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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 957-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE THE COMMITTEE OF PUBLIC ACCOUNTS Monday 27 February 2006 NATIONAL AUDIT OFFICE SUPPLY ESTIMATE 2006-07 NATIONAL AUDIT OFFICE SIR JOHN BOURN KCB, MR MICHAEL WHITEHOUSE and MR PHIL WOODWARD
Evidence heard in Public Questions 1 - 40
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Committee of Public Accounts on Monday 27 February 2006 Members present Mr Edward Leigh, in the Chair Mr Richard Bacon Greg Clark Mr Ian Davidson Helen Goodman Mr Sadiq Khan Sarah McCarthy-Fry Mr Alan Williams
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL NATIONAL AUDIT OFFICE SUPPLY ESTIMATE 2006-07 Examination of Witnesses
Witnesses: Sir John Bourn KCB, Comptroller & Auditor General, Mr Michael Woodhouse, Assistant Auditor General, and Mr Phil Woodward, Director of Finance, National Audit Office, gave evidence. Q1 Chairman: We are now in public session going to deal with the National Audit Office estimates and we have to give our advice to the Public Accounts Commission, which meets tomorrow, on whether we should support these estimates. Perhaps we can start with the NAO memorandum which shows that the increase in gross revenue is aligned to "the review of systems" from £8.4 million in 2005-06 to £9.8 million in 2006-07, that is 17%, and that this figure for 2006-07 differs by £0.8 million from the figure provided by the Corporate Plan for 2006-07 to 2008-09. Why is that, Sir John, or could you confirm why this gross resource requirement has increased from the forecast figure? Sir John Bourn: The reason that the increase between 2005-06 to 2006-07 for the review of systems is £1.4 million, which is 16.7%, is that essentially the review of systems is a work that supports both the value for money work and the financial audit, so it is by the review of systems that you get yourself in the position of being able to produce not only the financial audit but also the value for money audit. That is why, since ----- Q2 Chairman: Why has it increased now? Sir John Bourn: It has increased because the demands on the financial audit and the value for money audit have both increased. Public expenditure next year is due to rise by 5.8% and the particularly complex areas, like health, are due to rise by 9.2%, education by 6.5%. There is also considerable turbulence in the structure of the National Health Service and there is a range of complicated areas, for example, new accounts that are coming to us with the new statutory financial audit responsibilities covering the Olympic Delivery Authority, together with the general complexity and increased difficulty that arises through so many of the joint approaches, local area agreements, where you have such a large number of authorities coming together. For example, just to illustrate the point, Chairman, we are looking at an organisation called Roy Partnerships, which has inputs from the ODPM, the local regional development agency, the county council, the district council, the parish council, the Government office in the locality, the local and National Health Service, various voluntary organisations and various private sector ones. That is an example of the complexity of public administration which lies behind that figure which, of course, is still within the 6% which the Commission approved when they discussed it in October. Q3 Chairman: Do you recall that you published in March 2005 a document Public Sector Service Agreements: Managing Data Quality? There are some quite worrying findings in that: 13 systems (20%) where departments were not collecting data for the measures specified in their technical notes, three systems where departments had stated that they did not intend to report data, 20 systems where weaknesses were identified which departments should address. How much confidence can we have in the level of performance reported on PSA targets, do you think, given what departments are doing, or rather not doing? Sir John Bourn: I think the level of performance is very worrying. It is worrying for two reasons: one, for the reason that you have just said. Our reports on the technical notes - and this will be repeated in the second iteration of this - shows that in many cases the material to decide whether you have achieved the public service agreement is just not there. It is also the case that some of the public service agreements are set out in terms that defy any rational calculation at all. For example, if you take the Small Business Service, its targets include a target to "increase the number of people considering going into business". Well, whatever happens you could say you had hit that target. "More enterprise in disadvantaged communities": how would you say whether you had achieved that? You would just be able to claim you had. It is a combination of targets which are set in terms so imprecise that whatever happens you could say you had achieved them, and a failure to have sufficient means in departments to assess whether you had achieved them. Q4 Chairman: You are doing your second report now, are you not? Sir John Bourn: Yes. Q5 Chairman: Do you think that that will come to an equally poor conclusion on these targets? Sir John Bourn: I think there will be some improvement, but it will be essentially equally poor for the reasons I have stated. They are still there. Q6 Chairman: This second report is obviously a very important one. It was due last autumn, was it not? Why has it been delayed? Sir John Bourn: I am not aware, Chairman, that it has been delayed. Q7 Chairman: Was it due last autumn or not? Mr Woodhouse: Not to my knowledge. Q8 Chairman: Okay; I have got the wrong advice. When was it due and when is it going to come out? Sir John Bourn: It will be in March. Q9 Mr Bacon: Sir John, the NAO report on Gershon, effectively on managing resources to deliver better public services, highlighted the importance of departments having the necessary financial management skills at board level to drive the improvement. Allied to that the Treasury has acknowledged that it is unlikely to meet its target of having a qualified director of finance at board level in every government department by the end of this year, December 2006. How significant do you think this target is for the delivery of improvements in financial and performance management? Sir John Bourn: I think it is a very significant target. I think it makes absolute sense to have as the finance director of a government department a man or woman with a financial qualification. I think that means that there is a more informed assessment and focus on the accounts and on management accounting, and I think this goes with the Treasury's financial management initiative which is improving the quality of financial management in all departments. One aspect of that is to have a financially qualified person in the top position and on the departmental board. Q10 Mr Bacon: Would you say there is clear evidence that the failure to have a director of finance who is financially qualified has hindered the ability of departments to get resource accounts delivered pre-recess? Sir John Bourn: I think it has, because what it has meant is that the people at the top of the department understand intellectually why this is important but have no background, no experience, no real feel for how to get it to happen, so I think it has been a handicap. Mr Bacon: We had a session with Sir Michael Jay on resource accounts from the Foreign Office, which I found very interesting, and it struck me that perhaps we should look at resource accounts more often. There are a lot of interesting things there. They look interesting to get into on the face of them. One of the things Sir Michael Jay said in his expansive comments at the end, since it was his swansong, was that he had been surprised by how difficult the job of running the Foreign Office was when he took it on. Plainly there was one set of skills to being an ambassador in Paris, which he was immediately prior to the present job he had, and we all know what they are: they are very difficult skills to have at high level, but the skill of running an organisation with 16,000 employees in a hundred countries with 240 posts is like running a multinational company; it is a completely different set of skills. I notice that the Finance Director of the Foreign Office was a chap who had in his CV that he had been Ambassador to Slovakia. What competence that gave him to run a £1.7 billion budget is not at all obvious, is it? I am not casting any aspersions on any individual; I do not know. Chairman: Or on Slovakia. Q11 Mr Bacon: Indeed; I am sure it is one of the finest places on earth, but is it not the case that there is something odd about the way that the senior, chief executive-equivalent management positions are filled? Sir John Bourn: Yes, absolutely, and, as I think the officer himself said, he was going to be the last person in that job who did not have a financial qualification. I think traditionally in Whitehall the principal finance officer was seen as the man or woman who could most successfully engage with the Treasury in the annual spending round. Preparation of the accounts/financial management in the department was seen as a second order activity which tended to be done by people who were not seen as top-flight people in the department. This is now changing and it is not before time. Q12 Mr Bacon: It is still true that there are quite a few resource accounts upon which you have placed a qualified opinion, is it not? Sir John Bourn: I had to place a qualified opinion in terms of real accounting failure on two. Some were ones where there had been an excess vote and where the Treasury require me to do it, yes. Q13 Mr Bacon: How are you, the NAO, supporting the Treasury's achievement of the target of getting financially qualified personnel running the finance director post? Sir John Bourn: We are supporting it in that we have staff working with the Treasury in the development of this activity. One of the things which I hope in the future we might see is that one of the finance directors might be somebody who has spent some time in the National Audit Office. We have one example of that so far. There is the Finance Director of the National Health Service who had worked in the National Audit Office and was a qualified accountant. I would see the NAO and also the other audit offices in the United Kingdom being in a position to put forward candidates for those positions in the future. Q14 Mr Bacon: Last time we discussed this I remember you saying that 23% of principal finance officers had a financial qualification compared with about 85% in the private sector. This may result in your writing to the committee afterwards but do you know how that has shifted in the last two or three years? Ms Diggle: Maybe I can help you, Mr Bacon. It was about 60% the last I heard. I can get you a precise figure if you want me to. Q15 Mr Bacon: No. It is going in the right direction. Ms Diggle: It is certainly getting a lot better. Q16 Mr Bacon: When do you expect that it is going to be 100%? Ms Diggle: I do not have a figure for that, I am afraid. Q17 Mr Bacon: You do not have a date for that? Ms Diggle: I do not have a date for that, although we are certainly aiming for the end of the year if possible. Q18 Mr Bacon: But would you expect that, if you do not achieve it by the end of this year, which you may not, by December 2007 you would have achieved it? Ms Diggle: I would be very surprised if we had not. Q19 Greg Clark: We have a hearing next week on the Government's efficiency programme, the Gershon savings, and I notice that your memorandum makes some limited reference to increased activity aligned with this programme in the year ahead. It surprised me in some ways that the NAO was not more deeply involved from the outset in the Gershon programme, because obviously you have a store of expertise in each of the departments under scrutiny. You have an excellent track record in suggesting savings. Do you have any comments to make on the way that it was chosen to structure that programme? Sir John Bourn: Right from the start of Sir Peter Gershon's appointment we did work quite closely with him and seconded staff to him, and some of the subjects that we looked at, like purchase of professional services, had been the result of the conversations between us. With regard to this particular set of recommendations that he made, we had made a contribution to them but they were his recommendations and ministers picked them up, so we were consulted and did discuss with him and his staff the exercise that he had engaged in. Q20 Greg Clark: But you have not validated the figures that have been published, have you? You have high standards and I would have given them as reassurance, and they would no doubt have given the nation reassurance in the figures that were published if they had had your imprimatur, but they have not. Sir John Bourn: You are quite right. I am not the auditor of the Gershon programme. That responsibility lies with Mr Auton(?) who is coming before the Committee when our report comes out. Although we are not the people who will say, "Yes, all these savings have been achieved", of course, what we are looking at, as in the first report we have done, is how reliable the claims are that they have got there and, of course, what we are saying now is that the claims are not reliable and at the present time the savings claimed can only be seen as provisional. Q21 Greg Clark: Can you confirm, Sir John, that you have enough resource available in the 2006-07 estimate to validate in an ongoing way the efficiency savings that the review will produce? Sir John Bourn: We certainly have. Implicit in the bit that I have put forward will be the resources to enable me to do that, yes. Q22 Greg Clark: Do you think you will be able to do it in a similar way to the approach you take to validating performance against the PSA targets? Sir John Bourn: Yes, and I shall do it in a very detailed and proper way. Q23 Greg Clark: Will it better than it has been done in the last year, and I say this because at various points during the last year figures were produced by the Treasury that turned out to be - I was going to say bogus, but certainly misleading? Sir John Bourn: It will still be their business to produce the figures and it will be my business to audit them effectively and skilfully and draw to your attention the degree to which the figures back up the claims that they are used to make. Q24 Greg Clark: In terms of departmental capability reviews does the 17% increase in resources for review of systems include additional support for these reviews? Sir John Bourn: Yes, it does. When Sir Gus O'Donnell announced that he wanted to set these reviews up he spoke to me about this. I seconded some staff to the Prime Minister's Delivery Unit to plan it but I made clear that my support for the initiative was allied with the fact that I would audit it and report to the PAC on how well it was going. Q25 Greg Clark: |It does concern me that various parts of government seem to escape the rigorous scrutiny, and Sir Michael Bichard, talking about the DCR, said, "I find it difficult to understand how a civil service which has supported the reform of the public service on the back of external, independent assessment of performance still seems unable to accept that in its own back yard". Is that an assessment you share, Sir John? Sir John Bourn: I would not share it across the board in the way that Sir Michael was speaking because I think that the arrangements for both the financial and the value for money audits that the NAO discharges mean that there is more available than what Sir Michael was talking about. I think his particular concern was that there was no equivalent in central Government of the comprehensive performance assessments that you had in local government. Sir Gus O'Donnell made it clear that central Government did not think that you could compare, shall we say, the Foreign and Commonwealth Office, with Defra in the way that you could compare the standard of service between, say, York and Lancaster, so the idea of capability reviews is to look in an objective way at the ability of the different departments to carry out the responsibilities that they have. Q26 Mr Williams: You show for 2006-07 a 22% increase in consultancy costs. Is it entirely or predominantly attributable to the anticipated or hoped for earlier closing of resource accounts? Sir John Bourn: It is connected with that but it is also connected with the half million pounds which the Public Accounts Commission decided that they would support at the meeting in December for the planning of the refurbishment of the office. Q27 Mr Williams: So what proportion of it is due to the early closures? Instead of 22% what would the figure be if you had not had the half million pounds request from the Commission? Mr Woodhouse: It is difficult. We can give you a note of the precise figures but I would say about a third of the increase in consultancy spend is probably going towards the financial audit. The other percentage is going towards value for money work and the value for money work increase reflects the ----- Q28 Mr Williams: So in the 7%, 8% area? Mr Woodhouse: Yes, and the value for money work focusing on increasing complexity in the work that we are doing to generate more independent analysis. Q29 Mr Williams: So it is not as big as one feared because of the resource accounting? Sir John Bourn: No. Q30 Mr Williams: Last year, the financial year 2004-05, was very late for the closures and we were very disappointed about that. Mary Keegan envisages that the 2005-06 figures will be late. Does this mean that you will be able to make some economies on your consultancy costs because they will not have the accelerated accounts to cope with? Sir John Bourn: It is certainly true that, as the accounts are prepared in good time and are prepared in an accurate way, we will not need the same resources to look at them. Inadequate accounts come in and the auditors can see that they are wrong or misleading. I do not want just to qualify them like that. In the way that auditors properly and professionally do, you discuss with the auditee and point out the defects that the auditee has got to get right. When you get a perfect set of accounts, properly prepared, which the auditors can immediately start to examine, then you are able to do it with fewer resources, but if you get defective accounts which require reference back in order to get them into a proper form you need the resources to do it. As the departments get better, as they will under the financial management initiative, so the resources requirement will decline. Q31 Mr Bacon: Sir John, did I hear you say earlier that you are satisfied that 12% increase in value for money resources is adequate to provide you with what you need for effective and credible reporting on the Gershon savings? Sir John Bourn: Yes. Q32 Mr Bacon: Might I ask one other question, and that is about the report that your office is preparing on the national programme for IT in the Health Service, now known as Connecting for Health? We have already had from you and taken evidence on the small proportion of the programme in a separate report, the one on patient choice at the point of delivery, which was specifically about the "choose a book" element of the programme. You are doing a wider study on the entire programme, which is the largest civilian IT programme in the world with a contract value of £6.2 billion. It was originally said that it would be published last summer and then that it would be published during February of this year, this month, and it has been delayed again and apparently now will not be published until this summer. I have been following this issue for some time and I am very concerned about it because it exhibits all the classic signs of a huge IT failure, rather along the lines of Wessex Regional Health Authority where it was ordained from the centre, there was no consultation as to what local people wanted and yet the old-style district health authorities locally were required to pay for it, and in the same way the PCTs are effectively going to have to pick up most of the bill for implementation without actually wanting it. There is not a single one of the 32 foundation hospitals that has yet hooked up to this thing because it is overwriting good data with garbage. Every GP you speak to spits blood when you talk about it. I was meeting with all the hospital consultants in my area on Friday morning and they said the same thing and that the money would be largely wasted. Could you say what is happening to your report and when we may expect it? Sir John Bourn: The report is developing and essentially there are two main points in it. One is in relation to technical expertise, the design of the system and the contracting for it. The other one has to do with all the things that you say, which is the failure to take the people in the National Health Service with the system. I have been very keen to make it absolutely clear that in the report that I produce it will make clear the failure to take the people in the National Health Service with them. All the things that you say, the idea of having it wished on them, the idea of having to pay for something they do not want, are there. I think in some way it has become a focus of dissension in the National Health Service on the part of GPs and consultants and so on. A lot of this dissension is focused around the IT but it does not take away the fact that it has not won the hearts and minds of those who are being required to use it and we shall say that as well as describing what the department is doing about it. Q33 Mr Bacon: May I ask when you are expecting to publish it? Sir John Bourn: In the early summer of this year. Q34 Mr Williams: Risk management is something you and we have preached repetitively about to the departments. Why is the sermon not echoed very frequently in your own memorandum about your own activities? I had hoped that just before you go off on your great property boom it might be more prevalent in your thinking. Sir John Bourn: It is certainly there in that there is a series of risks that we discuss every month at the management board of the NAO, going through such risks as the ones that you would expect us to look at: are we going to audit the 469 accounts that we have to do next year; are we going to produce the 60 value for money studies; are we going to produce savings equal to eight times the cost of the office; what reputational risks are we running? The risks are there and I would be very happy, if the committee and the Commission were interested in this, to give you an account of what they are because we do discuss them every month. Q35 Mr Williams: The lesson on the matter of risk management we have emphasised as a key priority. How far do you feel we still need to keep on emphasising that or do you think the departments now have the message fully on board? Sir John Bourn: I think the departments have got much better and I think the requirement in the annual statement of internal control that the accounting officer has to sign, in which he or she has to sign that the statement does cover the full range of risk, not only the financial ones but the other risks as well, has helped with that, and, of course, it is part of our audit to see that there is nothing in our knowledge of the department that undermines that. I think that concern is growing, but I think this leads into a point that members of the committee have raised. This way of looking at it is much more akin to the way in which the professionally qualified finance director looks at it than to the way in which the traditional civil servant looked at it. Traditional civil servants' risks have tended to be the risks as the secretary of state saw them, political risks, rather than risks of the performance of the department, although that is perhaps a rather general statement. I think that the coming of professionally qualified people - and that will mean professionally qualified people on the staff as well as the finance director - will enhance that risk appreciation, so although I think it has got better I would not advocate that the committee should think it is all okay and you do not have to think about it. It will be my business to draw your attention to how it is developing. Q36 Mr Williams: So what are you doing in practical terms to bring about this intellectual conversion from political risk to financial risk? What practical help and support are you providing? Sir John Bourn: There are the reports that we have produced. There is the annual audit of the statement of internal control in which we draw defects to the attention of the accounting officer. Q37 Mr Williams: And these are nailed on a wall of each permanent secretary's office, are they, so that they are never forgotten? Sir John Bourn: I would like to think they are nailed on the wall in the same sense that mine are nailed on my wall, and I am encouraging them to get there and working with the Treasury because the development of the financial management initiative will again mean that a greater appreciation of risk is embedded into the whole way in which money is secured, disperse and accounted for. Progress is being made but we still have to keep at it. There are also conferences. This time last year we had a conference attended by many permanent secretaries that the Chairman himself spoke at about the appreciation of risk and also reiterated the committee's concern that they wanted well-thought-out risk taking. It did not mean to say that you were against departments taking risks but you wanted the risks to have been thought out rather than just risks embarked upon without thought and carelessly. Q38 Chairman: Lastly, in January 2005 the Chief Secretary asked for a nominal increase in the costs of department financial audits. You are exceeding the level of funding that the departments have got. How much difference do you actually make to their working, do you think? Mr Woodhouse: I think we are making a significant difference. I think the thing the committee can take confidence in is the Government's response to the omnibus report that the committee published on the scope for improving value for money where the Government recognised and welcomed the value of working with the National Audit Office and the Committee of Public Accounts. Sir John Bourn: I would just say that the Government did ask us to do extra work, as being the first financial year in which it comes out: to extend our role on regulatory impact assessments and to carry out reviews of the performance of regional development agencies. That was a request we had from the Government that we will undertake during the course of 2006-07. Q39 Chairman: We have got this NAO Report Managing Resources to Deliver Better Public Services. What evidence do you have that the departments are making progress on this? Sir John Bourn: They are delivering better services, in one sense financial, because they are doing it with less use of resources and our reports on savings generate this. Also, of course, a number of reports do describe and make further reference to the way in which services can be delivered better. One that is coming up before the committee quite soon is electronic tagging, which is a way of providing a service for the maintenance of prisoners in a way that saves resources but also provides an opportunity for the earlier re-integration of prisoners into local communities. Q40 Mr Bacon: Sir John, looking at the Northern Ireland Corporate Plan, which we are doing next, it says that the Department of the Environment in Northern Ireland designates the Northern Ireland Audit Office as local government auditors, which brings me to the question of yourselves and the Audit Commission. There is plainly one disadvantage in the separation, which came out in the education hearing we just had, which is that the shutters come down on the ODPM block grant and there are things you simply cannot look at, even if they involve hundreds of millions or billions of pounds, although there are arguments, I suppose for having the Audit Commission separately so that local government feels that it has got its own body. How strong are those arguments and do you see a case for moving towards the merging of the two bodies at some point or not? Sir John Bourn: I think to some extent there is a case for having in England, with something like 50 million people, two sets of people, just like in other walks of life some competition, and I think the knowledge that we have that the Audit Commission are there and that they are developing new approaches is an advantage, that there should be two of us, as it were, in the business. Of course, to the extent that central Government supervenes and the extent to which the position of local authorities, as some commentators say, is eroded, some of that case tends to evaporate, but at the moment I think perhaps more is gained from, as I have put it, having two people in the business who learn from each other and in a way at the staff level compete with each other. It does not rule out co-operation, as in the studies that we have just done on delivery chains; it does not rule out secondments between us; it does not rule out having Audit Commission people on our teams to do things and vice versa. In a way you could say the same thing perhaps in the private sector. We have got four big auditors. Would it be a good idea if they all came together? I think probably the answer is no and to some extent I feel that about the Audit Commission and myself. Chairman: Thank you very much, Sir John. That concludes the public session on the National Audit Office report.
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