TUESDAY 9 JULY 2002

SIR JOHN BOURN, MR MARTIN SINCLAIR AND MR MICHAEL WHITEHOUSE

  1. Welcome, Sir John. It is the first time you have had a chance to report back to us since we asked you to look more widely in you work, and we are glad to see that is reflected in the Corporate Plan. Would you like to give a very brief summation of the key points, as you see it, and then we will go into questions?

  (Sir John Bourn) Yes, Chairman, I am glad to do that. First of all, just to say that in the just completed financial year we did achieve our objectives. We audited all the accounts that we had to do; we did the 50 Value for Money studies that we were required to do; we answered 320 letters from Members of Parliament and the public; and we achieved our savings target.

  The Corporate Plan before you is essentially divided into two headings. There is one heading which talks about the money that is necessary to do the present work plus the adjustments necessary to take account of the Sharman proposals, now accepted by the Government, and to take account of extra audits that we are going to have—the 18 Special Health Authorities that we shall be taking over from the Audit Commission—and to do that I am looking for an increase of 6 per cent between the current financial year and the next financial year and then 6 per cent in the subsequent years.

  The second heading under which I have analysed the work is to respond to the Commission's request to do more work. This, of course, also echoes the Committee of Public Accounts' plans to hold more hearings than they have customarily held. The plan in the present Session is to move up from the average of 40 hearings, which is what it has been in the last few years, to something like 55 hearings. So, going from 40 to 55 is a substantial increase, so I would be planning to do 10 extra Value for Money reports for that and I would also be proposing to do some extra work on revenue audit. Revenue has been an area which has suffered particular difficulties, as the Committee of Public Accounts has concentrated on: tobacco smuggling; failure to pay the duty on spirits; the problems about the self-assessment; the coming of the tax credit scheme—all these things could usefully be tackled. So, under my second heading, I would propose an extra 4 per cent.

  So, under heading one I am asking for 6 per cent extra to do essentially my current work plus the 18 extra audits, plus a bit for Sharman. But to do the extra things which you asked me to do, which reflect the PAC's concern, I am asking for another 4 per cent. So, I am asking essentially for 10 per cent increase and that would take me from £54.7 million net (a 6 per cent increase) to £56.8 million net.

  So, Chairman, I hope briefly that shows how I have approached the work, as I say, designing a continuing programme and then what I have done to take account of your requests to me.

  2. Thank you, Sir John. We have altered the arrangements on the PAC slightly so that it will now probably annually have more hearings. But clearly some of the reports are not going to be reviewed by the PAC. From the Commission's point of view, is there any value in terms of increasing government efficiency, in you producing Value for Money reports which may not be reviewed by the PAC and receive its recommendations to government but will contain your own recommendations? Will it be a major disadvantage if PAC cannot deal with them all?
  (Sir John Bourn) I think it is a disadvantage in that a PAC hearing adds a lot of muscle to what we are able to say. But not everything is lost. And sometimes, of course, the PAC decide that there is a report in which there are some recommendations, but not those at the centre of their interests. But, of course, the NAO report has been made. We can ourselves follow it up with the department. The recommendations are good ones which produce improvements and so, if I am producing 60 and the PAC are holding 55 meetings, it is not many that would not get taken. So, not all is lost if not all of them can be discussed by the PAC, but it is of course an advantage.

  3. The advantage of a PAC report is that it has the Treasury Minute in response. Will it weaken the effectiveness for your Value for Money report, if it does not go before the PAC, and will not elicit a Treasury Minute?
  (Sir John Bourn) Well, I think the ones where it is especially important to have the PAC are if it is a subject to which there is a degree of contention. And it is the PAC that gives the muscle to that and the extra publicity involved with that and that, I think, creates the head of steam which overwhelmingly does see that the recommendations that the PAC make in their report are accepted by the Government. The ones the PAC do not take tend to be ones which are not contentious which are mainstream management. There is one, for example, about the formation of the new Defence College of which Members said, "Well, it is a worthy piece of work but we are not very excited about it". But it was the kind of piece of work where we did not have any trouble with the Department saying, "Yes, as the external auditor you have made some good suggestions. We take those on board". So, as I say, Chairman, not all is lost if there are a small number of the less contentious ones that the committee cannot take.

  4. You have taken on these extra bodies for audit. You referred to the Special Health Authorities, and so on. But that really will not impose a meaningful extra cost, will it, because you are able to recoup those costs from the audited organisation?
  (Sir John Bourn) That is right, and that is true, of course, of the Sharman recommendation accepted by the Government that we should be the external auditors of all the executive non-departmental public bodies which will bring us another 26 bodies, and we will get a fee for that, so that is not an increase for which I would need to ask you for the money to audit.

  5. Because you have not been auditing them before, will they get any sort of priority in terms of consideration for whether you need to do Value for Money assessments on them, since they have never had the rigours of Value for Money assessment, and how will you decide your priorities in relation to those who come in via the Sharman route?
  (Sir John Bourn) We will look at them particularly carefully and it may well be that in the first year or two a larger proportion of them will have a Value for Money study. I think, again, the Committee of Public Accounts will not have had the opportunity to discuss these bodies at all; bodies like the Environment Agency engaged in important work in an area in which the Committee is interested. I think we will have a tendency to look, in particular, at the new bodies as they come to us.

  6. How do you determine the level of fees that will be charged to these bodies, as an audit fee?
  (Sir John Bourn) The fees are essentially determined by requiring the audited body to meet our full costs. One of the great strengths of my audit, compared with the private sector side, is that I do not have to have a negotiation with the Departments about what the fee is going to be. It is the House of Commons that provides, over the great range of work, the money to do the audit. There are, by definition, a number of cases where a fee is charged, but it is set rather than negotiated, so that is how it is done.

  7. Is it set with any sort of profit margin in it, or is it to break even?
  (Sir John Bourn) It is to break even.

  8. Does that apply internationally as well?
  (Sir John Bourn) Essentially I am, on the international side, seeking to break even so the British taxpayer does not subsidise, but I am not trying to make a profit out of the United Nations, or whatever.

  9. There is an impressive range of activity here and I congratulate you on it.
  (Sir John Bourn) Thank you.

  10. Particularly for the enquiries to take up the suggestion of Members of Parliament, one of which I have benefited from myself. But I think it would have been helpful in the Corporate Plan if you had provided tables showing the disposition of financial audit and Value for Money audit expenditure over the areas that you go into and give us categories of the audit work. Could you provide that kind of analysis for us?
  (Sir John Bourn) We could provide anything, of course. The amount you spend on auditing a particular function is very much dependent on the way in which that function is organised. If you take defence, for example, the Ministry of Defence has got 80 separate organisations within it, each of which has a set of accounts which have to be audited. So you would look at defence, and you would see quite a high amount of audit expenditure related to it and you might think, "Well that reflects the special difficulties of defence". And, overall, of course, the amount you spend on defence does represent that. But it is a function also of the way in which the government is organised and the complexities that lie before that. But, of course, if the Commission would like to have that we could see what we could do and perhaps produce something which provided an analysis which took account of the complexity of the account, the size of the account, as well as the functional area.

  11. I am actually told that in the Resource Account, on page 27, there is a return, table 5—Operating Income by Classification Activity—a return of £1,342,000 to the Consolidated Fund. Why was that paid back?
  (Sir John Bourn) That was because we were more successful than we thought we would be in raising the money from fee-payers. We have been particularly concerned to get in all the money that the fee-payers owed us and we had a big drive to do that. In fact, it succeeded only too well and, under the Rules of Government Accounting, if you get in more money than you have got as your appropriation in aid you have got to pay it into the Consolidated Fund.

  12. Why could you not keep it and use it?
  (Sir John Bourn) I would be very happy to keep it but under the rules, as they now stand, I cannot do that. It does mean in a sense you are trying to make a sort of estimate within an estimate. It is not the most useful and productive way to spend your time. Of course, if I did keep it, that would mean that it would all be retained in the accounts and you would all know about it and you would just see that rather than paying through the Consolidated Fund and then having to ask for it again, I would, as it were, move it between financial years. But, under the present system of government accounting, I have to pay it in.

  13. Is that not a disincentive for pursuing the fees?
  (Sir John Bourn) I have made sure that it is not because I have made sure that the people in the office know that they have got to get this money in from the fee-payers. In past years, sometimes as we got towards the end of the year, there might have arisen a question as to whether we would get in all the money which we forecast under the appropriations in aid. I cannot afford to fail in a thing like that. I have got to get the money in. And I told the people in the office, "You have got to get the money in from the fee-payers" and it is an index of their success in doing it that we got this extra money.

  14. If you could keep it, you could not only finance more Value for Money studies but it would avoid getting silly notes from the Treasury like the one that we have just had. I think I commented last year that the Treasury note was churlish. This year it is just blandly condescending. You are nodding in agreement. It says, "I suppose we have got to give them money. We hope they will do all they can to contain future cost increases". This is just a silly note. You would not have to put up with that kind of thing if you could raise your money by getting a better return on fees and plough it back into the service.
  (Sir John Bourn) That is certainly true. I always think, with the notes from the Treasury, they, of course, are auditees and perhaps they have an interest in suggesting that there should be less resources devoted to the audit. Perhaps that is an unkind thought.

  I would have thought many departments would be very happy to have a bland note saying, "Yes you can have an increase of 6 per cent".

  15. Just before you move on, in view of all this money that has been successfully brought in, could I ask, do you have any bad debts?
  (Sir John Bourn) No.

  That speaks volumes.

  16. One of the justifications for the increase in the budget is that public expenditure is growing quite sharply. But I wonder if there are any particular parts of it, functional areas, which need more time and attention? I am thinking particularly of the kind of hybrid area of PPPs and PFIs and all that gobbledygook. It must be much more difficult to do the work of the office in respect of those kinds of contracts?
  (Sir John Bourn) Well, certainly, Mr Mitchell, you are absolutely right to say that the whole area of PPPs and PFIs does require a lot of attention. The Committee of Public Accounts is very interested in it. We have produced a lot of reports on it. It is an area where we have had some disputes this year with the government, and where we have held our line, on Network Rail. So PPP and PFI is an area requiring special attention. But, generally speaking, the areas that require special attention are if you have new programmes or if you have changed programmes. It is volatility in the nature of the programme that increases the risk involving the financial management and does require extra attention—for example, the formation of DEFRA out of the Ministry of Agriculture and parts of DETR. It is a policy decision to do it and, of course, that is a decision for the Government, but when you put together bits of the financial system of two Departments and seek to integrate them there is a prospect of some confusion. So it is new programmes, it is changed programmes, that cause particular attention. PPP and PFI, you are absolutely right to say that too.

  17. I think we have done some valuable work on it but I am just interested in this: this is a clipping from the Observer, and it is about the accounting methods used, where there is an argument between the Office for National Statistics and the Government. The Government asked the ONS to classify the £9 billion government guarantees for loans for the new firm as private and therefore to be kept off the Treasury's balance sheet, but the Audit Office presumably does not want these classified as private, wants them classified as part of the budget of the Strategic Rail Authority and therefore as public expenditure. Am I correct?
  (Sir John Bourn) I certainly do want it on the balance sheets of the Strategic Rail Authority and I have told the Department and I have issued a press notice to that effect, a copy of which I gave to the Chairman of the Committee of Public Accounts. I regard this as a case where there is absolutely no doubt at all that Network Rail should be on the balance sheets of the Government, the Strategic Rail Authority or the Department of Transport. And the reason for that essentially is, if Network Rail goes down, who will bear the risk? Who will have to find the money to resuscitate it again? It will be the government. And everything that the auditor is supposed to do is to look at substance over form. Not to be traduced by special purpose vehicles, a" la Enron, in setting up devices off the balance sheet which the people who owe the money seek somehow to intimate that they do not owe and they really do. I regard bringing of the Office of National Statistics into the picture—I respect them, they are excellent economic statisticians—as an irrelevance to what I am concerned with. If I put it in this way to make my point, I do not seek to define gross domestic product or to define what counts as an import or an export. I am the external auditor and it is for me to say what is on the balance sheet and what is not on the balance sheet and it is not for the economic statisticians to attempt to supersede me. So I do think, and I have said this in Whitehall, that I regard this as something of a red herring and it may be that, within the system of National Accounts, the Treasury will wish to regard it as private sector. But that does not alter my view that it is on the balance sheet and should be on the balance sheet, and if it is not on the balance sheet I should qualify the accounts.

  18. Just as a rider on that, was I misunderstanding or mishearing you when you appeared to be suggesting that Network Rail was a special purpose vehicle?
  (Sir John Bourn) I do not believe it is. No. But I think some people have tried to describe it as if it would be, or could be, or might be, or should be. But I do not think it is.

  19. If the accounts did include these sorts of risks that you say the economists are happy with but the accountants are not, how different would they look? These are large sums of money, are they not?
  (Sir John Bourn) Yes. Well, I have not got the figure in front of me. I have concentrated on the point of principle. But it will be on the accounts.