Appendix 1: Memorandum from the National
Audit Office
THE CORPORATE GOVERNANCE OF THE NATIONAL
AUDIT OFFICE
TAKING FORWARD THE PUBLIC ACCOUNTS COMMISSION'S
RESPONSE TO JOHN TINER'S REVIEW
1. This paper sets out how it is proposed that
the changes arising from the response[3]
of the Public Accounts Commission to John Tiner's Review of the
Corporate Governance of the National Audit Office[4]
should be implemented. The annex to the paper[5]
presents an initial draft of clauses and supporting schedules
(together with explanatory notes) which would give effect to those
parts of the Commission's recommendations which require legislation.
2. The draft clauses have been prepared by the
National Audit Office's legal advisers, taking account of the
work already completed by Parliamentary Counsel. The clauses
have been drafted as a free-standing Bill, though the Government
has agreed that equivalent provisions will be included in the
Constitutional Renewal Bill. The draft clauses will need to be
considered by Parliamentary Counsel before incorporation into
the Bill. Both the paper and the draft clauses reflect the discussions
that have been taking place between the Treasury and the National
Audit Office since the Commission's response was published in
March 2008.
3. The objectives of the Commission in making
recommendations for change were (i) to preserve the independence
of the C&AG in forming audit judgements, while at the same
time (ii) to strengthen the corporate governance of the National
Audit Office by bringing it more into line with best practice.
Reconciling these two objectives is not straightforward and requires
governance arrangements tailored for the particular circumstances
of the C&AG and the National Audit Office.
The role of the C&AG
The C&AG's role and status
4. No changes are proposed to the legislative
provision either for the C&AG's statutory financial audits,
set out in the Government Resources and Accounts Act 2000 and
elsewhere, or for the C&AG's value for money work, set out
in the National Audit Act 1983. The C&AG will continue therefore
to be responsible for making audit judgements, for deciding a
programme of value for money examinations, and for reporting the
results of his or her work to Parliament.
5. As well as providing for the C&AG's value
for money work, the National Audit Act 1983 set the legal framework
for the C&AG's independence from the Executive. There will
be no changes to the C&AG's status as an Officer of the House
of Commons, and he or she will continue to be appointed by The
Queen on a motion of the House of Commons moved by the Prime Minister
with the agreement of the Chairman of the Committee of Public
Accounts. The appointment process is to be strengthened by the
application of best practice on public appointments, as set out
in the Code of Practice published by the Office of the Commissioner
for Public Appointments.
6. The draft clauses in the annex provide for
the C&AG to be appointed for a single, non-renewable term
of ten years. This change is in line with the Commission's recommendation,
which was made in the light of John Tiner's observation that a
fixed term of eight years, as he proposed, should give the incumbent
time to become established and gain experience, while mitigating
the risk of the National Audit Office becoming too closely associated
with one individual over the longer term.
7. In view of the desire of the Chairman of the
Committee of Public Accounts to start the appointment process
for the next C&AG in advance of the legislation being passed,
the draft clauses provide for transitional arrangements. Should
a new C&AG be appointed prior to the commencement date of
the legislation, the Treasury will determine by order made by
statutory instrument how the maximum ten year term provided for
in the legislation should be applied but the existing C&AG
will serve a term of not less than ten years in total.
8. The introduction of a single, non-renewable
term in place of the current unlimited tenure makes it more likely,
however, that a future C&AG might seek other employment after
his or her term. Mindful of conflicts of interest, perceived
or otherwise, the Commission favoured a lifetime prohibition on
former C&AGs accepting any post in any body audited by the
National Audit Office or which is in the gift of the Government.
On this basis, a former C&AG would be unable to hold positions
for which individuals are appointed or recommended by or on behalf
of the Crown, or in any body whose accounts are audited by the
National Audit Office; or to provide consultancy services to the
Crown or any body acting on behalf of the Crown, or to any body
whose accounts are audited by the National Audit Office.
9. In addition, given the Commission's concerns
about apparent conflicts of interest in relation to posts with
suppliers to the public sector or other positions in the private
sector, former C&AGs may be required to consult before taking
up certain types of position or entering certain types of contract.
The proposal is that the Code (see paragraph 26 below) will specify
who the C&AG should consult and, as current structures stand,
it is likely to be the Advisory Committee on Business Appointments,
as the Commission suggested.
10. On the C&AG's salary, the draft clauses
provide that the value of the C&AG's remuneration package
on appointment should not exceed the maximum value of a Permanent
Secretary's package for the same period. The Commission had suggested
that the C&AG's salary might be linked to that of the Treasury's
Permanent Secretary but, as Permanent Secretaries are on personal
rates of pay, this approach could have resulted in the C&AG's
salary fluctuating inappropriately, for example with a change
in Treasury Permanent Secretary.
11. A more general provision is therefore proposed,
which in practice would prevent the C&AG's remuneration exceeding
that of the Cabinet Secretary. This formulation should not be
affected by future machinery of government changes. The remuneration
package might be determined by the Commission at the start of
each C&AG's term and uprated thereafter on an index-linked
basis.
The C&AG's ability to delegate
12. As John Tiner noted in his Review, it is
a long established practice that audit opinions are best formed
by individuals using their professional experience and judgement.
The CA&G will accordingly continue to be responsible for
forming audit judgements and communicating these to Parliament.
The C&AG will remain a legal entity in his own right as a
corporation sole, a status which provides for a continuing legal
personality and thereby ensures continuity in the event of a change
in C&AG.
13. In its response, the Commission noted, however,
that the C&AG's overall responsibility for audit judgements
does not imply that all such judgements must be made by the C&AG,
and it is therefore possible for the C&AG to delegate the
making of individual audit judgements to subordinates. Delegating
the signing of the audit opinion on some accounts would allow
the C&AG to select those accounts to which he or she wished
to give personal attention, while making appropriate arrangements
in other cases for duly qualified and senior National Audit Office
staff to sign opinions on his or her behalf.
14. Over time the number of accounts audited
by the C&AG has grown to over 500, and more recently the deadline
for most audited accounts to be laid by the Parliamentary summer
recess has resulted in the C&AG having to sign the majority
of accounts within the space of a few weeks in June and July.
For example, in 2006-07 the National Audit Office delivered 346
opinions on financial statements prior to the summer recess.
Against this background, a system of delegation would give more
substance to the exercise of the C&AG's independent judgement.
15. In fact, the C&AG already delegates the
signing of opinions on some accounts which he or she audits by
agreement. But extending the C&AG's ability to delegate to
cover statutory audits requires legislative change and the draft
clauses in the annex include the necessary provision. At a more
detailed level, the proposal is that the Code (see paragraph 26
below), approved by the Commission, will give authority to the
scheme of delegation by specifying the types of account that the
C&AG will be able to delegate. The intention is that the
C&AG will not delegate but will continue to sign personally
accounts relating to the Parliamentary system of supply, including
the departmental resource accounts, through which Parliament exerts
control over the Executive. Delegation will not apply to value
for money reports or any other report prepared by the C&AG.
Strengthening the National Audit Office's corporate
governance
16. Accepting the recommendations of John Tiner,
the Commission proposed a number of changes aimed at bringing
the National Audit Office's corporate governance more into line
with best practice in the public and private sectors, including
that set out for government departments in the Treasury's Code
of Practice and for listed companies in the Combined Code on Corporate
Governance. The Commission's intention in making its recommendations
was to introduce greater checks and balances over what had previously
been the largely unchecked power of the C&AG.
The National Audit Office Board
17. Drawing on the Commission's report, the draft
clauses in the annex provide for formalising the governance and
management of the National Audit Office. The National Audit Office
will be incorporated as a statutory Board, with a non-executive
majority and Chairman. The Board will employ the staff of the
National Audit Office, and contract for the provision of such
other resources as are needed to deliver the Office's programme
of work.
18. The Board's functions will include:
- agreeing
the strategy of the National Audit Office;
- agreeing
the National Audit Office's annual estimate and corporate plan
for presentation to the Commission;
- approving
the National Audit Office's programme of 'non-statutory' work
and the associated budgets (see paragraphs 31 and 33 below);
- preparing
a Code, for approval by the Commission, which will govern the
relationship between the Board and the C&AG (see paragraph
26 below).
19. The Commission suggested that the Board should
have seven members and the draft clauses so provide, but also
offer an alternative of nine members. A Board of nine would remain
manageable, but would make it easier to achieve a quorum and should
provide sufficient members for Board Committees, including Audit
and Remuneration Committees which would need to be composed entirely
of non-executives.
20. Regardless of size, the Board will have a
non-executive majority of one. There will be four [or five] non-executive
members - the Chairman, plus three [or four] others appointed
by the Commission on a recommendation from the Chairman; and three
[or four] executive (employee) members - the C&AG, plus two
[or three] others appointed by the non-executive members on a
recommendation from the C&AG.
21. John Tiner also suggested that the Chairman
of the Audit Commission should be a member of the Board, with
a view to facilitating closer co-operation between the National
Audit Office and the Audit Commission. The Public Accounts Commission
did not wish to go that far, but agreed that the Audit Commission
Chairman should attend the Board as an observer. This arrangement
would not require legislative provision and could be taken forward
on an administrative basis. The Audit Commission have, however,
indicated that they would not wish to take up this facility.
The Chairman
22. To achieve balance in the appointment process,
the Chairman of the National Audit Office is to be appointed in
the same way as the C&AG, by agreement between the Prime Minister
and the Chairman of the Committee of Public Accounts. The National
Audit Office Chairman will be a Crown appointment for a three-year
term, renewable for one further three-year term. The Chairman's
remuneration package will be determined by the Commission. He
or she will not be able to hold any other positions for which
individuals are appointed or recommended by or on behalf of the
Crown.
Committees
23. The draft clauses provide a general power
for the National Audit Office to set up committees. In line with
best practice, the Commission referred in its report to there
being an Audit Committee and a Remuneration Committee.
24. The intention is that the Audit Committee
would comprise only non-executive members, which would strengthen
the Committee's independence and effectiveness in scrutinising
the National Audit Office's executive management. The Chairman
of the National Audit Office would appoint the Chairman of the
Audit Committee, who would be a member of the Board, although
some of the other members might be appointed from outside the
Board. On the advice of the Audit Committee, the Board would
recommend external auditors for appointment by the Commission.
25. The Remuneration Committee would also comprise
only non-executive members. As with the Audit Committee, the
Chairman of the National Audit Office would appoint the Chairman
of the Remuneration Committee, who would be a member of the Board,
although some of the other members might be appointed from outside
the Board. The role of the Remuneration Committee would be to
set the remuneration of the two [or three] executive members of
the Board, other than the C&AG, and to advise on the remuneration
of any other National Audit Office staff referred to the Committee
by the Board.
Reconciling the C&AG's independence and stronger
corporate governance
26. The key challenge in developing proposals
to enhance the National Audit Office's corporate governance is
to ensure that the establishment of a statutory Board, and in
particular the appointment of a Chairman, does not cut across
the CA&G's independence in an inappropriate or unintended
way. Following discussions between the National Audit Office
and the Treasury, the intention is that this risk should be managed
through a Code, prepared under the relevant section of the legislation
and approved by the Commission.
27. The Code will set out how the Board of the
National Audit Office, its Chairman, and the C&AG will perform
their roles, and how the relationships between them will work.
Any amendment of the Code will also require the approval of the
Commission. The internal procedures and management of the National
Audit Office will be governed by standing orders provided for
in the legislation.
28. Key to the Code will be a distinction between
the National Audit Office's 'statutory' and 'non-statutory' work.
Statutory work is carried out under specific legislative provision,
and covers the accounts which the C&AG is required to audit,
the value for money examinations which the C&AG has a right
to undertake, and the C&AG's Comptroller function. Non-statutory
work covers the remainder of the National Audit Office's activities
and may include support to Parliament, audits and examinations
carried out by agreement (including the audit of certain companies),
technical co-operation projects and other international work,
responding to correspondence from MPs and the public, and the
development of good practice guidance.
Allocating resources
29. For the C&AG's responsibility for forming
audit judgements to be meaningful, he or she needs to control
the use of resources for statutory audit purposes. While resources
will always be limited in a general sense, artificial constraints
on the use of resources for statutory audits could influence the
scope of the work and thus indirectly the judgements reached.
Such constraints might also be hard to reconcile with the audit
standards and regulations under which the work is done.
30. So that the C&AG has sufficient control
over resourcing decisions, the Code will specify the respective
roles of the C&AG and the National Audit Office Board. Each
year, the C&AG will prepare a draft corporate plan, setting
out a multi-year envelope for the resourcing of the National Audit
Office, for discussion and agreement by the Board. The Chairman
and the C&AG will jointly present the corporate plan to the
Commission for their approval. The C&AG will then determine
an annual budget required for his or her statutory work, as a
prior claim on the overall resource envelope in the corporate
plan, as approved by the Commission. The C&AG will also determine
the budgets for individual statutory audits and value for money
examinations.
31. In the case of non-statutory work, however,
the C&AG will seek the approval of the National Audit Office
Board for the resourcing of such work within the remaining resource
provision not required for statutory work. The Board will have
the discretion to amend both the overall budget for this work
and the budgets for specific projects.
Deciding the work programme
32. The Code will provide for a similar dual-track
arrangement for the development of the National Audit Office's
work programme. Audits which the C&AG is statutorily obliged
to perform will necessarily be included in the programme, and
the C&AG will decide on a programme of value for money examinations.
The intention is that the Board may discuss the C&AG's proposed
programme of value for money work, and may challenge particular
proposals or the balance of the programme, but decisions about
its content will be taken by the C&AG. The C&AG will
continue to be required to take into account any proposals made
by the Committee of Public Accounts in determining what value
for money examinations to carry out.
33. In contrast to the position on statutory
audits and examinations, the Board will have a decision-making
role in relation to non-statutory work. It will discuss the C&AG's
proposals for a programme of such work, and may add, remove or
amend them prior to approving the programme. Once the C&AG
has obtained approval for non-statutory work and the associated
budget (see paragraph 31 above), he or she then has complete discretion
in carrying out the work and responsibility for the audit judgements
reached.
Commenting publicly on audit judgements
34. As noted in paragraph 12 above, the C&AG
will retain complete discretion in his or her audit opinions and
judgements, which will apply to both statutory and non-statutory
assignments. The Chairman of the National Audit Office Board
will have no locus to speak publicly on matters of audit judgement,
or otherwise to act as an alternative head of the National Audit
Office. Similarly, the Code will require other non-executive
members of the Board to refrain from public comment on audit opinions
and judgements.
National Audit Office
July 2008
3 Fifteenth Report, Corporate Governance of the
National Audit Office: Response to John Tiner's Review, HC
402, Session 2007-08. Back
4
Fourteenth Report, Review of the National Audit Office's Corporate
Governance, HC 328, Session 2007-08. Back
5
[Appendices 2 and 3 of the report.] Back
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