Select Committee on Members Estimate Committee Third Report


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 IEPStaffing 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 IEPStaffing 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


 
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