Appendix 3: Paper by the Comptroller and
Auditor General, National Audit Office
Audit and Assurance Arrangements for Members'
Allowances
1. The Speaker announced on 4 February 2008 that
the Members Estimate Committee (MEC) was to conduct a root and
branch review of the current system for Members' allowances.
2. In its Second Report of Session 2007-2008,
the Committee set out the issues to be considered in the review.[49]
It stated that:
The Committee is very conscious that the new low
threshold for claims needs to be under-pinned by a more robust
regime for audit. The House will need not just a new control regime
over claims, but also management controls and compliance work,
with both supported by proper audit assurance. Members from all
sides of the House have told us that the current arrangements
are well below the standards they were accustomed to in previous
jobs outside the House.
3. At its meeting with the Comptroller and Auditor
General on 30 April 2008 the Committee asked him to prepare a
paper on how a more appropriate level of assurance could be provided
to the House of Commons and, through them, to the public, that
expenditure on Members' allowances was in accordance with Parliamentary
intention, and was properly controlled.
4. In recognising that the current assurance
regime was in need of strengthening, the MEC asked two questions:
Is there a better model for providing assurance that
public money for Members' expenses spent on goods and services
has been used for proper purposes? and
What are the essentials of a new regime which will
provide transparency and inspire public confidence?
5. This paper is designed to assist the MEC in
their consideration of these questions. Throughout this paper
we have used the term "the House Authorities" to refer
to the Administration of the House, often effectively meaning
the Department of Resources. "The House" refers to the
House of Commons, meaning the Members, including relevant Committees
or other bodies as appropriate.
What is assurance?
6. Assurance is independent confirmation that
assertions made are consistent with the evidence. In the case
of assurance over Members' allowances, the assurance sought is
that only legitimate claims in respect of Members' allowances
are accepted and that they are processed, paid and accounted for
in an efficient and effective manner.
What are the essential components of an assurance
regime?
7. As recognised by the Committee, 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 and
- reporting on the outcome of those checks to those
wanting the assurance.
Who can provide this assurance?
8. The strongest assurance is generally provided
through a combination of good internal governance arrangements,
a robust and firmly enforced system of internal controls and independent
external audit.
9. For the House Authorities assurance
will come from its own internal processes. Such as:
- managers installing and implementing
a robust control system, so that only valid claims are processed
and paid
- managers performing checks on the application
of their control system, to ensure that these controls are rigorously
applied
- managers reporting on the outcome of their testing,
so that good practice is continued, and weaknesses are identified
- managers making recommendations to improve their
control systems, so that there is continuous improvement of the
systems
- any quality assurance regime introduced by management
to assess the level of compliance with the required control framework
- Internal Audit (as the organisation's control
experts) testing the control environment, reporting on their findings
and making recommendations on how to improve the control system,
thereby spreading good practice.
10. For the House of Commons and its Members
(and ultimately the public) the assurance comes from the assertions
by the House Authorities and External Audit's independent confirmation
of those assertions, as appropriate. This confirmation is provided
by the Audit Opinion.
11. It should be noted that this assurance can
only be given, if the underlying records and systems are adequate.
Otherwise the External Auditor might have to qualify his audit
opinion, as for any organisation subject to audit.
Who currently provides assurance?
12. Members take responsibility for the validity
of their claim, evidenced by their signature.
13. Once a claim is received assurance over the
processing and accounting by the House Authorities is secured
through the controls over payments of allowances, put in place
by the House of Commons Department of Resources; Internal Audit
work on Members' allowances; and the External Audit of the Members
Estimate Resource Accounts, which includes the payments for Members'
Allowances.
How is the assurance under the current arrangements
different to that provided elsewhere?
14. There is no statutory requirement for an
audit of the Members Estimate Resource Account, so the audit of
the financial statements is, by agreement between the House of
Commons and the Comptroller and Auditor General, on terms set
by the House. They set the scope of the engagement based on their
assurance needs.
15. 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. This limitation in the assurance is recognised
in both the Statement of Internal Control signed by the House
of Commons' Accounting Officer, and the Comptroller and Auditor
General's Audit Opinion.
16. The Audit Opinion states that:
As set out in the Statement on Internal Control,
the framework of rules governing the administration of Members'
allowances is drawn from Resolutions of the House of Commons.
The framework is based on the principle that Members are primarily
responsible for identifying, claiming and certifying their own
expenditure. The House of Commons Service (the Department of Finance
and Administration) is responsible for ensuring that the stated
purpose of Members' claims falls within the agreed framework.
The controls on expenditure therefore ensure that payments are
correctly accounted for and paid to the correct recipient; but
it is primarily the responsibility of Members to ensure the regularity
and propriety of expenditure for which they claim reimbursement.
My audit of expenditure considers whether payments from the
House of Commons: Members Estimate are supported by Members' claims,
whether the purpose of the expenditure stated on the claims meet
that of the relevant allowance, and whether the House of Commons
Service have properly accounted for these claims.
17. 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.
What steps can be taken to identify a new system
of assurances, which is workable, in line with practice elsewhere
and able to command public respect?
18. Improved assurance to the House of Commons
and its Members needs to be achieved in two ways. Firstly, by
strengthening and clarifying the rules and guidance as to what
are acceptable expenses for MPs and by enhancing the framework
of controls exercised by the House Authorities to ensure compliance
with these rules.
19. Secondly, by enhancing the scope of the work
undertaken by Internal Audit and External Audit, in effect allowing
the House Authorities, and Internal and External Auditors to look
behind the Member's signature. Without this change, any improvements
to controls would not provide more assurance than the current
arrangements, as those checking the application of controls would
not be able to look at the evidence, to support the assertion
that the claims processed are in accordance with the rules set
down by the House. They would not, therefore, be able to give
the greater assurance which the MEC is seeking.
How might such assurance be provided to the House,
and to the public under a new regime?
Option I: Expansion in the scope of the External
Audit of the House of Commons Members Estimate Resource Account
20. The establishment of clearer rules and a
better framework of internal control, together with the decision
to require receipts for items of expenditure claimed over £25,
would enable the House to remove the current limitation on the
scope of the Comptroller and Auditor General's audit engagement.
This would put the House of Commons Members Estimate Resource
Account 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. (See Annex A, Option 1 for illustration).
21. As part of this audit, we would test a sample
of allowance transactions to ensure that evidence was available
to support the validity of the claim, and also to check that that
transaction had been processed in accordance with the framework
of rules. To facilitate this, the population of transactions is
stratified by allowance. This ensures grouping of similar transaction
types. Conclusions about this representative sample can then be
justifiably applied to the whole population. This enables conclusions
to be drawn about the allowances accounted for in the financial
statements.
Impact of an Expansion in the scope of the External
Audit of the House of Commons Members Estimate Resource Account
22. As a result of expanding the scope of our
External Audit, we would expect to carry out more work, testing
the evidence that would be available under the new framework of
rules governing allowances. Provided sufficient records were held
by the House Authorities, we would expect this audit to take place
in the Department of Resources, at the House of Commons. This
would have some impact on the notional audit fee, depending upon
the quality of the systems introduced, and the effectiveness of
their implementation by the House Authorities.
Option 2: An assurance around the arrangements
put in place by Members to manage their claims, either as a group
or as individual Members
23. In January 2008, the Senior Salaries Review
Body[50] recommended
that the House of Commons request the National Audit Office to
audit the expenses of a representative sample of MPs each year.
To be of value, we believe that any such process would need to
assess both the system of control by which Members administer
themselves, as well as to audit individual transactions. One way
to approach such an engagement would be to provide assurance around
the arrangements put in place by Members to manage their claims.
24. Many professions e.g. lawyers, accountants,
surveyors etc 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.
25. Practice assurance takes many forms ranging
from a rigorous compliance check, leading to disciplinary action
against those who have seriously transgressed the rules, to arrangements
geared to spreading and developing best practice and upholding
of standards amongst the Membership. Most practice assurance regimes
embody elements from both.
26. 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 of Members to the framework of rules
and regulations
- reports to the Members themselves on gaps in
their practices and how they might be improved
- reports to the relevant disciplinary body within
their profession.
27. This model has a number of attractions and
the approach could be flexed at the discretion of the House. As
well as inspection, professional institutes support practice assurance
by providing guidance on the day to day running of a business
in a highly regulated environment. By analogy this might work
in the House of Commons through providing guidance to members
on human resources issues; health and safety matters; accounting
and record keeping etc.
28. For the House such a regime would provide
assurance over the claims process. The approach would be to cover
all Members over a five year period. It would involve examination
of the expense claims of an individual Member for 12 months prior
to the inspection date. For the Members such a regime would provide
a source of reassurance to them and a source of good practice
and advice on how they could run their office in compliance with
the framework of rules.
29. Assurance to the public would come from the
global reports on the regime, and from an awareness of the existence
of the framework of rules, with a process to escalate serious
matters appropriately. It is likely that the public wish for assurance
would be better met by the rigorous compliance end of the spectrum.
Impact of an assurance around the arrangements
put in place by Members to manage their claims, either as a group
or as individual Members
30. Members' systems are less likely to be stable
or well documented than in the commercial world, given differences
in Members' approach to their work as a Member of Parliament;
the different needs and concerns of their constituents; and the
varied skills and experience of their staff. For this reason,
the Senior Salaries Review Body[51]
recommendation that the House of Commons request the National
Audit Office to audit the expenses of a representative sample
of MPs each year, would be difficult to implement successfully.
Drawing valid conclusions from a sample taken from a population
of Members, whose patterns of allowance claims and related supporting
systems were not homogeneous, would be problematic.
31. In order to draw valid conclusions, a large
sample would need to be tested. The cost would be several times
more than the expansion of the external audit, and would also
be more intrusive for Members. Until all Members had been visited,
the assurance to the public might have to be limited to those
tested. It would also be taking assurance a step further than
is the normal practice for other bodies in receipt of public funds.
(See Annex A, Option 2 for illustration).
Conclusion and Recommendations
32. Assurance can only be provided if:
- there are clear rules and guidance
on the rules
- there is a system of controls to ensure compliance
with those rules and
- the assurance process goes behind the Member's
signature.
The House Authorities should publish their enhanced
rules, to ensure the transparency necessary for assurance.
33. 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.
34. 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.
Tim Burr
2 June 2008
Annex A
Option 1: Expansion in the scope of the
External Audit of the House of Commons Members Estimate Resource
Account
| ACA
| IEP | Staffing Allowance
| Assurance |
| MP 1 | ? |
| | ?? |
| MP 2 | |
| | ?? |
| MP 3 | |
| | ?? |
| MP 4 | |
| | ?? |
| Financial Statements Assurance
| | | |
|
For an External Audit the testing would be focused on the allowances.
A sample of allowance claims would be selected. Since allowances
had been tested, this would enable conclusions to be drawn on
the overall allowances (although not on individual Members, except
in so far as they had been paid through a system that had been
tested).
Option 2: An assurance around the arrangements
put in place by Members to manage their claims, either as a group
or as individual Members
| ACA
| IEP | Staffing Allowance
| Practice Assurance |
| MP 1 | |
| | |
| MP 2 | |
| | |
| MP 3 | |
| | |
| MP 4 | |
| | ?? |
| Practice Assurance | ??
| ?? | ?? | ??
|
| Key
Indicates that a sample transaction has been tested and no issues have
arisen.
Assurance satisfactory
?? Assurance unknown
Blank cell Indicates that no transactions have been tested relating to that allowance in Option 1 or the Member in Option 2.
|
Under a Members' assurance regime, the transactions tested would
relate to a sample of individual Members. This would give assurance
over the Members tested, but not over those not tested; and not
over the individual allowances, or the total of allowances.
49 www.publications.parliament.uk/pa/cm200708/cmselect/cmmemest/464/464.pdf Back
50
Review Body on Senior Salaries, Report No 64, Review of parliamentary
pay, pensions and allowances 2007 (Recommendation 18, Paragraph
5.5) Back
51
Review Body on Senior Salaries Report No. 64 Review of parliamentary
pay, pensions and allowances 2007 (Recommendation 18, Paragraph
5.5). Back
| 
