Examination of Witnesses (Questions 20
TUESDAY 9 JULY 2002
20. Perhaps I could pose the question, rather
than asking you a direct factual question, perhaps you could supply
us with a list of those areas where you think the risk has not
been transferred, and some elementary explanation of what the
accounts would look like?
(Sir John Bourn) I would be glad to do that.
21. Are there any other accounts in your period
as C&AG that you had to qualify for this particular reason?
(Sir John Bourn) There was a rather similar one a
short while ago, on Ordnance Survey. It was a broadly analogous
thing but they should, in my view, have valued their intellectual
property. All the knowledge of topography contained in their computers
out of which maps are constructed isto me and my professional
colleaguesintellectual property because it produces income.
The Ordnance Survey said they did not want to value that and,
of course, they did not because before accrual accounts came you
did not have to value the assets. It was just the money you spent
and the money you got in. So it is the coming of accrual accounts
that puts this duty on Departments to include on their balance
sheet those activities where the risk stops with them and comes
to them. And, we have an account exercise that I have been concerned
in saying to all my people, "As we look at and audit the
balance sheet make sure that it has got the risks on" and,
just as we say to the Ordnance Survey, "You should put the
value of your intellectual property on your balance sheet",
they disagreed with me, but I qualified the accounts because it
is an asset. So, I will gladly produce a note on these issues.
I think if you copy it to the chair of the PAC
as well, particularly as the PAC meets more frequently than we
do, but if it is copied to both, we will circulate it to our members.
22. I just wanted to clarify one very brief
point. Part of the reason why we in the Commission might have
an interest is that you have also taken on the additional role
of vetting the public accounts to some degree, at least vetting
the assumptions behind the accounts.
(Sir John Bourn) Yes.
23. And these numbers are now in proportions
which might affect one's judgment of the quality of those. And,
it is in that respect, and in respect of the public accounts as
set out in the Red Book, that I was particularly concerned to
see what reservations you might have, set out in a form that we
could relate to the existing publication.
(Sir John Bourn) Yes, and thank you for that development
of the areas of your interest, Mr Tyrie, yes.
24. I am delighted to hear that Andersen and
WorldCom accounting styles are not going to be acceptable to the
British Government, and that they are not going to go to the Arthur
Andersen school of acquiescence for training your auditors. But
I have a letter here from Mr Michael McDermott, who says that
the practicethe Enron practice of capitalising trading
costs and losseshas been going on on a considerable scale
with British Nuclear Fuels Limited. I am sending you the letters.
(Sir John Bourn) Yes, please do.
25. I have just raised it today because I have
just got it. And the amount so capitalisedand it has been
going on since 1983, it saysis £2.9 billion, and had
this not been treated in that way, in other words, had BNFL not
transferred its net costs, instead of making profits they could
have posted losses in all but one of the years since 1983.
(Sir John Bourn) I am not the external auditor of
British Nuclear Fuels; but still, currently, the shares are all
owned by the government, so I do have access to it. So I shall
be glad to look over it.
26. I will send you the letters. Now, paragraph
2.8 of the Corporate Plan says that the proportion of audits contracted
out is going to increase from around 13 per cent to 25 per cent.
Is not that a retrograde move? Do you trust the private auditing
industry after the experience we have been having over the last
(Sir John Bourn) Well, of course, I do take care in
the arrangements that I have to contract out work, and the office
does have quality control arrangements in relation to that work.
If I had any doubts about putting work out to a particular firm,
I would not do it.
27. No, but is it not going to weaken morale
in the Audit Office, the fact that work is going outside, that
they had been deemed not competent to do it?
(Sir John Bourn) I do not think it will, because it
is not as if they will be losing work that they are now doing.
This is very much around the extra work that we are getting through
the coming of the executive non-departmental public bodies. And
subsequently, another Sharman recommendation that the government
agreed to was that steps should be taken for us to be able to
audit PLCs, and we are in discussions now with the DTI and the
European Commission to get that. So, it will not be taking away
from my people work that they have already got. The good pointand
they have thought about it carefullyis that there will
be more work for the existing members of the staff to do because
each account involves a good deal more work now it is on accrual
basis than it did when it was the simple cash account. I am concerned
always to watch the morale of my people.
28. Since in previous discussions we have established
that you are able to attract staff by virtue of your status, but
you are not always able to match outside salary levels, does it
not seem implicit in this proposition that the costs of doing
it outside are going to be higher than the cost would have been
of doing it inside?
(Sir John Bourn) If I find that they are I shall come
to you and explain why I have not met the 25 per cent target.
29. You would be better asking for an increase
in staff, would you not?
(Sir John Bourn) Implicit, of course, in the proposals
that I put before you, is some modest increase in staff, yes.
30. I see that you also contract out your internal
audit function. Why is that? That is not a normal practiceor
is it a desirable practice? I would have thought you would be
better having your own internal auditors.
(Sir John Bourn) We used to have a group of people
in the office who were our internal auditors, but we are quite
a small organisation and it did seem to us that, having run the
internal audit with a group of our own people who did it for a
number of years and then moved to other work, it would be an interesting
experiment to put the internal audit out, and we have an outside
firm which has been our internal auditor for the last few years.
I think they have done it well; they do bring a different set
of people to the internal audit. The chair of our audit committee,
for example, is an outsider. He is a man who was the Treasurer
of Hampshire County Council, and I think in your internal audit
there is something to be said for having a bit of a mixture of
31. Oh yes, I agree with that. You are saying
the experiment has worked?
(Sir John Bourn) Yes.
32. Now just to pursue Alan's pointpay
structures. Have you got sufficient flexibility and sufficient
range to attract and keep the best talent? I asked you about this
a few years back, and you were confident. I am not sure what effect
recent problems have had. I know they have affected the esteem
of auditorsI do not know if they have affected the salary
of auditorsbut we do have more accountants in this country
than the rest of the European Union put together, which I would
have thought, on the law of supply and demand, must have got them
more cheaply. Can you compete on salary for the best talent?
(Sir John Bourn) We are certainly competing on the
salary terms for people up to the age of about 33, 34, that sort
of level; and I am able to pay amounts of money which enable me
to do that. Of course, while I am competitive in salary and remuneration
terms to people of that ageand I have got people of the
same quality in terms of their performance as graduates, plus
their performance to become members of one or other of the institutesas
I said to the Commission before, it is after that kind of pointafter
about the £80,000 a year mark. I can give the Commission
the latest figures, I have referred to this before. Now that some
of the major firms have started to publish what they pay their
people, we can see that the average remuneration of an Ernst &
Young partner is £449,000 and there are some 400 of them.
33. Have you got the figure for Arthur Andersen
(Sir John Bourn) Arthur Andersen have not published
these yet. The two who have published them are Ernst & Young
and KPMG. I understand that Deloitte & Touche and PricewaterhouseCoopers
are thinking about it. The highest paid man in Ernst & Young
is earning over a £1 million a year, and of course I am not
in that league. But what I think is encouraging is that there
is no shortage of really bright young people who want to come
to the Office.
34. It looks as though you train them and train
them well, I am sure. But then your stars are in danger of being
stolen from 35 onwards.
(Sir John Bourn) There is a danger of that. There
is a crucial periodshall we say 32 to 38because
that is the time people have got good experience; they are therefore
attractive to people outside. At that sort of age they know it
is now or never. If they are ever to earn £400,000no
good waiting until you are 45 to go, you have got to go then.
So we do have some people leave us. Not exclusively the very best.
But I say, "Even if you are going, it does not mean to say
you must not come back". We do seek to keep in touch with
all the people who have been with us but we cannot guarantee people
jobs back again. But by keeping in touch, there have been some
people who have come back and we have been glad to take; and there
have been some people who wanted to come back and we have not
been glad to take, so they did not come back.
What I am interested in is getting the good
people. It is encouraging, I think, that there is a sense of public
service; there are a lot of people who really think it is important
to do their best to serve the public. And, some of them know that
they couldand as they get on know that they mighthave
moved on. We have had some people who joined us who trained with
the firmsparticularly a woman who is now one of our assistant
auditors generalshe came on secondment from a firm in which
she was a partner, and when the time came for her to come back
she said that she would like to make an application to stay with
the National Audit Office, and I said to her, "I cannot pay
you what you will get if you go back to your firm", and she
said, "Oh, I know that". I am paying her a reasonable
amount, not out of line with what I am paying my other people.
But what she said was, "I spent 20 years of my life auditing
the accounts of limited liability companies in accordance with
the requirements of the Companies Act, and I do not want to spend
the next 20 years of my life doing that. The work in the National
Audit Office is more various and more interesting". Our financial
audits are not constrained, they do include concern for legality
and propriety, and the Value for Money work. Job attraction is
something that we do have and does exercise its power. So although
I am not complacent about people, and I know we have to work hard
to recruit them, train them, motivate them, look after them in
a sensible way, we have continued to get good people. For example,
this year we were are looking for 48 graduates. We have got 46
signed up4 are still thinking. But of the 46, 7 have first-class
honours, 38 have upper seconds and 1 is on a lower second, and
they come from universities right across the UK.
35. In your Corporate Plan, page 26, table 9,
this is your net resource requirement to get everything you are
asking for; it does show that human resources are set to increase
by about 25 per cent. But other running costs are set to increase
by a bigger percentageby 45 per cent. You have spoken a
lot about staffing and unless I am misreading these figures, I
cannot really find an explanation as to why running costs are
increasing so dramatically.
(Sir John Bourn) The running costs cover the areas
of capital expenditure, travel and subsistence, and recruitment
and training costs, and the running costs associated with maintaining
the headquarters. Perhaps I can ask Mr Whitehouse to give the
figures and comment on that.
(Mr Whitehouse) One of the areas that is covered by
that is the amount of consultancy support that we get for Value
for Money work. Over the last year we have contracted out at least
one Value for Money study in its entirety to the London School
of Economics, and we envisage that we would continue to do that.
So, within that, other running costs is an element of contracting
out Value for Money work. There is also the investment in IT equipment;
we are increasingly using IT to improve the analysis and collection
of data that we carry out with our Value for Money work, very
much in the context that we are trying to get a much wider perspective
of improvements in services. For example, where we are looking
in the health service we are collecting a lot more information,
looking to analyse that in different ways. To do so, we need to
make use of increases and improvements in information technology.
36. Can I establish, please, are you talking
of LSE doing the external assessment of your Value for Money work,
or are you saying, "Now I am sub-contracting to them mainstream
Value for Money work"?
(Mr Whitehouse) We have one study a yearone
study about every 18 months that the LSE have done for us, making
sure that there is no conflict of interest as such. We are also
looking at other service providers
37. So who monitors the quality of their value
for money, if they are evaluating yours?
(Mr Whitehouse) Mr Chairman, it is a very good question.
I have overall responsibility for that particular study, and I
am using another academic institution to actually produce a quality
review on the LSE's work, and it is quite an interesting way of
checking out the assessments that the LSE do on our work. We are
constantly seeking to develop and enhance that process. I would
not want to give the impression that we just rely on the LSE where
we contract out. We have relied on other professional organisations
who can do this work for usfor example, the Rand Corporation,
who are about to start some work looking at the procurement of
research and development in government Departments. I think it
is a good principle because it allows us to test the cost of our
own Value for Money work, and it generates new ideas for us. We
learn from the approaches that other organisations adopt in doing
Value for Money studies. We should not stand still, we should
continue to learn.
The NAO is becoming another source of university
fundingI am sure that will be picked up very quickly.
38. Just again returning to these running costs.
I understand that you contract out one Value for Money study and
I do not know how much you charge for that, but if it is anything
like what it costs you internally, it is £200,000. You have
talked about an IT project and indeed, Sir John has taught me
to be very suspicious of IT projects because we have looked at
IT projects in the past. I just do not really understand why running
costs are going to increase by £10 milliona 45 per
cent increase. I can understand the human resources increase because
of all the reasons that Sir John has given Austin Mitchell, but
would you not be very suspicious of a government Department whose
running costs were increasing at 45 per cent?
(Mr Whitehouse) There is also the additional work
that we do on financial audit, where we are contracting out, financial
audit has got administrative costs that we have to take account
of. There is also the investment in recruitment and training.
We have quite a good professional training course that we provide,
both for our Value for Money staff and our financial audit staff.
One of the reasons why we are able to recruit people of high quality
and ability, is the fact that we do provide them with
39. You have already got that. I presume you
have only got that now.
(Sir John Bourn) I think I can say the main reason
for it is the point that has come out in previous discussion.
If we are going to move up the amount of contracted out financial
audit from 13 per cent to 25 per centand that is logged
up in the other running columnthat explains a large amount.
Mr Chairman, if it would be helpful I would be happy to put in
a note explaining exactly . . .