Scottish Commission for Public Audit, 05 Nov 2008

Meeting date: Wednesday, November 5, 2008

Official Report 196KB pdf

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Budget Proposal 2009-10

We move to agenda item 4 on Audit Scotland's budget proposal for 2009-10, which we have before us. I welcome the Audit Scotland team again. After today's meeting, the Scottish Commission for Public Audit will produce a report on the budget proposal, a copy of which will be forwarded to the Finance Committee so that it can consider it as part of its overall budget scrutiny. I invite Mr Black to make an opening statement.

The budget paper that the commission has starts with an outline of the business issues that require to be taken into account in building up our budget for the next year. We are, of course, very happy to answer questions on that.

We have, as the commission has requested in the past, attempted to present the information in a format that is aligned as closely as possible to the annual accounts. Essentially, the budget is to provide us with the following: the resources for our core functions, which are the audit of the 200 or so public bodies in Scotland; a programme of performance audit studies, best-value studies and overview reports; the capacity to prepare reports on issues of concern that arise during the year; and contributing to the development of public sector policies, practices and accounting standards.

We have widely consulted clients and stakeholders about our corporate priorities and will bring our corporate plan and forward work programme to the Audit Committee in January. On page 3 of the budget proposal, we set out our budget assumptions and details of how the budget breaks down for our planned efficiency savings. In essence, our budget would deliver a reduced reliance on end-year flexibility and would incorporate in the core budget a resource for future development work, out of EYF. I emphasise that the budget will achieve an efficiency target of 2.2 per cent on our 2008-09 expenditure. Fee increases of 3 per cent for the 2008-09 audit year and 2.5 per cent for the 2009-10 audit year, and the cost of international financial reporting standards are all included. That results in a resource requirement of £7.279 million from the Scottish consolidated fund, which is a 0.4 per cent increase from the approved 2008-09 budget.

The Audit Scotland board considered the budget in detail and approved it for the SCPA's consideration today. The Accounts Commission has approved the charges to be made on local authorities.

The budget proposal states that basic pay increases from April 2008 are still under negotiation. When does Audit Scotland expect those negotiations to be concluded? What range of effects might the pay increases have on Audit Scotland's budget?

In the current financial year, we budgeted for a 2.5 per cent pay increase. The offer on the table for local authorities is 3 per cent this year and 2.5 per cent the year after. The additional cost to us of moving from a 2.5 per cent settlement this year to a 3 per cent settlement would be around £60,000 to £70,000, which we believe we will, for this financial year, be able to manage within existing resources. We recognise, however, that the local government negotiations have yet not been voted on or settled—I think balloting is going on at the moment. We await the result with keen interest, as do our staff.

With respect to age discrimination legislation, I note that Audit Scotland estimates a 0.5 per cent increase in fees for the audit year 2008-09. Will you further explain that increase and what impact it will have on the two financial years 2008-09 and 2009-10, which are covered by the 2008-09 audit year?

The arrangements for moving to a new reward package with staff are the subject of negotiation with our trade union. We made a formal offer on Monday. The transition arrangements on age discrimination, too, are the subject of negotiation with the union. In the budget, we have provided for the uplift on fees as our estimate of the cost in the first year of that move, but we have not yet finalised negotiations.

That is noted with thanks.

I notice that there is an additional increase in payments to the approved auditor firms from November 2008, to reflect the introduction of the international financial reporting standards, which is estimated at 6 per cent of the cost of national health service and central Government audits, and that Audit Scotland intends to apply that increase only to audit work that is outsourced. How was the estimated increase in costs arrived at?

It is to some extent an estimate that will be borne out by experience. We have talked extensively to the other audit agencies, which are all facing the same issues. Our feeling is that the figure represents a reasonable estimate at this stage in the development of IFRS work to reflect the additional work that will be needed during the transition phase, when the shadow accounts and the opening balance sheet require to be reviewed. Once IFRS is fully in place, we intend to review the estimate to see whether it is appropriate, or whether it is too low or too high.

We understand that in the private sector, fees rose by anything up to 20 per cent. We do not believe that some of the complexities that occurred in the listed companies translate into the public sector. For example, there are no complicated option arrangements and there are few acquisitions and disposals of businesses, which are major issues in the private sector.

A reasonable estimate at this stage is to come down somewhere below half of what was experienced in the private sector, although we believe that there will be considerable variation in that average figure, depending on the complexity of the public bodies that are subject to review. For example, those with complex private finance initiative schemes are likely to require more audit work in the transition period than those that have simple administrative functions and no complexities.

Will the 6 per cent uplift be an annual increase in cost or is it likely to be a one-off?

The 6 per cent will be applied to the 2008-09 audit year and will remain in place during the 2009-10 audit year. At the end of that year, we will review it to establish the extent to which the costs relating to IFRS audit are transitional and the extent to which they need to be embedded. At the moment, I do not know how that will pan out.

We have discussed the Crerar review. At the last bullet point on page 3 of the budget proposal, Audit Scotland says that it has not sought additional resources in the 2009-10 budget for potential on-going costs that result from implementation of the Crerar review, as that is still at an early stage. However, on page 5 of the autumn budget revision, Audit Scotland requests substantial EYF for "development of the business" in 2009-10 and refers to

"an unusual peak of development work"

that has included

"responding to the Crerar review".

Will you reconcile those statements, which appear to be contradictory?

The amount that is included in the autumn budget revision relates to the work that we are doing to support the Scottish Government and the various work streams that it established following the Crerar review to consider how to implement the review's recommendations. It will also support the development of our initial response to the additional functions that the Accounts Commission was given—its gate-keeping role in relation to scrutiny of local authorities. It takes a fair degree of high-level effort to work through and develop proposals and get them to the implementation stage.

We do not yet know whether any additional on-going costs will arise from the Accounts Commission's gate-keeping role. Until that is developed, we do not know whether it will require significant additional resources or whether, through efficient use of our resources in developing the second round of best-value audits and the relationships with other inspectorates that develop through that process, it will be able to be absorbed in current resources.

The proposed use of EYF in the autumn budget revision shows that Audit Scotland has decided not to request to carry forward some of the previous underspend but to make a rebate to audited bodies, which reduces the current balance. What steps are evident in the 2009-10 budget proposal to ensure that less underspend is generated in the future?

One measure in the 2008-09 budget that will continue into 2009-10 is that we have increased the vacancy factor that we use in staff budgets. Historically, we ran a 3 per cent vacancy factor, but our experience has been of a slightly higher figure so, for 2008-09, we moved that to 4 per cent and we are maintaining it at 4 per cent. That is one way in which we will tighten up on and reduce the amount of EYF that is requested at the end of this year and in 2009-10.

In 2008-09, we reduced some individual budgets and pooled an element—for consultancy, for example—so that instead of having several small budgets, all of which tended to be conservatively set, we reduced those budgets and brought an element into central management. We will continue with many such measures in 2009-10. As members can see from page 5 of the budget proposal, we also have several proposals for further efficiencies that we intend to make in 2009-10.

I have no further questions.

The operating cost statement on page 8 shows that legal and professional fees have risen from £784,000 in 2006-07 to a proposed £1.2 million in 2009-10. I think I am right in saying that, on top of that, there is a further £108,000 for the reward and competency strategies. I assume that those are, at least in part, for consultancy work. There seems to be a bit of a growth projectile in that area, so to speak. Will you give us a flavour of that?

Yes. We have been conscious of this for a while. The figures in the 2006-07 and 2007-08 columns—£784,000 and £815,000 respectively—represent significant underspends against the budgets that we had set for those years. If we had given you the four-year budgets, you would have seen a much straighter line.

The 2009-10 budget proposals include a significant element for the second round of best-value audits. That is one way to achieve a shorter timetable for completion of the second round. As we said earlier, the original three-year timetable slipped partly because we did not spend the full budgeted resource. A degree of additional consultancy or buying-in of resources from professional firms is included. That explains a fair amount of the increase.

I turn to whether that represents a long-term increase. When we first started out on the best-value audits three to four years ago, the total cost was £1.25 million. The total projected cost for 2009-10 is now £1.284 million. To a degree, you are seeing a restoring of budgets to original levels.

Do you have an idea of the forecast outturn for 2008-09 under that heading? Will you reach budget or be below or above the forecast figure?

We have only just started our forecasting. As of the end of September, we were fairly close to budget. However, it is a phased budget and, in terms of consultancy, it was expected that more would be spent in the second half of the year.

Does your reliance on outside contractors reflect a lack of expertise in your organisation, a way of dealing with the peaks and flows of best-value audits, or some other thing?

It reflects all those things.

Do you anticipate a steadying in that or will it continue to rise? I return to the trends that you have set out. I accept what you say on the underspend, but the expenditure is on a fairly straight upward line. A substantial amount has been spent over the recent past. Do you expect that to continue or flatten?

We expect that it will flatten.

I have two more questions, the first of which picks up on our earlier discussion on future development work. In the budget bid, you say that you are incorporating a resource for future development work into the core budget and you mention two posts. In the 2008-09 autumn budget revision, under the "Development of the business" heading, you are seeking £482,000 of EYF to be carried forward to 2009-10. How much money will be incorporated into the core 2009-10 budget for future development work?

Given that it is for two relatively senior posts, the figure is approximately £160,000 to £170,000.

Thank you.

Finally, on page 7, you say that a net resource requirement of just over £7.2 million from the Scottish consolidated fund represents a 0.4 per cent increase on that which was approved for the previous year. However, on page 4, you say that the net operating cost is rising by 3.9 per cent and that the 0.4 per cent figure is largely due to Audit Scotland requesting significantly less capital this year than previously. Why is that the case?

On the capital side, 2009-10 will be a year of relatively lower expenditure for Audit Scotland. We will have completed a large number of major capital projects, particularly in this year, such as the replacement of our laptop and desktop hardware, which will then go on to a three-year to four-year cycle. In this year, the capital request is lower than has been the case in previous years. It will start to tip back up again when those capital items need to be replaced.

Thank you for your time this morning. We appreciate the work of our colleagues in Audit Scotland. Thank you for giving such comprehensive evidence.

Meeting continued in private until 12:18.