Scottish Commission for Public Audit,

Meeting date: Wednesday, May 13, 2009

Official Report 135KB pdf

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Economy, Efficiency and Effectiveness Examination of Audit Scotland

Agenda item 2 is Audit Scotland's response to the follow-up three Es—economy, efficiency and effectiveness—report on fees and charges. Colleagues will recall that in our previous meeting in December last year, the commission received a report and took evidence from Jubayeth Hussain of HW Chartered Accountants on his follow-up economy, efficiency and effectiveness study of Audit Scotland's fees and charges. Following the meeting, the commission wrote to Audit Scotland asking for its comments and a response is included in the meeting papers. Once again, I invite Mr Black to make an opening statement.

I do not want to say anything much about this. It is of concern to my colleagues and me if the commission does not have confidence in any aspect of how we are running our business, and it is for that reason that Barbara Hurst is with us. The issues seem to relate primarily to an exchange about the operation of the time recording system in the public reporting group. There must be a misunderstanding somewhere in that regard, because it was my clear view that the time recording system was being applied across the whole of the organisation although, as ever with such things, it was a business in progress at the time that the audit was undertaken.

If you have questions please feel free to ask them of me, but I will have to rely quite extensively on Barbara Hurst, who is directly managing this, to provide you with fuller and better-informed answers than I could manage.

I seek clarification on that point: is the system now being used comprehensively across the organisation?

I was very keen to come here today to clarify what we are doing. The time recording system, which was introduced in 2007, has always been used in the PRG: I want to make that absolutely clear. At the time of the follow-up audit, we were in the process of developing a more sophisticated management information system. Everybody uses the time recording system; it gives real-time information about the time that is spent on a project and the cost of that project to that point.

Our management information system, which went live last month but which has been in development since autumn last year, builds on the time recording system but also monitors the progress of a project against indicative time and cost budgets. We have always measured time and set indicative time budgets—we could not manage a programme of work without doing that. However, we have not been so good at putting a pound sign to it, and we have now done that. I am keen to convince you that we have always been measuring the time, and that we are getting better at the costing side.

I read the Official Report and my initial reaction was—to be honest—annoyance, but then I thought that I was perhaps partly at fault. I had had the conversation with the auditor, and we must have been talking at cross-purposes. I was in very enthusiastic mode, talking about what we could get from the management information system that we were introducing, but Mr Hussain perhaps thought that I was talking about the time recording system. For me, however, time recording is just a basic thing that we have always done; I was moving to the next level, if you like.

You are right: the matter was discussed in the three Es report. I do not know anything about time recording in particular, but it was clear that the view that Mr Hussain was putting across—which related to the to the three Es report—was that the time recording system could be

"better and more fully utilised"

and that

"Full use of the time system would support the development of cost measures".

If I recall correctly, he distinguished between different parts of your operation in that regard.

That was the basis of the questions that we put forward at the previous meeting on that subject. I think that Mr Hussain went back to saying that

"Formal recognition … of a need to develop a risk assessment framework to underpin fee setting in the future"

was the nub of the matter. Can you tell us a bit more about that? You might be right in saying that it is a misunderstanding, but the view was undoubtedly based on the three Es report. One would have hoped that if that information was incorrect, it might have been sorted out between you at the time.

The report was fair, in a sense, because we are using the time recording system. However, at the time of the follow-up audit, we had not gone as far as we had hoped to around the costings. We have—stop me if I am getting too boring, because I could bore for Scotland on this—a very detailed quality project management framework. Every project goes through six key stages. We set indicative time budgets for each of those stages, and we are now setting indicative cost budgets. I am hoping—because I get drowned in the detail—that red flags will be raised if there are any problems.

We know, with regard to the extensive work that we have done on that, that there are two key stages at which there is the biggest risk of going over budget. Those are the scoping stage—at which we home in on what the study will look at, what the big issues are, and where the biggest return for our work is—and the reporting stage. The reason for that is that we are often dealing with technical issues and there is a risk of getting drowned in the jargon, so we are running a big campaign to plain English our reports. To tell you the truth, that is a challenge for some people, because most of us have come through a system in which one writes not directly but in an academic way, and that is no good for the audiences that we want to hit.

Those are the two areas that my teams are focusing their attention on improving. The system is good in terms of the teams' understanding; if we go over the time budget, there is a cost implication, which is flagged up. For me, that is a very powerful—

Management tool.

Absolutely.

We are doing a lot of work on that. We are trying to do that across the group so that we have a common platform and common standards, not just in the teams that I manage but in the local government team, and so that we are monitoring against that. My team covers health and central Government, so most of the funding for its work comes from the Parliament, with an element of fees from a health audit. However, that does not mean that we treat our work any differently from how we would treat it if it was all fees based; it is important that we demonstrate that we deliver value for money.

Now that we have the system in place, we want to link the costs with the impact reports that Diane McGiffen talked about. We are putting our money into the ones that will have the biggest influence and make the biggest difference.

You talk about your team. Is that the team that does health board audits and special audits across functional issues?

Yes.

Is it a bit of both?

Sorry. I am assuming a level of understanding; I bet that I did that with the auditor as well. The teams that I manage are the health and central Government performance audit teams. They are responsible for the national reports that go to the Public Audit Committee—they do section 22 reports and cover a range of issues.

As opposed to the routine audits on individual bodies, which is another team in your department.

Exactly, but increasingly we are linking up. On follow-up, which has been mentioned, we want to work more closely with the local audit teams. We get a lot of information from them, which informs our study programme selection. On the development of the use of the resources toolkit that the Auditor General talked about, they are mixed teams, so we are doing a bit of matrix management as well.

I have a question about the other parts of Audit Scotland, which do the routine reports. I think that I am right in saying that one of the issues that emerged previously was that it was not evident that the fees for local authorities—I am talking about estimates and so on—were based on time recording arrangements. Is that correct, or have I misunderstood entirely?

I will hand that question over to Russell Frith, because that is not my area.

To pick up on Hugh Henry's earlier points, the budget that is set for all the individual audits in local government is based on the premise that the full cost of each audit is recovered.

In any given year, there will be pluses and minuses in terms of the actual outturn—

I am sorry if I am totally thick about all of this, but does that mean that you work out the time that is spent on the project, and then charge the local authority or other body accordingly?

No. We estimate the time that will be spent in the forthcoming year, and the charges are levied on that basis, particularly in respect of the study programme. In respect of the local audit work, we set what we call an indicative figure. The local auditor and the audited body agree the final figure based on the estimated work for that particular audit.

As required—

As required, based on the risks for that audit. The outturn will be plus or minus that, so the body is charged what we estimate, based on the best available information at the time when the fee is set. It will rarely be changed.

I am very sorry—I am sure that this is my fault. Effectively, you give an estimate, based on past practice and so on. Is the final fee adjusted according to the reality of the time spent?

No. In most cases, the final fee will not be adjusted.

To go back to the original point, am I right in saying that the way in which you charge the local authorities and other bodies is not influenced by the time recording machinery?

The time recording machinery informs management of our overall resources, and that will inevitably involve overs and unders between different audits. If there is a significant change between the planned work and the final work, the fee may be adjusted, and the time recording system will be the basis for that change, so it is also important in that respect.

It might be helpful if I point out that the external auditor commented extensively on the use of the time recording system in what we call the audit services group.

There are two groups in Audit Scotland. One is the public reporting group, within which we have Barbara Hurst's team, which does the reports to the Parliament, and David Pia's team, which does the local government work. That group is the subject of a degree of misunderstanding around the application of time recording.

The other group is the audit services group, which is by far the larger group in terms of staff numbers. It is also divided into two broad teams: one that does health and local government, which parallels Barbara Hurst's team; and another that looks after all the local government work, including all the best-value reviews of local government.

As Russell Frith has explained, in relation to the audit services group, there is an indicative audit fee that is based on an indicative figure for the number of days that are required to conduct an audit of, for example, the City of Edinburgh Council or NHS Lothian. There is then a negotiation between the appointed auditor and the audited body about the number of days that are likely to be required to do the audit—that involves an opportunity to flex the fee up or down. As the audit is driven through, there are extremely robust systems—as the external auditor has confirmed—for applying time recording and costing to that work. That is an area in which we have moved forward tremendously in the past few years. A much more businesslike approach is being taken to that than was the case in the past.

That is a helpful clarification of the various groups and so on.

I remain puzzled. If there is a robust time recording system, it must be able to identify how much time is spent on any particular project and, presumably, enable charges to be levied accordingly. If there is such detail on the actual time that is spent on each project, why do you continue to charge on an estimate basis?

This is a complex area of our work, and it feeds into some of the uncertainties around our forward budget planning. For example, in the autumn of this year, the local auditors will start to think about planning the audit work for the 2009-10 financial year, which ends next spring. They will plan a lot of the work for 2009-10 before March next year, and the final accounts work and so on will be done after March next year. Clearly, they have to plan ahead, so they need to have an indicative number of days, as a sort of ballpark figure to work with. However, as they work through the audit plan, they apply the actual number of days that are allocated to particular pieces of work, which will determine the fee that is paid.

The whole system is pretty robust. The proof of that is that, at the end of the year, the fees that are paid are close to what was predicted, and they all tie up with the audit plan for the body in question.

It is quite typical of the business model that works in the auditing profession generally for fees to be agreed at the beginning of the audit and adjusted at the end of the audit only if there is significant variance between what has taken place and what was estimated at the start.

I will let Hugh Henry follow up his question, but I think that Diane McGiffen has something to say first.

If your concern is about what happens to the difference between the estimate and what shows up on the time recording system, I should point out that, twice in the past year, we have rebated back to audited bodies money that has been generated by the fact that we have delivered the audits for less than we anticipated.

That explains what happens when there is an overcharge. However, what if there is an undercharge? I assume that the sum would not be significant, but if it happened a lot, it could mount up. Presumably the public purse has to bear that cost.

If extra work needs to be done in an audited body that is subject to this fee regime, it will pick up the cost.

Under the Public Finance and Accountability (Scotland) Act 2000, we are under a statutory obligation to break even, broadly, taking one year with another, on either individual audits or groups of audits. We consider the matter on a groups-of-audits basis, with local government as one group, health as another group and so on. To the extent that any of our estimation is not accurate, it will be adjusted as soon as it can be—

Within the group.

From one year to another.

So there is a degree of cross subsidy.

Between individual audits, on a minor basis, in a given year, there will be unders and overs between different audits, yes.

But not taking one year with another.

Most of this is going over my head, so I will bring it down to a practical level. Do any of your staff clock in and clock out?

We operate a flexi system. People keep flexi sheets that record their hours; we do not have a factory-like clocking-in and clocking-out system.

But you know when they come in and when they leave.

Yes.

Do they keep time sheets for each day that say, to the quarter hour, how much time they spent on each particular job?

Yes. Some might not do it down to that level, but they could do if they wanted.

Like George Foulkes, I am all for plain English. I get the feeling that the committee would like to have a continuing dialogue with you as regards how the situation is developing. Obviously, the issue has implications for parts of your business—fees, charges and so on—that we have a responsibility for scrutinising.

I fully understand your concern, as, in theory, it is the biggest area of risk in our business. However, I remind you that you have the assurance of two external audit reports that have considered the matter in some detail. The first one, which came out some time ago, provided a lot of assurance about the nature of the system but indicated that we should do work on development; and the latest update, with which we are comfortable, provides an accurate picture of the systems that we are now running. I have found it useful to have had the opportunity to explain to you that there might have been a misunderstanding about the application of time recording in one comparatively small part of our business: the team that is led by Barbara Hurst and, to some extent, the team that is led by David Pia.

The committee agrees that the follow-up report by HW Chartered Accountants says that Audit Scotland has made good progress against the recommendations in the 2006 report. I note that Barbara Hurst said that you accept the auditor's report as fair. I was merely flagging up that you should not be surprised if, at future meetings, you are asked about the time recording system.

Absolutely. If we are, we will do our best to answer in plain English.

Are there any more questions?

What are you going to charge this hour to?

Parliamentary support. [Laughter.]

I thank Ms Hurst, Ms McGiffen, Mr Black and Mr Frith for once again coming to a meeting of the commission and for giving us the benefit of their time and expertise. To repeat what George Foulkes said, which I do not do often, we appreciate the good work that Audit Scotland does.