as set out in DAO (GEN) 13/00. The system was fully operational by 31 March 2003 and has been in place since then up to the date of approval of the annual report and accounts and accords with Treasury guidance.

As Accounting Officer, I also have responsibility for reviewing the effectiveness of the system of internal control. In June 2002, following a TLB-wide review of progress in embedding corporate governance and risk management processes, Defence Internal Audit (DIA) reported that significant progress had been made, and provided assurance that the progress was sufficient to ensure that mature governance and risk management processes would be in place by 1 April 2003. Recommendations necessary to deliver a fully supported system of internal control were addressed during the year.

In line with HM Treasury guidance, I have established the following processes:

• A Defence Management Board (DMB), which meets monthly to consider the plans, performance and strategic direction of the Department, which comprises the senior members of the Department and has two external independent members;

• A Defence Audit Committee (DAC), chaired by an external independent member of the DMB, which has adopted a risk-based approach to internal control and is placed at the heart of the assurance process, co-ordinating the activities of internal audit, and drawing on reports from specialist bodies, including:

  - Defence Environment and Safety Board
  - Departmental Security Officer
  - Defence Internal Audit
  - Director General Financial Management
  - National Audit Office
  - In addition, since the end of the financial year, the DAC has reviewed a report from the Director of Operational Capability providing assurance on the Department's operational capability;

• A Departmental Corporate Governance & Risk Management policy statement and strategy cascaded down through TLB Holders;

• A Departmental Performance Management System based on the Balanced Scorecard. Key Departmental objectives, performance indicators and targets are defined annually by the DMB and cascaded to TLB Holders including through new Service Delivery Agreements. Performance is monitored and discussed quarterly at DMB meetings, including explicit consideration of key risks. Operation of the system was reviewed during the year by DIA who gave substantial assurance on its effectiveness;

• A Departmental risk register, supported by operational-level risk registers, which complements the Defence Balanced Scorecard. The Departmental risk register has been reviewed and endorsed by both the DAC and the DMB;

• Through TLB Holders, a cascaded system for ensuring compliance with legal and statutory regulations. Each TLB holder is supported by an Audit Committee, which includes non-executive directors and at which representatives from the internal and external auditors are present. Like the DAC these committees have refocused their activities to provide advice on wider-business risk and assurance processes;

• Through TLB Holders, a cascaded system for ensuring that Business Continuity plans are in place, and that these plans are tested on a regular basis. An in-year, DIA-conducted audit gave assurance that Business Continuity plans had been established but highlighted the need for further work regarding their maintenance, review and testing. Recommendations to address these areas are being taken forward;

• An annual risk-based programme of internal audit provided by DIA, who is the primary source of independent assurance, is complemented by the activity of the Directorate of Operational Capability (DOC), which in turn provides independent operational audit and assurance to the Secretary of State and the Chief of Defence Staff;

• Annual and Quarterly Reports providing measurable performance indicators and more subjective assessments on the Health of Financial Systems from all TLB Holders and key functional specialists. Considerable efforts were made during the year to sustain financial control during the second transitional year of Stage 1 of resource accounting and budgeting (RAB). These efforts proved successful with the Department delivering its outputs within the resources devoted by Parliament, notwithstanding the considerable demands arising from the first five-yearly review of the valuations of the Department's fixed assets. This has, however, resulted in continued high loading on finance staff, although there are some signs that this is beginning to ease. Experience has exposed some issues surrounding the effectiveness of the Department's asset management systems, and continuing issues with the effectiveness of stock management systems and the generation of accurate data on stock consumption. Both are being addressed as part of structured process improvement programmes. Looking ahead, the transition to RAB Stage 2 from 1 April 2003 is likely to continue the heavy workload on finance staffs;

• Appropriate assurance measures – in particular, a comprehensive policy document 'Assuring Delivery' and a 'Centre of Excellence' – to ensure that high-risk mission-critical projects and programmes carried out by the Department do not suffer from any of the common causes of failure identified by the Office of Government Commerce and the National Audit Office; and

• Appropriate mechanisms to strengthen the management of scientific risks, particularly to Service personnel health, and in health, safety and environmental matters.

To address audited weaknesses and ensure continuous improvement, further development of the Department's internal control framework is planned for 2003-04. In particular, I shall look to improve the Department's existing risk management capability as a result of the Treasury-led Risk Management Improvement Programme arising from the Cabinet Office Strategy Unit's risk report ¹

My review of the effectiveness of the system of internal control is informed by the work of the internal auditors and the executive managers within the Department who have responsibility for the development and maintenance of the internal control framework, and by comments made by the external auditors in their management letter and other reports.

Kevin Tebbit

Accounting Officer
22 October 2003

¹Strategy Unit report – Risk: Improving Government's Capability to Handle Risk and Uncertainty – published 20 November 2002.

Last Updated: 2 Dec 03