Scottish Commission for Public Audit, 18 Jun 2008

Meeting date: Wednesday, June 18, 2008

Official Report 116KB pdf

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Budget Estimate 2009-10

Agenda item 3 is a look ahead to the financial year 2009-10. We have received correspondence from Mr Black with regard to the provisional budget bid. I invite him to make a brief opening statement.

What we have done accords with our practice in previous years, which is to give the commission an early indicative figure at this stage. At the moment, we are working to put together a full budget for discussion in September.

I will ask the question that I started to ask earlier when I got my papers mixed up.

The covering letter talks about a 2 per cent efficiency target and a 2 per cent increase in pay and non-pay costs. I probably do not understand the issue as clearly as I should, but will the 2 per cent increase cancel out the 2 per cent efficiency savings, in monetary terms? How does the £800,000 fit into the figures? I cannot follow how we get from £7.250 million for 2008-09 to £7.478 for 2009-10. I would like that to be a little clearer to me.

We considered several other issues considered in preparing that submission. We referred to the 2 per cent efficiency target and a general inflationary increase of 2 per cent in pay and non-pay costs, but other things would have been built into that, such as the new international financial reporting standards. We expect them to cost us around £800,000 to implement, although we will be doing a lot of work on that over the summer, especially because the timetable has changed since we prepared that estimate.

The increase in total expenditure is, roughly, 2 or 3 per cent, which means that it is going up by more than inflation, even allowing for efficiency savings that are made. Is the £800,000 an extra amount that sits on top of all that, or are you incorporating lots of savings to produce the scope for that £800,000?

The £800,000 is not on top of the other elements.

The figure of 2 per cent for pay and non-pay costs is an assumption. When will you have, if not certainty, a better steer in that regard? Obviously, across the public sector there is a lot of controversy about pay relative to inflation. Is 2 per cent a reasonable figure?

We do not yet know the final local government pay settlements for the current year, although we have made a payment of 2 per cent to staff.

We are reviewing our overall pay and reward strategy, which is currently linked to the local government pay scheme. We are doing an exercise to review a number of aspects of our pay and rewards strategy to ensure that they comply with a number of pieces of legislation, including age discrimination legislation.

We do not yet know what the local government settlement is for this year, but we should be clearer about that in September. We will also be clearer then about any costs that might fall from ensuring that our pay scales comply with age discrimination legislation. We have a number of long pay scales, which are likely to need to be shortened. We are actively engaged in modelling work on that at the moment.

Is the 2 per cent that is projected for 2009-10 based on the assumption that the pay award for the current year will be 2 per cent? If this year's award turns out to be 3 per cent, will there be a knock-on impact on the 2 per cent that is projected for next year?

I think that our budget made provision for 2.5 or 3 per cent.

We assumed 2.25 or 2.5 per cent as the base inflation for 2008-09.

Will you be in a position by September to tell us whether this year's assumptions have had a knock-on effect on the budget for 2009-10?

Yes.

You say that Audit Scotland's pay scheme is linked to public sector pay scales, which tend to be fairly rigid and do not always reflect the market conditions that exist for some professions. The skilled staff that Audit Scotland needs are often attractive to the private sector. In a period in which inflation will edge up and the private sector will not be constrained as much as the public sector, do you anticipate that Audit Scotland will be able to retain its staff? Will that put pressure on Audit Scotland to go higher than the budget estimates to ensure that it has the right staff to do the job?

That is an extremely important issue for us, for the reasons that Hugh Henry has outlined. Partly for that reason, over the summer months we are undertaking the review of our awards strategy. I think that we will find it difficult to give a clear answer on that until that exercise is concluded.

However, I do not want to be too pessimistic. Quite frankly, Audit Scotland is now seen to be a very good place to be trained and to get professional experience. We are doing really quite well in attracting high-calibre people into our organisation at the bottom and developing and moving them through. Fundamentally, we are in quite a sound position.

We do not lose many people to the private sector—we occasionally lose staff, but not to the private sector; we lose some people at higher levels to other public sector bodies. There is a challenge in ensuring that we stay competitive with salaries at the most senior levels. As ever, the picture is quite complex, but I and my colleagues will be happy to share more hard facts about it at the next meeting, when we will have the results of that exercise.

I have a question on the implementation of the international financial reporting standards, which I think we were told before relates in substantial measure to the accrual of untaken holidays. How much of the £800,000 relates to that aspect as opposed to other aspects?

None of it relates to that aspect. All of the £800,000 relates to the additional audit work that will be involved in reviewing and auditing the restated balance sheets as at 31 March 2008 and the shadow accounts for 2008-09 that will be required by all central Government bodies.

What is the impact of the holiday issue that we were told about before? Where is that issue dealt with?

That is not dealt with in the bid, because we do not yet have a clear timeframe from the Scottish Government with regard to how it intends to deal with the budgetary implications of moving to the IFRS. It is currently in the process of developing a timetable for that.

In budgetary terms, what does that mean for us? You indicated that you expected about £500,000 in that context.

That is still our estimate of the impact of the IFRS on Audit Scotland. We expect that that will be required to be brought through one of the budget revisions during 2009-10.

As far as that figure and the figure of £800,000 are concerned, does the whole amount fall on the Government bit—the bit for which we must be specifically accountable—or is it also spread across the charges that you make to local authorities and others? If so, is the total much bigger than the £800,000 and the £500,000 that we have talked about?

The £800,000 is spread across the whole lot, so only a proportion of that falls on the Government. That probably partly explains the reason why the figures did not appear to gel: only the non-chargeable audits part of the £800,000 is included in the £7.478 million estimate. A large proportion of the £800,000 will be recovered through fees and charges.

There is an element of mixing ducks and drakes in the way that the letter is phrased. The problem that we have had throughout is that there is a difference between the gross amounts stated, because of the local government aspect and so forth, and the bit that falls as a charge on the Scottish exchequer. Can you further explain your figures? How much of the bits and pieces of capital, for example, will be charges on the £7.478 million, and how much will be spread across other areas? For example, the letter states that capital accounts for £533,000. Is that part of the £7.478 million, or is only a bit of it part of that figure?

As the first sentence of the letter says, our total bid from the consolidated fund is £7.478 million, of which £6.934 million is revenue costs and £544,000 is capital.

What is the trend, if any, in relation to the gross figures? Are you in a position to give us the gross figures as well?

Not yet. That will depend on the fees strategy.

To what extent has the delay that was announced in the implementation of the IFRS been reflected in what you plan to do and when you plan to do it? What financial impact is that delay projected to have on Audit Scotland?

The impact of the delay on the amount of audit work will be relatively small because, as well as announcing the delay in producing full IFRS-based accounts, the Treasury announced that it would require shadow accounts to be produced for 2008-09 on an IFRS basis, in order to keep the momentum of the exercise going and to avoid potential qualifications in the first year of full implementation. The delay will not have a significant impact on the amount of audit work, because of the introduction of the shadow accounts. Our budget of £500,000 for holiday pay will be delayed a year.

Is it possible to explain in simple terms the difference between the amount of work involved in producing the shadow accounts and the amount of work involved in producing the full accounts?

If the Government had gone for full implementation immediately, with no shadow accounts, we would have had a significant amount of additional audit work to do in the first year of the new standards. By introducing the shadow accounts a year early, we are in effect giving audited bodies longer to make the adjustments. We will have to review an additional set of accounts on an IFRS basis, but that is far less work than doing a full audit, because most of the underlying work on the systems is not affected by which set of accounting standards we use. We are looking at the changes from United Kingdom generally accepted accounting practice-based set of accounts to the IFRS-based set of accounts in doing the shadow accounts. Overall, the approach inevitably means that there will be a little more work, but it will probably result in a smoother and more professional changeover from UK accounts to IFRS accounts.

Would you like to add anything, Mr Black?

I am conscious that we have not been able to answer all the questions as fully as you might expect, for which I apologise, but that is a reflection of the fact that the forward budget planning requires us to produce a full analysis slightly later in the year. As I endeavoured to assure you earlier, we will present a full analysis that encompasses all the issues in time for any discussion that you might wish to have in the autumn.

We look forward to receiving the more detailed budget proposals at the end of September.

Thank you for your time this morning, which is much appreciated. Have a nice day.

Meeting continued in private until 11:54.