Select Committee on Public Accounts Tenth Report



THE NATIONAL AUDIT OFFICE

Statutory Functions

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

    -   to examine the Estimates for the National Audit Office (NAO) proposed by the Comptroller and Auditor General (C&AG) and to lay them before the House with such modifications as it thinks fit;

    -    to appoint the accounting officer for the NAO; and

    -   to appoint an auditor for the NAO.


The NAO's Corporate Plan

9. The Commission continued its usual practice of considering the NAO's current Corporate Plan at its summer meeting. 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 meant that the Commission has not needed to seek adjustments to the Estimate when it is presented for the Commission's approval in December.

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 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 1999-2000 to 2003-04, which was considered by the Commission in June 1998, sought an increase in the Office's net budget for 1999-2000 of £1.4 million in real terms — an increase of 3.4 per cent. The Chief Secretary to the Treasury, while recognising that the NAO had achieved significant efficiency savings and the value of its work in saving public money through its audits (see para 24 below) and acknowledging that its workload was growing, was concerned at the size of the increase being sought. He hoped the Commission would ask the NAO to do all it could to contain its costs and avoid further increase in the next year's Plan.

12. The 1999 Corporate Plan for the period 2000­01 to 2004­05, which the Commission considered in July 1999, sought the same gross cash budget for 2000­01 as had been approved for that year in the 1998 Corporate Plan, a total of £55.3 million. In real terms that represented an increase of 0.5 per cent. While noting that the proposed budget for 2000-01 was at the level approved in the 1998 Corporate Plan, the Treasury again expressed its hope that the NAO would do it all it could to contain future cost increases.

13. In its Ninth Report the Commission noted that the NAO's workload had increased by more than 10 per cent in the three years to 1997-98 while gross costs had increased in real terms by only 1 per cent. It suggested that that trend was likely to continue.[4] This expectation proved correct. Both Corporate Plans referred to the increased workload with which the NAO has had to deal. This includes extensions to the C&AG's rights of access, which we welcome, the provision of advice and assistance to Government departments and Parliament on the introduction of resource accounting, and work on the review of audit and accountability arrangements for central government. We discuss these additional demands further below. In total, over the ten years up to 1998-99, the NAO's workload increased by more than 25 per cent while its net costs went up by only 11 per cent in real terms.

14. In addition the NAO has continued to contribute significantly to the achievement of value for money in the organisations it audits. Over the three years up to 1998-99, for example, the work of the Office led to savings of some £1.2 billion, an average of nearly £400 million per year. Although we do not intend to discuss the 2000 Corporate Plan in detail in this Report, we have noted that the NAO's work has led to even greater savings over the last three years. The Office has thus more than met its objective, as set out in the Corporate Plan, of achieving savings for the taxpayer of eight times its net costs. In addition the work of the NAO has helped to ensure that uneconomic activity does not take place in the future. Other changes, such as improvements in hospital treatment, have lead to greater effectiveness or improved services to the public but cannot be easily measured in money terms.

15. The Commission is satisfied that the NAO has indeed done all it can to limit increases in its expenditure and is impressed by the fact that, given the growth in its workload, it has managed to contain the increases sought. The Commission had no hesitation in approving the Corporate Plans for both 1999-2000 to 2003-04 and 2000-01 to 2004-05.

The NAO Estimates

16. The Estimate for Class XVIII B, Vote 1 (NAO) for1999-2000 was exactly the same as that proposed in the NAO Corporate Plan for 1999-2000 and approved by the Commission on 30 June 1998. It sought a net total of £43.4 million, which was 6.1 per cent higher than the final net provision for 1998-99 of £40.9 million. The Treasury, which had commented on the Corporate Plan, did not comment separately on the Estimate. The Commission approved the Estimate in December 1998.

17. The Estimate for the following year too was identical with that proposed in the Corporate Plan approved by the Commission in July 1999, namely £44.7 million. The Treasury, which had already commented on the Corporate Plan, also commented on the Estimate. It noted that the provision was 3 per cent higher than the forecast outturn for 1999-2000 of £43.4 million and above inflation, notwithstanding the fact that the NAO was no longer responsible for funding work in Scotland or Wales. The Commission recognised that the advent of resource accounting involved considerable extra work and that were also more accounts to be audited. It noted that no provision had been sought for auditing Scotland as after March 2000 the work was to be carried out by Audit Scotland and funded by the Scottish Parliament, and that in Wales the NAO would be reimbursed for the work involved. The Commission approved the Estimate without amendment in December 1999.

Appropriation Accounts

18. At its summer meeting, the Commission considers and takes note of the Appropriation Account for the previous financial year. The Appropriation Account for every year since 1991-92 has shown an underspend. The Appropriation Accounts for 1997-98 and 1998-99 also showed underspends which at £306,389 and £277,246 respectively were considerably smaller than that in 1996-97 which was £560,796. The underspends in 1997-98 and 1998-99 were less than 1 per cent of the total net provision in both years. The Commission welcomes this evidence of effective financial monitoring in the NAO.

Value for Money Studies

19. In addition to its financial audit work Robson Rhodes, the NAO's external auditor, prepares value for money (VFM) studies on various aspects of the NAO's operations. At its meeting in June 1998 the Commission considered a VFM study on Information Systems (IS) and Information Technology (IT) strategy. The study had concentrated on the IS/IT environment supporting the Resource Management System which was unique to the NAO. It found that the NAO's system had a number of strengths — it had been delivered on time and within budget, the latest hardware was being used and staff appeared well motivated and relatively experienced in the technology used — but identified two areas which could be improved — user sponsorship/involvement could be increased and there was a need to develop and improve user manuals and training. The NAO has accepted the recommendations made in the study.

20. In July 1999 the Commission considered Robson Rhodes's VFM Review on Reliance on Internal Audit. The study assessed the scope for the NAO to place more reliance on the work of internal audit to support the C&AG's opinion on the financial statements. It noted that the combined cost of internal and external audit, some £50 million, appeared relatively small when compared with the £600 billion of expenditure certified each year but concluded that it was nevertheless a substantial investment in public accountability and that it was incumbent on all concerned to ensure that this money was effectively deployed. The study, while acknowledging that much had already been done to promote better understanding, proposed certain changes such as continuing to monitor the development of Audit Committees in central government and using the opportunity created by the introduction of the statement on internal financial control to review critically the discharge of the Accounting Officer and Internal Audit responsibilities in relation to systems of financial control. The NAO accepted the Review's recommendations and has been working with the internal audit profession in Whitehall to identify best practice.

Other responsibilities of the NAO

The introduction of resource accounting and budgeting across Government

21. We have referred above to the extra work which the introduction of resource accounting and budgeting has engendered. The first sets of Resource Accounts to be audited fully and laid before Parliament will be published by each department for the financial year 1999-2000. The key difference between Resource Accounts and Appropriation Accounts is that Resource Accounts consist of five statements whereas Appropriation Accounts are only one. This and other additional features of Resource Accounts will make the audit work more complex and demanding. For example, Resource Accounts provide far more information on resources consumed and the value of assets and liabilities; there is thus considerable scope for different interpretations.

22. The results of the dry-run audits of departments' 1998-99 accounts revealed the extent of the work still to be done on all sides. Of 52 accounts, 30 would have received a qualified audit opinion. The NAO found that it is predominantly in the larger and more complex departments that difficulties have tended to arise. In addition to the substantial number of qualifications which would have been required, nearly a third of the accounts had not been submitted to the C&AG for audit by 30 November, the likely statutory deadline for submission once resource accounting goes live. Assisting departments to take firm action to address their outstanding accounting issues and the ongoing need to provide advice and guidance will continue to place a very heavy burden on the NAO.

23. We understand that if the Government is to achieve its aim of replacing Appropriation Accounts with Resource Accounts for 2001-02, there are two critical years when Resource Accounts run in parallel with Appropriation Accounts — 1999-2000 and 2000-01 — during which the majority of the difficulties identified during the dry-run process must be ironed out. The Treasury has requested the NAO to provide all help possible to departments in making the initiative a success. The Office must, therefore, be in a position to apply increased resources to identifying and helping to resolve problem areas, as well as continuing to play a very active role in providing advice and guidance. It will also be necessary for the Office to have extra resources to reduce risks, identify remedial measures and report findings to Parliament and the Committee of Public Accounts.

Rights of Access

24. The 1998 Corporate Plan noted that the C&AG had been appointed to audit all the non-departmental public bodies which had been proposed in legislation since May 1997. These include the Legal Services Commission, the Disability Rights Commission and the National Lottery Commission. A full list is given in Annex A.

Investors in People

25. The 1999 Corporate Plan noted the NAO's commitment to quality and to the continuous improvement of its practices and the development of its people. The quality of the Office's work is dependent on staff having technical and management skills and knowledge that are appropriate and up-to-date. The Office therefore seeks to ensure that staff are supported by providing appropriate induction, training and development opportunities, in line with business goals.

26. As part of its programme of continuous improvement, the National Audit Office has been using the nationally recognised framework for bench-marking training and development activities, known as Investors in People, some three months earlier than originally planned.

The Government Resources and Accounts Bill

27. In the autumn of 1999 the Government Resources and Accounts Bill started its progress through Parliament. The primary purpose of the Bill is to implement resource accounting. However, the legislation provides a rare opportunity to modernise the NAO's audit and access rights and the accountability of Government to Parliament. The Committee of Public Accounts[5], supported by the Chairman of the Commission, has therefore been pressing the Government to use the legislation to put the Office's access rights on a firmer footing, to make the C&AG auditor of all executive non-departmental public bodies and to provide for him to make independently-validated performance measures.

28. A number of important improvements to the Bill have already been secured:

    -   statutory regularity audit will extend to all accounts prepared by departments and cover the use of resources, not just cash;

    -   there is to be a mechanism to enable the Treasury to make the C&AG the statutory auditor of non-departmental public bodies that he does not currently audit; and

    -   the C&AG's role and his relationship with Parliament have been made more secure in several ways.


The Commission welcomes these improvements. However, we remain disappointed that the Bill fails to ensure that the C&AG has access rights and an audit remit reflecting current delivery of public services and that further necessary improvements have not been achieved.

Review of audit and accountability arrangements for central government

29. As the Government Resources and Accounts Bill completed its passage through the House of Commons, the Chief Secretary to the Treasury announced a study to recommend suitable audit and accountability arrangements for central government in the 21st century.[6] The study will cover all of the concerns raised by the Committee of Public Accounts, together with the Treasury's own issues, including:

    -   the role of audit in modernising government, including performance validation, the audit of joined-up activities and attitudes to risk-taking;

    -   the implications of devolution, the wider European context, possible models from other countries and the relationship with other audit and regulatory bodies; and

    -   the importance of Parliamentary scrutiny, the costs and burdens of regulation, and the mechanics of change.


Lord Sharman has been appointed to lead the project team. A full list of the members of the Steering Group, under the Chairmanship of the Chief Secretary, is given in Annex B.

External Auditors

30. Robson Rhodes were appointed as the NAO's external auditors for a three year term with effect from the 1996-97 accounts. An option to extend the appointment by a further two years was exercised in summer 1999. Robson Rhodes' appointment will therefore end after the completion of the 2000-01 audits. Our practice is to rotate auditors after their appointment is completed and procedures are therefore under way to recruit new auditors. The Commission would like to thank Robson Rhodes for the excellent work they have carried out during their appointment.

Visits to the NAO

31. Commissioners visited the NAO's headquarters building in Buckingham Palace Road in March 1999 for an informal briefing on the work of the Office. As we noted in our previous Report[7], we welcome the opportunity which such visits provide for discussions with senior staff at the Office. Their work in scrutinising the Executive is a vital contribution to the effectiveness of the Parliamentary system.


3  Eighth Report, HC 658 (Session 1995-96), para 12; Ninth Report, para 9 Back
4  Op cit., para 12 Back
5  Ninth Report from the Committee of Public Accounts, Government Resources and Accounts Bill, HC 159, Session 1999-2000 Back
6  Official Report, 28 February 2000, col 152W Back
7  Op cit., para 31 Back

 
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