Scottish Commission for Public Audit, 05 Nov 2008

Meeting date: Wednesday, November 5, 2008

Official Report 196KB pdf

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Annual Report and Accounts 2007-08 and Auditor's Report

We move swiftly on to agenda item 2, which is Audit Scotland's annual report and accounts for the year to 31 March 2008 and the auditor's report on the accounts. As we know, the commission is responsible for securing the audit of Audit Scotland's accounts, and has contracted Haines Watts the chartered accountants to undertake that. We now have the auditor's report for 2007-08. Later, we will have an opportunity to take evidence from HW.

I must apologise—we are all a little weary this morning, having stayed up most of the night watching the very exciting American elections.

Without further ado, I welcome Robert Black, the Auditor General for Scotland and the accountable officer for Audit Scotland; his colleague Russell Frith, the director of audit strategy with Audit Scotland; and Diane McGiffen, the director of corporate services with Audit Scotland. I invite Mr Black to make a short opening statement.

For the record, let me state that I have no advantage over you, as I am also feeling slightly weary. I could not resist staying up last night.

A brief word from me on the annual report and accounts might be appropriate. As ever, Diane McGiffen, Russell Frith and I will do our best to answer any questions on that and any other relevant matters.

In the annual report and accounts, we set out the full range of work that we have delivered, and we also include some case studies. The report that you have before you does not give quite that level of detail. Although there are, therefore, two versions of the report, the core information is in both.

From our point of view, the highlight of 2007-08 was the production of 201 final audit reports on all the audited bodies in Scotland as part of more than 300 separate reports that Audit Scotland produced for the bodies that we audit. That work is not above the horizon terribly often in Parliament, but it is a cornerstone of our work, together with our performance reports, which come to Parliament. A huge volume of activity goes on at that level.

In the last financial year, we produced 18 public performance reports. All the audits that Audit Scotland did were completed on time. We ran the national fraud initiative again, which identified overpayments and savings in the year of about £9.7 million. The cumulative amount that that project has identified in recent years is now in the order of £37 million.

The past year saw major developments in the review of scrutiny, which was designed to achieve a more integrated and streamlined approach. That is closely linked to developing the framework for best value. Audit Scotland staff and I have been involved in that quite closely.

We have made quite significant progress on the helping improvement agenda by engaging more effectively with our stakeholders and the audited bodies. I do not mind the word "client" being used, as it encourages the auditors to recognise that they have a duty of care and reporting to public bodies, which does not in any way compromise their independence. We engage with them effectively, and have taken part in many meetings, conferences, seminars and working groups to try to spread the understanding and impact of our work.

It is important that we communicate well about our work, so we work quite hard to distribute the annual report. We recently undertook a survey of our stakeholders on a range of issues, and we found that about two thirds of them had read our annual report, which is a surprising and encouraging percentage for that sort of document. The same percentage thought that it was very satisfactory and required no improvement. Given that it is a worthy—if, I think, reasonably interesting—document, we are reasonably satisfied with that outcome.

I am happy to answer any questions.

Before we get on to the meat of our questions about the annual accounts, I would like to ask you about a matter that is not directly related, involving coverage in the Sunday Herald on 19 October about Audit Scotland's budget and international development work.

I know that, last year, my colleagues on the commission discussed Audit Scotland's international work and the ways in which it was prioritised and decided on, and how much it cost. I also know that you helpfully sent a detailed letter to the commission following the appearance of the Sunday Herald article. Would you like to put anything on the public record regarding the recent media coverage?

I am grateful for the opportunity to do so. I am conscious of the time, so I will not take more than a moment or two.

The article in the Sunday Herald was seriously misleading. My colleagues and I took it very seriously, because bodies such as Audit Scotland and the office of the Auditor General for Scotland can function only if the public and Parliament are confident that we observe high standards in our own work.

I was extremely concerned about the article, which talked about a "junket culture" in Audit Scotland. That is most unfortunate, because my colleagues in Audit Scotland worked hard to explain the context and content of our international work to the journalist from the Sunday Herald.

In my letter, I attempted to summarise the information that appears in the annual report about the range of work that we do. Most of our work is carried out within the European Union, in the accession countries in the Balkans and the Baltic states. We also work with the National Audit Office and the Swedish National Audit Office. A lot of that work is extremely demanding, and it takes place in parts of the world where the staff often have to experience some personal discomfort. I will not name individual places, but it is clear that it is not always easy in a personal sense to work in developing countries, and the staff do it for no extra reward.

We have developed an international strategy, of which the Scottish Commission for Public Audit is aware, and we ensure that it is proportionate and limited. We try to ensure as far as possible that there is no significant burden on taxpayers in Scotland. As I outlined in the letter, we estimate that over the past three years the cost has been something under £1,700 per year. The bulk of that cost has been recovered from other agencies such as the European Union and the World Bank, and through bilateral aid programmes that are funded by the European Union. I assure you that we get an extremely positive response from people who have the benefit of Audit Scotland input and, as I said in the letter, we are rather proud of what we have achieved as a relatively new organisation.

I will make one final comment, as I am personally rather enthusiastic about our international work. Many of the accession countries and the developing countries have come relatively recently to modern structures of government, and their size means that they can identify more closely with the Audit Scotland scale of activity than with audit organisations in big nation states. For those two reasons—we are a comparatively new organisation, which has thought through some first principles in the context of a new Parliament, and our nation is a certain size—we can often offer particularly relevant thoughts, advice and support to those countries.

I will stop there. I am glad to have the opportunity to offer those comments. We are always vigilant to ensure that those activities are proportionate and do not get in the way of the main work that we do, and we will always be transparent about reporting such work through our annual report.

Thank you, Mr Black. Modern structures of government and emergent democracies certainly require good governance and robust audit arrangements. I am happy to move on, unless members have any questions.

I welcome all the work that Audit Scotland has done, not least the work in the international sphere that you mention.

I have a couple of points. One is on the balance between private firms and Audit Scotland. The report indicates that about one third of the public body audits are carried out by private sector accountancy firms, and 94 are done by Audit Scotland staff, but the private firms get only 23 per cent of the total expenditure. There may be all sorts of reasons for that, but can you give us the background?

Yes, there are reasons. I invite Russell Frith to give you the definitive explanation.

The figure of one third refers to the value of financial audit work, so it does not represent the full scope of the audit work: it is the audits of the annual accounts, rather than, for example, the performance audit studies that come before the Audit Committee. It is one third by value, but it is more like half by number of bodies. That is because, for example, all 39 relatively small further education colleges are audited by firms; none is audited by Audit Scotland teams. The balance in the size of audits is that the Audit Scotland team does relatively more larger audits and that firms do relatively more smaller audits, particularly of further education colleges.

The accounts show that you spent £1.362 million on purchasing fixed assets against an original information technology budget of £451,000. Will you give the background to what appears to be a significant discrepancy?

The biggest element of the fixed-asset expenditure was completion of the refurbishment of 18 George Street. That was not in the original budget for 2007-08, as it had been in the budget for 2006-07, when we had expected to do the work. We did not do the work then, so we carried forward the expenditure through end-year flexibility in the autumn budget revision last year. In effect, that was added to the budget of £500,000 or so for IT stuff.

My final question might not really arise from the annual accounts. In a sense, the pension provision is historic. I am conscious that a large part of the assets that make up that provision are equities. What might happen with that, given the current financial background?

As you can see from the balance sheet, the net pension position moved substantially during 2007-08, from a net deficit of £2.6 million to a net surplus of £3.3 million, which reflected the significant increase in stock market values over that period. It is obvious that if market values stay as they are, I expect that number to reverse again by the end of this year, but this year's position will be complicated by the fact that a full actuarial evaluation is taking place.

For our purposes, I am interested in whether that is likely to produce a significant call on public funds to balance out the position.

If a deficit arises, it is typical for the actuary to assess it every three years and to recommend a contribution rate to recover it, usually over a fairly long period. The period that the Lothian pension scheme uses is 20 years, so any deficit is unlikely to lead to a significant short-term additional call.

I will ask general questions. I am aware that Audit Scotland's income depends on how far advanced audits are at the end of each financial year. Audit Scotland has said that its billing timetable might mean that significantly more fee income is received in one financial year than in another. In its continuing dialogue with Audit Scotland, the commission has discussed how that situation could be improved. Pages 35 and 46 of the annual report and accounts show that operating income rose by 6.8 per cent, largely as a result of fees that local authorities paid. Will our guests explain further that increase and the extent of the year-on-year fluctuation? I understand that the figure in 2006-07 was substantially reduced from that in 2005-06, even after the restatement to cover VAT issues.

Between 2007 and 2008, the volume change in the position that was reached at the end of March did not, on average, alter significantly. Most of the difference in the income relates to the inflationary increase in fees of about 3 per cent, plus the slight increase in the fee income that was earned above the indicative levels. Some auditors undertook additional work, for which they charged, which raised the total income by another 1 or 2 per cent. The difference in the two completion rates at 31 March was only 1 or 2 per cent.

On a positive note, I am aware that 90 per cent of audit fees were agreed within a specified timescale, which is an improvement on the previous year's rate of 56 per cent. What measures were taken to make that improvement? Is that improved rate expected to be maintained in future years?

The improvement was caused largely by stressing to all auditors the importance of agreeing fees as soon as practicable. It is also fair to say that the audit fees that were agreed during the year were relatively straightforward, in that there were only small changes in the audit scope or number of audits. It was a fairly stable year. We hope to maintain the level, although one or two changes that are coming through may delay some agreements this year. One example is the scope of work on international financial reporting standards.

Audit Scotland states on page 13 of the annual report that it has reduced staff numbers by 2.5 whole-time equivalents, generating savings of £54,000. However, note 2 to the accounts on page 41 states that the average number of staff directly employed during 2007-08 increased by 11 from the previous year and agency staff increased by three. Page 41 shows salary costs increased by 4.8 per cent over the year. How can those statements be reconciled? Have additional posts been created or have vacant posts been filled?

The measure of the average number of whole-time equivalents that is used in the annual report refers to the average number of people who we have in post during the year. We have published that figure in previous annual reports, and it is different from the number of posts in our establishment in any year, which is higher. In the current year, the number of posts in our establishment is 293 whole-time equivalents, but the average number of people who are employed in the year, as noted in the annual accounts, will be lower because of turnover, vacancies and so on.

It is possible to reduce the number of posts in the establishment while seeing a higher number of average employees during the year. The establishment figure will have shifted down, but because of faster recruitment or lower turnover we will have more people in post for more of the year than previously. We reduced two posts in the establishment but had more people in post for more of the year than previously.

Let us move on to staff turnover. I notice that staff turnover was significantly higher in 2006-07 than in 2005-06: 8.5 per cent compared with 2.2 per cent. No figure appears to have been provided for 2007-08. Why is that?

The figure for 2007-08 calculated on the same basis as previous years is 7 per cent. I would need to flick through the paperwork to see why it has not been given.

The figure that we quoted was 8.5 per cent in our 2006-07 annual report and 7 per cent in 2007-08. We have moved internally to refine the measure of turnover that we use following some work during a study on benchmarking. We now use the Chartered Institute of Personnel and Development calculation as an indicator for consistency with previous years, but we also have another measure, which is a value-for-money indicator on turnover. We consider the issue closely.

I am always interested in sickness levels. Audit Scotland's sickness rate of 8.11 days per employee is below the national average for public sector bodies, but it is an increase on previous years—it was 5.3 days in 2006-07 and four days in 2005-06. Is there any explanation for that increase? I know that you have an absence management strategy.

The increase is due to a combination of things. There has been a greater focus on reporting sickness absence. Our staff are dispersed over a range of working locations. During the year, we fully introduced an electronic time-recording system for all staff. Part of the shift that you mentioned is accounted for by the more accurate capturing of sickness absence data as well as by slight peaks in sickness absences in the winter and spring periods, when we seem to be susceptible to catching colds and the flu. We have focused our attention for some time on ensuring that we capture data quickly, and our new time-recording system ensures 100 per cent coverage of everyone and a way of matching up sickness absence records with time-recording records. We now cross-reference and analyse that information.

I want to stay on the subject of staffing. On the general strategy, we have covered the increase in staff numbers and the use of temporary staff, and have touched on the use of private firms. You have some discretion on what work you put out to private firms and when you might use temporary staff as opposed to recruiting permanent staff, but what is the strategy? When would you use temporary staff in your organisation and when would you recruit permanent staff? When would you use an external firm to do work? What drives the underlying trends in numbers?

The temporary staff tend to be mainly agency staff who work on audits. Perhaps Russell Frith will comment on that.

Short-term temporary staff tend to be used in two areas. They are mainly used to deal with peaks of work on final audits over the summer months. We are careful to ensure that we use such staff only when we cannot use our own staff, because there are risks in using temporary staff, as they need to be managed to ensure that we get the quality work that we need. Short-term temporary staff also tend to be used in corporate services—we have had short-term staff on reception, for example.

The balance between the use of firms and the use of in-house teams is set once every five years, because we offer audit appointments for five years in order to give firms the critical mass that they require. The Auditor General and the Accounts Commission set the volumes last time. However, we will review matters whenever we go through a procurement exercise.

I would like to return to the issue of the discrepancy between the number of posts in the establishment and the average number of people in post, which was raised earlier. I understand what you said. You mentioned a faster recruitment rate. Given staff turnover, recruitment costs seem to have tailed down at a faster rate than might have been expected. In light of what you said, it is difficult to see that a reduction in the number of posts in the establishment can really be classed as an efficiency saving. Surely the real measure is not what you could have spent but what you actually spend. Have I misunderstood your explanation?

Taking permanent posts out of the establishment means that we are saying either that we are not doing that work any more or that we have found another, more efficient way of doing it. I think that it would count as an efficiency saving. That is a slightly different point from the turnover issues and the movement within our workforce over the course of the year. We would not be using temporary staff to replace the posts that we have deleted, if that is what you are asking.

The business groups, particularly the audit services group, have workforce planning programmes and workforce plans that take a longer-term view of their likely need for resources over time, and consider the skills mix that will be needed, how they deploy staff, when agency staff will be required and what alternatives to agency staff there might be. We expect that those plans will, over the next few years, help us to deliver greater efficiency and further reorganisation of our core work to enable us to do things such as delivering the new international financial reporting standards.

The £54,000 that is mentioned on page 13 is therefore a saving resulting from the reduction in staff by 2.5 posts that were filled but which no longer exist. Is that correct? Is it a cash saving, as opposed to simply the deletion from the establishment of 2.5 posts that were not filled?

The posts were deleted from the establishment. The posts were not filled at that point, but they had been in the past.

It strikes me that, if it is to be counted as a real efficiency, that £54,000 should be a real reduction in costs, rather than a reduction in what the costs would have been if the posts had been filled. To suggest that the deletion of those posts is a saving is, perhaps, putting it too strongly. It might be better to consider that to be a potential saving. If another organisation were to suggest that that was a real efficiency saving, would you accept that?

In the public sector, yes, we would, provided that the organisation was being consistent. Our benchmark for efficiencies over the long term is movements in budgets from one year to the next. Provided that the organisation is consistent in that approach and starts from an agreed baseline, it is a fair way of proceeding.

So your assessment would be of a movement in budgets rather than a movement in actual expenditure.

Yes, provided that that is the consistent base over a period of years.

The point that we are trying to make is that the actual spend in year will vary with turnover, so that cannot be seen as an efficiency measure. What matters is the movement in the budgeted establishment.

The other feature of this issue, which is difficult to capture in an analysis of efficiency and effectiveness, is the work rate of corporate services staff. I recall that, in previous years, we have mentioned that issue. For example, in the human resources function, as the organisation has grown and the expectations of human resources support have grown in terms of staff development and training as we have moved towards being a best-practice employer and so on, the volume of work that the HR team has had to do has increased enormously. We must take into account that side of the issue, which is more difficult to capture.

I invite Diane McGiffen to say something about the workload in some of the corporate services.

I said earlier that we now have an establishment of about 290 staff. When we began, we had an establishment of around 220 staff. Although the staff numbers have grown, the support services have not grown at the same pace, so the ratio of HR staff, for example, to the people whom they support has grown over time—we have provided the relevant figures to the commission previously. We have found different ways of managing the workload and delivering services and support so that the costs of supporting staff have not grown at the same pace as the numbers of staff. We monitor over time the ratios of support staff to our core business staff, and benchmark accordingly.

My question might stray a little bit from the annual report, but it concerns a matter that is mentioned in it.

You mention the adherence of Audit Scotland to the Confederation of British Industry's prompt payment code of practice. At a governmental level, in the United Kingdom and in Scotland, there have been announcements that there should be a 10-day period for payments to small firms. Is that acceptable to you? Audit Scotland need not follow the direction of either Government but, given the improvement in your payments based on the existing criteria, have you given any consideration to whether you might be able to move towards that sort of target?

We have not yet formally considered that, but we are doing on-going work around our internal financial systems, and are looking to continue to improve the rate at which we process payments. We are on an improvement journey in that area.

I thank our witnesses for giving lucid and coherent evidence this morning, despite the late night that Mr Black has confessed to having had.

I invite Richard Gibson to take a seat at the table, which I admit slightly resembles a piece of furniture that might be used by the politburo. It sometimes seems as if these committee room tables are getting longer and longer.

As I intimated earlier, the commission is responsible for securing the audit of Audit Scotland. To help us to do that job, we have contracted the services of HW Chartered Accountants. Before us we have, as well as Audit Scotland's report and accounts, the report from our auditor. Mr Gibson is our lead contact in the external audit of Audit Scotland.

Mr Gibson, for the record, I ask you to confirm that HW Chartered Accountants has received all the information and explanations that were necessary to enable you to form an opinion of the accounts and to give us an overview of observations that were made during your work.

I confirm that that is the case.

I invite you to make an opening statement.

I am the responsible individual at HW Chartered Accountants for the audit of Audit Scotland, which means that it is my ultimate responsibility to ensure that we have complied with all the professional standards that have been set out by our institute. We are a firm of registered auditors and chartered accountants and we have, for the past three years, acted on your behalf in the auditing of Audit Scotland, following our appointment as a result of a competitive tendering process.

Our work was undertaken from February to May 2008, and our audit report was signed on 24 June, following a presentation to the board of Audit Scotland. The documents that have been submitted to your commission are our audit report, which forms part of the annual report and accounts that you have before you, and a report to management, which is a letter identifying what weaknesses, if any, were found in the systems and procedures of Audit Scotland, and recommendations for improvement, if appropriate.

I can confirm, following our review, that I am happy to sign off our audit report, based on the fact that the information that was provided to us allowed us to believe that the accounts provide a true and fair view of Audit Scotland's performance during the year to 31 March 2008, and that the accounts comply with all the relevant legislation. I am happy to report, also, that there were no issues that we felt need to be brought to your attention, or, indeed, the attention of the management of Audit Scotland, as part of our report to management.

I can further confirm that the points that were raised in 2007, which the commission has considered, were discussed with Audit Scotland and have been adequately addressed during 2008. Although those issues were not a matter of significant concern, we are happy that they have been addressed and the necessary improvements have been made.

I am happy to recommend to the commission the adoption or acceptance of the accounts.

That is helpful. Neither of my colleagues has any questions, so you are getting off lightly, as I have no questions, either. Thank you very much. We appreciate that you had a long journey to get here.

Not at all—it was a pleasure.