Select Committee on Public Accounts Minutes of Evidence

Memorandum submitted by the National Audit Office (PAC 00-01/40)

  1.  The National Audit Office Act 1983 requires the Public Accounts Commission to examine the National Audit Office's annual Estimate and lay it before Parliament. The Act provides that in doing so they should have regard to any advice given by the Committee of Public Accounts.

  2.  The Public Accounts Commission approved the National Audit Office's plans for 2001-02 to 2005-06 on 18 July 2000. This memorandum summarises the key features of those plans and covers my 2001-02 Estimate proposals.


  3.  The Estimate differs from that presented in previous years. Under Section 5 of the Government Resource Accounting Act 2000 the National Audit Office will account for its operations in resource rather than cash terms, from the year of account 2001-02 onwards. The Office has therefore prepared its Estimate for 2001-02 as a Resource Budget—similar to that which will be used by Government Departments, for their Resource Estimates. Resource budgeting aims to change the way in which central government bodies plan and manage their spending, by:

    —  ensuring that the full economic costs of activities are measured properly, both by including non-cash costs such as the cost of capital, and by matching costs to the period in which they are incurred rather than when they are paid;

    —  improving the treatment of capital spending by spreading the cost and consumption of capital over its useful life.

It therefore introduces new accruals items such as depreciation, cost of capital charges and provisions into budgets which did not apply to cash.

  4.  The Resource Estimate consists of three parts as in the old style Supply Estimate. Part I of the Resource Estimate gives the Ambit, confirmation that the National Audit Office will account for the Estimate and the net provision sought in resource and cash terms. Part II sets out the National Audit Office's Request for Resources in gross terms, showing resource expenditure and income.

  5.  Part II also reconciles the net cash requirement to the net resource outturn setting out the non-cash items and working capital movements. Part III is available to show extra receipts payable to the Consolidated Fund (CFERs), analysed between income (CFERs due in the financial year), and receipts (CFERs received in the financial year).

  6.  A key difference from the Cash Estimate is that the Resource Estimate contains a forecast Operating Cost Statement which shows resources that are expected to be consumed by the Office during the year net of the Office's income. The Net Operating Cost includes non-voted items provided direct from the Consolidated Fund whilst such items are excluded in the voted net resource outturn and resource budget outturn. There is also a forecast Cash Flow Statement showing the cash inflows that are expected to occur during the year.


  7.  In 1999-2000 the National Audit Office delivered all its planned outputs within the cash voted by Parliament. Net expenditure was £43.1 million against the provision of £43.4 million. The Office delivered 52 major reports to Parliament, completed 660 audits and produced a significant volume of other financial audit and value for money outputs.

  8.  In addition the National Audit Office has continued to respond to the interests and concerns of Parliament on issues of accountability and propriety, and to changes in the way public services are delivered. There have been increases in workload arising from the introduction of resource accounting, work on issues such as electronic service delivery and an increase in the complexity and range of letters and enquiries from Members of Parliament and the public.

  9.  This was also the first year in which the National Audit Office provided an all-embracing service of financial and value for money audit and administrative support to the Auditor General for Wales, who reimburses all the costs incurred. In addition, the Comptroller and Auditor General continues to audit functions in Wales and Scotland, such as defence, social security and Inland Revenue—around 50 per cent of general government spending in Wales and Scotland.

  10.  Since 1990-91, the National Audit Office workload has increased by around 30 per cent while its net costs have gone up by only 6 per cent in real terms.


  11.  The Office plans to continue to deliver 50 major outputs for Parliament in 2001-02 and subsequently, and to audit 650 accounts in 2001-02.

  12.  The Office's efficiency programme will continue but the level of resourcing required by the National Audit Office is determined largely by external factors outside its control. There is a continuing increase in workload from resource accounting and other initiatives, and the Office must respond to the rapidly changing environment. The Office therefore needs to invest in its capability for the future. There are a number of developments which necessitate an increase in funding in 2001-02 including:

Government initiatives and restructuring

    —  Resouce accounting and budgeting: The results of the dry run audits of departments' 1998-99 accounts revealed the extent of the work still to be done for the successful introduction of resource accounts. Over half the accounts would have received a qualified audit opinion and nearly a third were not rendered to the Comptroller and Auditor General by the due date. It is predominantly in the larger and more complex departments that difficulties have tended to arise. Departments have a significant programme of action to meet the Government's timetable for the implementation of resource accounting and budgeting, and the Public Accounts Committee, along with the Treasury have asked the National Audit Office to provide all possible help to departments. This will continue to require additional effort and resources from the Office to make it a success;

    —  Increased expenditure programme: Government expenditure continues to rise steadily, by some 6 per cent, or £20 billion, in 2001-02 compared with the previous year, with a corresponding rise in tax revenue. The National Audit Office has to respond to these changes and ensure that the rigour of its audit coverage remains at the high level expected by Parliament;

    —  Additional audits: The Government is setting up a number of new or re-constituted bodies. We have been successful in securing an increase in the number of Education Action Zones to be audited from 25 in 1999-2000 to 73 in 2001-02. In the first years of an organisation's existence, considerable investment is required by the National Audit Office in acquiring the necessary understanding of its activities, business processes and accounting systems;

    —  Developments in auditing: As part of the corporate governance reforms recommended by the Turnbull Committee, from 2001-02 departments will be required to produce statements of internal controls along with the financial statements. These will need to be reviewed by the National Audit Office as part of the financial audit to ensure that controls in material areas of risk have been identified and reported as operating.

The National Audit Office modernisation programme

    —  Human resources: The quality of the National Audit Office's people and management practices received external validation in 1999 with Investor in People accreditation. Review of the Office's staffing strategy in the changing environment has identified scope for further development from greater investment in such areas as recruitment, training and secondments/outplacements, so as to ensure that in the medium term and beyond it is able to recruit, reward and retain high quality staff;

    —  Information and communications technology: The National Audit Office has several strategic projects in information technology, designed to improve efficiency and provide staff with the necessary support to fulfil their Office's role. The Office is procuring new financial audit software, is piloting a mobile computing strategy and is developing an electronic records management system;

    —  Accommodation and facilities: The significant improvements in working practices sought through the Office's information and communications strategy depend on appropriate infrastructure, notably replacement telephone system. The Office also intends to buy a new fire detection and alarm system for its Headquarters.

Staffing in a competitive environment

    —  Salaries: The National Audit Office continues to find itself in a very competitive market for the recruitment and retention of high quality staff. While the Office has been able to attract graduates and trainees because of the quality of its early training regime, it can be difficult to compete with the schemes and benefits available in the private sector for qualified staff. Demand is also intensifying for staff with other skills and experience, particularly in the fields of information and communications technology. All these factors put upward pressure on the Office's salary cost.


  13.  In addition to securing efficiencies itself, the National Audit Office continues to contribute significantly to the achievement of value for money in the organisations it audits. For example, in the last three years savings resulting from the work of the Office have amounted to some £1.3 billion, an average of £427 million each year. The Office has thus met its target of achieving savings for the taxpayer of eight times its net cost.


  14.  There have been two changes since the Commission approved the National Audit Office's plans and which affect the Office's gross requirement:

    —  the Office has enjoyed additional success in winning self-financing fee paying work: from the Welsh Assembly; on partnering Supreme Audit Institutes in EU candidate countries; and in respect of conferences drawing on lessons learned from our Value for Money reports; and

    —  a technical accounting change to meet the requirements of the Resource Accounting Manual whereby the costs of NAO staff seconded to external bodies are accounted for gross rather than netted off in a suspense account.

Accordingly, the Office is now seeking an additional £800,000 gross funding, in cash terms, ie £58.4 million, fully financed by additional receipts.

  15.  The net provision in cash terms remains at the level approved by the Public Accounts Commission in July 2000—a net total of £47.6 million. In the same terms, proposed net expenditure for 2001-02 shows an increase of 6.5 per cent over 2000-01.

National Audit Office

January 2001

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