Meeting of the Commission

Meeting date: Tuesday, October 4, 2011

Official Report 403KB pdf

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Audit Scotland Autumn Budget Revision 2011-12

We commence agenda item 2. I ask Robert Black to make an opening statement.

My statement is essentially to do with end-year flexibility, as our proposed autumn budget revision seeks approval for a matter relating to EYF.

As the SCPA is well aware, Audit Scotland is required under the Public Finance and Accountability (Scotland) Act 2000 to break even in broad terms, taking one year with another. We cannot carry forward reserves, so end-year flexibility is the only mechanism available to enable us to balance one year with another.

In the past we have faced the challenge of audit years not coinciding with financial years, so there have been issues around billing and cash flow to be managed. In recent years Audit Scotland has substantially reduced its EYF and, as my colleagues and I have outlined in the annual report and at today’s meeting, we are well on the way to implementing a number of significant cost reduction measures in recognition of the pressures on public finances.

Our underlying underspend in 2010-11 was £1.275 million. That is £590,000 more than the amount that was recorded in the previous year, mainly because Audit Scotland is making good progress towards its four-year cost reduction target. In other words, we are ahead of the game in that regard.

Given that we have a current cost reduction target of 20 per cent over the four-year period, there must be implications for a reduction in the fees that we charge audited bodies. We outline in the budget revision document that it would be possible to provide those public bodies with a further financial benefit from the funds that we did not use in 2010-11, and we can do that only through the EYF provisions.

We suggest that £945,000 of the end-year flexibility, which in effect is comprised of resources that came to us through fees charged, is used to provide a one-off fee rebate of just under 5 per cent of fee charges to audited bodies. That is a repeat of an exercise that we carried out in 2008-09, when we provided a similar rebate to clients using the EYF mechanism.

The balance of £330,000 would be retained by the Scottish consolidated fund; Audit Scotland’s net funding requirement is met by the Parliament, so it is right and proper that the Parliament gets some benefit from that. That will be the only use to which we put the EYF. It is a means of restoring to the public bodies to which we charge fees some of the money that we took from them, because we have not found it necessary to use that resource due to the progress that we are making with our efficiencies.

Russell Frith and Diane McGiffen can help me to answer any detailed questions that you might have. I should add that the policy principle that I describe was established last year.

Thank you, that was helpful. Before I throw open the discussion to members, I have a question.

Audit Scotland has applied to use £945,000 of end-year flexibility, which will be returned to audited bodies by way of a reduction in audit fees that are levied in future. The effect of that is an average 4.9 per cent reduction in audit fees for one year. Will it be made clear to audited bodies that the discount is non-recurring and is unlikely to apply year on year? Secondly, will the discount be explicit on the invoices that Audit Scotland sends to the audited bodies?

The answer to both questions is yes.

Excellent—thank you.

Page 3 of the budget revision document states that £173,000 of the end-year flexibility arises as a capital variance. Section two explains how the revenue budget variance has resulted in revenue EYF, but it does not explain the capital variance.

In the original budget proposal for 2011-12, there was a capital resource requirement of £250,000. Can you confirm that the £173,000 of capital variance is underspend? How did that underspend arise?

I confirm that it is money that we requested, but have not used. As I think we have discussed with you, we have been reviewing our property portfolio and making provision to reshape and change our accommodation. We did not proceed with that in this period, but we made some provision in case we were able to exit early from our properties. We have made savings on our capital budget, which primarily funds information technology investment and adjustments to our properties. We have made considerable savings in our IT investment programme and the underspend that you see is a result of that.

Thank you. On an entirely different strand, if you made savings on IT investment, please pass on how you achieved that. Some of us would like to achieve it elsewhere.

On page 3 of the autumn budget revision it states that end-year flexibility had arisen due to a

“pay and recruitment freeze that was introduced at the start of 2010/11.”

Page 26 of the annual report and accounts show that the assistant Auditor General’s salary has increased by two bands from between £95,000 and £100,000 to between £105,000 and £110,000. Can you explain that apparent salary increase in view of the pay freeze introduced at the start of 2010-11? I know that the assistant Auditor General is here.

The explanation is partly the result of the bandings that we use. The pay freeze applied to all the scales in the organisation. There were still pay awards based on contribution. All pay was frozen and all pay scales were frozen, but employees who had, in line with their remuneration scheme, made sufficient contribution were still eligible for very small contribution-based payments. In addition, for the latter part of the year, some colleagues were undertaking additional responsibilities as a result of the secondment of the deputy Auditor General. The pay that you see attached to the assistant Auditor General job is not a like-for-like comparison with the previous year, because the role had changed.

Okay. I thought that a pay freeze would apply right across the board, but I think I understand the explanation.

I will build on what Diane McGiffen said. Across the public sector as a whole, the pay freeze has been in operation for some time now. We went into the pay freeze a year earlier than other bodies; we decided to do that and we are seeing the benefit of it in the flow-through of the efficiency savings. Across the public sector as a whole, people are still entitled to what used to be called incremental progression, so there will be a cost. In fact, we highlighted that in our recent report on Scotland’s public finances.

The deputy Auditor General has been away on secondment for a year doing a very major piece of work for the United Kingdom Government. Clearly we are saving the full cost of that person’s salary and it is perfectly common that while that is happening other colleagues in an organisation such as ours would receive a small recognition of the extra responsibility that they are carrying. That is an element in this, but it is not a permanent enhancement; it is a temporary enhancement pending the interim arrangements that are put in place.

The overall financial effect of the secondment is that we are generating a significant short-term saving, which we discussed in relation to the miscellaneous income in the accounts.

That might help your understanding of the overall picture.

Would it be correct to describe it as an acting allowance, as opposed to an actual salary increase?

Yes, indeed. It is to do with the extra responsibilities taken on during the past 12 months.

Do members have any other questions that they would like to ask?

The rebate to the audited bodies will be more than welcome, but you emphasised clearly that it will not be recurring. You identified that the underspend came from things such as the recruitment freeze and the pay freeze. When you outsource your work to public bodies, you are charged a fee. Is that fee reflected in what you charge local authorities or is there a difference between that fee and what you charge, which may have accounted for some of your underspend?

The fee that we are charged by the firms is one part of the total charge to the audited bodies. The audited bodies also pay a contribution towards some of the performance audits and the best-value audits in local government, for example. We do not apply a mark-up to the element that comes from the firms. Yes, the total charge to the audited body is greater than the fee from the firm, but that reflects the other costs that we are required to bill the audited bodies for.

Could you identify what the difference is, percentage-wise?

It varies significantly between sectors, depending on the elements of our work that are paid for through the Scottish consolidated fund. For example, local authorities pay for every part of their audit work: the financial audit, the performance audit, the best-value audit and their contribution to the national fraud initiative are all paid for directly. In central Government, the audited bodies pay for the financial audit, but the cost of the performance audit comes out of the money that is provided from the consolidated fund. In health, it is a mixture. In further education, it is purely the financial audit that is paid for.

As there are no more questions from members, I thank the witnesses very much for their attendance. I have no doubt that we will see you back here again soon.