Supplementary Evidence by the National
(i) Tables showing the disposition of financial
audit and VFM Studies over the various functional areas of public
expenditure and categories of audited body, possibly following
the functional analysis used by the Treasury in the Public Expenditure:
In response to the Commission's request the
table below provides a broad indication of the proportion of National
Audit Office resources devoted to each main functional area in
2001-02, compared with the proportion of expenditure under scrutiny.
The table excludes work which it is not possible to attribute
to individual areas. For example, value for money studies on cross-cutting
issues such as procurement, investment in IT and construction
cover a number of departments and cannot be attributed to a single
programme. The table also excludes the cost of audit work on the
assessment and collection of revenue, where the amounts are very
large in relation to expenditure on individual programmes, and
so would distort the comparison between expenditure and audit
|Functional area||Proportion of
|Health and personal social services||21
|Environment and transport||9
|Law, order and protective services||6
|Trade, industry, energy and employment
|Agriculture, fisheries, food and forestry
|Culture, media and sport||2
As the Comptroller and Auditor General explained in his evidence
to the Commission the relationship between the resources needed
to audit an area of expenditure depends on how a department is
organised. The Ministry of Defence, for example, has more than
30 executive agencies, each of which prepares annual accounts
requiring an audit opinion. Other departments, such as the Department
for Work and Pensions, have relatively few subsidiary bodies.
In the case of social security benefit expenditure, the sums
under scrutiny are considerable. The systems used to manage benefits
expenditure are however relatively small in number and consequently
the audit requires a lower proportion of the National Audit Office's
resources than might be expected. The proportion of National Audit
Office resources allocated to the audit of health and education
is also lower than might be expected because some of the detailed
audit work in health authorities and further education institutions
is undertaken by other auditors, for example, the Audit Commission.
Other factors which may influence the amount of resources
needed to provide assurance to Parliament include the size of
a department's asset base and risk. With the introduction of resource
accounting, the National Audit Office has had to confirm the value
of assets included in departmental balance sheets. Some departments
have considerable asset values, for example, the Ministry of Defence,
the Prison Service and the Highways Agency. Finally, although
a department may have a relatively small expenditure programme,
the potential risks to value for money may be significant.
For all these reasons, there is not a direct correlation
between the value of expenditure under scrutiny and the amount
of audit resources devoted to individual programmes.
(ii) Details of other areas of pubic expenditure, particularly
relating to public/private partnerships, where the NAO has concerns
about the treatment for auditing purposes of risk and/or the use
of off balance sheet devices.
The National Audit Office has taken a robust line in ensuring
that assets and liabilities are properly reflected in pubic sector
balance sheets in accordance with UK Generally Accepted Accounting
Practice. This has been particularly the case in Private Finance
Initiative deals where the accounting decision is often difficult
and public sector bodies may have an incentive for the assets
and liabilities under such deals to remain off balance sheet.
As a result of the Office's work there have been a number of cases
where discussion with public sector bodies on proposed accounting
treatment has helped to bring PFI assets on balance sheet. Some
examples are HM Prison Service (PFI prisons), Highways Agency
(PFI roads), and the Ministry of Defence (its main building refurbishment).
Of course, a number of PFI deals are legitimately accounted for
off balance sheet, but if an audited body were to persist in off
balance sheet treatment where the Office considered it to be inappropriate,
the Comptroller and Auditor General would qualify his opinion
on the accounts. For example, failure by the Ordnance Survey to
capitalise the National Topographic Database led the Comptroller
and Auditor General to issue an adverse audit opinion on their
(iii) A more precise explanation of the circumstances
surrounding the surrender in 2001-02 of £1,342,000 to the
Consolidated Fund as Consolidated Fund Extra Receipts.
The National Audit Office derives income from four main types
(i) the financial audit of accounts of non-departmental
public bodies, trading funds, internatinal bodies and certain
other statutory funds, for which a fee is chargeable;
(ii) audit services provided to the Auditor General for
(iii) pre-accession advice to European State Audit Institutions
prior to their country's accession to the European Community funded
by the EU PHARE programme; and
(iv) the salary and related costs of members of staff
on temporary secondment to other organisations.
The majority of income arises from the Office's core activity
of auditing accounts.
During 2001-02 the National Audit Office earned £1.342
million (12 per cent) more income than it estimated. This was
due to two main factors.
(i) Under the accounting policies adopted for resource
accounting, the Office accrues income in respect of work in progress
on fee-paying work at the year end. 2001-02 was the first year
in which Estimates were prepared on an accruals basis and, in
drawing up its estimate of income, the Office took a prudent approach
in estimating how much progress it would make on fee-paying work.
In practice, the Office needed to devote less input to non fee-paying
work in 2001-02 than it had planned, for example on advice to
departments on resource accounting. As a result it was able to
make better progress on fee-paying financial audit work, to the
extent that the value of work in progress at the year and recoverable
from clients increased by around £1 million, compared with
the previous year.
(ii) The Office exceeded its forecast of income in respect
of salaries of seconded staff in 2002-03 by £0.355 million.
In most cases, National Audit Office staff on outward secondment
transfer to the host organisation's payroll. This arrangement
is not always practicable, in which case the Office retains the
member of staff on its payroll and invoices the cost to the host
organisation. The fluidity of the secondment programme, and the
uncertainty over which organisation will pay the individual's
salary in each case, make it difficult to forecast income accurately.
Under the statutory provisions governing Parliamentary control
of expenditure, the Office can only use income generated by its
operations up to the limit approved by the House of Commons. Any
income over this limit must be surrendered to the Consolidated
Fund. The Office has learned lessons from its experience in 2001-02
and is taking steps to improve its forecasting of income, particularly
work in progress.
(a) Did the NAO consider requesting a Supplementary Estimate
to allow the additional operating income to be appropriated-in-aid
If the National Audit Office had needed to use the additional
operating income to meet increases in expenditure, it could have
asked the Public Accounts Commission to approve a Supplementary
Estimate to increase both its gross resource requirement and its
appropriations-in-aid. The Office decided not to do so because
it judged that it would be able to deliver its programme of work
within the gross resource requirement approved by Parliament.
The Estimate therefore remained unchanged and the surplus income
has to be surrendered to the Consolidated Fund.
(b) Did the NAO have to surrender to the Consolidated Fund
the £326,000 by which its actual Net Cash Required was less
than its Estimate in 2001-02?
In accordance with the requirements of Parliamentary control
over expenditure, the National Audit Office is required to surrender
this amount to the Consolidated Fund.
(c) Will the higher level of Estimated Appropriations-in-Aid
in 2002-03 (£12,700,000) be achieved?
The National Audit Office expects to earn this amount of
income in 2002-03. If, during the course of the year, there are
indications of a shortfall, the Office will adjust its programme
of expenditure, so as to remain within its net resource requirement.
(d) Does the NAO enjoy End-Year Flexibility on its Departmental
Expenditure Limit, in the same way as government departments?
The National Audit Office does not have an End-Year Flexibility
arrangement as any underspending by the Office normally represents
less than one per cent of its net cash requirement. If the Public
Accounts Commission were to approve such an arrangement, it would
be possible to carry forward any year-end cash surplus. As with
government departments this, however, would require a Supplementary
(iv) An explanation for the approximately 45 per cent
increase in the NAO's running costs over the period covered by
the Corporate Plan (ie an increase from the £23.1m outturn
figure for 2001-02 to the forecast figure of £33.6m for 2005-06).
Table nine on page 26 of the corporate plan provides an analysis
of the Office's forecast gross resource requirement over the plan
period, distinguishing between human resource costs and other
running costs. Other running costs are forecast to grow at an
annual rate of 9.8 per cent. A significant element of the increase
is accounted for by expenditure on professional services, which
is projected to rise by some 19 per cent as the Office moves towards
the 25 per cent contracted out target for certification work recommended
by Lord Sharman. The Office also envisages increased use of consultants
to support the delivery of additional value for money reports.
(v) Details (including the independence of the process)
of the methodology used in auditing the public expenditure savings
claimed to be attributable to NAO recommendations, including the
question of how far such savings represent a reduction in the
consumption of real resources (as opposed, for example, to the
raising of additional resources through charges for services).
How cost savings achieved by the National Audit Office are
In 1989-90, the National Audit Office introduced an impact
measurement system designed to measure the impact of the Office's
outputs. The system aims not only to provide feedback on audits
but also to inform the planning and management processes.
The system which has been devised primarily to identify impact
in the value for money area includes the following key features:
identifying potential impacts at the planning
devising methodologies such as cost-benefit analysis,
benchmarking, modelling and what-if analysis to separate and quantify
identified impacts and measure the extent to which they are achieved;
setting out clearly in the reports the scope for
improvements and identifying who should be responsible, the likely
cost and the time horizon for achievement; and
tracking post-report outcomes on an ongoing basis
and reporting annually.
The corporate plan reports identified impacts which have
occurred in the previous calendar year as a result of prior action
by the National Audit Office and the Public Accounts Committee.
Impacts are measured by number and type and, where possible, evaluated
financially. In addition:
comprehensive guidance on measuring the impact
of NAO outputs, which is circulated internally on an annual basis,
requires staff to ensure all impacts are validated and agreed
with audited bodies;
savings are projected forward for an additional
two years beyond the initial year if continuing savings are confirmed
The figures reported at paragraph 1.2 of the corporate plan
are moving averages reflecting savings achieved/counted over the
most recent three years.
External audit/scrutiny of cost savings declared by the National
The Office's impact recording system is scrutinised periodically
by internal audit. They last examined this area in December 2000.
How far do these savings represent a saving in real resources?
Financial impacts achieved by the National Audit Office each
year fall into a number of categories, including increases in
income and tax revenue; savings in expenditure and improvements
in operational efficiency; and savings to the citizen or business.
The mix of savings across these categories varies from year to
year, depending on the particular topics investigated in value
for money examinations in previous years. In 2001-02, over 40
per cent arose from savings in expenditure and improvements in
operational efficiency, a similar amount derived from action taken
to recover costs or improve the collection of tax revenue, with
the majority of the balance being attributable to savings to the
citizen or business.
(vi) An assessment of the effect of devolution on public
audit. In particular, are the specific arrangements for Wales
working satisfactorily, and is there a clear delineation between
the responsibilities of Audit Scotland and the National Audit
The effect of devolution on public audit
Although devolution has made the public audit sector in the
United Kingdom more complex, all the bodies involved work closely
together to ensure that the quality of public sector audit in
the United Kingdom continues to be of the highest standard. An
important element in promoting and extending existing co-operation
between the audit bodies is the Public Audit Forum which is chaired
by the Comptroller and the Auditor General, and includes the Controller
of the Audit Commission, the Auditor General for Scotland, the
Northern Ireland Comptroller and Auditor General and the Auditor
General for Wales. The Public Audit Forum published a paper in
January 2002, Central Government Audit in the UK after Devolution,
which set out the current audit arrangements and highlighted the
ways in which the different audit bodies work together. An electronic
version is available on the Pubic Audit Forum's website at www.public-audit-forum.gov.uk.
Are the arrangements for Wales working satisfactorily?
The Government of Wales Act specifically provides for co-operation
between the Comptroller and Auditor General and Auditor General
for Wales. Sir John Bourn was appointed to the post of Auditor
General for Wales when the National Assembly for Wales took its
powers on 1 July 1999. He has since been reappointed for a second
three-year term. The National Audit Office provides a full range
of audit services to the Auditor General for Wales. The Auditor
General for Wales audits the Assembly's accounts and those of
its sponsored bodies, undertakes value for money examinations,
publishes reports and presents them to the Assembly. The reports
are considered by the Audit Committee of the Assembly.
Since the National Assembly for Wales was established, the
National Audit Office has produced between five and nine value
for money reports and certified over 30 accounts annually for
the Auditor General for Wales, as well as continuing to fully
support the Public Accounts Committee.
Is there a clear delineation between the responsibilities of
Audit Scotland and the National Audit Office?
The responsibilities of Audit Scotland were set out in the
Public Finance and Accountability (Scotland) Act which established
Audit Scotland from 1 April 2000. Audit Scotland was formed from
National Audit Office staff based in Edinburgh, and staff of the
Accounts Commission, to bring together the audit of devolved central
and local government functions in Scotland. Audit Scotland supports
both the Auditor General for Scotland who is responsible for scrutinising
the expenditure of the Departments of the Scottish Executive and
most other public spending bodies, and the Accounts Commission
for Scotland, which is responsible for local authorities and fire
and police boards.
The Comptroller and Auditor General does not have access
to devolved matters in Scotland and the Public Accounts Committee
does not examine Accounting Officers for Scotland. However, the
Comptroller and Auditor General retains responsibility for auditing
matters "reserved" to the UK Government, including defence,
social security and central government taxation. This work in
Scotland, as in other parts of the United Kingdom, is carried
out by NAO staff.