Scottish Commission for Public Audit, 05 Nov 2008

Meeting date: Wednesday, November 5, 2008

Official Report 196KB pdf

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Autumn Budget Revision

For item 3, I welcome back the Audit Scotland team, although they did not physically remove themselves from the table. We have before us Audit Scotland's proposals for the 2008-09 autumn budget revision. I invite Mr Black to make a short opening statement.

We were aware of the wishes that the Scottish Commission for Public Audit has expressed in the past regarding how we handle such revisions. We have undertaken to address those concerns in the present budget cycle. The commission asked us to consider whether we could reduce the on-going use of end-year flexibility and the cumulative EYF position, possibly by way of a rebate to audited bodies and perhaps by trying to include some development capacity in our core budget, so that it does not feature recurrently in EYF. You also asked us to provide more details on the sources and proposed use of EYF. This year, we have done our best to address those concerns. We indicated to you that we would not be able to resolve all the issues in one year by virtue of the nature of EYF, which tends to be something that is considered over one year. However, we suggest that our proposals this year make considerable progress under all those headings and that our reliance on EYF will come down significantly.

We propose rebates to the audited bodies and to the Scottish consolidated fund. We will conclude the first round of best-value audits and plan for best-value improvement without the need to increase the fees that are charged to audited bodies. We will use EYF to help us to meet unanticipated properties costs. Page 2 of our budget revision proposal details all the elements in the potentially available EYF, and pages 4 and 5 detail the proposed use of EYF. We have done that in some detail, because that is what the commission requested. There are some fairly full notes explaining each element of EYF. Taking that document along with our budget proposal, which the commission will consider shortly, and the documents that we have submitted on the fees strategy, I hope that you will be comfortable that we have tried to respond to your desire for more information and greater transparency on the issue.

As I say, it is not possible for us to eliminate all the elements of EYF in one year, but our document attempts to take us quite a way along the road towards that.

It is fair to say that Audit Scotland's reliance on EYF has been a focus of our past attention and discussions. Robert Brown, our EYF specialist, has some questions.

I thank the Auditor General for the budget revision paper, which lays out clearly several of the issues and gives a breakdown, which is helpful to our consideration. I have a general question. As I understand it, the revenue bit of EYF that Audit Scotland requests has increased from £1.541 million in 2007-08 to £2.483 million in 2008-09. You then knock off £1 million for the rebate to the audited bodies, which takes the figure back down to £1.483 million, which, dare I say it, is virtually the same as the figure for last year. That is against the background of what you describe as a reduced reliance on EYF. Against that general background, can you clarify how that is a reduced reliance on EYF? What steps are likely to impact on the amount of EYF that Audit Scotland will request in future? Obviously, you touched on the trend in that respect.

You are absolutely correct in saying that, in the 2007-08 autumn revision, we requested £1.5 million in revenue and just over £1 million in capital. The total requested was just over £2.5 million. This year, we are looking for a rebate of about £1 million to clients. In effect, we are asking for £1.483 million on revenue and a small amount of capital. Russell Frith will say more on the pattern of movement over the years.

By the time that we were able to consider the points that the SCPA made last year, we were almost too far through 2007-08 to do an awful lot within that year—in fact, we could not do anything in the year. To some extent, we are now seeing a finishing off of the existing position. For example, in essence, all the elements around best-value audit and development of the business are a continuation of the things that we asked for last year and which are working their way through.

I turn to what we expect to happen in future years. We have tightened some aspects of our budgeting for 2008-09; we did that in the original budget proposal for 2008-09. Our experience in the six months of the year thus far is that we are much closer to our expenditure budget than we have been in recent years. If we carry on as we are, the amount of EYF that is potentially available will start to come down significantly, particularly if we go through with the rebate proposal. In future years, the SCPA should expect to see the amount come down significantly.

In essence, we have the original 2008-09 budget of £6.7 million and a revised total funding figure of £9.2 million. The figures are quite substantial in overall terms, are they not?

They are indeed. However, in order to address the cumulative EYF position by means of rebates to audited bodies, we have to bring the resources through the EYF mechanism. We have no alternative mechanism to legitimise that.

In a sense, the policy issue is the proposed use of EYF. I have some questions on your paper. You say that the staff conference was deferred from the 2007-08 budget and have given us a figure of £80,000. Given the number of Audit Scotland staff, the proposed expenditure looks like a substantial amount per head. Why is the conference so expensive? What is it?

Audit Scotland hardly ever has the opportunity to get its staff together in one place. Clearly, we are required to do that to operate to good management standards. We therefore have a policy of not having an annual staff conference where everyone gets together but a conference once every three years for our people who are in Inverness, the west, Aberdeen, Edinburgh—everywhere. In the year in which the conference takes place, it is a noticeable item—in this case, £80,000. However, if one looks at the cost over a three-year period, it works out at around £90 per head per annum. That is a very small sum of money to get all our staff together to do some intensive work over a two-day period.

The estimated cost of the correspondence-handling arrangements is £81,000, which is intended to accommodate 200-and-something letters. To put that into perspective, that is significantly less correspondence than most of my colleagues receive in their offices, yet the proposal is to spend £81,000 on a pilot project on that. That seems to be a lot of money. In the overall scheme of things, is that expenditure justified? Is it intended to be offset by redeployments? It is in the proposals as an additional outlay rather than a cost that is accommodated by savings elsewhere. One guy—who appears to be quite senior—does the work. Will that free up other staff, so that expenditure is not increased?

Diane McGiffen will be able to answer more fully and helpfully than I can, but I will give a general response. I am certain that the arrangements are right. In previous years, we received manageable volumes of correspondence, which went to the relevant individuals for responses. As the reach and complexity of our work have increased, and as Audit Scotland's profile has increased, not only has the volume of correspondence intensified but the significance of some issues has increased. Therefore, a significant amount of correspondence requires full and detailed consideration, because we must respond accurately to people.

As we reported in last year's annual report, we have found some evidence of our response times slipping. Senior management and I were increasingly concerned to ensure that people receive a robust, high-quality and relevant response to their inquiries. For that reason, we reviewed our systems. We decided that to have a dedicated unit that could draw on the resources of the rest of the office and of the firms that work with us would be much more efficient and would manage the risks for us by ensuring that consistent and well-supported work was undertaken before replies were written.

I will keep my comments brief. The correspondence to which the document refers is not all the correspondence that the office receives but the correspondence in which people raise concerns about bodies that we audit. In the past three or four years, the volume of that correspondence has risen significantly in relation to local and central Government. We must consider such correspondence seriously. It has resulted in some significant reporting on audited bodies and it has raised significant concerns that have been substantiated. Such work requires detailed consideration and co-ordination. Audit Scotland receives correspondence but, as we have said, external auditors and firms do some of the work, so we must liaise with local auditors. We must try to meet our correspondence-handling targets, consider the issues seriously and respond in detail to people's inquiries.

We have tried various ways of operating. Initially, such letters were simply given to the appointed auditors, who dealt with them however they wished. However, that did not meet the expectation of the people who wrote to us that Audit Scotland would respond. We also had no control over the time that was taken to respond.

Many issues that are raised in correspondence are dealt with in the course of audit work but, by keeping a central team focused on that, we know about our engagement with whoever corresponds with us. We know where we are in the investigation of a concern, we are clear about the follow-through and we can manage and deliver the level of service that we would like.

Dealing with correspondence has become complex over the years, partly because of the volume and partly because many correspondents raise technical and complex issues that take some working through. We need to find a way of resourcing it that enables us to consider everything seriously; to deliver on our commitment to respond appropriately; and to ensure that we can track and monitor responses and provide a consistency in our approach, which was a problem that we experienced in the ways in which we previously dealt with correspondence.

Early indications are that the correspondence in relation to local and central Government has gone up yet again this year. The volume increase for us is continuing, and correspondents' expectations that we will be able to process their concerns are higher than ever. Members of the public often feel very strongly about those concerns and expect us to be able to deal with them. We want to fund the scheme as a pilot to establish whether it is the best way to deal with correspondence, before we reorganise and consider which resources it might enable us to free up or adjust later on.

It is not appropriate to go into examples in great detail, but I have one example that might help your understanding of the challenges that we face in that area.

In recent years, we have received a lot of correspondence about common good funds in the local authority sector. If one examines the aggregates of local government finance, one finds that, generally speaking, the common good funds do not impact significantly on public spending, because they are separate. It is therefore quite difficult for auditors to respond, because they have very heavy workloads elsewhere. It is time consuming and difficult to trace the exact circumstances of common good funds, and it involves making a lot of judgment calls along the road about how far we can take the audit process.

That has generated quite a lot of work for Audit Scotland staff and, as Diane McGiffen mentioned, correspondence sometimes leads to what might be described as mainstream audit activity. In this case, it has led to the Accounts Commission asking for a piece of substantive work to be carried out on common good funds.

That is very helpful by way of background. I suspect that I know one or two of the people who have sent you that correspondence over the years.

I would like clarification on a couple of points. First, is the pilot a one-off expenditure that, once it is scoped and worked through, will be reabsorbed without an increase in the overall staffing arrangements? Secondly, is any of the expenditure recoverable from local authorities, if some of the work relates to the incidentalia of your relationship with local authorities?

Russell Frith will correct me if I am wrong, but I do not think that that expenditure falls into the recoverable category, other than in the broad sense of the amount of local authority fee that helps us to support our central charges. That fee resources other office functions, but it is not specifically recoverable from any individual local authority, regardless of the volume of work that might be generated.

The intention behind the pilot is to consider the implementation of a different way of managing the process. If it is successful in enabling us to respond to the volume increases and to meet our targets, we will seek to build it into our core budget. However, the decision on how much of the cost will be built into the core budget depends on the efficiencies that might be generated and on what other people might stop doing. In other words, that depends on our arrangements with all the appointed auditors with regard to the balance between the amount of investigatory work that we do centrally and the expectation of what they would do locally and so on. The pilot will give us the time to work through all that.

My general point relates to all those things. In these times of public sector stringency and difficulty, one would hope that—in the long term, if not the short term—such a cost would certainly be absorbed and dealt with in your own budgetary arrangements, rather than lead to a staffing increase.

The pilot will give us the opportunity to resource the area more effectively and to try out different ways of handling correspondence. The evaluation at the end of the scheme will examine how we can build that into our core work. It might lead to a marginal increase in cost, or something that would head towards the full cost, but we will be able to assess that at the end of the pilot.

I have a few disparate questions on the uses of EYF. I notice that the 2009-10 budget includes money for development of the business in response to our recommendation that Audit Scotland should budget for that in the usual way rather than relying on EYF. However, the amount in the 2009-10 budget is not specified. Will you say a bit more about that and what you are likely to use the money for?

In the 2009-10 budget, the two posts—

I am sorry; I will be specific. I am looking for clarification of whether the amount in the 2009-10 budget is in addition to the £482,000 of EYF that has been requested for use in 2009-10.

Yes, it is, although some of the activities may well be the same. The idea is to move the funding of those development activities from being entirely based on EYF—as it has been in the past—towards being entirely within our budgets but at a lower constant level than is implied by the current EYF, because we believe that we are at a peak at the moment in the development of best-value work and responses to the Crerar review.

Will you say a little bit more about how the money for developing the business will be spent? Have you any idea what proportion will be used for responding to the Crerar review or implementing the IFRS regulations? Will it be used for other things?

It will probably be the best use of our talents if I answer on scrutiny and Russell Frith answers on IFRS.

The development work for implementing the next round of best value overlaps in many ways with that for streamlining scrutiny, which is the objective that arises out of the Crerar report. We are developing the new models of best-value auditing in the context of the desire to reduce the perceived burden of audit on local authorities. With other inspectorates and agencies, we are examining opportunities for co-ordinating the timing of audits and inspections of local authorities and other bodies to make the process more manageable for audited bodies.

That constitutes an overall package of work. Some people will lead on specific pieces of work related to the Crerar review of scrutiny, and some have led our involvement in working groups and working parties to take forward issues such as how public bodies handle complaints. We are using a team of people to do different aspects of that work, but it is difficult to disentangle it because the development of best value is informed by our efforts to implement the expectations of the Crerar review. That team involves a number of posts and our ability to use other people to help us develop new tools and techniques. We have some people who have been seconded from local authorities, and some who are helping us to review different aspects of our toolkits and audit modelling, for example.

There is a range of work and it is difficult to disentangle the Crerar-related work and best-value development, as they are interconnected. However, once much of the work is done, the products will be developed and we will make the decisions about what the new models of audit will look like. The EYF requirement for the development end of that bit of work, which, as Russell Frith said, is at a peak, will disappear and it will become part of the mainstream maintenance and evolution of the work that we do. There will be no need to create things from scratch, on which a great deal of effort is focused at the moment.

IFRS is a matter that is well beyond my scope, so I will hand over to Russell Frith.

Very little of the business bid that has been developed for the autumn budget revision relates to IFRS. When we get to 2009-10, the figure is in the low tens of thousands of pounds.

Thank you very much.

Last year the commission reflected in its report our desire for Audit Scotland to examine the possibility of making savings by sharing backroom services with other organisations. I note that Audit Scotland proposes to use £80,000 of EYF for a replacement payroll/HR system. Has Audit Scotland had the opportunity to explore the possibility of sharing backroom services? Would the purchase of new systems be a barrier to the use of shared backroom services to reduce such costs?

Over the years, we have considered carefully the use of shared backroom services. A fundamental problem is that we must be independent of the bodies that we audit. The simple fact is that the bodies with which we might share services are often audited bodies.

We have taken some initiatives in that area. For example, the Sustainable Development Commission is located in one of our offices and shares some of our support services, because we did not think that that represented a conflict of interest, and we have occasionally assisted other bodies to develop their systems. However, I tend to be rather resistant to the principle that the auditors should share the services of the auditees, because of the perceived conflict of interest. I am not sure whether there would be an actual conflict of interest, but the perception would certainly be that such a relationship would be inappropriately close. My colleagues might wish to add to that.

I have nothing to add on shared backroom services. Our approach has been to look for benefits through sharing development costs or initiatives with some of the other audit agencies. We shared the development of the work that we did collectively on benchmarking corporate services across public bodies, and we support the implementation of that project across the UK's audit agencies. We have sought other opportunities to obtain benefits from shared working that would not flag up for us some of the issues that Bob Black described.

A range of bodies are involved in that process, but one direction of travel that a number of people have examined relates to the work of all the various commissioners and ombudsmen. I imagine that you fulfil an auditing role in relation to them as well, but if we are too strong on the issue of not sharing payroll services, for example, when reasonably significant savings could be made in that area, will we not find ourselves in a theoretical cul-de-sac? I do not know whether significant savings could be made on payroll services—it might be that although that is a totemic issue that we all go on about, it all amounts to much ado about not very much. I would like clarity on whether such opportunities have been explored.

In my view, there is no major conflict, perceived or otherwise, in endeavouring to share backroom services in those areas with the commissioners and ombudsmen. Although those bodies could not be said to perform similar roles to that of Audit Scotland, which in many ways is unique, they operate in an auditing/complaints handling environment and are not major providers of public services in the way that health boards and local authorities are. Is there really a problem with discussing the sharing of services with them?

I absolutely agree that we should be vigilant and look for opportunities in that area. As I understand it, the Scottish Government is soon to announce some of its findings from the independent review of scrutiny bodies. I do not know whether its approach will involve changing and streamlining structures, but it is possible that there might be a configuration of bodies with enough of a critical mass to allow us to revisit the issue of shared services. However, we must be vigilant in recognising the independence of the auditors from the audited bodies in such matters.

You have said that the Accounts Commission has determined that the first round of best-value audits must be concluded by next April. When did the Accounts Commission take that decision?

I beg your pardon. Which decision are you referring to?

The decision that the first round of best-value audits be concluded by April 2009.

When the Accounts Commission started out on its best-value programme a couple of years ago, its target was to conclude the first round by around now. There has been some slippage because of the size and complexity of the work, but its target for completing the work by the end of this financial year has been in place for some time.

Your comment that you are on-track to conclude the field work for all this tends to add weight to the notion that that aspect has been relatively foreseeable, which raises the question of why it is necessary to set aside £321,000 of EYF for it.

The main reason for using EYF for that purpose is that our original budget for collecting income from local authorities to cover the costs of the best-value audits was based on the assumption that the original target of completing the first round within three years would be met. That target has slipped, but we have still recovered the income for covering those costs. If we were to stop collecting that money and do something else with it, we would not be spending it on the activity for which we had received it in the first place. We could give the money back to the local authorities by increasing the rebate and then simply charge them again this year. However, we feel that the fairest way of dealing with the income that we have received through local authorities is to retain it through the EYF mechanism and to spend it this year on completing the work.

That was my follow-up question. How do you reconcile that approach with that proposed in your fee strategy to recharge public authorities for the costs of the best-value audits, particularly with regard to the proposed rebates to local authorities? Manipulation is the wrong word to use in this context, but there is scope for the numbers to be moved in a direction that has not been set out in the fee strategy. In effect, you are saying that all this expenditure from the local authorities will be expended on best-value projects.

That is right. It will be spent on completing the first round of best-value audits by the end of April 2009.

So the figure does not represent an increase in the expected cost of completing that work.

No. It is a rephasing.

This area shows why there is a possibility that EYF will always be necessary, because it is all about the pattern of work flow. When the statutory best-value regime was introduced for local government, the principal decision on its funding was that costs should be recovered from the local authorities. Related to that was the decision that costs would be recovered broadly in proportion to population. That element is built in every year. However, as Russell Frith says, it means that, if for any reason—many of which would be understandable—the work is postponed, we have the income but we have not yet undertaken the work. That is the nature of running any business, and we are no exception.

Like Russell Frith, I can give an absolute assurance that we are not operating inefficiently or seeking any additional funds from local government. It is a true EYF-type issue.

To some extent, is that argument not a bit circular? You require to use EYF only because you have billed on a different cycle from that of the work that is being conducted, which is a result of the decision to phase over the whole timescale of the best-value regime, regardless of which councils are being examined at any time. You could reduce reliance on EYF if you changed your policy by saying, for example, "If we are going to undertake a best-value audit the City of Edinburgh Council this year, we will bill the council this year."

There seems to be a route other than that of using EYF, and the requirement to use EYF is fundamentally driven by your decision on the fees strategy. I accept that it might be necessary to use EYF in the case in question, but it is a circular argument to say that that is an example of why you need EYF. It seems that your policies lead you to needing EYF.

To a degree, that is right.

As we have no further questions on the proposed use of EYF, we will move on to the rebate of fees to audited bodies, which will be welcome news to many. Why has Audit Scotland chosen to reduce dependency on EYF by giving audited bodies a rebate of £1 million rather than taking other approaches, such as returning the money to the Scottish Government for it to be allocated according to other priorities?

The proposal to rebate money to audited bodies arises from the simple fact that that is where we believe that the EYF has arisen from. The £1 million has arisen from work for which we have billed audited bodies over the years, and we therefore believe that it is appropriate for it to go back to the people who paid it.

There is another element—approximately £300,000—that, by not claiming EYF, we are effectively returning to the Scottish consolidated fund for use by the Scottish Government however it wishes. We estimate that that element arises from the work funded by the SCPA element of our overall budget. To the extent that it has arisen on, for example, non-chargeable audits, it is included in the £300,000 that we are not claiming and are therefore, in effect, returning to the Government.

Why is that the other way round from the balance of fees, a third of which goes to private firms auditing local authorities and the rest to central Government?

This is a question of our income, three quarters of which comes from fees from audited bodies.

Audit Scotland states that just over £1.4 million of revenue EYF comes from chargeable audit work. Why is it proposing to rebate only £1 million of that to audited bodies?

The table on page 6 of the autumn budget revision shows where all the potentially available EYF arises from. As we have proposals amounting to £1.483 million for using EYF, that eats into some of the balance that would otherwise be available for rebating. If we had come up with fewer specific proposals for the use of EYF, more would have been available to rebate to audited bodies. It may have come to more than £1.4 million, depending on what the specific requests were.

I am interested to know how and when Audit Scotland plans to provide the rebates to the audited bodies. How will you decide on the allocation for each audited body?

We plan to make the rebates along with the first invoice for the 2008-09 audits, which we will issue in December. We propose to allocate the rebate in proportion to the size of the audit fees that the various bodies paid.

There are no more questions on this item, so I thank Mr Frith.