The Commission is grateful to you and your colleagues for answering our questions so fully at Tuesday's meeting. On that basis, we have approved the NAO's draft Estimate for 2002-03 and we have agreed that it should be laid before the House of Commons.

  As you know, during the course of our questioning, a number of issues arose on which you undertook to provide the Commission with further information and I thought it would be helpful if I briefly summarised my understanding of these.

(i)  Your observations on the level of assistance the NAO receives from Government departments in its attempts to secure overseas audit contracts and, in particular, a list of the ways in which you feel that the Department for International Development could be more proactive and supportive in promoting the concept of auditing as a key component of civic improvement programmes (you mentioned in particular the frequency of changes in the criteria for providing development assistance as between regional and single-country projects).

(ii)   Your estimate of your current share of the global market in contract work for the auditing of public sector bodies and other organisations which disburse public money.

(iii)  Any information you have about the ratio of the cost of auditing public expenditure to the volume of such expenditure audited, both in the UK and other comparable countries.

(iv)  Your assessment of the difference in he impact made, in terms of implementation, of VFM studies taken up by the PAC, as compared with those which are not.

(v)   Your assessment as to how the NAO, through extra VFM studies, could significantly expand the scope of scrutiny—and thus the perceived risk of scrutiny—amongst accountable bodies. (Particular reference was made in this context to the Sixth Report of the Public Administration Committee of 1998-99 into Non-Departmental Bodies).

14 March 2002

Rt Hon Alan Williams, MP

(Chairman of the Public Accounts Commission)

ITEMS ARISING FROM THE ESTIMATES HEARING

  Thank you for your letter of 14 March. I am pleased the Commission has approved the NAO's Estimate for 2002-03 and agreed to lay it before the House of Commons.

  At the hearing I agreed to provide further information to the Commission and I am grateful for your summary of the issues to be covered. I address each of them below.

(i)  The level of support we receive from the Government in relation to overseas contracts

  We have consistently received sound and effective support from the Foreign and Commonwealth Office and the Department for International Development in relation to our bids for the audit of international organisations and contracts for other overseas work. We are also pleased with the support we have received in respect of our expanding programme of technical co-operation work. The Foreign and Commonwealth Office recently wrote to all heads of missions alerting them to the kind of work the NAO undertakes as a means of ensuring that further opportunities for winning external audit work are not overlooked. We are hoping that this will alert Embassies and High Commissions to "nose out" opportunities and surface them with us. This is, of course, In line with Parliament's concern for the development of democratic government overseas—and, of course, for the better stewardship of British taxpayers' money provided as overseas aid.

  One area which we feel would merit further consideration is the support by DFID of regional rather than national development programmes. In certain parts of the world (for example the Caribbean) the provision of generic training and support on a regional basis is likely to be more efficient and effective than specific national programmes.

(ii)  An estimate of our share of global contract work for the audit of public sector bodies

  Unfortunately, there is no information on which to base a comprehensive market share statistic for international organisations audited by Supreme Audit Institutions. However, to take one sector as an example of our share of work, we hold four of the 17 available audit appointments to United Nations Organisations and the Specialised Agencies (International Labour Office, International Atomic Energy Agency, World Food Programme and the Pan-American Health Organisation). No other Auditor General has more than three appointments.

  We have also been very active in developing technical co-operation programmes with overseas national audit institutions. We have won a majority of the work available through the EU-funded twinning programme to assist Candidate Countries to improve their financial management and administrative procedures. Of the eight public audit sector twinning projects set up by Candidate Countries to date, the NAO is the leading partner in six—Hungary, Slovenia, Bulgaria, Romania, Latvia and Lithuania; and is involved in providing short term inputs to the other two—Estonia and the Czech Republic.

  All of this work abroad the NAO has won in open competition with other national audit bodies. And where we have an opportunity to compete with private firms for international work undertaken at home we are also successful. An example is the work we do on behalf of the European Commission on the Commission's Agricultural Guidance and Guarantee Fund.

  Of course, and as you know, this overseas work is not an NAO expense as it is fully funded by the purchaser.

(iii)  The cost of auditing public expenditure

  The NAO's expenditure was some £55 million in 2000-01 against aggregate revenue and expenditure audited of £650 billion, leaving the cost of the NAO at £84 per £1 million of aggregate revenue and expenditure. Where data exists, the NAO compares favourably with other Supreme Audit Institutions. For example, the cost of the Canadian Office of the Auditor General was around $59 million (equivalent to £26 million) for 2000-01 against $344 billion (£150 billion) aggregate revenue and expenditure audited. This means that the cost of the Canadian Office was £170 per £1 million of revenue and expenditure audited. And the US General Accounting Office cost $413 million (£286 million) compared to government revenue and expenditure of $4,560 billion (£3,173 billion) so that the GAO cost £90 per £1 million of expenditure audited.

  However, there are a number of problems in comparing the UK figures with other Supreme Audit Institutions. The NAO's remit, comprising both financial audit and value for money audit, is broader than that of many other audit offices and we are therefore able to ensure closer scrutiny than is the case elsewhere. And the level of work involved in carrying out, for example, a financial audit in different countries varies considerably. In France the regulations allow several years' departmental accounts to be audited at the same time, which entails considerably less work than the UK requirement to audit each year's accounts separately and to report to Parliament as appropriate.

(iv)  An assessment of the difference in impact between those studies which are taken by PAC and those which are not

  The Committee's decision to take an NAO report increases its impact. Senior Departmental officials spend a considerable time focusing on the report and preparing for hearings. The generation of a Committee report requires the Government to respond via a Treasury Minute. And the potential threat of a follow-up by the Committee ensures that Departments respond positively to the recommendations made.

  However, it is not necessary for all of our reports to be taken by the Committee; and reports which are not taken also have an impact. For example, our report on Regulating Freight Imports from Outside the European Community (HC 131, 2000-01) made important recommendations in respect of the risk management systems at HM Customs and Excise. The Department produced an action plan and are working through the required actions.

(v)  How the NAO could expand the scope of its scrutiny through extra VFM studies

  NAO reports to Parliament cover the full range of Departments' activities so that the Committee can exercise effective scrutiny of how public money is utilised. When new methods of service delivery and new initiatives have been introduced, such as joined-up government, e-government, the Private Finance Initiative and Public Private Partnerships, it has been important to provide the Committee with an early opportunity to consider whether these initiatives are likely to deliver value for money and that public funds are not put at risk. The pace of change in the public sector continues, however, and new approaches to service delivery continue to be introduced which must be subject of scrutiny. There is, therefore, now scope to increase the number of reports which are published each year to assess how these changes in the delivery of public services and ongoing increases in public expenditure are delivering value for money.

  More work is needed to determine the level of increase in reports that would be justified and over what timescale such an increase might be implemented. The number of NAO staff deployed in producing reports for Parliament is maintained at a level that itself represents value for money while having some margin which allows the NAO to report quickly on events such as the significant delays in issuing passports in the summer of 1999. An initial assessment, however, suggests that there are two areas where an increase in the number of NAO reports would strengthen the Committee's scrutiny:

—  to enable members to assess how well Departments are implementing the Committee's recommendations the NAO could produce a number of short reports or memoranda on the action taken by Departments and the impact in improving value for money. These reports would form the basis for the Committee to question Accounting Officers on the progress they had made; and

—  to strengthen and enhance the Committee's coverage of executive agencies and Non-Departmental Public Bodies (NDPBs) the NAO could increase the number of reports on these organisations many of which, though relatively small compared with the Departments of State, are at the forefront of service delivery. Many are also entities which are in the public eye, such as the Housing Corporation and the Environment Agency. An increase in our scrutiny of NDPBs would be very much in keeping with the recommendations of the Sharman Report, and with the report of the Public Administration Committee to which you refer in your letter, in strengthening Parliamentary accountability for these bodies.

  My intention is to consider these possibilities and others in more depth including their resource consequences over the coming months. The Public Accounts Commission would then have an opportunity to consider them in more depth when they review the NAO's Corporate Plan for 2003 to 2006 in June.

16 April 2002

John Bourn

  Thank you very much for your full reply, dated 16 April 2002, to my letter of 14 March. This is most helpful.

  I was pleased to note that, in general, the NAO received full co-operation from the FCO and DFID in relation to bids for contract work overseas. I will, however, take up with DFID the point you made about supporting regional rather than national development programmes.

  I was also encouraged by your reference in paragraph (v) to your consideration over the coming months of ways in which the NAO could usefully expand the scope of its scrutiny through additional VFM studies. The Commission will certainly welcome the opportunity to discuss your thinking in this area at our summer meeting on the NAO's Corporate Plan.

  In the spirit of greater openness encouraged by the Sharman Report, we may wish to publish your letter of 16 April. Would this cause any problem for you?

24 April 2002

Rt Hon Alan Williams MP

(Chairman, Public Accounts Commission)

Dear Mr Williams

CORRESPONDENCE ON THE ESTIMATES HEARING

  Thank you for your letter on 24 April. I welcome your intention to take up with the DFID the question of their support of regional rather than national programmes of financial training and support.

  You ask whether I foresee any difficulty should you decide to publish my previous letter of 16 April. I am glad to say that the answer is "No" and that I would be content for you to publish the letter in due course.

20 May 2002

John Bourn