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Home -> E. Hilton Young -> The System Of National Finance -> VI

The System Of National Finance - VI

1. Preface

2. I

3. Ia

4. II

5. IIa

6. III

7. IIIa

8. IIIb

9. IV

10. IVa

11. V

12. Va

13. VI

14. VIa

15. VIb

16. VII

17. VIII

18. VIIIa

19. VIIIb

20. IX

21. IXa

22. X

23. Xa

24. Xb

25. XI

26. XIa

27. XII



HITHERTO we have been concerned with the
practical work of getting and spending. We have
seen Departments estimating how much they will
need to spend in the coming year; Parliament
authorising expenditure according to the esti-
mates, and saying how the money is to be got
to meet it ; the revenue departments getting the
money; and the spending departments, through
the Paymaster-General, spending it. Now we turn
from the practical business of legislation, of the
collection and expenditure of revenue, and the
manner in which they are organised and controlled,
to the paper processes of accounting.

In private life a very careful man keeps accounts
from day to day to show him how much he is getting
and how much he is spending, so that he may be
sure at all times that he is not running into debt.
A state has to be even more careful than that : it
has to plan its expenditure and income beforehand,
and to draw up anticipatory accounts of them as a
guide to itself and to its servants in their subse-
quent proceedings. At the beginning of the year
the State draws up accounts of how much it is
going to spend, those are the estimates ; and it
makes another account of how much it is going to


get, that is the budget scheme. Having made the
two balance by reducing estimated expenditure or
increasing estimated revenue, it has done with its
principal account-keeping for the year. It has
kept all the accounts which the average careful
man keeps. In theory everything is now to take
place exactly as the estimates provide. Spenders
are sent off to spend and collectors to collect
according to the estimates and the authority given
them, and at the end of the year the anticipatory
and estimated accounts would, in a perfect world,
stand as realised accounts. But Parliament is
not content to rest in the simple faith that every
spender will do exactly what he is told, neither
spending a penny more than he is authorised to
spend, nor spending on one service the money
voted by Parliament for another. In the days of
its struggles with the Crown it learnt the vanity of
content with a formal grant of credit, without
supervision of the way in which the credit was
spent. In its struggle against the Executive for the
control of finance its first victory was to make the
Executive come to Parliament for money, and to
prevent it from getting money elsewhere. Its
second victory was to gain the right to say upon
what the money which it voted was to be spent.
But that was not enough. It was all very well to
appropriate the money voted for a specific purpose,
but what was to prevent the Executive, once it had
got the money out of Parliament, from snapping
its fingers at Parliament's directions as to
appropriation, and from spending it as it pleased ?
It was not until at least a century after the time
at which Parliament established its right to


appropriate that it woke up to the inadequacy of a
formal appropriation to secure its purpose, unless
it exercised some control over the actual expendi-
ture. During the first half of the nineteenth
century it was becoming clear to financial reformers
that the active enforcement of the appropriation of
grants, even after they had been released from the
control of Parliament for the use of the spenders,
was a necessary coping-stone of the structure of
Parliamentary control over finance. The financial
genius of Gladstone gave the principle clear
expression. " It is undoubtedly the business of the
House of Commons," he said, "to be responsible,
not only for the inception of all public expenditure,
but also to follow money raised by taxation until
the last farthing is accounted for." l

The lesson had by then been learnt that to sup-
port the power of Parliament in money matters it
is necessary that Parliament should not only direct
how the money is to be spent beforehand, but
should see that its directions are carried out. It
cannot of course watch the spending of money from
day to day throughout the year. But what it can
do is to require at the end of the year an account of
how the money has been spent, and evidence that
it has been spent on the purposes to which it
was allocated by the votes in Supply and appro-
priated in the Appropriation Act. Knowing that
there is such a reckoning before him an official
spender dares neither to spend more than he is
authorised to spend, nor to divert money from the
purposes to which Parliament appropriated it.
Were he to do so, he would be detected at the ex
1 Hansard, Vol. 197, p. 633.


post facto revision of his expenditure, and a sur-
charge would be the penalty for his illegal act.

Monopoly in the granting of public money, the
right to direct how the money which it grants is to
be spent, and the power to see that the money
which it granted has been spent as it directed, these
are the three essential constituents of a full control
by 'Parliament of revenue and expenditure. The
third essential was secured by the Exchequer and
Audit Act of 1866. By that Act it is provided that
every spending department is to render to Parlia-
ment, at the end of the financial year, an account
of the way in which it has spent the money voted
for it by Parliament. Those accounts, which show
how the money voted has been appropriated, are
called Appropriation Accounts. They are the
coping-stones of the financial structure of the year.
By their means the expenditure of the year is
brought under the review of Parliament, and
Parliament is enabled to watch and see that no
money has been spent for any other purpose than
that to which Parliament appropriated it.

In a world in which nothing ever happened
contrary to expectation, the Appropriation
Accounts would be a replica, word for word and
figure for figure, of the anticipatory accounts as set
out first in the Estimates and finally in the schedule
to the Appropriation Act. Their purpose is to
enforce the legal duty of adherence to that
schedule, and were there no deviation from the
legal duty, authorised or unauthorised, they would

1 Examples of Appropriation Accounts will be found in Ap-
pendices A. and B.


show that the money had been spent penny for
penny as the schedule provided. In this bad world
in which it is the unexpected only that comes to
pass, it is necessary to make some provision for
the authorisation of deviations from the schedule
in case of emergency, and at the end of the year
it may turn out that, intentionally or uninten-
tionally, some deviations have been made from it
that were unauthorised. Deviations of the sort we
will consider hereafter ; for the present in dealing
with the preparation and examination of the appro-
priation accounts we may leave them out of ac-
count, and deal with the accounts as if they were
records of expenditure by the departments which
has accorded exactly in every detail with the
scheme of appropriation in the schedule, and in so
far as they show deviations therefrom are irregular
and censurable. In form these accounts follow ac-
curately the form of the estimates and the schedule,
Vote by Vote and subhead by subhead. They
show the original and the supplementary grants of
Parliament for the year, as a charge, and against
them and in discharge of them the sums which
have actually come in course of payment in that
year. They show also the estimated amount of
receipts to be appropriated in aid of grants, and
the sums actually realised in respect of the same.

Obviously it is for the party who does the
spending to account for what he has spent. Each de-
partment which presents an estimate and receives a
grant must prepare also an Appropriation Account,
to show how the money granted has been spent.
But Parliament is not content with any general or
collective responsibility in a whole department for


an Appropriation Account. For greater security
it now requires that in each department that
renders an Appropriation Account there shall be
a single official, called the Accounting Officer, who
shall have a direct and personal responsibility
for the Account. 1 When the Account has been
drawn up in the department, the Accounting
Officer signs it with a declaration that to the best
of his knowledge and belief no part of the expen-
diture contained in the Account has been incurred
without authority superior to that of the depart-
ment, in cases where such superior authority is
required. The account is sent to the Treasury,
and to the Comptroller and Auditor General, who
examines it on behalf of the House of Commons.
It is then laid before Parliament. Containing as it
does a detailed statement of all sums which came
in course of payment during the financial year, the
Account cannot be completed until some time after
the year has come to an end on March 3ist. In
general it is not until the following January that
the Accounts are presented to Parliament, in time
to be considered in the new session.


Many documents submitted to Parliament, when
they have been laid before it and have been ordered

1 Under the Exchequer and Audit Act. Section 22 of that Act
provides that the Appropriation Account is to be prepared by the
Department charged with the expenditure of the Vote, and adds
that the term "Department" is to be construed to include any
public officer to whom the duty may be assigned by the Treasury.
The Treasury has in fact assigned the duty to a special officer in
each department ; and the Public Accounts Committee and Parlia-
ment have often approved and enforced that arrangement.


to be printed, have received all the attention from
Parliament which they ever will receive. But the
House of Commons is not content with a merely
formal reception of the Appropriation Accounts.
It is not content to take it for granted that its
directions as to the appropriation of public funds
have been carried out ; it imposes upon itself the
tasks of careful and minute scrutiny of the accounts,
of enquiry into all irregularities, and of admonition
and, in case of final need, of punishment of peccant
officials. For the performance of these duties
close consultation with the Treasury is necessary
and the examination of witnesses and of documents.
The House itself would be quite unable to do the
work ; it would have neither the time nor the
means ; so it entrusts the task to a Select Com-
mittee, called the Public Accounts Committee,
which is appointed for "the examination of the
accounts showing the appropriation of the sums
granted by Parliament to meet public expenditure."
First established by Gladstone when Chancellor of
the Exchequer in 1861, the Committee has ever
since been annually reappointed towards the
beginning of the session in January or February.
It numbers fifteen members ; according to custom
its chairman is generally a member of the Opposi-
tion and amongst its members is the Financial Secre-
tary of the Treasury. Members of each party are
elected to it, and especially any member who may
be distinguished by a knowledge of public finance.
At most times the Committee, and through the
Committee the public, have had the advantage of
the services of one or two members who have
made finance their study, and have laboured there


for the maintenance of the highest standards of
financial rectitude, at a sacrifice to themselves of
time, energy, and personal political interests which
has been to the very great advantage of the nation.
Many gallant stands have been made at that board
for order, regularity, and economy in the methods
of public finance. Valour is needed to press an
enquiry home against a phalanx of experts, and in
large measure the success of the Committee's
efforts has depended on its command of the
services of members who have been at pains to
provide themselves with weapons from the
armoury of special knowledge, so that they may
meet the experts from the departments on terms
which are not too unequal. It is an evil day for
the public and the House of Commons when that
supply fails. It is no less evil for the Civil
Service ; for the knowledge that effective criticism
and prompt retribution at the hands of the Com-
mittee await the taker of liberties in matters of
finance must be the best help and protection for
the civil servant who is maintaining regularity and
legality within his department against those of less
orderly mind, and those less careful of the essentials
of good financial administration.

As soon as appointed by the House, the Com-
mittee takes the Treasury in one hand and the
Auditor General in the other, and goes a-hunting
in the expenditure for the year under review, as
certified in the Appropriation Accounts. The
Auditor General beats the bush and starts the
hare : the Committee runs it down : and the
Treasury breaks it up. Reports are prepared for
the Committee by the Auditor General on the


Appropriation Accounts and all other matters into
which he has enquired in his preliminary investiga-
tions. He, it will be remembered, is the servant of
the House of Commons and of its Committee,
responsible only to them and to no other master.
Nine-tenths of the Committee's enquiries are con-
cerned with points which he raises. Any member
of the Committee may raise any relevant question
on his own initiative, but in practice the Committee
works on the Auditor-General's brief. He sits
with them at the Board, and gives them help. A
high Treasury official also is always present to
advise them. In their decisions the Committee
and the Treasury are generally in hearty agree-
ment. Their point of view in these matters is the
same : both are concerned to enforce regularity
and economy in the administration of the depart-
ments, and the Committee is the rod which the
Treasury has been shaking over the heads of the
Civil Service throughout the year. When the
Committee's decision has been recorded, it is for
the Treasury to take the matter up with the
department concerned. If the Committee has
censured something, the Treasury communicates
the censure, adds its own, and tells the department
that it must not happen again. It is common
indeed to find an opinion expressed with judicial
mildness by the Committee enforced with far
stronger language by the Treasury in communica-
ting it to the department. Where the Committee has
roared as mildly as a sucking dove, the Treasury
roars like a Libyan lion. Very seldom the Treasury
does not agree with the Committee. Special
attention is then called to the disagreement in the


report to the House of Commons with which the
Committee ends its labours, and it is for the House
to take action if it pleases, which it very seldom
finds time to do. Final evidence of the importance
which the House of Commons rightly attaches
to the ^hole of this process of the review of
expenditure is to be found in the circumstance
that its receipt of the report of the Committee is
no longer a mere formality. An opportunity is
given for a debate on the report and for a division,
so that any questions of importance raised thereby
may be discussed with more publicity than is
given to the proceedings of the Committee.

This is the last stage in the history of national
finance for a year. The Report of the Public
Accounts Committee is its epitaph, and the debate
thereon its dirge. It may not be until late in the
session that the House of Commons has time to
receive the Report. By then the departments are
already beginning to think of their estimates for
the following year. Nearly three full financial
years are thus needed to complete the life-history
of a year's finance. A beginning is made with the
estimates for the financial year 1914-1915, for
instance, in October, 1913. Appropriation Accounts
for 1914-1915 are presented in January, 1916, and it
is not till late in that year, it may be not until an
autumn session, that Parliament finally disposes
of them by receiving the Report of the Public
Accounts Committee. Having done so, it has
completed its task under the system of control
whidh it has devised to maintain its power. It has
granfcd the money needed, it has appropriated the
sumSgranted to specific purposes, and through the


Public Accounts Committee it has seen that its
orders as to appropriation have been obeyed. As
regard the finances for the year reviewed Parlia-
ment is then functus officio ; and it leaves their
dead record for a prey to the statistician.


From what has just been said it will be clear
that the great value of the control of expenditure
exercised by the Public Accounts Committee is
due in large measure to the preliminary investiga-
tion made on behalf of the Committee, and in
discharge of his statutory duties under the Ex-
chequer and Audit Act, by the Auditor General.
As his name shows, the investigation which he
carries out is in the nature of an audit. In making
it he must make use, in the first place, of the
Appropriation Accounts supplied to him by the
Accounting Officers of the departments. These
Accounting Officers are an essential element in
the processes of audit and control. As already
mentioned, their chief duty is to render the
Appropriation Accounts to the Auditor General,
showing how the grants of Parliament have been
spent. They sign the accounts and are primarily
responsible for their correctness. But their re-
sponsibilities are far higher than those of a
mere accountant. Each in his own department
is the guardian of the scheme of appropriation
authorised by Parliament. Each is responsible
to the head of his department and to the Trea-
sury that no money is spent by the department
otherwise than as authorised by Parliament. To


discharge that responsibility, they must either
themselves or through their subordinates of the
financial staff of the office follow the payments
made by the departments day by day, and assure
themselves that each is duly supported by Parlia-
mentary authority. They cannot of course in-
vestigate every payment, and see that it is actually
made as it professes to be made : but they must
take reasonable precautions. It is incumbent on
them before making or allowing payments to
satisfy themselves by means of certified statements
from the officers entrusted with the detailed duties
of payment that each payment is legal. They are
entitled to consider that a statement of the sort is
enough for them. If they can show that they have
not acted except on such statements, with common-
sense, and after consulting a Treasury expert in
case of doubt, the Committee and Treasury con-
sider that they have discharged their responsibility
as regards payments which are on the face of them

To discharge his responsibility for a payment
which is on the face of it illegal is for an Accounting
Officer a harder matter. It is to be observed that
he is an officer of his department, and not even in
his function as Accounting Officer a servant of the
House of Commons or of the Treasury. He cannot
therefore simply veto such a payment. Had he the
power to do so, that would involve two ill con-
sequences : it would destroy the salutary respon-
sibility of the Head of the department for the
expenditure of his department, and it would lead
to friction and even to deadlocks in the working
of the machinery of administration. But the


unfortunate Accounting Officer must not be fixed
with an inevitable responsibility for irregularities
or illegalities which he is unable to prevent. A
way must be given him to shift the responsibility
on to other shoulders, once he has done his duty
by doing his best to stop the illegal payment. His
means of escape are by shifting the responsibility
on to the shoulders of the supreme chief of his
department. He alone has power in the de-
partment to override the Accounting Officer's
decision that a payment is irregular or illegal. If
such a payment is proposed and the Accounting
Officer's protest is disregarded by subordinates, he
must carry the matter to the Head of the depart-
ment. He must make known to him that the
proposed payment is irregular, and that there are
no funds legally available to meet it. If the Head
does not support him, he must obtain from him a
written authority to make the questioned payment.
Having obtained that he has done his best, and is
immune when the rendering of the Appropriation
Account discloses the irregularity to the Treasury.
Without it he is personally liable to make good the
irregular payment, and his liability, if the Public
Accounts Committee disallows the payment in
question, can then be removed by a Vote of
Parliament only.

Mention has been made before this of the
anxieties attaching to the free balances of public
funds once they have come into the hands of the
spenders. The funds in the hands of a depart-
ment consist of (a) a balance with the Paymaster
General, (b) balances in the hands of its own Officers,
called in this capacity sub-accountants, which have


been issued to them as imprests from the Pay-
master General's balance. It is the latter that are
referred to here as free balances. Pains are taken
to keep these free balances as small as possible,
but some of the departments have to meet local
payments and so on from day to day, and some-
body must be responsible for them. This respon-
sibility is imposed upon the sub-accountants by
whom the imprests are received. It is shared
by the Chief Accounting Officer. He must remain
responsible for all payments made by sub-account-
ants out of imprests, because just as much as the
final payments made by the Paymaster General for
his department they are charges against the Votes
for which he is responsible. He must, therefore,
take all reasonable precautions to ensure against
misuse of the balances. He must see that no
sub-accountant holds unnecessarily high balances,
or delays to render his accounts ; and he must see
that money is entrusted to those officers only who
are of a standing commensurate with the balances
which they keep, and so on. But the personal
responsibility of the sub-accountant who has the
custody of the balance is the foundation of the
system by which the use of the free balance is
checked and controlled. Thus the Accounting
Officer answers for the money which has passed
out of the custody of the department, and he and
his sub-accountants answer for the balance which
still remains in its custody ; and so an account is
given of every penny that the department has

In the relations between the Accounting Officer
and the sub-accountants there are certain difficulties,


difficulties which arise out of the distribution of
authority and responsibility between the financial
and the executive staffs of an office. To explain their
nature, let us consider an example of the practical
working of these arrangements. At the Admiralty,
for instance, the Accounting Officer is the Account-
ant General, and he has sub-accountants in the
Paymasters on board each ship. He corresponds
directly with them, and they make representations
directly to him. But a ship is imperium in imperio,
and the authority of its ruler, the captain, must be
kept absolute. Out of deference to this rule of the
Navy, the Sub-accounting Officer on board must
make any payments which the captain authorises,
and if they are irregular must make his representa-
tions on the subject to his financial chief through
the captain. On the other hand, the captain cannot
block a representation of the sort or refuse to
forward it. In such relationships it is obvious that
there are openings for jealousy and friction between
the executive officers who have got to get the work
done and the financial officers on whom is imposed,
by Parliament and the Treasury, the duty of acting
as guardians of the Parliamentary scheme of
appropriation. History, in fact, tells of more than
one effort on the part of the more powerful
spending departments to get rid of the independent
authority of the Accounting Officer and his sub-
accountants (an authority, it is to be remembered,
which being subject to the supreme chief of the
office is only partially independent) by subjecting
it to that of subordinate executive officers, or by
transferring the functions bodily away from the
financial staff to executive officers. In 1905, for


instance, an Army Order was published which
transferred the powers of certain sub-accountants
to a class of military administrative officers. By
making the spenders themselves judges of the
legality and regularity of their own spending, the
Order struck at the root of the whole system of
control as established by Parliament. No harm
was done, because the attempt was frustrated by
the energetic action of the Public Accounts
Committee. It served indeed a useful purpose in
moving the Committee formally to emphasise the
supreme importance of the position of the Account-
ing Officers in the maintenance of Parliamentary
control over expenditure, and to make a clear
statement of the powers and duties secured to
them by Parliament in order that they may do the
work which Parliament requires of them, and which
the Executive must not seek to qualify. The Com-
mittee affirmed "the necessity for maintaining
unimpaired the established system of accounting
to Parliament for appropriation of public moneys
to the purposes for which they are intended by
Parliament to provide," and declared " that neither
can the existing system of Parliamentary control
nor the strict responsibility attached by it to the
Accounting Officers appointed to carry it out, be
removed, otherwise than by Parliament itself." To
remove doubts, the Committee recommended that
it be laid down that "(i) in the case of the Army,
as of all other departments of accounting for
moneys received, expended, or in hand, the re-
sponsibility for them lies upon the Chief Account-
ing Officer of the department ; (2) the authority
over, and responsibility for all Sub-accounting



Officers [more properly called sub-accountants]
belongs to him ; (3) no part of the authority and
responsibility can be diverted to any other person
whatever; (4) in all matters of accounts, and of
payment and repayment, in dispute or not, the Sub-
accounting Officer is authorised and required to
communicate directly with the Chief Accounting
Officer." i

The duties and responsibilities of an Account-
ing Officer evidently could not be imposed with
propriety upon a subordinate officer of the depart-
ment. "The officer entrusted with these duties/'
the Treasury has declared, "should occupy a
sufficient standing to enable him not only to
exercise a direct supervision and control over the
persons executing the detailed business of account
and book-keeping, but also to influence the work-
ing of the department in all those respects which
affect the method of its receipts and expenditure.

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