Select Committee on Public Accounts Commission Report

5  Benchmarking the NAO against best practice and practice elsewhere

21. The two most relevant sources of best practice guidance are the Combined Code on Corporate Governance applicable to all UK listed companies and HM Treasury's Corporate Governance in Central Government Departments: Code of Practice. I have also looked at the governance arrangements in the devolved administrations in Northern Ireland, Scotland and Wales and in a number of other countries.

Combined Code

22. The code, which was last updated in June 2006, sets out the main principles and provisions applicable to listed companies under five headings (italics refer to the provisions of the code):


23. Every company should be headed by an effective board…with a clear division of responsibilities between the Chairman and the Chief Executive. The NAO is, as stipulated in law, headed by the C&AG. There is no separate Chairman and Chief Executive and no formal board. The C&AG is supported by a Senior Management Board, comprising the C&AG as Chairman, the Deputy C&AG, the seven Assistant Auditor Generals (AAGs) and a non-executive who is also Chairman of the Audit Committee. The Senior Management Board meets quarterly. My discussions with the members of the board (excluding the C&AG) suggest that it does not operate in a fashion similar to a corporate board and makes limited contribution in a practical sense to effective corporate governance. Under the Senior Management Board is a Management Committee, chaired by the Deputy C&AG, which manages the day to day operations of the Office.

24. There should be a formal, rigorous and transparent procedure for the appointment of new directors and there should be a balance of executive and independent non-executives on the board. The C&AG is a Crown appointment on a motion of the House of Commons moved following agreement between the Prime Minister and the Chairman of the Public Accounts Committee. There is no limitation on the number of years the C&AG may serve in office. The C&AG can only be removed by a resolution of both Houses of Parliament.

25. There is no formal procedure for either executive or non-executive appointments to the Senior Management Board. Past appointments to the position of AAG have sometimes followed an open competitive process and at other times the individual has simply been appointed. The non-executive member of the Senior Management Board and the two additional non-executives who sit on the Audit Committee have all been appointed with no open competitive process. All appointments are made by the C&G. There is no utilisation of the Code set out by the Office of the Commissioner for Public Appointments. The balance of executives to non-executives on the Senior Management Board is 9:1.

26. Non-executives should be appointed for specified terms and should be subject to re-election at the end of their appointed term. The non-executive member of the Management Board and the two additional non-executives who sit on the Audit Committee have all been appointed for a period of three years. However, the terms of two of the three non-executives expired during 2007, yet they have continued in office and have received no communication about their reappointment or otherwise.

27. The board should undertake a formal and rigorous annual evaluation of its own performance, its committees and individual members. No such evaluation has been performed by the Senior Management Board. The Management Committee has sought to fill this void by reviewing its performance in 2006 and again in 2007 as part of its review of the performance of the NAO as a whole.


28. Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully. In order to reinforce the independence of the C&AG, his salary is pegged to that of a High Court judge and paid out of the Consolidated Fund and so is not charged to the NAO budget.

29. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. There is no Remuneration Committee at the NAO. The remuneration of the Deputy C&AG and the AAGs is determined by the C&AG.


30. The board should present a balanced and understandable assessment of the company's position and prospects. The NAO publishes an Annual Report which includes its audited financial statements, a report on the work and contribution of the NAO (including the financial impact of its work) and various statements about the internal operations and controls of the Office.

31. The board should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets. The C&AG, as the Accounting Officer, makes a Statement on Internal Control in the NAO's Annual Report. The support for this statement is derived from a bottom up process involving budget holders, the finance function and the Audit Committee.

32. The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company's auditors. The NAO has an Audit Committee chaired by an individual with recent and relevant financial experience. In addition to the non-executives, the Deputy C&AG and an NAO director are also members of the Audit Committee, which, as executives, is contrary to the code.

33. The external and internal auditors routinely attend Audit Committee meetings, although there are no formal meetings with these auditors without the presence of the executive Audit Committee members. The Annual Report sets out a list of Audit Committee responsibilities and activities but does not offer any qualitative assessment or evaluation of the financial reporting or internal controls which may be informed by those activities. The Audit Committee reports through its Chairman to the C&AG and, following concerns over the C&AG's expenses, has a direct line to the Public Accounts Commission.

34. In accordance with the National Audit Act 1983, the external auditors are appointed by the Public Accounts Commission on the advice of a selection panel which included a non-executive member of the Audit Committee. In addition to the financial audit, the external auditors also perform Value for Money (VfM) studies whose scope is agreed by the Chairman of the Audit Committee.


35. There is no parallel for the NAO in respect of these final two headings in the code. The NAO audit and VfM reports on government departments are addressed to Parliament and then discussed with the Public Accounts Committee. The NAO is also increasingly providing support to other Select Committees.

36. The Public Accounts Commission appoints the Accounting Officer (the C&AG) and the external auditors and also examines the NAO's annual Corporate Plan and Supply Estimate.

Corporate governance in Central Government Departments: Code of Practice

37. The Corporate Governance in Central Government Departments: Code of Practice was published in July 2005 and sets a number of principles which it expects Government Departments to apply flexibly in the context of their own circumstances. The code covers three main headings (italics refer to the provisions of the code):


38. Under the Minister, the head of the department, as its Accounting Officer, is personally responsible and accountable to Parliament for the management and organisation of the department, including the use of public money and the stewardship of assets. Since the NAO is independent of government there is no minister responsible for it. The C&AG is the Accounting Officer accountable to Parliament through the Public Accounts Commission.


39. Each department should be managed by an effective board which supports the head of the department by advising ministers and taking ownership of the department's performance. The board's membership should have a balance of skills and experience appropriate to directing the business of the department and should include independent non-executive members to ensure that executive members are supported and constructively challenged in their role. The NAO's Senior Management Board meets quarterly, but its members feel that it is of limited value in supporting the C&AG or maintaining good standards of governance. There are concerns that there is no substantive discussion of major issues, with decisions in effect being taken outside the Management Board meetings. The Senior Management Board only has one non-executive, making it very difficult to effectively challenge the executive and the C&AG in particular.


40. The board should ensure that effective arrangements are in place to provide assurance on risk management, governance and internal control. In this respect, the board should be independently advised by: an audit committee chaired by an independent non-executive member and an internal audit service operating in accordance with Government Internal Audit Standards. There are processes in place through the Director of Internal Assurance, the external auditor and the oversight of the Audit Committee to put the C&AG, as the Accounting Officer, in a position to make the statements about the NAO's internal controls as set out in its Annual Report. However, the C&AG himself, as a corporation sole and not an employee of the NAO, has not been required to sign the employee Code of Conduct.

The devolved administrations

41. Following devolution of administration different arrangements have emerged in Northern Ireland, Scotland and Wales, as summarised below:


42. The Northern Ireland Audit Office (NIAO) is modelled on the NAO, although there are a number of changes currently being contemplated. In particular, there are likely to be significant changes to the process of how the NI C&AG is appointed.

43. The NI C&AG is appointed by Her Majesty The Queen on the nomination of the NI Assembly. The NI C&AG will be a permanent post with a statutory retirement age of 65. When the NI C&AG position becomes vacant a selection panel will be formed comprising the Speaker (Chairman) of the Assembly, the Chairman and Vice Chairman of the Public Accounts Committee, the Chairman and Vice Chairman of the Audit Committee and the C&AG of the NAO. An open competitive process will be followed and candidates will be assessed against pre-determined criteria established by the selection panel.

44. The NI C&AG is supported by a board, which is in the process of being restructured. The new Senior Management Board will be chaired by him and comprise his deputy and two non-executive members. All members of the board are appointed by the NI C&AG and the selection process is subject to the Code set out by the Office of the Commissioner for Public Appointments. It meets quarterly. There is an Audit Committee comprising the non-executives (one of whom is the Chairman) and two members of the executive. I understand the composition is currently under review with the intention that the non-executives will be in the majority.


45. The Auditor General in Scotland (AGS) is appointed under the Scotland Act 1988 by Her Majesty The Queen on the nomination of the Scottish Parliament. He is appointed for an unspecified period. He can be removed by a vote of two-thirds majority of serving Members of Parliament following a petition. His remuneration is determined by the Scottish Parliament. The AGS has complete discretion in the performance of his function. He employs a small number of direct staff but has access to Audit Scotland and professional audit firms to support him in the performance of his work.

46. Audit Scotland is a corporate body, set up under the Public Finance and Accountability Act, which provides services to both the AGS and the Accounts Commission, which is responsible for appointing auditors of local government. The board of Audit Scotland is chaired by the Chairman of the Accounts Commission and comprises the Auditor General, Deputy Auditor General, one further member of the Accounts Commission and an independent non-executive. The AGS has been appointed the Accounting Officer of Audit Scotland. The board of Audit Scotland has two sub-committees - a Remuneration Committee and an Audit Committee.

47. The Remuneration Committee, is chaired by a non executive and consists of members of the board who are not employees of Audit Scotland, including the AGS. The Remuneration Committee recommends to the board the compensation of all senior employees of Audit Scotland.

48. The Audit Committee, under Audit Scotland's standing orders, consists of members of the Board who are not employees of Audit Scotland.  It currently comprises three members, all of whom are non-executives. The AGS attends the Audit Committee.


49. The legal framework for the audit of Central Government Departments is similar to that in England in that the Auditor General (AGW) has complete discretion in the discharge of his functions. The one significant difference is that the Welsh National Assembly can fix the period of office at the time the AGW is appointed. The current AGW is appointed for a renewable term of 5 years. The AGW is appointed by the National Assembly and its Audit Committee (equivalent to the Public Accounts Commission) which is required to write to the AGW, on appointment, setting out his duties as Accounting Officer.

50. In addition to auditing Central Government Departments, the Welsh Audit Office (WAO) also has responsibility for appointing auditors of local government, a role carried out in England by the Audit Commission.

51. The AGW has set up an Audit and Risk Management Committee comprising three members external to the WAO. It is empowered to have direct relationships with both internal and external auditors and the Chairman of the Committee has access to the Chairman of the Audit Committee of the Assembly. The Audit and Risk Management Committee members are each appointed by the AGW but selected through open competition and I understand each was previously unknown to the AGW. The Chairman of the Committee is consulted on the pay of senior staff.

52. There is no unitary board comprising both executive and non-executive members. The AGW is supported in the running of the Office by a Management Committee, which he chairs. The AGW has also appointed a Compliance Partner (who is also the Head of Internal Audit) whose activities include regulating WAO staff and the external contracting firms appointed by the AGW. The AGW himself is subject to the internal and financial controls of the Office and the work of the Compliance Partner.


53. I have met with the Auditor Generals of Canada and Sweden and reviewed the arrangements in a number of other countries. Broadly, there seem to be two distinct approaches to the audit of public money.

54. The first is similar to the arrangements in the UK, with wide discretions conferred on the Auditor General who is personally and directly responsible to the legislature, but with many different approaches in the detail of how the Auditor General chooses to organise the governance, leadership and management of their Office. In Sweden there are three Auditor Generals with each having equal powers. Most major economies have a fixed term of appointment which generally is not renewable, although those which have shorter durations (such as 5 or 6 years) may be renewed.

55. The second approach, which is more prevalent in mainland Europe, places the authority to inspect the proper use of public money on a specific division of the Judiciary. The responsibility is for the Courts to be satisfied that the annual budget of public expenditure has been incurred in accordance with the budget law passed by the legislature.

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Prepared 7 February 2008