House of Commons - Members Estimate Committee

Select Committee on Members Estimate Committee Third Report

2 Better financial assurance

The current system of control

23. The House already operates a number of internal controls in relation to Members' allowances. There is a Code of Conduct for Members of Parliament; the Green Book exists to explain the principles and rules for claiming allowances; and the Department of Resources has systems and procedures for staff to follow, conducting a range of pre-payment checks on claims received from Members and occasional post-payment checks if required (for example in response to a request from the Parliamentary Commissioner for Standards) and requesting receipts or other documentation to support many claims. There is comprehensive internal and external audit: the internal audit function undertakes regular reviews of the Department's systems; and the NAO tests sample transactions for the financial audit. All these elements form part of the existing control framework, which enables the Accounting Officer to sign the statement of internal control for the Members Estimate and the Comptroller and Auditor General to sign his audit report to the House.

24. Claims are not accepted without question. Queried and rejected allowance claims amount to some 3-4% of the total. Of these a proportion are subsequently paid once additional information is provided. Claims are rejected for a number of reasons, the most frequent being because the items claimed for are not allowable.

25. A process of audit is carried out, both internally by the Internal Audit team (in partnership with PwC) and externally (by the NAO). These audits check on the operation of the internal controls. The focus of the external audit checks is on the financial accounts. There is a formal governance structure for the Members Estimate.

26. Controls are currently limited by the guiding principle, as set out in the statement of internal control in the Resource Accounts, that "Members are primarily responsible for identifying, claiming and certifying their own expenditure". Existing controls focus on "ensuring that the stated purpose of Members' claim falls within the existing framework" and ensuring "that payments are correctly accounted for and paid to the correct recipient" (Resource Accounts: Members 2006-07, statement of internal control). This means that neither existing internal management controls nor audit look behind the Member's signature further to assess regularity and propriety. In other words there are no checks on actual usage of resources paid for from the allowances.

Advice of the Members Estimate Audit Committee

27. The Members Estimate Audit Committee (MEAC), comprising two Members of the Commission/MEC and two external members, has put forward proposals for improving the audit arrangements.[9] Since the creation of the MEAC in 2004, the Committee has been concerned about the matter of auditing of Members' expenses and allowances, and has discussed the need for appropriate governance on a number of occasions. In 2005-06, in order to facilitate discussion with management and then the Members Estimate Committee, the Committee agreed to commission a process review of Members' allowances that would concentrate on ensuring that the Green Book could be clearly interpreted by Members and staff of the House. In December 2007 the Committee agreed a paper on this subject to the MEC making recommendations regarding the audit of Members' expenses, which was considered by the MEC at its meeting in January 2008. The Audit Committee's paper appears at Appendix 2.

28. With regard to the Green Book, the MEAC said "The Green Book has grown in length over the past few years, as the allowances themselves have been extended and as individual cases have highlighted a need for more detailed provisions. In consequence, some parts of the Green Book are clearer than others, and some are inevitably 'greyer'. The audit review found that the Green Book was pitched at about the right level, but that it could be improved by increasing the level of internal consistency and reducing the amount of ambiguity."

29. On the administration of claims, the MEAC said "The issue here is how much scrutiny by officials is appropriate. There seems a strong case for the [Department of Resources] changing its approach from what is now mainly light-touch validation of claims to a different one which could, for example, include more advice to Members in advance of claims combined with sample checking of actual usage of resources paid for from the allowances. This could maintain the present level of flexibility in the Green Book and perhaps even reduce the detail, whilst improving the level of accountability."

The Committee on Standards in Public Life

30. In its 'Principles to govern a review of MPs' allowances', the Committee on Standards in Public Life said:

"Wherever reasonably possible, all claims for expenses should be backed up by receipts or other appropriate documentation, available to be produced if necessary."

"Claims should be subject to robust audit on a sample basis using a proportionate and risk-based approach. Members should be expected to retain receipts for a set period, perhaps three years, to make this possible."

"In deciding whether to make a claim, the spirit of the rules should be respected as well as the letter."[10]

SSRB proposals

31. The SSRB recommended in 2007 that the ceiling for reimbursement of unreceipted expenditure be set at £50 per Member per month and that the National Audit Office should audit the expenses of a representative sample of MPs each year. MEC has already agreed a £25 threshold (£50 for petty cash). The Comptroller and Auditor General told us that this change to the receipts threshold per item will enable checks on claims to be audited much more thoroughly, and bring their audit of the House accounts into line with other public bodies. This of itself, in their view, will go a long way to remove the audit limitation mentioned in paragraph 26 above.

What happens in other organisations

32. The Committee has met private firms of accountants, the NAO, a consultant formerly with the Institute of Chartered Accountants in England and Wales and officials from HM Revenue and Customs. Members have been keen to learn how examples from claims and audit regimes in the private and public sectors could be applied in the House. Several points are clear about how these matters would be dealt with elsewhere in the public sector, voluntary sector and in the private sector:

any expenses claim—even that of the chief executive of an organisation—would be signed off by someone else

anyone claiming expenses would be subject to challenge by the finance director and would have to show that the spending was reasonable and for the purposes intended

rules on expenses are not always clear cut because it is impossible to cover every eventuality

staff who have to work away from their home or are relocated could be expected to receive reasonable expenses and not be out of pocket

any audit system needs to have some teeth but to be proportionate

most errors found by auditors involve mistakes or misunderstandings—minor lapses can be corrected but, in very serious cases, there is also a real risk of greater consequences

additional housing costs resulting from working in different places would be met either through taxable benefits in kind as part of the "remuneration package" or would be reimbursed directly to ensure the individual was not out of pocket. For individuals in the private sector with equivalent responsibilities to MPs, this additional cost would often be treated as part of the salary package.

33. The general practice in other organisations in the public, private or third sectors is for all claims to be accompanied by receipts. This is not universal and in some cases there is a de minimis threshold of £5 or so. Not all claims would be checked in advance of payment, especially in organisations where the total sums involved were minor in relation to its main business. Most organisations have systems for occasional post-payment checks of claims and the effect on an employee of a false claim would be serious. The Committee was told by an accountant that the tests that would be applied in such a professional practice were whether the claim could reasonably be charged to the client or, if not, paid for out of the partners' own profits. Audit arrangements in other organisations are also tailored to the relative importance of the sums involved to the overall business.

34. The Committee has learned about the arrangements for "practice assurance" introduced by the Institute of Chartered Accountants in England and Wales in 2004. This involves a specially-trained team visiting firms of professional accountants once every six years or so. They assess their processes and practices against a set of principles-based standards, through a combination of interviews and examination of documentation. The team reports initially to the firm itself, with any recommendations for improvement, with summary reports being presented to a committee of the Institute.[11] This form of friendly but robust challenge ensures that the firm's practices meet the required professional standard and that the people operating them are competent to do so. It may also contribute to the confidence the external auditors have about the systems of control. We have been told that such a scheme might cost between £150,000 and £500,000 a year, depending on how it was run. This is between 0.1% and 0.3% of the total annual cost of the Members Estimate.

The Scottish Parliament

35. The recent independent review of the allowances for MSPs did not make any specific recommendations for changes in the audit arrangements but emphasised the need to adhere to the seven Nolan "principles in public life".[12] They recommended the following principles for the reimbursement of expenses:

Objectivity—Expenses are to be reimbursed only for the purpose of a Member carrying out his or her parliamentary duties. The requirement for efficiency, effectiveness and value for money should always be central in claiming for accommodation, goods or services funded from public funds.
Accountability—Individual Members must take personal responsibility for all expenses incurred and for making claims, even if he or she delegates the administration of claims to others. All claims for expenses incurred must be supported by receipts or other documentation confirming the expenditure.
Openness—Individual Members should be open and transparent about expenditure incurred under the scheme. Information on individual Members' expenses claimed will be published regularly to enable the public to see what expenses have been incurred, except where there is personal or third party data or security considerations.
Integrity—A Member must ensure that any claim is above reproach and that there can be no grounds to suggest misuse of public money. Any payments made must not relate to party political activity, nor should any arrangement entered into give the appearance of a benefit to a party political organisation.
Selflessness—A Member must ensure that any claim does not give rise to, or give the appearance of, benefit or subsidy to a Member, or someone close to a Member, for a purpose other than carrying out parliamentary duties.
Honesty—All claims must be made honestly and a Member should take steps to resolve any conflicts arising in a way that protects the public interest.
Leadership—A Member should lead by example, strengthening the public's trust in the integrity of the new scheme and setting high standards for other areas of public service.

Advice from the Comptroller and Auditor General

36. The Comptroller and Auditor General (C & AG) advised the Committee that the essential components of an effective assurance regime are:

clear rules and guidance as to what is and what is not acceptable under the rules

robust management controls and processes, designed to ensure compliance with the rules

checks and testing of the controls, to ensure that they are adequate and effective

reporting on the outcome of those checks to those wanting the assurance.

37. The C & AG said "Members are responsible for identifying, claiming and certifying their own expenditure, and thus the House does not seek further assurance, beyond that implicit in the Member's signature on each claim. One of the consequences of this limitation is that adequate documentation is not always available, to support claims, or the documentation is not sufficient to provide either the House Authorities or the auditors with the assurance they need. If this limitation was removed, the House Authorities, as part of the new framework of rules, could require Members to provide sufficient evidence that their claims were in accordance with the framework of rules governing them. This evidence would provide internal assurance to the House Authorities, as well as providing the auditors with the evidence required to give assurance externally."

38. Two options were put forward by the C & AG in his paper (see Appendix 3):

Option 1: Expansion in the scope of the External Audit of the House of Commons Members Estimate Resource Account
Option 2: An assurance around the arrangements put in place by Members to manage their claims, either as a group or as individual Members.

39. The C & AG concluded:

"While Option 2 has some attractions, we do not think that it is the best or most practical way forward. In order to provide the required level of assurance, it is likely that the programme of Member assurance visits would be a substantial, intrusive and costly exercise (several times the cost of the audit of the financial statements). Additionally, the assurance gained from this quality assurance scheme would be limited, until all Members had been visited, and it might require several cycles of visits before valid assurance could be given. The value for money of such an assurance regime is questionable."

"Our advice, therefore, would be to expand the scope of the external audit. An expansion of the scope of the external audit of the House of Commons Members Estimate Resource account would put the audit on a basis that is consistent with the audit that is applied by the Comptroller and Auditor General to other bodies in receipt of public funds. This would mean that the public and the House had the same assurance as they receive for those other bodies."

Views expressed by Members

40. A large number of Members recalled their experience in previous jobs of having to produce receipts for all claims and some suggested that this should apply in the House. Many expressed dismay that the reputation of the House had been damaged by old-fashioned practices which they themselves deplored. No one argued against a tighter claims regime or random audits, though one or two drew attention to the likely increased costs of administration. Members generally reflected a perception that the claims and audit system had improved over the years, with successive new intakes of Members following practices closer to what would be expected elsewhere.

Opinion of the Committee

41. A critical component in the task of rebuilding public confidence in Parliament's allowances regime has to be an overhaul of the systems which exist to verify claims, check the uses to which resources are being put, and secure value for the public's money. From the start of this review, we identified that our top priority would be to bring forward a robust and transparent process for claiming allowances and auditing them.

42. It should be said that the current systems are considerably more rigorous than is often supposed or reported, comprising three tiers of assurance: checks on claims before payments are made; internal audit checks of those controls; and NAO external audit of the accounts, systems and processes.

43. But the essential weakness is that an MP's signature certifying that the claimed expenditure is "wholly, exclusively and necessarily incurred to enable the Member to perform their parliamentary duties" is effectively the last word on the validity of the claim. We are convinced by the argument that this arrangement can no longer be sustained. Viewing a gentleman's word as his bond, beyond all further challenge, belongs more to a 19th century club than to a 21st century legislature.

44. We also sought advice on how the House's internal controls could be further tightened by systematically analysing statistical information to look for trends and anomalies, improving financial assurance, and by assessing the effectiveness of these internal controls as they interface with internal controls in Members' offices. At present, the Department of Resources has not been required to conduct systematic statistical analysis of expenditure under the allowances. More work on trends in this area might—as well as providing useful planning information—enable possible problem areas with regard to the expenditure of individual Members to be identified earlier.

45. Some Members also called for the Fees Office (Department of Resources) to be more proactive and give Members practical advice and guidance on how the rules operated and what may be claimed. (This could be an extension of the helpful Personnel Advice Service already provided in relation to the staffing allowance.) Members told us they wanted that help and guidance before submitting a claim for reimbursement which may be met with rejection. Clearly the Department of Resources does give advice by telephone but there is a demand for some senior and experienced experts to look over their expense claims to ensure that they are following best practice and getting it right from the start.

46. We now propose to go further still and bring House systems into line with practice in most other walks of life and to demonstrate to the public how seriously we are committed to improving our systems by ensuring that there is supporting evidence for all claims.

47. We recommend that, from the start of the 2009-10 financial year, the receipt threshold should be reduced from £25 to zero and that all claims, however small, will have to be backed by receipts.

PRACTICE ASSURANCE

48. The SSRB report recommended that the House request the NAO to audit the expenses of a representative sample of MPs each year. The NAO already looks at samples of claims for each allowance type. Due to the size and random nature of these samples, a significant proportion of MPs have some form of check every year. The NAO and others have suggested that one way of augmenting their work in auditing individual transactions might be to assess, and provide assurance around, the way MPs administer their own office arrangements and manage their claims.

49. Many professions, such as solicitors, accountants and surveyors, have in place arrangements to ensure that firms of professionals and individual practitioners comply with the framework of rules and regulations set out in their professional standards. This is commonly known as "practice assurance" and takes various forms ranging from arrangements geared to spreading and developing best practice and upholding standards, through to rigorous compliance checks, which can lead to disciplinary action against those who have seriously transgressed the rules. Most practice assurance regimes embody elements of both.

50. In most instances the practice assurance is undertaken by a dedicated independent team, who provide three types of report:

a regular global view of the general level of adherence to the framework of rules and regulations

reports to the individual on gaps in their practices and how they might be improved

reports to the relevant disciplinary body within their profession.

51. We believe that this model would be highly appropriate for adapting to the House of Commons. Applying a similar approach to Members' allowances would require the creation of a practice assurance team either set up within the Department of Resources, or provided by external professionals under contract to the House. The merits of involving external professionals are that they would:

be seen as independent by the public, working to recognised professional standards
be seen as independent by Members, so perhaps as more acceptable to them
be more robust in challenging Members.

52. The practice assurance team would have access to the Members' records held by the Members themselves. They would initially report to the Member, advising on any problems they found during the assurance; they would assess the reliability of the Member's office systems for ensuring he or she was meeting their Green Book responsibilities, by interviews with Members and office managers and staff, and by sample checking of records at Westminster and in the constituency.

53. Reports to individual Members by the practice assurance team on internal controls systems and procedures should be supportive but challenging. They might include comments on matters such as examples of where public finance has been well used; the evidence base and adequacy of record-keeping; any inadvertent or unknowing failures against the standards; any intentional, reckless or repetitive failures against the standards; and whether failures have been remedied adequately.

54. If the House adopted a scheme of this kind, the advantages would be:

to help Members compile and record better evidence of their claims
to check on the uses to which parliamentary resources have been put rather than (as now) verifying only the initial expenditure
to clarify rules and guidance
to set a standards framework
to improve office systems and avoid errors
to support both internal and external audit.

55. A scheme of practice assurance would be made effective by revisions to the Green Book. The aim would be to ensure that in claiming parliamentary allowances MPs should comply with the Code of Conduct for Members and Green Book rules; ensure that they are equipped to do so; and ensure that the quality and verifiability of claims is monitored. Checks on usage would be integral to such a regime.

56. There is a further aspect of internal controls that merits attention in the light of recent controversies: MPs' employment practices and the keeping of records about staff employment. We address this is more detail in paragraphs 99 to 103 below, but we simply record here that this area should also be included in the process of practice assurance and audit.

57. The suggested inspection and advisory system need not be too onerous and should have flexibility to match the different working practices in Members' offices. The aim would be to maintain a constant dialogue with all Members but also to conduct detailed practice assurance visits to roughly 25% of MPs' offices each year (aiming to cover every MP over a Parliament) in order to ensure that expenditure is proper and regular, achieves good value and is verifiable.

58. The practice assurance team would make a general report on a regular basis to a House committee charged with oversight. Furthermore, the assurance team might report individual cases to the committee where a Member had made serious intentional or reckless failures against the standards; or over a period of time had not improved his or her administrative arrangements.

59. A sliding scale of measures would be available to the committee to enable a proportionate response to be made to individual lapses. For example, these might include the practice assurance team assisting a Member in improving office practices, critical review by the oversight committee, withholding allowances until practices are improved, or instructing repayment. Beyond this would lie reference to the Parliamentary Commissioner for Standards and consideration by the Committee on Standards and Privileges, who have a full range of sanctions at their disposal for ultimate submission to the House.

60. The advisory aspect of the work of the practice assurance team is vital to achieving consistency and high standards of practice. But practice assurance teams will not be in Members' offices every week, and MPs will still need to draw timely and consistent guidance from the Department of Resources. It is important, therefore, that there are mechanisms in place to ensure that there is complete consistency of advice as between the Department and the practice assurance team. This points towards the Department and the assurance team working closely together. One option would be for the practice assurance team to be made up mainly of external professionals, but to include a specially-trained member of the Department to provide the necessary link.

61. The findings of the practice assurance team will need to feed back into the House's formal system of internal control, which is the subject of audit by the NAO, and lessons learned from practice assurance will need to feed back into the Department of Resources' rules, guidance and administrative arrangements.

62. The detailed operation of this new practice assurance system will need to be developed by the end of this year and piloted in the spring of 2009 before being brought into effect from the start of the 2009-10 financial year. We believe that such practice assurance, new oversight arrangements combined with more extended advisory service and the spread of best practice, will provide Members with the evidence to justify their spending and significantly improve public confidence in the integrity of the House.

63. We recommend that there should be a robust new system of practice assurance involving regular financial health checks on records kept and processes used in Members' offices with outside professional teams covering about 25% of Members each year and every Member each Parliament.

STRONGER EXTERNAL AUDIT

64. The SSRB report recommended that the House request the NAO to audit the expenses of a representative sample of MPs each year. At present the NAO looks at a number of claims against each allowance every year as part of their audit of the Members Estimate Resource Accounts. While this is structured to validate the correct payment of each individual allowance rather than the total picture for individual MPs, the effect has been an audit down to receipt level where required of a sample of payments made by over 100 MPs each year.

65. We recognise that the concept of random audit of MPs' expenditure claims by independent auditors is vital to building public confidence in the system of parliamentary allowances. Extending the audit approach offers a way of meeting the spirit of the SSRB's recommendation and the scope of this important work must now deepen. The NAO have pointed out that, as receipts will now be available for a much more extensive range of MPs' claims, this in itself will extend the depth and scope of their audit. They are also prepared to increase the size of the sample of claims they examine, and we propose that they should do this.

66. We are committed to strengthening and clarifying the rules and guidance for MPs' expenses, enhancing the framework of controls to ensure compliance with these rules, and enhancing the audit function by allowing both House Authorities and external auditors to look behind the Member's signature. These developments, together with the decision to require receipts for all items of expenditure, would enable the House to remove the current limitation on the scope of the NAO's audit engagement and put the Members' Estimate Resource Account on a basis which is consistent with the audit that is applied to other bodies in receipt of public funds. This would offer the public the same assurance as they receive for those other bodies.

67. While recognising the C & AG's right, as independent external auditor, to determine his approach to the audit of the financial statements, we also believe that the House wants greater assurance. In addition to an expanded audit engagement, the Committee would like the C & AG's audit of Members' claims to ensure that an agreed proportion of Members is covered by sample testing each year.

68. We recommend that the House extends the scope of the audit engagement so that it is the same as for other public bodies. The NAO expects that their sampling of claims paid will include one or more transactions relating to at least 20 per cent of MPs each year.

REVISION OF THE GREEN BOOK

69. A feature of the current allowance system is the lack of detailed rules and the concomitant use of discretion exercised within a set of broad principles. A new system might require a Green Book which describes in more detail what may or may not be claimed and a more standardised process for claiming. There is a balance to be struck, however, because no system of rules can predict every eventuality. There is therefore a trade-off between flexibility and certainty.

70. Members claim for different things, in different ways, at different times within the existing rules. There are probably hundreds of different recording and accounting systems operating in MPs' offices. The benefit of a practice assurance team visiting every MP's office in the course of a Parliament is to gradually bring standardisation to the way claims are made without imposing a central control on what paperclips may be purchased. The more standardisation there is in the claiming process the less likely it becomes that mistakes will be made and the easier it is for auditors to spot them.

71. We recommend that the Green Book (setting out the rules on allowances for Members) be revised to specify more detailed rules and that the new version be brought into effect by 1 April 2009.

9 Following implementation of the Tebbit review, the Audit Committee will have three MPs and three external members. Back

10 CSPL principles, 13, 14 and 16. Back