Scottish Commission for Public Audit, 19 Sep 2007

Meeting date: Wednesday, September 19, 2007

Official Report 169KB pdf

---

Expenditure Proposals 2007-08 and Autumn Budget Revision

We move to agenda item 4. Audit Scotland's budget for the current financial year was approved by the commission at the end of last year. Members will recall that, at the end of our first meeting, we agreed that we would take evidence on progress that had been made in the current year and any in-year budget revisions that Audit Scotland may propose. I welcome Mr Black and Mr Frith back to the table and invite them to make any brief opening statement that they may wish to make.

I am not sure that we have anything that we want to add to what is contained in the papers that members have before them.

Okay. Do members wish to ask any questions?

I want to stray a little wider than the paper that I have before me. My question relates to how your organisation is performing in relation to efficiency. I want to consider the issue in a broader context than the efficiency programme in Audit Scotland.

When we consider how Audit Scotland spends its money, we must also consider the impact of Audit Scotland's activities on how the rest of the public sector spends its money. Has any work been undertaken on the impact of additional spending—or, indeed, a reduction in spending—by Audit Scotland? I am thinking of the consequences of that for the number and scope of audits that you are able to conduct and the consequential impact on the change in efficiency in the parts of the public sector that are your auditees. In other words, is there an easy way in which we can identify whether an extra pound of spending for Audit Scotland can save more for the public purse elsewhere? To turn the question round, could spending less money on auditing lead, through inefficiencies, to greater spending in the public sector?

That is a wide-ranging question. When I last appeared before the commission, to give evidence on Audit Scotland's annual report and accounts, we discussed the way in which Audit Scotland's role has evolved and developed since devolution. It is undoubtedly true that our role has evolved. I apologise for the fact that there is no simple answer to the member's question.

We are attempting to evaluate the impact that we have on public bodies, using a number of different criteria. What is our impact on the strength of financial management and the value for money that audited bodies deliver? What contribution are we making to improving the accountability of public bodies? We will also look at the efficiency and effectiveness agenda, the quality of service delivery and the quality of planning and control. We would like in our next annual report to present as clearly as possible what our impact on that wider dimension has been.

Of course, the fundamental requirement is for us to provide Parliament and the Scottish Government with an assurance that public money is spent properly and wisely, to achieve value for money. We do that through the large number of reports that we make. It is impossible to unravel from many other factors our impact on the high standards of financial stewardship in Scotland. However, I would like to think that over the years we have made a significant contribution to improving the standards of financial management and governance across the Scottish public sector.

I return to the issue of EYF and fluctuation in the figures. In your preliminary note on the autumn budget revision, you indicate:

"Audit Scotland had the following amounts available to request as EYF:

Revenue £2.416m

Capital £1.043m".

The figure for capital is explained partly by the £200,000 or thereabouts that is estimated for landlord works on the offices. Are there other capital requirements for EYF that will influence the matter, or is £200,000 the total figure?

I invite Russell Frith to answer your questions on EYF matters.

The completion of the refurbishment of the 18 George Street offices, which was spread over the year end, has the biggest impact on capital. Subsequent to the year end, we have spent £475,000 on completing that refurbishment. Of the £1.043 million that you mentioned, £475,000 has already been spent on completing the refurbishment that was started before the year end. A further amount—possibly £200,000—is to be spent at some stage on the common areas, when the landlord decides the precise scope of the work that he wishes to carry out. It will include the refurbishment or replacement of the lifts in the building.

Perhaps it is not all landlord driven, but that seems a far cry from an initial estimate of around £200,000. We are now talking about total costs of £675,000.

The landlord works are additional works that we did not know about when the refurbishment was initially planned. After seeing the work that we had done on our areas, the landlord decided that the common areas, too, should be upgraded.

I might come back to that. On the revenue side, you talk about your fees strategy requiring £480,000 of revenue funding to be carried forward. That is linked to what we were talking about before, which you explained as partly to do with evening out fee increases and things of that sort. I do not follow that—it seems to me that the fee increases can be taken in the round, and that when the money is received, and not whether it will lead to fluctuations in fee increases, is the real issue. Can I have an explanation about that?

I will try. The fee levels are set on a resource basis and not on a cash-flow basis, so the two need to be divorced. All audited bodies have given us the clear message that they would prefer us to give a smooth and steady flow of fee increases rather than significant ups and downs from year to year, if we can manage that. One of the ways in which we can do that is by using the end-year flexibility to smooth the matching of costs and revenues—that is what we planned to do at the previous year end, taking it over two years. Hence, we still have the bulk of the £480,000 to play out in that.

I understand that you would not require it necessarily all in the one year, and that the ability to have flexibility over a couple of years is valid—but I cannot understand why funding that needs to be permanently down to you. That seems to be a slightly different proposition.

One of the assumptions that we made in presenting the 2007-08 budget to the commission a year ago was that there would be a degree of smoothing still to take place in 2007-08. The only way in which our organisation can do that is through using end-year flexibility. Because of the structure of Audit Scotland, we are not allowed to hold reserves. A normal organisation would have used reserves to smooth out differences between its costs and its charging, but as a body that is directly funded from Parliament, we are not allowed to hold any reserves. In other organisations, the amount that we use for fees and charges—and developing the business—would be funded from reserves.

I am sorry to press you on the fees strategy, but I would appreciate some clarity—is that just an approach you take, or is it a written document that we can access? What about the point regarding more regular billing throughout the year to even out some of the flows?

More regular billing would have no impact on that at all—the figure is an accruals figure and not a cash figure. We could have more regular billing—for example, monthly billing—for at least the larger bodies, but there would be a significant additional administrative effort in doing so, both for us and for the audited bodies. To us, it seems more efficient and economic to do it two or three times a year, depending on the size of the organisations.

I can recall, from my local government days, favouring an arrangement in which the audit fee was paid for a few months at a time, rather than a monthly billing system. It is a more efficient way of doing business.

Robert Brown might be reassured that, in constructing our proposals for the next year, we believe that we have ended the need to use end-year flexibility for fees and charges—at least for the foreseeable future. We have tried to address some of those issues and I think that we have succeeded.

Rather than the committee dealing with the matter today, might the Auditor General be prepared to write to us in more detail on exactly what is being proposed and how that might work through? It is quite an important issue—although it does not fundamentally relate to the accounts, it provides us with difficulties in understanding the flow of accounts. If that could be resolved, it would be helpful to my understanding as a layman, and perhaps for others as well.

Yes, we will do that.

We will be happy to send you a letter.

I have just realised why Derek Brownlee is asking such clever questions—he is an accountant. Robert Brown is interrogating effectively because he is a lawyer. I want to ask a daft-guy question. Do all the bodies that you look into have internal auditors, external auditors or both?

Yes. Any body of a significant size will have a significant internal audit presence, although it might be fair to say that some of the smallest ones do not. Russell Frith might be able to help with that.

Even the smallest ones tend to have a degree of internal audit capacity, which they might share with other small bodies.

Yes, the small bodies would have a shared rather than a dedicated audit facility.

So all your expenditure is extra expenditure on top of those bodies' expenditure on audit. Do you ever assess your work to find out how much you have saved and whether it is more than you cost?

Perhaps I misunderstood the premise behind your question. Each body in Scotland has an internal audit capacity of some sort. The external auditor is the auditor who is appointed by Audit Scotland. We are not an overhead in addition to that of the external auditor; we provide the external audit on behalf of the Parliament.

So all the bodies that you scrutinise have internal auditors. I repeat my question: are the savings that are achieved as a result of your work compared with the cost of ensuring that those savings are achieved?

The direct answer is no. The primary purpose of a significant proportion of our work, particularly the annual audits of the financial statements, is to provide assurance to the stakeholders—who are the equivalent of the shareholders in a company—that the accounts truly reflect the business over the preceding 12 months. In other words, a significant proportion of our work is not primarily designed to look for savings.

The performance audit programme—the programme of studies that come to the Audit Committee—has a mixture of objectives, one of which will sometimes be to identify what savings and efficiencies might be available. Performance and governance issues will be considered, too. One of the slides in the presentation that we gave at the away day illustrated some of the financial savings that we have helped to achieve over the past few years. For example, we recommended greater use of generic drugs, which led to savings in general practitioner prescribing costs. We helped to make benefit savings through the national fraud initiative and to improve in-year council tax collection rates. Those are examples of financial impacts that our work has had, but we do not design our study programme explicitly to save specific amounts of money. The aim of saving money is just one of a balanced series of objectives.

Forgetting about your ordinary external auditing work, is it true that the amount of money that has been saved over the years would be substantially greater than the cost of the work that you do to find savings?

Yes. You might be reassured to learn that our costs are about £25 million to £26 million, which is less than 0.1 per cent of audited expenditure. Russell Frith mentioned some savings that we have helped to achieve. As regards identifiable savings—which are often for other bodies to deliver—we have estimated that £27 million was saved through the national fraud initiative, so one could say rather tritely that in one year alone our costs were met by the amount of fraud that was uncovered just by that exercise. However, I would not make such a claim. In addition, £14 million was saved on GP prescribing and more than £100 million was generated by improvements in in-year council tax collection rates. In respect of the management of housing voids and rent arrears, £33 million and £8 million, respectively, were gained, so we are talking about significant sums of money. However, I emphasise what Russell Frith said—the achievement of savings is no more than one part of our programme.