Our next item of business is to consider Audit Scotland’s annual report and accounts for 2013-14.
I will take that responsibility, if I may, convener. Thank you for the opportunity to give a brief statement.
Thank you.
Thank you. I think that there are a few questions.
There has been significant progress on that. Russell Frith will pick up that point.
When we first realised that we would have to do the audits of the charities that are operated by local government, there were about 1,200 of them in Scotland. Many of them have now been amalgamated by councils, who have worked with the Office of the Scottish Charity Regulator to reduce the number. The number that we will finalise the audits of over the next couple of months is now down to between 200 and 300, and the figure is still moving, as the amalgamation schemes are still going through the approval processes. The number has reduced considerably and we expect it to reduce further next year.
What criterion do you use? Is it the fact that the charities exist, or is it size or something else?
In 2005 or 2006, a new piece of charities legislation in Scotland formed OSCR and the Scottish charities register. England had had a register since about 1960, but there had never been anything similar in Scotland. All that a body in Scotland had to do to be treated as a charity was to write to the Inland Revenue and convince it that its objectives were charitable. Consequently, the on-going cost of registration as a charity in Scotland was low and, accordingly, far more charities were created here than in England. Over many years, when Scottish local authorities received bequests or donations, they tended to set up individual charities rather than put the money into an existing charity. However, with the advent of regulation, that is no longer the most efficient approach.
That leads me into a slightly different area that we have discussed in the Public Audit Committee, which is the auditing of arm’s-length external organisations—ALEOs—many of which are charities. A lot of public money goes into ALEOs, and concerns have been expressed about whether that public money is being properly audited. Will you now be looking at the ALEOs?
The situation is slightly different in practice in that case, because most local authority charities are very much part of the local authority and administered by it in a closer way, and because the arrangements that the Accounts Commission has approved for their audit mean that, in almost all cases, the auditor of the charity is also the auditor of the local authority. That brings economies of scale, in terms of the cost of the audit. There is much closer join-up between the activities of the charity and those of the local authority. There is still the issue of principle about the different set-up arrangements that keep some funds slightly at arm’s length, but I think that they are less at arm’s length than in some of the cases that the Public Audit Committee has shown an interest in over the year.
As the Auditor General says, the Accounts Commission will appoint the auditors for charitable bodies. We have discussed with the Accounts Commission how to ensure that we can follow the public pound into the ALEOs that are, say, limited companies rather than charities. For the moment, we believe that the Accounts Commission’s powers to look at the way in which the councils monitor, regulate and control the activities of the ALEOs gives us enough to provide assurance on the way in which the money is being spent. We need to push those powers and ensure that we use them to the full before we consider whether any further powers might be needed.
In my experience of council charities I have found that many are relatively small when compared with ALEOs, which are usually much bigger organisations. Is it a good use of resources to focus on the small charities run by councils, as opposed to ALEOs, which have a great deal of public money?
All the ALEOs will be subject to audit.
By Audit Scotland?
They will not necessarily be audited by Audit Scotland, but they will be subject to audit by private sector auditors. Many ALEOs, particularly the biggest ones, come into the group accounts of the council concerned and therefore are subject to some degree of audit involvement by Audit Scotland, as the group auditor.
There still seems to be a bit of a gap there. A great deal of money is going into those organisations, yet Audit Scotland, as the public sector auditor, does not seem to have the same grip on them.
It is certainly at further arm’s length than the very direct audit oversight that Audit Scotland has over local authorities through the Accounts Commission, and other public bodies through my own responsibilities. That throws up some questions, particularly about transparency, which we have discussed with the Public Audit Committee on several occasions. As we have discussed in those meetings, there are good reasons for ALEOs and charities being set up in some instances, but there are questions as to whether that balance is right and whether there is enough transparency for people to have confidence in the way in which public money is being used.
I am sure that the issue will be back in front of us at some point.
I want to follow up on a couple of those points before we move on. I share the convener’s concern about ALEOs. At some point the Scottish Government may have to consider the relationship of ALEOs to Audit Scotland because there is a gap. Mr Frith, what is your definition of large and small in relation to charities? Will Audit Scotland directly audit the 200 to 300 charities that it will have responsibility for or will private companies do those audits?
I will respond to the second point first. The Accounts Commission appointed the auditor of a council to be the auditor of that council’s charities. So, for the 20 or so councils where Audit Scotland is the auditor, Audit Scotland will audit the charities; for the remainder, where the Accounts Commission has appointed private firms as the auditors, those firms will do the charity audits as well.
How significant will the workload be in auditing those relatively small bodies?
The workload varies according to the way in which the council concerned has restructured so far. Some councils have reduced the number of charities from more than 100 down to three. Clearly those take considerably less effort to audit than those councils where there are still 30, 40 or 50 charities. We hope that over the next year those councils will get through the reorganisation so that all councils have only a small number of charities, which reduces the burden considerably.
Let us move on. Page 15 of the report states that Audit Scotland has started a “healthy working lives initiative” for staff. We are aware that other public bodies previously provided such schemes for staff that were withdrawn because of budget pressures. Can you provide more information on the initiative and any indicative costs?
I will kick off and then ask Diane McGiffen to give you more detail about the costs in the schemes.
Certainly. We started with a survey that the healthy working lives organisation manages and delivers for us, and we surveyed staff in October to find out what they felt would help to promote health and wellbeing in the workplace and where some of the stresses and strains occur. We developed a programme of training and development following that. The cost of those things was met by refocusing some of our investment in learning and development. We have delivered training on personal resilience and working smarter and looked at ways to manage time and pressures. We have rolled out to all colleagues a taster session on thinking about the ways in which we can all make sure that we are paying attention to the flags that signal that we are under stress and being less effective than we might be. We completed a couple of those sessions yesterday in Perth with about 60 of our colleagues.
What about the indicative costs? There must be some projections of that.
As Diane McGiffen said, what we have done so far has involved refocusing spend that we already had in the training budget, the occupational health budget and our health and safety work. We had a sense that good work had been done in all those areas but it was not adding as much value as it could for safeguarding people’s health and helping them to deal with the new reality of the size of our organisation and the expectations of us. If the committee would like more of a breakdown of that, we can certainly follow up with the detail after today.
I think that the important thing is that no additional costs are being incurred in rolling those activities out. The concern is that money will be pulled elsewhere because of costs.
As I said in my opening statement, we are very conscious that we need to demonstrate the same standards of governance and value for money as other organisations do, and that this activity has to be sustainable. We are looking at people and the organisation making sustainable changes to how they work and that has to be within the budgets that we already spend. We are redirecting that spend effectively and we can certainly follow up with more information if that would help.
Page 17 of the annual report states that Audit Scotland
It is fair to say that it is always very difficult to see any clear trends coming through. First, the numbers tend to go up and down from year to year anyway, depending on the particular issues that people are concerned about, which are often in their local area.
Okay. Can the increase be attributed to organised campaigns, for example?
In some instances, certainly. We have examples of concerns about redevelopments of particular sites in particular areas that relate to either the process or the proposed use of the land. Because of the nature of the letters—people use common wording—it is very clear that there is a campaign. We think that that is entirely appropriate. People are entitled to raise their concerns in that way.
Has Audit Scotland experienced any budgetary pressures as a result of that increase in correspondence?
It is obviously fair to say that, if there is a peak over a year or in a short period of time, resourcing that becomes more difficult. That is one of the things that we have to play into our resource planning every year. It is clear that we do not seek to come back to the commission to ask for additional fees at that level of detail, but that is one of the pressures that we take into account in our budget planning. We are currently looking at how we can use our resources better to manage the peaks and troughs in that work and ensure that it is better connected into the foreseeable and predictable work that we do in ways that help us to manage the pressures. However, you are quite right: they can be tricky to manage in the short term.
I want to go back to the number of concerns that were raised. How many were raised internally by whistleblowers in your organisation over the past year?
I ask Diane McGiffen to pick up that question, as she oversees the process for us.
We have a whistleblowing policy and there is an annual report on whistleblowing to Audit Scotland’s audit committee. The audit committee considers that annually. This year, no complaints fell into the category of whistleblowing, although we considered some concerns raised by staff that did not quite fall into that category.
Would you contend that your internal investigation procedure for following up issues from whistleblowers is fit for purpose?
Definitely. We have worked with Public Concern at Work, reviewed our whistleblowing policies, had discussions with our audit committee, and developed our policy in line with best practice. We are a designated body under the whistleblowing legislation to receive complaints from external parties, and we apply the same principles internally.
To stick with page 17 of the report, sometimes the words that are used in a report seem to throw up a question. Page 17 of the report states:
Our internal auditors have used a process that gives three categories: substantial, moderate and limited assurance. I will ask Diane McGiffen to talk the committee through where we sat within each of those bands.
In all the auditing that we did, two audits received reasonable assurance. That is the middle band, which means that there are satisfactory processes in place but some areas for improvement. One of those audits was on data security, and the improvement areas were tweaks that we could make to how we test the resilience of our systems and so on, and better documentation of reviews of user access, which is when you have file structures and people have access to different things. There were recommendations for ways in which we could improve, which included introducing tweaks to the processes that we have in place. We are very pleased to have internal audit come with a fresh pair of eyes and help us to look for those areas.
Staying on the subject of internal audits, the report notes that a procurement process to appoint an internal auditor for the three-year period 2014 to 2017 has commenced. Is there any specific reason for making a relatively short appointment of three years rather than a five-year appointment, which might have been expected?
The audit committee of Audit Scotland has considered the timing and alignment of the rotation of internal and external auditors and there is scope to extend the three-year appointment, should the audit committee wish to do so. With three years, we have the ability for internal auditors to come in and develop a plan. There is flexibility about timing, reappointment or extension, depending on where the SCPA would be with its consideration of the external audit appointment and so on.
On that subject, has there been any progress in the appointment process since the report was published?
Yes. The procurement is complete. TIAA has been appointed as the internal auditor and it has already begun working with us for this year.
On page 20, the report states that £1.6 million of efficiency savings has been delivered, although the target was only £0.8 million. That is commendable and I think that the commission would want to recognise the effort that has been made by Audit Scotland in generating and achieving those efficiencies. We understand that it cannot have been easy. Can you confirm that the efficiency savings of £1.6 million will be recurring savings? Will they be factored into your future budget bids?
The amount that we had in the budget is certainly recurring. Some of the other savings are one-offs. The best example for that is in relation to staffing costs. Within our overall target, £409,000 was budgeted staff efficiencies, which we have achieved. In addition, our staffing costs were under budget by £314,000 as a net figure because of vacancies that occurred during the year and because of staff being appointed at a lower cost than staff who had left, for example. We have counted them as an efficiency saving because we delivered all our planned work within the costs for the year. However, they are timing differences that will be made up in future years.
If I can be clear, then, the £800,000 will be recurring, but the remainder will not necessarily be recurring.
That is exactly right. Some of it will be, and we will continue to keep pressure on our costs where we can. However, some of it is one-off efficiencies that simply occurred during the year. We were able to deliver our work within those, but we do not expect to be able to maintain those savings for the longer term.
Page 21 shows that fee income across all public bodies—including fees paid by the Scottish Government and sponsored bodies—increased between 2012-13 and 2013-14 by roughly 10 per cent. However, page 7 says that the costs of audit to public bodies decreased in real terms by 2 per cent over the same period. The fees that public bodies pay are increasing, but the costs of audit are reducing. What is the reason for the increase in fees?
This is one of the areas that are difficult to explain. I ask Russell Frith to explain it on my behalf.
Thank you, Auditor General. The fee income that is recognised in our accounts is based on the activity that is undertaken in the financial year, which is 1 April to 31 March, whereas our fee-setting process and the 2 per cent decrease to which you referred relate to audit years, which broadly run to the end of October. For the audit year 2013-14, we reduced the fees that bodies pay. However, the accounts recognise the activity level in the financial year.
You contend that any increase reflects additional work. Will you assure us that, if the costs to public bodies are decreasing, the fees that are charged will reflect that reduction?
Yes—absolutely.
Page 22 says that two new additional staff members contributed to the increase in staff costs from 2012-13. Are those posts new? What are their respective roles and responsibilities?
The posts are not straightforwardly new. In reducing our overall costs and particularly our staff costs, we have focused on reducing the cost rather than the number of staff. In the main body of staff, we have reduced management costs and invested in the staff who carry out audit work. The grade mix has changed. The number of staff has increased slightly, but we have not added two separate posts—there is a shift across the levels of the organisation.
Page 22 further notes that cost reductions of £73,000 have been recorded for buildings, rent and depreciation, but note 4 on page 50 shows that rent and rates have increased by £69,000 at a time when you have been rationalising your overall accommodation. That has included closing one office in the west end of Edinburgh, which I think you reported to us last year as being planned. Given that Audit Scotland is occupying fewer premises, will you explain the increase in rent and rates?
As it involves another accounting adjustment, that question is headed for Russell Frith again.
The figures for 2013 include the release of a provision for rent increases in the building that we vacated, which was no longer required as the landlord did not pursue an increase in rent. That provision was released in 2013, which means that the 2013 figures are low in terms of the overall trend.
I want to recapitulate a few things that I would like you to clarify. The recruitment costs for 2013-14 were £148,000. Page 15 of the report states that you “targeted recruitment” to achieve a more effective balance of skills and capacity and
I think that Diane McGiffen will be able to give you that figure.
In total we filled just under 50 vacancies—
Fifty?
Yes. Some of those were internal promotions. For example, some of our graduate trainees will qualify for vacancies following a competitive process.
So the numbers that I mentioned are simply the top line of a substantially more active churn in the organisation.
Yes. We have had a lot more recruitment activity this year because in reducing staff numbers we have recognised that we will put too great a strain on the business if we are not sharper at filling vacancies.
Can you provide a breakdown of the recruitment costs internally compared with the costs of recruitment activity outside the organisation?
In 2013, we spent just under £80,000 on selection costs for assessment centre-type activity to give us information about the strengths of different candidates. That related to both internal and external recruitment. I am not sure whether I can break down those costs internally and externally as we run single centres for internal and external applicants, but I can look at what we can do.
I want to clear up an anomaly that I have been thinking about. Audit Scotland’s gross administration costs in 2013-14 were around £24 million and note 4 on page 50 of the report states that its own external audit fee was £25,000. However, the external audit fee that Audit Scotland charged the Scottish Public Services Ombudsman was £19,500 against the SPSO’s budget of around £3 million for the same period. All audits will have an element of fixed costs and I know that various things such as complexity, the volume of transactions and other issues will come into it, but that particular audit cost seems to be relatively high compared with that paid by Audit Scotland for having an external audit carried out on itself. What is the logic behind that?
I will ask Russell Frith to respond in a moment, but I want to step back and give you the picture of how our audit fees are set and what they cover.
That was a fair summary. I simply add that we run the competitiveness process for the firms that are appointed and the fees charged by an in-house team will be in line with the results of that process. The SCPA runs a separate exercise, and it would be difficult to comment on the relative outcomes of those exercises.
I see that other members have no more questions, but I have one or two left. In the “Welcome” section of the annual report and accounts, the third paragraph of the accountable officer’s report on page 5 talks about
Certainly, convener. You might recall that around 12 months ago we published a report called “Developing financial reporting in Scotland”, which looked ahead at the implications of the changes that are coming through the Scotland Act 2012 as it is implemented over the next couple of years and potential further financial devolution, whatever the outcome of the referendum in six weeks’ time. The report recognises that those changes mean that, for the first time, significant tax-raising powers and greater borrowing powers will come through this Parliament to the Scottish Government, and there is a general need to manage the greater variability that that will bring. It also recognises that looking at the public sector’s finances will be more complex.
So assets that are basically UK assets do not tend to be captured in the same way in Scottish Government accounts.
They do not and, at this stage, I would not expect them to be. The argument is really that even the things that are clearly within the Scottish boundary as it stands are not captured in a single set of accounts in that way. The Scottish consolidated accounts include, for example, the health service assets and liabilities, but not the assets and liabilities of local government or some other fairly significant bodies.
I am looking at page 7 of the report and the table entitled “Objectives”. Best-value audits have dropped from 12 to eight to four. In my experience, best-value audits are valuable tools, especially for local government. Why has there been such a drop?
The Accounts Commission has been focusing on its approach to its best-value responsibilities during the past couple of years, and the table shows the impact of its much more risk-based approach. That is partly historical. Best-value audits were introduced approximately 10 years ago, and at that stage the approach that was taken was a rolling cycle of audits that covered all councils at least once and possibly twice during a five or six-year period.
I hope that that will be kept under review, because I certainly value the best-value reviews.
It was brought to the SCPA’s attention early in the year. It was a small-scale technical issue. Russell Frith can talk you through it.
Audit Scotland operates the controller function under which we are required to approve drawdowns from the Scottish consolidated fund by the Scottish Government or other public bodies. The amounts that we can approve are based on what is in the budget acts and subsequent budget revisions. Towards the end of the year, Parliament passes the spring budget revision, which comes into force on a given date.
That is very much a technical issue.
The accounts of further education colleges are prepared under UK generally accepted accounting practice and the statement of recommended practice for those accounts. The new SORP, which will come into effect in 2015, is much more heavily based around international financial reporting standards and new financial reporting standards in the UK.
The fourth paragraph on page 9 says that auditors are preparing
There is a new approach right across the European Union to agricultural funds that are disbursed from Europe, and the Scottish Government is working hard to ensure that it is ready to implement those changes. The amounts of money that are involved are significant and, obviously, the number of farmers and other landowners who are affected is also significant. We are reviewing the resource requirements that might come from that.
As the Auditor General says, the issue concerns the work that we do on the European agricultural funds, which is required by Europe. The UK audit agencies work as a consortium to do that work across the UK. The EU has extended the requirements to require a great deal more actual testing on farms and agricultural premises, and that will significantly increase the work that is involved. We are still working through the exact resources, but we are looking at several hundred thousand pounds in additional costs.
Can that be absorbed within the existing budget?
No. We will be charging additional fees to the UK co-ordinating body.
So, it is recoverable?
Yes.
It is not going to come back as a charge to the Scottish Government at any point.
As Russell Frith said, it is recoverable from the UK administering body. However, as I said, it is possible that we might come to you to ask for some funding for the transitional costs, as we are double-running the existing audit on the old agricultural funding arrangements and the new development work for the new arrangements. We do not expect that to be significant, but I wanted to flag up the possibility to you.
On page 10, there is a chart entitled
No, it is really just a question of complexity. To a great extent, our planning is resource led. We start off with the resources that we expect to put into performance audit and best-value audit, and then the commission and I agree a programme of work that comes from that. In some years, a number of smaller pieces of work may be done more quickly and with fewer resources. In other years, the work can involve big and complex issues of great public interest, like the work that we did last year on reshaping care for older people. The amount of work routinely goes up and down. It is more about the scale and complexity of the work than about resources.
I want to ask about the second paragraph on page 15—I am sparing you one or two points. You have been successful at reducing the fees in the past few years. Obviously, there will come a point at which that cannot continue. Are we now at that point?
I think so. As we flagged up to you before, we had a four-year plan, which we have achieved; we have succeeded in reducing both costs and audit fees. We believe that it is not possible to take that further without compromising the quality of the work that is done, and the Accounts Commission and I are simply not prepared to do that. We need to meet the international standards on auditing, and we ourselves set high standards for it.
Under the heading “Internal audit and risk management” on page 17, you state that you co-opted
I think that the chair of the board may want to respond to that one.
You will perhaps recall, convener, that the composition of the board changed quite rapidly, as I mentioned in my opening remarks, with the retirement of John Baillie and Katharine Bryan. We felt that, to allow the committee system to have a consistent approach over the period, we would make a co-option. We have done that and I am happy to say that it has worked successfully.
Sorry, convener, but can I ask a question?
Yes.
Who approves co-options such as the one described? Does the board have unfettered discretion to make such decisions?
Strictly speaking, the answer is yes; it is a board responsibility. However, we took the course of action of discussing the issue with the SCPA, as it was planned, and keeping it advised of our intentions and the reasons for them all through the process.
I appreciate that, but can the board co-opt as many members as it thinks fit?
Under the legislation, there is a facility to exercise co-option, which is written in a way that enables us to have some freedom in how many co-opted members we want. In practical terms, we have the numbers that are required at the moment, but in an ideal world—this takes us into another discussion—perhaps the shape of the board would be more easily managed if there was another additional non-executive member. However, we are perfectly content to live within the rules as they exist at the moment.
It is perhaps worth clarifying that the board can co-opt members only to the board’s committees and that the membership of the board is a matter for this commission, so there is a separation there.
Yes, indeed.
Page 27 of the report has a chart on remuneration. I understand that the figures for the Auditor General are a wee bit out of kilter because of the 2012 start date. Unless I am reading the chart wrongly, it seems that there has been a substantial salary increase for Fraser McKinlay.
Yes. There are differences in the way in which the salaries in the table are agreed. My salary is set by the Parliament. As you said, it is affected by the fact that I was in post for part of the 2012-13 year. The salaries for other members of the management team are approved by the board’s human resources and remuneration committee in line with the public sector pay policy. As you highlighted, there were very significant changes to the role for one individual, which had an impact on that person’s salary.
On page 28, the pension increase for the Auditor General seems to be more than the increase for others.
It is. In a moment, I will ask Russell Frith to talk you through the way in which that figure is calculated. The variability that you see in the table is down to membership of different pension schemes. We have two broad schemes: the local government scheme and the principal civil service pension scheme, and within the civil service pension scheme there are two different variants that apply to its members. Beyond that, the increase in pension value relates to a person’s length of service and the value of that service, all of which plays into differences in the figures. Russell may want to clarify that for you, because it is another complex area.
Which table are you referring to, convener? Is it the second table that—
I am referring to the table headed “Pensions” on page 28.
As you rightly say, the figure for the Auditor General shows a significant increase during 2013-14, which is entirely down to the Auditor General having transferred service from previous schemes into the principal civil service scheme.
It is as simple as that. Do members have any points that they would like to raise?
As Ronnie Cleland has already stated, he is coming to the end of his tenure as chair of Audit Scotland. The commission would like to thank him and commend him for his work during his time in office. We wish him well for the future and in his endeavours to come.
Thank you, convener. That is much appreciated.
I welcome to the meeting the representatives of Alexander Sloan, the external auditors of Audit Scotland: Andrew McBean, senior partner, and Steven Cunningham, partner.
I am happy to confirm that we have received all necessary information and explanations to allow us to undertake our audit for the year ended 31 March 2014. I would like to give an overview of our work.
Thank you. The commission notes that Alexander Sloan has issued a true and fair audit opinion following its work on Audit Scotland’s annual report and accounts. Can you confirm that you received all the necessary information and explanations required by you to form your opinion on the financial statements?
We received all the information that we required. We identify areas at the beginning of the audit, and from our review of management accounts, minutes and other information we identify audit areas of risk in which we want to focus our work. We did our planning and identified those areas and, yes, in the course of our work we received all the information and explanations that were required.
Many people around the table and who have been here this morning have done a lot of hard work and endured a lot of sleepless nights over the VAT problem, which has been dragging on for a while. We have now received good news and assurances. Your report states that you have considered Audit Scotland’s treatment of VAT on behalf of the Accounts Commission. Can you confirm that you have received sufficient assurance that this matter is now resolved to the satisfaction of HM Revenue and Customs?
Yes, I can confirm that that is the case. A considerable amount of work has been done and we have had a considerable amount of correspondence, which involved Audit Scotland, the agents who were brought in to deal with VAT matters and HMRC. We have reviewed all the correspondence. We looked at the matters that HMRC raised in its letter and we are satisfied that everything has been properly dealt with. In a sense, that has been matched by the fact that there was a debtor in the accounts: money was to be returned from HMRC. That money was returned shortly after the year end.
It is always nice to hear of folk getting money back from HMRC.
No, there were no specific matters. The management letter that we have presented goes through a number of areas. It identifies responsibilities that we have as auditors—there is a lot of detail in there. It also identifies some of the key areas that we focused on in the course of the audit; VAT was the primary matter. A lot of that is information to show the completeness of the audit process.
No other members have questions that they would like to ask, so I thank you for your attendance.
Thank you very much.
That concludes the public part of proceedings and we move into private session.