Select Committee on Public Accounts Eleventh Report

Supplementary Evidence by the National Audit Office

(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: Statistical Analyses.

  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 effort.

Functional area
Proportion of
aggregate central
government expenditure
Proportion of
National Audit
Office resources
Per cent
Per cent

Social security
Health and personal social services
Environment and transport
Law, order and protective services
Trade, industry, energy and employment
Overseas services
Agriculture, fisheries, food and forestry
Culture, media and sport

  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 accounts.

(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 of activity:

    (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 Wales;

    (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 in 2001-02?

  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 Estimate.

(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 calculated

  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 stage;

    —  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 each year.

  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 Audit Office

  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 Office?

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

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.

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Prepared 7 November 2002