Scottish Commission for Public Audit, 18 Jun 2008

Meeting date: Wednesday, June 18, 2008

Official Report 116KB pdf

---

Expenditure Proposals 2008-09 (Audit Scotland Response)

I welcome our guests—Mr Black, Ms McGiffen and Mr Frith—who have come to give evidence to the commission this morning. Obviously, we have been having various discussions on our most recent report and Audit Scotland's response to it. Today's evidence-taking session is part of an on-going dialogue.

Mr Black will make a short introductory statement.

I will keep it brief, convener.

I recognise the extremely important role that the Scottish Commission for Public Audit plays in holding Audit Scotland to account. We look forward to working with the commission during the coming year and we will do our best to continue to supply members with whatever information they feel they need to help their understanding of our business so that they can exercise their duties appropriately.

Of course, we will be in a much better position to assist the commission with full information in September when, I understand, we will finalise our budget. At some time after that, we will perhaps have the opportunity to discuss how our budget is shaping up. By then, we will also have published Audit Scotland's annual report—it will come out before Parliament rises for the recess—which will contain as much information as we can provide about our activities and performance over the past year.

We are continuing to work on some of the issues that have, perfectly understandably, been of concern to the commission. We will do our best to give as much information as possible on those in September. At that time, we can perhaps also update members on what we are doing to continue to improve the transparency and relevance of the information that we supply.

Do colleagues have any questions for Mr Black?

I will kick off by asking about the budget estimate. Sorry, that is item 3—I am getting mixed up—so you had better go back to square one, convener.

End-year flexibility has been a constant theme. I know that Audit Scotland's aspiration is to move away from using end-year flexibility, but it has also indicated that EYF could be used to deal with unforeseeable issues. The debate, I suppose, is whether that is a good way to use EYF arising from any underspend, or whether the base budget should be increased to reflect what might be a trend—albeit that EYF is being used to meet unexpected demands. From a management perspective, are we now in a phase in which demands on Audit Scotland will recur year on year such that we should make a change to the base budget, or is it better to manage such demands over the next couple of years by using end-year flexibility?

The short answer is that we anticipate having to use end-year flexibility into the future, for reasons that we explained in previous submissions to the commission regarding the framework within which our budget operates and the cycle of audit years. However, we will endeavour to do two things: first, we will try to reduce our reliance on end-year flexibility as much as possible in accordance with the commission's wishes; and secondly, we will be as transparent as possible when presenting the budget on what the uses of end-year flexibility will be.

I know that members have had the opportunity to hear more fully from my colleagues about how end-year flexibility fits into our budget planning and the delivery of our services, but I am sure that Russell Frith would be pleased to provide more information formally on the record.

The issue is not so much the detail as the principle. Is there an issue about the base budget that should be addressed?

My answer to that question is that we are constrained by the statutory framework within which Audit Scotland's budget must be constructed and its spending managed. Essentially, we are required to recover our costs mainly from the bodies that we audit and to seek a balance of resources from the Parliament. We are also required to keep that budget in balance taking one year with another. However, we must not overspend at the end of each financial year, because that would be a breach. That gives rise to two related issues, the first of which is that we will always have a margin of underspend on what might be called the current budget. As with any organisation, we need to finance projects such as capital works that have a longer timescale transcending the end of the financial year.

Secondly, as I think the commission now understands, the audit year, which runs from November to November, does not tie in with the financial year, which runs from April to March, and problems with planning our resource needs arise because of that quite long business cycle.

That is a rather full response to your question. The point is that there is no problem with our base budget; I think that we can robustly cost our resource needs. However, there are some constraints with regard to managing flexibility at the end of the financial year to cope with our business cycle and our need for resources to carry out capital works.

Hugh Henry's point picks up on the very useful discussion that we had last month with the commission. Our experience over the past few years is that, although levels have varied, there has been a constant underlying volume of unforeseen developments such as, for example, the Crerar review and further activity on developing best value. As a result, we will need to consider building into our budget, which will be presented to the commission in September, a base level of resource for development-type activities. Whether that will lead to an increase in our budget request will depend on how such work interacts with our efficiency targets.

Your written response contains the helpful comment that a fee strategy will be provided along with the next proposed budget. Will that, as I presume, be the strategy on which you will base your forward plans? I also imagine that, as part of all that work, there will be discussions about alternatives and various practices that might or might not be adopted. Would it be possible to see not only your recommendations for the fee strategy but any options that you consider and reject and the reasons why you think they are inappropriate? Such a move would give us a very helpful breadth of understanding of the range of options that you have considered and your decision-making processes.

Absolutely. The commission must ask for whatever information it feels appropriate for a good understanding of the business. It might be helpful if the audit adviser and the external auditor could give us an indication in advance of what exactly you are looking for. After all, there are a lot of numbers flying around.

I will make another attempt to ask a question, if I may.

I want to come back to the basic principles behind all this. One of the most important elements is transparency—in other words, the ability to see and understand what exactly is happening. We were concerned that the use of end-year flexibility was muddying the waters and making it difficult to compare the trends in one year with those in another, particularly when capital works, for example, were taken into account. You have said that you will do your best to indicate any significant changes in the paperwork for the budget, and that will be extremely helpful as a starting point.

However, we also highlighted one or two other issues such as the fee strategy that Derek Brownlee has mentioned and the various capital projects. I thought that we had arrived at a point at which it was recognised that things of a more on-going nature, such as Crerar and best value—in so far as they were not things that you were incorporating anyway as you went along—required additional resources, as they went a bit beyond the norm, and that there would need to be some sort of bid for specific finance for them. I do not think that anyone has any problems with the issue of capital projects that are delayed—that is reasonably straightforward and obvious.

Is there a way of cleaning up the issue about the carrying over of fees and charges? Perhaps there could be a one-off payment or something of that sort. Personally, I am not overpersuaded about the difficulties around EYF, as it strikes me that you have more predictable fee income than many businesses have and that the position ought to be a lot clearer with regard to being able to allocate fees that are coming in to particular years and so on. Is there a way of making that clearer?

I am sure that Russell Frith can help you with that question. However, I should say that we differ quite fundamentally from a business as we do not have working capital. We have a requirement to operate within the resource limit each year. Our sister organisation, the Audit Commission, can carry balances, and uses that to smooth things out from one year to the other. We cannot do that, which takes me back to my answer to Hugh Henry's question about whether there is a fundamental problem. There is a structural issue that is a reflection of the legislation.

The suggestion that you make about cleaning up the situation is one that we are explicitly modelling as we work on our autumn budget revision and our budget for 2009-10.

We left our helpful discussion with you a month ago with three strands of work to consider with regard to EYF. One was the point about building scope for development work into our core budget, which might mean that there would be less reliance on the use of EYF. The second involved making a significant adjustment to the cumulative EYF position, which would create greater transparency. The third involved making less conservative assumptions, based on the evidence of past performance, in some of our budget modelling. At present, we have year-end surpluses because—due to the fact that we cannot overspend, as the Auditor General said—we have made extremely conservative modelling assumptions.

Over the summer, we will consider those three areas of the budget. You will see the results of that work when we come back in September.

We also talked about time recording during our discussion. Are you likely to make progress on that?

Can you give us an idea of the timescale for activating the sort of changes that you hope to make?

We might be able to implement some elements of the strategy in our proposals for September, but others might take one or two years to work through. We will make that explicit when we come back in the autumn.

That was a useful summary of the three strands that you will pursue with a view to reducing reliance on EYF. Which area do you envisage being able to make most progress on soon?

We are currently modelling the fee issue.

We are ensuring that we incorporate resources for development activity into the core budget. We will definitely do that this time round. We will also probably make significant progress on cleaning up the cumulative EYF position as well, but we need to do more modelling on how that would work.

When you speak about continuing the work over a period of years, do you mean a few years, several years or many years?

Given that our fee year is different from the financial year, which means that any adjustments that we make will straddle two financial years, I would say that we are talking about a period of one or two years. Once we have completed our work over the summer, we will be able to be more explicit about that.

As we have no further questions, for the record I thank you for coming to this morning's meeting. We have had a useful on-going discussion and we appreciate the time and effort that you have put into that.