TUESDAY 9 JULY 2002

SIR JOHN BOURN, MR MARTIN SINCLAIR AND MR MICHAEL WHITEHOUSE

  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 is—to me and my professional colleagues—intellectual 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 practice—the Enron practice of capitalising trading costs and losses—has 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 capitalised—and it has been going on since 1983, it says—is £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 few months?
  (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 point—and they have thought about it carefully—is 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 practice—or 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 people.

  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 point—pay 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 auditors—I do not know if they have affected the salary of auditors—but 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 age—and 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 institutes—as I said to the Commission before, it is after that kind of point—after 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 there?
  (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 period—shall we say 32 to 38—because 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 £400,000—no 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 could—and as they get on know that they might—have moved on. We have had some people who joined us who trained with the firms—particularly a woman who is now one of our assistant auditors general—she 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 up—4 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 percentage—by 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 year—one 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 us—for 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 funding—I 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 million—a 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 cent—and that is logged up in the other running column—that explains a large amount. Mr Chairman, if it would be helpful I would be happy to put in a note explaining exactly . . .