Examination of Witness (Questions 1 -
19)
TUESDAY 25 JANUARY 2000
RT HON
DAVID DAVIS
Chairman
1. Can I welcome you to the first session of
the Committee's inquiry into the work of the Audit Commission.
Can I remind people that we have published this morning Volume
II, which is the memoranda[1]
that the Committee has received on the issue of the Audit Commission
and it is available in printed form at £11.50; it is also
available, I think from lunchtime today, on the Internet. Mr Davis,
can I welcome you to the Committee. Do you want to say anything
by way of introduction, or are you happy for us to go straight
to questions?
(Mr Davis) Good morning, Chairman. If
it suits the Committee I can spend a couple of minutes outlining
a few views if it would be helpful and give members of the Committee
something to bite on.
Mr Olner
2. Or negate the questions.
(Mr Davis) I hope not. I have never known that to
be a problem in these committees. Can I start by saying, Chairman,
as a general impression the standards of this organisation are
very high, it is a very high calibre organisation in its leadership
and in my observations of it. It might surprise the Committee
to hear I take the view that standards of audit and oversight
in the public sector (as against financial management) are actually
rather higher than they are in the private sector. I say that
as a past board member of two very large companies, an industrial
company and a financial company. My experience over the last couple
of years of the National Audit Office and the Audit Commission,
and over my previous career, is that the public sector auditors
have advantages in three areas. In terms of a normal financial
audit they are probably on a par, but in three areas there are
significant advantages in the public sector. One is the area of
Value For Money, which I will talk about in a second, and the
other two are in the areas of regularity—the use of money
for the purposes laid down—and propriety, which is obvious.
The standards are higher in the public sector, largely because
the demands are higher, but nevertheless they are higher. Certainly
that is true in all three sectors of the National Audit Office.
My experience of the Audit Commission is primarily in the Value
For Money area. In many areas they are better than the private
sector average. I cannot really comment on the district audit
side because I do not have direct experience of that. If you wanted
to get comments then probably the Comptroller and Auditor General
might be the person to talk to. I have one minor hunch (and it
is only a hunch) and that is, they may not spend enough in terms
of the financial audit side of all the locally delivered services,
not just local government, health and so on. That is only a hunch.
In terms of maintaining those standards the Audit Commission is
a member of the Audit Forum, which is chaired by the C&AG
and that helps to maintain that. The second area of importance
for auditors is independence—independence from the people
they are auditing. I used to have worries about this with the
Audit Commission. Two years ago I was a little concerned because
all of their income comes from the people they are auditing; but
the mechanism they use (that of price setting and effectively
allocation of the work by the Commission itself) I think negates
that concern. Whilst I think from time to time the Audit Commission
look quite kindly to their customers, I think there is a different
reason for that and I can come back to that. The Value For Money
side interlocks like a jigsaw puzzle with the National Audit Office.
You have got studies which start with the Audit Commission and
end with the NAO, like the health authority scandals of the last
decade or so. The other way round you have got NAO studies on
NHS supplies which end up as studies into the individual trusts.
You have studies like the NHS bed management, the one coming on
hospital acquired infections, health and safety in NHS trusts,
for which the work is often done by the Audit Commission. In that
area my experience is that universally the quality of work is
very good from the Audit Commission to the NAO. There are also
joint studies such as the housing benefit fraud studies in 1997
and 1999; the Trading Standards Office study of last December;
and there was an earlier one some years ago on probation services;
and the aim in future is to have one a year. From the Audit Commission
you have very high standards and the advantage of a local perspective
and, therefore, unique insights into vital areas. Vital areas
where they have unique insights are: law and order, through the
police; health; education; and transport. The issues which are
most important to Members of Parliament in this House pretty much
all are covered by the Audit Commission and often covered across
the board so they can spot the cracks between them. The point
I wanted to start with, and I will stop when I get to this point,
is this: in my view, you have got a very, very high quality machine
which could actually be made better. The way it can be made better
is if the reporting arrangements were changed. At the moment one
of the major distinctions between the National Audit Office and
the Audit Commission is that the Audit Commission reports to the
Department of the Environment, Transport and Regions (and that
of course is understandable, and it was set up by the Conservative
Government in 1982 on that basis) but it seems to me that it loses
something that the NAO has. I will remind you of how the PAC structure
works. The NAO produces a report which takes a year to produce
and some time to agree, but it is an agreed report and comes to
the Public Accounts Committee. The Public Accounts Committee therefore
has a very strong factual base for anything it says. That allows
it to be completely non-partisan about the investigation underway.
Then there is typically a very high profile outcome in terms of
the PAC report after normally very boring, grinding factual meetings,
and it then follows it thereafter to make sure something happens
both on the part of the Committee itself, the NAO and indeed the
Treasury. I am not so sure the follow-up on Audit Commission Reports
is so good. For example, they did a report a few years ago and
it was a fabulously good report called Misspent Youth,
very high quality, very effective, all about youth crime and the
contributory causes, the causes of crime and the things that lead
them into it. It was very high quality but, because it hit a number
of different departments (it was everything from Education to
the Home Office), I am not so sure we actually got the delivery
out of that which we should have done. This is not a political
point, it brackets both governments. I think that the biggest
single change to be done with the Audit Commission is to create
another public accounts committee, if you like, for local service
delivery rather than just local government, looking at what the
Audit Commission does. There is something of a precedent in the
current reporting arrangements between the Audit Commission and
the Welsh Assembly. You will get arguments from constitutions
who say the "Welsh Assembly is fulfilling an Executive role",
which in a sense it is, and in the same sense as Parliament, but
it does report directly to the Welsh Assembly. I think there would
be a major force multiplier for the Audit Commission's incredibly
high quality of work on all these areas of enormous importance
to Members of Parliament if there was the equivalent of the PAC
for the Audit Commission here. It would also inform Parliament,
because these factually based reports, indisputable really in
terms of the hard facts underlined, drawn up in a non-political
environment, drawn up to see what real performance delivery is
and what the real problem is, would serve as a magnifying glass
on the actual delivery of real services on the ground, real public
service delivery. That is the point I want to finish on, Chairman,
to throw in a firecracker to give you something to take up with
me.
Chairman
3. That is very useful. Do I take it you are
really talking about a separate committee, or is it a bid from
the Public Accounts Committee to extend its remit?
(Mr Davis) No. I am afraid the Public Accounts Committee
already has too much to do. It might even be a part of this Committee
(although I have to say the workload would be pretty high) or
something else. No, I am saying a parliamentary committee
to take up the work of the Audit Commission, follow up on it,
take evidence on it, report on it and make sure a year or two
later something has happened. That is the aim. Not the PAC. The
one reason this would fail is if you tried to make it a sub-committee
of the PAC—it could not cope.
4. There are 31 select committees of the House
now, the more you have the less impact any one can possibly make.
Do you think it should be just Members of the House, or perhaps
include representatives from local government on it?
(Mr Davis) In this context, no, I think Members of
the House. I would remind the Committee (and use the PAC as an
example) there are times when the PAC taking an NAO report produces
something which is then taken up by another select committee.
I see that happening a lot in this sort of structure. For example,
you may remember the Pergau Dam episode. When the Pergau Dam episode
came out of a follow-up on a National Audit Office report during
the course of a PAC hearing, the PAC, with Robert Sheldon, basically
said, "This is now a matter for International Development
[or Foreign Affairs, I cannot remember which], hand it on to them".
They did a report on the policy realities of the Pergau Dam. There
are plenty of other examples. You will be aware of that. I would
see this mechanism work in the same way. The important point here,
and I am talking about the parliamentary body, is looking in detail
(and these are national policies) at the local delivery of national
policies, and I do think Parliament has an interest there.
Mr Olner
5. Could I move on from that. As you know, the
Audit Commission appoints and oversees auditors of local authorities
and NHS bodies and it does national Value For Money studies, and
this year it will be doing Best Value. Which of these do you see
as its main role or function?
(Mr Davis) They are both crucial. I am a strong supporter
of the Best Value initiative; I think the Government has got it
exactly right.
6. Given that Best Value means it is up to local
people or local representatives to determine what is Best Value
for their local authority, how does that start to figure in the
national value?
(Mr Davis) The key consideration in my judgment are
the performance measures. The performance measures are not wholly
decided on by the local authority. When you talk to the Commission
they will take you through it. Their evidence to you points up
they are consulted and have their own set of measures too. The
simple fact of the matter is, they are measuring a whole range
of locally delivered services. This is the way that Government,
both nationally and locally, is going to go—that is measuring
the outcome and outputs of public service delivery. That is the
key point here. The difficulty with this, one has to say there
is a practical difficulty, despite the fact that the Audit Commission
were getting about £50 million (£25 million from Government,
and £25 million as a levy from local authorities), despite
the fact they were getting those extra resources, I think it will
divert them somewhat away from some of the Value For Money studies.
It would be inhuman if it did not, just because of the focus of
the senior management.
7. Do you see a conflict between Best Value
and Value For Money?
(Mr Davis) It is not an "in principle conflict"
in the sense you were describing to me; I think it is a management
conflict, a conflict of commitment and emphasis, rather than a
philosophical conflict. I think when you see the information that
comes out of the Best Value initiative it will create questions.
Information systems more often than not create questions than
answers, and the answers, I suspect, will come out of subsequent
VFM studies: just as with the National Audit Office many of our
studies come out of the financial audit that goes on and things
are spotted there. What will happen is they will interlock, but
in the short-term in the next couple of years, when the Audit
Commission are quite reasonably (because it is on their shoulders)
trying to make Best Value work, it will be difficult for them
to put quite so much effort into VFM. It is a resource and focus
issue.
8. You mentioned in your evidence one of your
fears about the Audit Commission is that it does 70 per cent.
of its work in the public sector and only 30 per cent. goes to
the private sector. Do you think there is a very great difference
between probity and financial regularity and performance indicators?
Which do you think the Audit Commission places stress on?
(Mr Davis) There is no clash there. The probity issue
is absolute in public service and the use of public money. It
is an absolute. I do not see a clash. Perhaps I have misunderstood
the question.
9. It seems to me there is a very great difference
between local authorities who have electably accountable members
and, say, National Health Service Trusts where the thing is not
brought out into the public as it should be?
(Mr Davis) Probity matters equally well in both. Some
of the great scandals of the last four decades have been in local
authority delivery, in housing and that sort of area, just as
much as in the Health Service. I do not think that the public
accountability of a democratically elected member protects the
public from improper use of public money or, indeed, improper
allocation of public resources. That is not a protection, frankly,
particularly in areas (and it does not matter which Party) where
you have a long period of one Party and one Party in power—it
is not a protection.
Mrs Ellman
10. You have given the impression you see the
Audit Commission as a high quality body.
(Mr Davis) The bits I see, certainly.
11. Why do you think that?
(Mr Davis) I caveated it in the sense that I cannot
comment on district audit because I do not have a direct impact.
In terms of the Value For Money area, there is a huge interlock
between them and the National Audit Office, so I see them up against
one another. I have a very clear view of all the elements of the
National Audit Office and when it is a basic financial audit I
should think they are as good as any private sector firm on the
three areas of VFM, regularity and proprietary. Because it matters
more in public service they are better than most of the private
sector accounts I have come up with. They are more skilled and
have more experience. When I see the Audit Commission up against
them in an area where they cannot compete but co-operate (but
sometimes compete because people are competitive) they are very
good too. They are of a high standard. In that Value For Money
area (which is the bit of the iceberg I see) they are invariably
high quality. I cannot think of an Audit Commission report which,
in my judgment, was either badly argued or badly researched—these
are the VFM reports. That is the best indicator I can give you.
12. What about the Audit Commission's work in
the Health Service, are you satisfied with that, or do you feel
you know enough about them?
(Mr Davis) I think so. I will distinguish for you
the financial audit side because I cannot comment. May I flesh
out my hunch, Chairman. I said I originally had some worries about
the independence of the Audit Commission and now I do not, really
with respect to its clients as it were. The reason for that is
the way the Commission itself sets the pricing and the allocation
of work between the Commission and the private sector. The slight
drawback of that is they, in effect, set the amount of money spent
on audit, and accountants, by their nature, tend to be very economical
and not want to spend too much. We have a very large and complex
Health Service, one of the biggest organisations in the world
in some respects; indeed, all of the areas of audit are large
and complex and as a result there may be a risk (and it is only
a hunch) that they under-audit in terms of the amount of resources
going in. That is not a quality judgment, that is a question of
resources. It is a hunch. I cannot prove it. I am putting it to
you as a question you might want to put to the Audit Commission
for later. In terms of the work we have seen them do in the Health
Service, I did mention a couple where some of the Health Service
scandals (West Yorkshire and some of the others, which the NAO
picked up), originated with Audit Commission discoveries. Audit
Commission work came out of the Health Service. In that area they
have acted very well to provide, as it were, an intelligence arm
for what we do. In some of the other areas—where we have
done work on the National Health Service in terms of, let us say:
hospital acquired infection, which has a report coming out by
the NAO in a month's time; on bed management, another report coming
out soon; a previous one on health and safety in the National
Health Service Trusts, which identified a million accidents a
year taking place, all based to a very large part, if not in total,
on Audit Commission work—my discussions with the National
Audit Office indicate they are very satisfied with the calibre
of that work. That is all VFM and not the financial side, except
the financial side in propriety terms. All of that seems to be
very good.
13. How should the Audit Commission's work be
assessed so the public are more aware of what they are doing and
the effectiveness of it?
(Mr Davis) There are two questions there: how should
they be assessed, and how should we make the public aware. Firstly,
to start right at the beginning of their work, they do a good
job of consultation over the way they approach something. They
consult all the stakeholders pretty much, except the public are
large, and they cannot do that. They consult the local people,
they consult the NAO, they will bring things in the future to
the Public Audit Forum if there are serious problems there. The
National Audit Office itself audits their work, audits their overall
operation. I think there are discussions (and perhaps you may
want to see an AG in front of you for this) about the quality
of financial audit which do go on. They are not things I see myself
in my role; it is a very narrow part of their work. Maybe that
is an area you should look at. In terms of the public perspective
of this, can I say upfront, speaking as a Chairman of the Public
Accounts Committee, I am always conscious that accounting and
audit are not exciting things that take the headlines when they
are going properly. The very word "accountant" does
not conjure up James Bond, it conjures up somebody a little less
exciting. The public at large does not pay a great deal of attention
if things are going well. It would pay more attention if things
went wrong. I am just being practical about this. If things were
going wrong it would automatically come to the public eye. I worry
less if it is going well. It is not something the public worry
about. They will worry much more about the things the Audit Commission
looks at itself—the public service delivery where the rubber
meets the road in public policy.
Mr Olner
14. You did mention the West Yorkshire scandal,
do you think that would have come out if anybody other than the
Audit Commission were doing the auditing?
(Mr Davis) It might have done.
15. If they had got their own external auditor
would it have come out?
(Mr Davis) It might have done.
16. Only "might"?
(Mr Davis) Only "might", yes.
17. In 30 per cent. of public bodies there might
be scandals occurring but they might not be coming out?
(Mr Davis) I am sorry, you posed the question in a
way which implied you had a different arrangement over audit.
Let me be very clear about this, because I think it is an important
point of principle. Where the Audit Commission and, in central
government, the National Audit Office are in effect setting the
guidelines for the audit, the way the audit is done—as they
do in both cases where they contract out in effect—there
I think you get a high quality audit. You get auditors involved
who are used to public audit. If you just simply left it to the
organisation concerned to get in a private sector auditor and
you did not have an Audit Commission oversight, a different arrangement
from what we have now, then you could face the problem over those
matters of regularity and propriety I mentioned earlier. Let me
give you an example from my own experience. In the last year we
have had a series of scandals with further education colleges,
one after another. Each of those further education colleges was
audited by a private sector auditor not under the remit of the
NAO but directly contracted by the body concerned. The result
of that, frankly, was that the audit done was not up to the public
service standard we would have expected.
18. And did not get into the public domain and
public information like the Audit Commission?
(Mr Davis) It did eventually because we exposed it,
but it would not have done otherwise. The thing we exposed came
about through whistle-blowers and not through the auditors. The
problem led to the Further Education Funding Council looking at
the quality of audits in 26 cases. I am speaking from memory so
I may have got this number wrong, it was either nine or 11 out
of 26 audits were found to be not adequate. It is a very different
game when you have got a public sector auditor saying, "You
must check regularity", meaning the money is spent for the
right purpose. "You must check very high levels of propriety".
The reason is simple, it is not because they are bad people or
even incompetent people in the private sector, they have a different
exercise; they are representing shareholders in the private sector
most of the time and doing a different job. When they come to
the public sector they are doing a different task and it is important
they either are directed or they learn the lessons. When they
are under Audit Commission or NAO direction (with the possibility
of checking as to what has happened) then you have no problem.
If you did it a different way, if you suddenly said, "That
hospital gets its own auditor; that police force gets its own
auditor", then you get a different outcome and the outcome
may not be satisfactory.
Mr Brake
19. Can I come back to the question of a separate
committee to scrutinise the work of the Audit Commission. One
of the complaints from local authority is that there is a proliferation
of audit bodies—OFSTED, Social Services Inspectorate, mental
health. Would you not just be adding to this plethora of audit
bodies if you proposed a separate committee?
(Mr Davis) No, because you would be talking about
the same VFM studies that go on now; the same Best Value initiative
that is going on now. What I think you would do, however, is make
it more likely that a given audit report once it is produced,
you would make it more likely that something would happen. This
is most important in the non-dramatic things. Not where you have
suddenly found somebody with his fingers in the till; not where
you have suddenly found a catastrophic failure in a hospital;
but where you have got performance not quite as good as the average,
or significantly less than the average but not capable of making
the front page of the Sun or the Daily Mail. What
I think would be the worst of all outcomes is to have a proliferation
of audit measurement and no result, which is a risk. I do not
think it is a probability but it is a risk. There was a lot of
work done on Misspent Youth and I think it is just a waste
of public resource, and a very high quality resource as I stressed
before, if you do not actually really act on all those things.
I will make a party pre-point here—not political party—there
is a lot of argument in the public service these days about over-audit.
I actually do not think the public sector has been over-audited,
but what we are doing at the moment is going through a public
service revolution where we are going through the measurement
of inputs, costs and so on, and politicians basically bragging
about the amount of money they have spent rather than about the
amount of good the public service has done. We are going from
a public service expenditure base to a public service delivery
base. I think that is very important. If you look at New Zealand
and other countries around the world that have started down this
route they are getting better Value For Money and they are getting
better outcomes. What we care about, irrespective of party, is
how many people get cured in the Health Service; how much crime
is prevented or stopped in the police service; how safe our roads
are. These are outcome measures and, invariably, with an outcome
measure you have some sort of audit or validation process, which
you have to have; you cannot leave it to the person doing it himself.
We are all the same—we would always want to pick the best
outcome and shape it the way we want it to go. It is undoubtedly
going to happen. There will be squawks because people will get
less than perfect marks—that is government. That is my view.
I am sympathetic but I am afraid I recognise that this is an era
in which scrutiny and audit are going to be big issues in the
next decade.
1 HC 174-II. Back
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