The Foreign and Commonwealth Office (FCO) has made good progress in its financial management, aiming to establish itself as one of the best departments in Whitehall in this respect. It has shown strong leadership in raising the profile of good financial management across the Department. Up to 2007-08, however, the FCO has underspent consistently against its budget. The Department has introduced a financial management improvement programme "Five Star Finance", the aim of which is for the department to be a Whitehall leader in financial management. It currently rates itself at three and a half stars on a 1(low) to 5 (high) scale, a rating confirmed by NAO. The FCO operates in a challenging environment in terms of the global nature of its operations. The fluctuations of global currency markets pose particular difficulties for the Department. Until 2007-08, its budgets were protected by the Treasury from exchange rate fluctuations. When this protection was withdrawn, the FCO introduced alternative measures to manage its exposure, principally the forward purchase of major foreign currencies. It needs to ensure that its finance team has the right skills and experience to manage the financial risks it now faces. The FCO is taking action to avoid future underspends against its budget. In other respects, FCO's financial management has improved. The accuracy, reliability and timeliness of its financial reporting have all been enhanced. In 2007-08 it laid its accounts on 30 June, the earliest date it has ever achieved after the March year-end.

Against a backdrop of historically weak financial management and significant under-spending, the Foreign and Commonwealth Office has made considerable progress over the past three years to improve the accuracy, reliability and timeliness of financial information. Having recognised the need to take action, the Department set up its 'Five Star Finance' project which is due to completed in the summer of 2010. Of particular benefit has been the recruitment of a professionally qualified finance director and increasing the number of professionally qualified accountants within the finance function. An important factor has been the need for better information on the costs of individual embassies and this has been strengthened. Further action, though, is still required to implement a workable and effective system of costing activity in all locations to enable it to make informed decisions about its operational priorities. Given that over half of the Department's expenditure of some £2 billion is paid out in foreign currency the Department has suffered a significant reduction in purchasing power as a result of the weakening of the Sterling. The Department now forward purchases US dollars, euros and yen but with input from the Treasury it also needs to work with other Departments to identify the most effective way to manage exchange rate risk for the government as a whole. The Department confirmed that its aim is to maximise the benefits from each of its embassies in pursuit of British trade and foreign policy interests and that it has no plans to sell-off any of its prestigious buildings around the world

The FCO departmental report and resource accounts 2008-09 published as HC 460-I,II (ISBN 9780102961614)

Despite good progress in improving the professional capability and capacity of government finance departments since the National Audit Office last reported in 2008, good financial management is still not embedded in the civil service culture, and financial matters do not have sufficient influence over departments' strategic decision making. The NAO concludes that departments have achieved a core level of competence in financial management, but further improvement in financial management capacity and capability throughout their organisations is required to enable them to meet the challenge of delivering the savings set out in the Spending Review 2010. There has been important progress - all departments now have a professionally qualified Finance Director, supported by an increased number of qualified finance staff. The Treasury is also implementing accounting changes to bring greater transparency to government financial reporting. Whitehall's central finance functions competently capture and report the transactions and financial position of the departments. Annual accounts are delivered before the July Parliamentary recess. The number of overall overspends against the amounts approved by Parliament is low. However, departments are generally weak at monitoring their balance sheets and at forecasting cash flow in the medium term. Departments do not fully understand the costs of their activities, and it is rare for them to have good information on the unit costs of outputs, levels of productivity or the value of outcomes. Departments generally focus on monitoring against the agreed one-year budget, with a few looking as far ahead as the current spending review period of four years.

This report is the Committee's annual review of how the FCO is managing its resources. This year a key area off interest has been the 2007 Comprehensive Spending Review because the Committee think it is one of the tightest in Whitehall and it risks jeopardising some of the FCO's important work. Apart from this the other subjects covered are: measuring performance; operational efficiency; management and leadership; FCO services; diplomatic representation overseas; transparency and openness; public diplomacy; British council; BBC World Service.

The FCO (the Department) has over 4,000 buildings across its global estate, in 279 different locations. The estate is a mix of properties including embassy, high commission and consular offices, ambassadorial residences, prestige and historical buildings and staff accommodation. The estate is valued at £1.6 billion and capital and revenue expenditure in 2008-09 totalled £269 million. The Committee welcomes the improvements the Department has made in managing its estate more effectively, including the recent appointment of an estates specialist as estates director and the development of a new estate strategy. The Department however has a poor understanding of its estate and the information it holds on its properties is basic, incomplete, out of date and inaccurate. In addition, the Department does not collect data, such as the cost and amount of space per person, recommended by the Office of Government Commerce for the effective management of government offices in the UK. The Department has unused space in its offices even in locations where other UK government organisations are based in separate premises. Other organisations are often deterred from co-locating with the Department because of the security measures necessary in embassies as well as the high charges they must pay to use the Department's buildings. The Department now needs a better managed estate with improved data to enhance understanding of the estate, and its new strategy to be implemented effectively at each location.

This report is the Committee's annual review of how the FCO is managing its resources, examining the departmental annual report for 2007-08 (Cm. 7398, ISBN 9780101739825). Chapters cover: new strategic framework; performance measurement; global network; essential services; FCO Services; personnel issues; transparency and openness; financial management; public diplomacy and communication; the British Council; the BBC World Service. The Committee is concerned that the FCO is facing serious financial pressures in this financial year due to the Treasury's withdrawal of its support for the Overseas Pricing Mechanism (OPM) which used to protect departments from the weakening of sterling. There is a risk that the FCO may not be able to meet higher international subscriptions over the next two financial years, causing its performance against Public Service Agreement targets to suffer. The likely increase in the UN Regular Budget and other international subscriptions will push this figure even higher. The FCO should have to shoulder the financial burden from within its already tight budget to pay for subscriptions which also benefit other Government departments. The Committee recommends that additional nondiscretionary costs should properly be met by the Treasury.