Meeting of the Commission

Meeting date: Tuesday, October 4, 2011

Official Report 403KB pdf

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Audit Scotland Annual Report and Accounts and Auditor’s Report

I welcome everyone to the Scottish Commission for Public Audit’s second meeting in 2011 in the fourth session of the Parliament. I remind everyone to switch off their mobile phones and other communication devices. I believe that we have received apologies from Hugh Henry.

The first item is consideration of Audit Scotland’s annual report and accounts for 2010-11 and the auditor’s report on them, which are published on the commission’s web page. The commission is responsible for securing the audit of Audit Scotland’s accounts and has contracted the chartered accountants Alexander Sloan to undertake that work. We will hear first from Audit Scotland and then from Alexander Sloan.

I welcome from Audit Scotland Robert Black, the Auditor General for Scotland and accountable officer for Audit Scotland; Russell Frith, assistant auditor general; and Diane McGiffen, chief operating officer. I invite Mr Black to make an opening statement.

Good morning, convener. As members will see, the Audit Scotland annual report for 2010-11 provides a summary of our performance over the year and information on what we have done with our resources.

I will go straight to the numbers. Some time ago, we set ourselves a target of reducing the cost of public audit by 20 per cent in real terms over the four years to the end of the spending review in 2014-15. Over that period, there will be significant retrenchments in public sector finance and my Audit Scotland colleagues and I were of the clear view that we had to make our own—albeit numerically small—contribution to that and have been working hard on the issue.

In 2010-11, we significantly reduced the costs of our work and subsequently the fees that we charged public bodies. Compared with 2009-10, fees were reduced by 5.5 per cent in real terms and the organisation is on track to deliver the planned 20 per cent reduction—and potentially more than that—by 2014. As part of that work, we will have reduced staff numbers by 42 by the end of that period and, because we started early and have been paying a lot of attention to workforce planning, we are already halfway towards that target. I can also confidently assure the commission that we have maintained and, in some areas, improved our performance over the period. Our efforts to meet our targets have not been made at the expense of the quality of our work.

A number of key highlights in the report include the fact that, in the financial year 2009-10, we produced with our partners in the firms involved 212 final audit reports on all the public bodies that we audit. Those reports, which are written at the end of the audit, not only are directed to the senior management, the non-executives and the councils of the bodies concerned but are available to Audit Scotland staff for use in our work to Parliament. The reports are all available on the website. A huge amount of work goes on in that respect; indeed, our work programme includes not only the more than 200 final audit reports but 600 separate reports to those bodies. The reports are on a vast range of subjects but are aimed at improving efficiency, effectiveness, financial control and risk management.

The report contains a table showing that more than 90 per cent of health bodies and all further education bodies thought that the audit had provided a high-quality service. Although that is satisfying, we hope to continue to improve in that respect.

It is also worth mentioning the work that we do for Parliament and the Accounts Commission. In all, we published 26 performance and best-value reports, a full list of which can be found on the report’s inside back cover. We would be very happy to talk about that work, which, in general, is designed not only to challenge the public sector on its efficient use of public money and its performance but to support improvements. In our reports, we use techniques to encourage audited bodies to take our recommendations seriously. Examples are highlighted in the annual report but we will answer any questions that members might have.

The national fraud initiative is an exercise that we have been running for a number of years. The initiative, which is overseen by Russell Frith, has achieved a £63 million cumulative impact in Scotland during the period that we have been working on it. Again, there are details of that in the annual report. We launched the latest national fraud initiative exercise recently and will be using some of the new data-matching powers that the Scottish Parliament brought into effect last year.

I am pleased to say that Audit Scotland has achieved—and continues to enjoy—one to watch status in the Best Companies review. The review, which is of the whole United Kingdom public sector, identifies the top 75 public sector workplaces in the UK, so our achievement is significant.

We take very seriously our support for work with people with disabilities, and we have been given the two ticks accreditation for that work. We take satisfaction from such endorsements but, of course, we will continue to work hard to improve in that area.

During the past year, we presented at almost 70 seminars, conferences and training events, which we itemise in the report.

During the year, we also received four groups of overseas visitors. Our work overseas is a small part of our work, but we think that it is very important for two reasons. First, it is right that an organisation such as Audit Scotland should help and support the development of high standards of governance and financial management in other countries, particularly in Europe. Secondly, it is good experience for our staff. They get a sense of satisfaction from helping those countries, and sometimes we learn from their experience.

We have also done some work overseas in partnership with the National Audit Office and the Swedish audit office, and we are doing work on the audit of the United Nations, which is a good experience for our staff. Much of that work might not be immediately evident or transparent to the commission, so our international work is the subject of a report on our website. Through contributing to conferences, seminars, training events and so one, we like to think that we are making a contribution to improving standards of governance, audit and financial management.

My colleagues and I are happy to answer questions. I will be relying on Diane McGiffen, as the chief operating officer, and Russell Frith to help me answer any detailed questions.

Thank you. I will throw the discussion open to members in a moment, but I will kick off. Page 45 of the annual report and accounts shows that income from local authorities increased marginally from 2010 to 2011, from £13,183,000 to £13,429,000. Although that increase is less than 2 per cent, year on year, it is not reflected in other sectors, where income from fees and charges has actually fallen year on year. Why have the fees and charges payable by local authorities increased from 2010, while those payable by other sectors have fallen?

Russell Firth will answer that.

There is a combination of factors. The income that is shown in the accounts is a combination of income from two different audit years: the conclusion of the 2009-10 audits and the start of the 2010-11 audits. The income reflects the activity undertaken by the auditors between 1 April and 31 March. If they are slightly further on or slightly less far advanced in a particular year’s audits at 31 March, that will have an impact on whether the fee income that is recorded in the accounts is slightly up or slightly down one year in comparison with another.

For the 2010-11 local government audits, a new, additional set of audits was undertaken. The local government pension schemes were subject to separate audits for the first time. Although we were quite rightly saying that the fees charged for like-for-like work were going down, the volume of work for local government was going up, because of the introduction of new separate audits for the pension schemes. That explains why the local authority bit is slightly higher. In the other sectors, the audits were not quite as far advanced at 31 March 2011 as they were at 31 March 2010, by very marginal amounts, and there were no additional volume elements in the other sectors.

You are essentially saying that it is a question of timing on the billing—

Largely, yes.

Which will adjust itself through the next year.

Yes.

I have a supplementary. The same table on page 45 of the report indicates that there has been a tremendous increase in miscellaneous income. Is the explanation for that the same as the one that you have just given the convener?

No. Miscellaneous income is largely income from secondments. We had more staff—in one case, a very senior member of staff—out on secondment during 2010-11.

As there are no more questions on that matter, I throw the discussion open to members.

I will raise a couple of issues related to tax liabilities. Section 3.3 of the audit management letter highlights as a significant matter a creditor this year for VAT liabilities relating to the outward secondments of staff in current and previous years, which you mentioned. Was VAT levied on invoices in previous years and not paid over to HM Revenue and Customs, hence the liability arising, or was VAT not charged, for which Audit Scotland is now liable retrospectively?

It is the latter.

I move on to other tax liabilities. On page 4, the audit management letter states that Audit Scotland may be subject to corporation tax for certain future and previous income streams. Audit Scotland has estimated that liability, at 31 March this year, as less than £3,000. Does the estimate of £3,000 cover all the previous years’ potential liability or does it just cover the year ending 31 March 2011?

It covers the previous years’ potential liability, back to when we understand that HMRC changed its view on the taxation of public bodies for such income. In our case, it is pretty much entirely interest income, which has been very low for the past two or three years.

So you believe that £3,000 will cover any total liability.

Yes.

I congratulate Audit Scotland on initiatives such as the national fraud initiative. It is encouraging to see £60-odd million result from that.

The annual report states that Audit Scotland has a recruitment freeze in operation, yet table 4 in the notes to the accounts, on page 44, shows that £70,000 was spent on staff recruitment in 2011. Can you clarify that?

We have a targeted recruitment freeze. We have continued to recruit to our graduate training scheme and we have not been able either to do without or to fill in-house a few specialist posts, so we have had to advertise those externally.

The bulk of the costs cover our graduate training recruitment scheme, which we have exempted from the recruitment freeze because there is a continuing role for us in developing the next generation of auditors for the public sector and for ourselves. They play an important part in how we deliver the work that we do and we feel that we make an important contribution to the development of financial auditing skills by continuing with that scheme.

Thanks. That is an encouraging response. I am keen on graduate training schemes.

You said that the bulk of the £70,000 was spent on that scheme. Can you give us a rough percentage?

I guess that about £40,000 might be the total cost of not simply advertising but of running assessment centres and the various stages of recruitment. I will come back to you with specific detail on that.

10:15

Thank you—that would be appreciated.

In the remuneration report, you list the salaries of individual members of the senior management structure and identify two posts as the deputy Auditor General and the assistant Auditor General. Can you clarify what foundation there is for those job titles, as they are not provided for in statute? What would be the bearing of the deputy Auditor General in particular should—God forbid—the Auditor General resign or be unable to fulfil his role?

On my advice, the board of Audit Scotland approves the senior management team. For a few years now the organisation has recognised the need to have someone in the organisation who can deputise for me in my absence for whatever reason. A letter is held by Audit Scotland that authorises the deputy Auditor General to assume my role pro tem if I am unable to fulfil my duties for a time. The title also reflects the fact that the occupier of that post in our current structure has oversight of all the delivery mechanisms in Audit Scotland with the exception of those that fall under Russell Frith, so they are the most senior member of staff in Audit Scotland.

Who is the letter from that confirms that the deputy Auditor General would stand in?

It is from me to her.

It is my understanding that the Scottish Commission for Public Audit would appoint a depute in Mr Black’s absence, but we can get clarification on that.

I am happy to provide that.

Those are all our questions for Audit Scotland, so I thank Robert Black, Russell Frith and Diane McGiffen for attending today. We will suspend for a couple of minutes to allow a changeover of witnesses.

10:17 Meeting suspended.

10:19 On resuming—

I welcome Andy McBean and David Jeffcoat from Alexander Sloan chartered accountants, external auditors of Audit Scotland. I ask Andy McBean to confirm that Alexander Sloan has received all the necessary information and explanations to inform its opinion of the accounts. Perhaps he can provide an overview and any observations that have arisen from the work.

Good morning. I am happy to confirm that we received all the necessary information and explanations to allow us to undertake our audit for the year ending 31 March 2011.

I will give you a quick overview of our work. Following a competitive tendering process, Alexander Sloan was appointed last December to carry out the external audit of Audit Scotland. We are required to provide an opinion on whether the accounts give a true and fair view and whether they have been prepared in accordance with international financial reporting standards, as interpreted and adapted by the financial reporting manual. We are also required to confirm that they have been prepared properly in accordance with the Public Finance and Accountability (Scotland) Act 2000 and directions by Scottish ministers.

We carried out an interim audit in February and a final audit was carried out in May and early June of this year. Our audit was carried out in accordance with international standards on auditing. As I said, we received all the information and explanations required to carry out our work, and the audit was completed without any significant issues. We signed our audit report on 15 June 2011.

Our audit report is unqualified—that is to say that there are no significant matters that should be brought to the attention of the readers of the accounts. In other words, it is a clean audit report.

We are also required to prepare a report—or letter—to management to summarise the key issues arising from our audit and report any weaknesses in the accounting and internal controls that came to our attention during the audit.

This year we have made two minor recommendations in our report, neither of which is of significant concern. I am pleased to report that those recommendations have been accepted and actioned by the staff at Audit Scotland.

Finally, I record my firm’s thanks to the staff at Audit Scotland and the support staff at the SCPA for their assistance during this first year of our appointment.

Thank you. I invite members to ask questions.

Section 3.2 of your letter highlights as a significant matter a provision of £776,000 to cover the cost of the voluntary early release arrangement. Have you reviewed the basis of that provision and the underlying calculation on which it is based, and are you satisfied that the individual payments reflect the entitlements of staff members who have opted to leave Audit Scotland in 2011-12?

We identified that as a key item in our audit. We examined the calculations and checked them against supporting documentation. Part of the provision relates to pension liabilities and payments to be made to the pension scheme. We checked that, too, and we were satisfied that there were no errors in the figure. The point to highlight is that the provision is made only when the person has signed up for the arrangement, which is then approved by Audit Scotland. People might perhaps take advantage of the scheme at a later date, but the provision relates only to those who were officially signed up by 31 March 2011—that is the only basis on which we can provide for it within the accounts.

When do you hope to see an efficiency saving being made from that early release arrangement? When will that start to feed into Audit Scotland?

Obviously, the payments have to be made and that has put a charge into the accounts, but the people concerned will not all be retired by this stage; some might retire towards the end of this calendar year. We will probably not start to see any benefit until the end of this accounting year.

There are no other questions, so thank you very much for your attendance, which we appreciate. We will suspend the meeting for a few minutes while we change witnesses.

10:24 Meeting suspended.

10:25 On resuming—

I welcome back Robert Black, Russell Frith and Diane McGiffen from Audit Scotland for consideration of Audit Scotland’s 2011-12 autumn budget revision.

Thank you, convener. I will be guided by you on this: if you wish, I am happy to provide further information on the operation of our early retirement scheme, to assist in answering John Pentland’s question to our auditors.

That might be helpful.

We have agreed that 17 staff may go under the scheme. It is the principal means by which we are generating the significant efficiency savings that we have already partly delivered and that we anticipate continuing to deliver through to 2014. My colleagues and I in Audit Scotland are committed to demonstrating that the scheme delivers value for money, not only in aggregate but in respect of the individual posts that are going.

As your auditors have informed you, they have examined the scheme and provided an assurance that it was properly undertaken. I will outline some of the key numbers for the record. The 17 agreements into which we have entered will generate net savings of £967,000 over the three years that were used to assess the business cases. An annual saving of £590,000 will be generated from April 2012.

So far, up to the end of September, six colleagues have left the organisation under the scheme. The remaining 11 staff will be away by the end of December. The actual costs relating to the six departures have already occurred, and were very close to the provisions that we made. We anticipate that the total cost will be very close to our estimate of £776,000.

Each of the proposals for the agreed departures has been reviewed in detail; I would have it no other way. A period of three years was used to assess the cost and savings for each case. Each case was considered on its individual merits and had to generate a financial benefit over the three-year period equivalent to 25 per cent of the annual salary of the departing member of staff.

Given that staff costs are by far the largest single element in our budget, that is the only way in which we can generate the sort of savings that we are seeking. Each and every agreed departure is generating savings in its own terms.

A further benefit of the scheme is that it allows us to examine the skill mix in the organisation. As I am sure that members will appreciate, the staff who are leaving the organisation generally have long service. We are able to consider the range of skills that we need in the organisation, not least with regard to some of the new directions in which I want Audit Scotland to go with its performance audit work, for which stronger analytical skills are needed.

The other benefit is that, in so far as we are replacing staff, the new staff tend to be on lower salaries, so we are pushing down the total wage cost in that way. All the numbers have been subject to external audit.

That was useful. Would John Pentland like to ask a supplementary?

No; that was helpful. I would be pleased if we could get a copy of that information.

We will be happy to drop you a note.