The Public Accounts Commission Ninth Report



Statutory Functions

8. The Commission has three main functions under the National Audit Act 1983:

The NAO's Corporate Plan

9. The Commission continued its usual practice of considering the NAO's latest Corporate Plan at its meeting in July. The Corporate Plan represents the medium term strategy of the NAO for the following five years. As we have noted in previous Reports[3], presentation of the Corporate Plan at this point in the year enables the Commission to consider trends in the scale and range of the NAO's activities and their possible implications in terms of both human and financial resources before the Office's annual Estimate is prepared. This arrangement has continued to work smoothly and has again obviated the need for the Commission to seek substantial adjustments to the Estimate when it is presented for the Commission's approval later in the year.

10. An opportunity is also given to HM Treasury to comment in writing on the NAO's Corporate Plan before the Commission considers it. This practice, though not mandatory, is consistent with the Commission's statutory duty under Section 4(3) of the 1983 Act to have regard to any advice from the Treasury (and the Committee of Public Accounts) before presenting the NAO's annual Estimate to the House. Any concerns expressed by the Treasury are then discussed with the C&AG before the NAO Estimate is prepared.

11. The NAO's Corporate Plan for 1998-99 to 2002-03 sought a real terms increase in net expenditure of £1.1 million or 2.8 per cent over the 1997-98 figure, a total in 1998-99 of £40.9 million cash. The Treasury, commenting on the Plan, recorded the Chief Secretary's concern that it sought significant increases in the NAO's spending, bearing in mind the Government's manifesto commitment that for the next two years departments should work within the ceilings for spending that had already been announced. He recognised, however, that the NAO had achieved very significant efficiency savings over the years in its own operations and that through its audits its work saved many millions of pounds of public money. The Chief Secretary also acknowledged that the Office's workload had increased significantly in recent years and that it would continue to do so in pursuit of projects such as resource accounting and budgeting. He hoped, however, that the Commission would ask the NAO to do all it could to live within its provision for future years, perhaps by considering whether it could extend the scope of the work for which it charged.

12. The Commission considered the NAO's 1997 Corporate Plan at its July meeting. It noted that for the three years to1997-98 the NAO's workload had increased by more than 10 per cent while gross costs had increased in real terms by only 1 per cent. That trend was expected to continue. As well as its programme of 50 major value for money (VFM) studies in each year of the planning period, the NAO would be conducting new audits following the Government's proposal to introduce by 2000-01 resource accounts running in parallel with Appropriation Accounts and would also be further examining risks to regularity, propriety and the conduct of public business. The NAO had also been given a new and continuing role in auditing the process of forecasting the prospects for public finances, see paras 21-23 below. In addition there was expected to be a significant growth in the number of accounts to be audited in the Plan period, with the number increasing by over 20 per cent between 1996-97 and 1998-99[4]. Not only would the NAO have to deal with new next step agencies but also, for example, with the division of the Ministry of Defence into smaller units. It would in future have to audit 130 defence balance sheets as well as the Department's accounts.

13. The Commission concluded that, in the light of the amount of new work which the NAO was being required to carry out, the request for additional funds was modest. It did, however, consider whether part of the increase could be met by the NAO charging more for its work. The C&AG explained that it was Government policy that the NAO should not charge departments for its work though it could, and did, charge trading agencies. He felt it would be inappropriate to charge higher fees - rather than the actual cost of the audit - on one account in order to subsidise another. The Commission agreed. It subsequently approved the NAO's Corporate Plan for 1998-99 to 2002-03.

The NAO Estimates

14. The Estimate for Class XVIII, B, Vote 1 (National Audit Office), for 1997-98 was exactly the same as that proposed in the NAO Corporate Plan for 1997-98 to 2001-02 and approved by the Commission in July 1996.[5] The Estimate sought a net total of £38.7 million, which was 4 per cent higher than the final net provision for 1996-97.

15. Although the Treasury did not comment on the 1996 Corporate Plan, it did decide to submit a memorandum on the Estimate. The Treasury recognised that the NAO was planning for an increase in workload of some 6 to 8 per cent from 1997-98 to 2001-02. It noted, however, that the NAO's plans had used Treasury GDP deflators taken from the Financial Statement and Budget Report (FSBR) 1996-97 and that the forecast published in the subsequent FSBR was that inflation would be lower. The Treasury hoped that when the C&AG reviewed his plans in 1997 he would be able to take the revised GDP deflators into account for the clients he audits. The C&AG agreed to do so.

16. The Estimate for the following year too was identical to that contained in the Corporate Plan for 1998-99 to 2002-03 and approved by the Commission in July 1997, namely £40.9 million. The Treasury had commented on the Plan, see para 11, but did not comment on the Estimate. As the C&AG explained, the Treasury had recognised that extra work was being required of the NAO and that the extra funding it had requested was justified. The Commission approved the Estimate in December 1997.

Appropriation Accounts

17. At its summer meeting, the Commission considers and takes note of the Appropriation Account for the previous financial year. We noted in our last Report that the Appropriation Accounts for each year since 1991-92 had shown an underspend but that, for the last two years, the underspend had been considerably smaller than for the previous three years.[6] The Appropriation Account for 1996-97 again showed an underspend, in this case of just under £561,000. That underspend was due mainly to savings achieved through improvements in efficiency during the year.

Value for Money Studies

18. In addition to its normal audit work, Robson Rhodes, the NAO's external auditor, prepares VFM studies on various aspects of the NAO's operations. The Commission considered the first of these studies, on the Efficiency of the Use of Graduate Trainees in the NAO, at its meeting in July 1997. It was impressed by the quality and thoroughness of the study.

19. The study covered the planning and implementation of work experience programmes by the NAO for its graduate trainees; the efficiency with which the NAO's business units use their trainees and enable them to make progress; and the scope for enhancing links between work experience and development planning. The study noted the strong support given by the NAO to a graduate training scheme. The current scheme, which has been in place since 1991, is based on the Institute of Chartered Accountants in England and Wales (ICAEW) qualification. Pass rates at the most recent (to May 1997) sittings of the Intermediate and Final level examinations had been well above the national average.

20. The study concluded that the training provided by the NAO was a success and that each trainee was self-financing over the period of the training contract. It noted, however, that there was a tension between the needs of the trainee and the needs of the NAO and that a little more flexibility in handling this was needed. The study made recommendations to help improve trainees' productivity and their contribution to the long term success of the NAO. The NAO accepted the recommendations and has drawn up an action plan to implement them.

Other Responsibilities of the NAO

The Role of the C&AG in Future Budgets

21. In addition to its consideration of the NAO's Corporate Plans and Estimates, the Commission has continued to take the opportunity afforded by its regular meetings to discuss some of the wider aspects of the operation of the NAO.

22. During 1997-98, the C&AG was invited by the Chancellor of the Exchequer to express an opinion on significant assumptions and conventions underlying the fiscal projections. A total of eleven assumptions was covered in the July 1997 and March 1998 Budgets and the November 1997 Pre-Budget Report. In each case, the C&AG concluded that the assumptions were reasonable and consistent with available evidence.[7] The Code for Fiscal Stability published with the March 1998 Budget states that: "The Treasury shall invite the National Audit Office to audit any changes in the key assumptions and conventions underlying the fiscal projections. The Comptroller and Auditor General shall ensure that any advice is communicated to the Treasury and laid before Parliament."[8] Provisions to that effect have been included in the Finance Bill currently before Parliament and lay a duty on the C&AG to examine assumptions submitted to him by the Treasury and to report to Parliament. Besides auditing changes in key assumptions, the C&AG may also comment where circumstances have changed to an extent that the basis of the assumptions on which he had previously reported has been affected.

23. The effort required to meet this new statutory remit will depend on the number of assumptions submitted for examination each year. However, the C&AG does not expect the cost of carrying out this work to be high or to exceed the capacity of the statistical and economic expertise already available within the NAO.

Implications of Devolution in Scotland and Wales

24. At its meeting in December 1997, the Commission considered the likely implications of Scottish and Welsh devolution for accountability to the House of Commons for the funds it has granted. It is concerned that the House of Commons should be able to ensure that there is effective financial oversight of the £21 billion a year to be voted to the new Scottish and Welsh administrations and that the arrangements for accountability and audit for the National Assembly for Wales and the Scottish Parliament maintain the high standards which prevail at present. In Wales there will be an Audit Committee chaired by an opposition member as is the Committee of Public Accounts at Westminster. There will also be an independent Auditor General for Wales, with provision to allow the possibility of the C&AG filling that position, for whom the NAO will provide the staffing. The Auditor General for Wales will be in place shortly before the elections to the Welsh Assembly are held and will take over functions from the C&AG at the same time as the functions and assets of the Secretary of State for Wales are transferred to the Assembly. The C&AG will, however, retain access to all devolved matters in Wales. Under the proposals there is provision for a continuing role for the C&AG, the NAO and the Committee of Public Accounts.

25. In Scotland, the detailed arrangements for accounts and audit will be a matter for the Scottish Parliament and will not therefore be known for some time. The C&AG will undertake comptroller and audit functions in Scotland throughout the transitional year, reporting to the Scottish Parliament as appropriate. The Scottish Parliament will be permitted under the Scotland Bill to choose the C&AG as its auditor, or to allow the Scottish auditor to draw on the work of the NAO. The C&AG will also retain his responsibilities in Scotland for functions reserved to the UK Government.

26. Experience in Northern Ireland is relevant in this context. It underlines the importance of taking scale into account in any consideration of the structure of public service audit arrangements in the United Kingdom. The Northern Ireland Audit Office (NIAO) is a relatively small unit in relation to the scope of public administration in the region and this can lead to significant diseconomies of scale. In addition the scope and complexity of public sector activities make it demanding for a small office to establish and maintain the full range of skills and experience necessary for effective audit. In order to offset these disadvantages, the NIAO has established close links with the NAO which carries out similar functions on a much larger scale. Some of the important benefits of this relationship include the use of NAO audit methodology, technical assistance, training, monitoring the standard of audit work and the common use of developments in Information Technology.

C&AG's Access to Bodies Spending Public Money

27. The C&AG audits all government departments and executive agencies as well as the NHS Executive and the majority of executive non-departmental public bodies (NDPBs), and as a consequence has full access to the papers of these bodies. The Companies Acts do not permit him to audit the 200 or so publicly owned companies set up as non-departmental public bodies or owned or overseen by government bodies. In addition the C&AG has secured access to nearly all the non-departmental public bodies which he does not audit and has access, guaranteed by statute, to around 680 separate bodies in the NHS and around 2,000 higher and further education institutions and grant-maintained schools.

28. Over recent years, different types of local bodies, funded at arms length by central government departments and executive NDPBs, have played an increasingly important part in delivering government programmes. These bodies, some of which belong to the private or voluntary sectors, receive about £15 billion per annum in public funds. Although the C&AG has access to most of these bodies, including, by agreement to Training and Enterprise Councils, he does not have a right of access to housing associations (now officially known as registered social landlords), although these receive public funding of over £1 billion a year. Nor does he have a guaranteed right of access to private firms delivering government services under contract or to all final recipients of Government and European Community grants. Lastly, although the C&AG audits the Office of Passenger Rail Franchising which is responsible for monitoring and managing the obligations to provide passenger rail services contained in the franchise agreements with operating companies, he does not have right of access to Railtrack and the operating companies themselves.

29. The C&AG has recently achieved access in two important new areas: first, to Camelot, the operator of the National Lottery, and second, to the Royal Household which thus allows him to examine property services and Royal travel. The Commission welcomes this extension to his rights of access. However, it believes that the rights of access of the C&AG need further to be extended to provide him with access to housing associations; contractors providing public functions and services under contract; and Railtrack and train operating companies. In addition, the European Court of Auditors, unlike the C&AG, has access to all documents and information relating to the financial management of the bodies subject to its inspection which includes all bodies receiving amounts granted as aid by the European Community. It is in the Commission's view unacceptable that the C&AG should not enjoy at least equal powers of access.

30. Annexed to this Report is a note by the C&AG on the areas to which he requires greater rights of access. The Commission firmly believes that it is now time for the C&AG to be granted the access he needs to enable him to provide Parliament with greater assurance that public funds have been used as Parliament intended, and with due concern for regularity and value for money.

Visits to the NAO

31. Commissioners visited the NAO's headquarters building in Buckingham Palace Road in February and June 1997 for informal briefings on VFM studies and the corporate and strategic planning of the NAO. The Commission welcomes such opportunities for discussions with the senior staff of the Office whose contribution to the effective and thorough scrutiny of the Executive is so important to the effectiveness of the Parliamentary system.

3   Seventh Report, HC567 (Session 1993-94), para 8; Eighth Report, para12 Back

4   From 520 to 631 Back

5   Eighth Report, para 25. Back

6   Op cit, para 18 Back

7   See Cm 3693, HC 616 and HC 361 (Session 1997-98) Back

8   The Code for Fiscal Stability, March 1998, para 26 Back

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Prepared 10 July 1998