House of Commons - Public Accounts Commission

Select Committee on Public Accounts Commission Report

6 Proposed future governance framework

56. There is in my view an overwhelming case for strengthening the governance of the NAO. I have considered three approaches to resolving the shortcomings in the present arrangements.

57. First, maintaining the powers and authorities set out in the National Audit Act 1983 whereby the C&AG has complete discretion over all matters related to the work, operation and governance of the National Audit Office, but with the Public Accounts Commission setting out clear expectations about standards of governance in making the appointment of the next and subsequent C&AGs. This could be in the form of a transcript of Commission meetings or a letter from the Chairman of TPAC to the C&AG at the time of his/her appointment. Much of what I believe needs to change could be accomplished by a C&AG who without the force of law wishes to maintain governance in practice of the highest standards. While this approach would not require primary legislation, I believe it has a number of shortcomings. TPAC may feel concerned that they do not have the necessary expertise in governance matters to clearly establish such expectations. Also, subject to refinements for emerging best practice, there should be institutional continuity in the governance arrangements and not major changes coinciding with a change in C&AG. In addition, preserving the present arrangements would continue to place the responsibility for appointments of non-executives solely with the C&AG and runs the risk that the C&AG may over time pay less attention to the governance framework given the complete authority vested in him as an individual.

58. Second, transferring the complete authorities from an individual (the C&AG) to a corporate body. This body would be represented at Parliamentary Committees by its Chairman and/or Chief Executive. This would provide a robust framework for the shortcomings in the governance of the NAO to be addressed. However, I consider it has one fatal flaw; that the responsibility for making audit judgements would be determined by the board (perhaps by delegation to individuals or sub-committees) and ultimately the accountability for those judgements would rest with the board, rather than the responsibility for audit judgements and the accountability for them being conferred on an individual by statute as is presently the case. It is a long established practice that audit opinions are best formed by individuals (for example individual partners in professional accounting firms) using their professional experience and judgement, often following consultation with senior colleagues. In the context of the NAO, I believe it would be a dilution of the Auditor General's responsibility for him to derive his powers from the board rather than directly from Parliament.

59. The third and my proposed governance framework is to combine the best of the above two approaches. The essence of my proposal is to preserve the discretion of the C&AG in forming audit judgements and communicating these to Parliament, while putting in place formal and institutionalised processes for the governance, leadership and management of the office, including the C&AG.

60. I recommend the following:

61. A new corporate body should be formed (The National Audit Office) to carry out financial audits, Value for Money studies and such other work as its board may decide is consistent with its objectives and responsibilities. The Chief Executive of the Office, who would be styled the Comptroller and Auditor General, would continue to have sole discretion over all judgements about financial audits and Value for Money and other studies and also the form and tone of presentation of all reports to Parliament. I am not aware of the background to the C&AG being an Officer of the House of Commons and feel it is a matter for Members of Parliament to consider whether this should continue in the event that my proposals for changing the governance of the NAO are taken forward. It would be consistent with past practice and, in my view appropriate, for the Chief Executive to be appointed by the Public Accounts Commission as the Accounting Officer of the NAO.

The Chief Executive

PERIOD OF APPOINTMENT

62. The Chief Executive would be appointed for a single, non-renewable, term of 8 years. It is clear to me that the position should have a fixed term and that the length of this term should on the one hand give the incumbent time to settle into the role and to become a strong and effective leader of the Office, while on the other hand mitigating the risk that the Office becomes too closely associated with the personality of the Chief Executive over the longer term. I also believe that refreshing the leadership of an organisation such as the NAO from time to time enables it to continually improve its performance and contribution. Many other countries have fixed, non-renewable terms for their Auditor Generals, ranging from 5 years in Norway to 15 in the United States. It seems to me that the term for the Chief Executive of the NAO should be at the shorter end of this spectrum, although I think, given the complexity of the role and the reliance Parliament places on the judgements of the C&AG, that 5 years is too short a period. It is also clear to me that there should be no question of the Chief Executive seeking reappointment, which either in reality or perception may compromise his judgements as the possible renewal of his term approaches.

APPOINTMENT PROCESS

63. Like the C&AG in the present arrangements, the Chief Executive of the NAO would hold a unique position in assisting Parliament to hold Government Departments accountable for the efficient and effective use of public money. It therefore remains essential in my view that the appointment of the Chief Executive is made by the Crown following approval by the House of Commons, where the motion is moved by the Prime Minister with the agreement of the Chairman of the Public Accounts Committee (who according to convention is a member of the Opposition). To give credibility to the independence of the position of Chief Executive, the nomination must receive cross-party support. However, improvements do need to be made in the way the candidate presented to Parliament for approval and Her Majesty for appointment is selected. In particular the principles set out in the Code of Practice published by the Office of the Commissioner for Public Appointments should be followed.

64. I would advocate a Nominations Committee being formed whose membership would include the NAO Chairman and an Independent Assessor. Identifying candidates should be an open and transparent process including public advertising and specific searches for potentially suitable candidates. The criteria for the Chief Executive should be determined by the Nominations Committee. While it is not in my terms of reference to advise what the criteria should be, based on my observations during this review and my professional experience, it seems to me that the criteria should include (a) experience of auditing large complex organisations; (b) experience in successfully leading large organisations through change; (c) knowledge and experience of the public sector; (d) evidence of a strong independent mind and an ability to take decisions; and (e) strong influencing and communication skills.

RESPONSIBILITIES

65. The Chief Executive would be responsible to Parliament for the audit opinions and other reports he issues and would be responsible to the Board of the NAO for the proper running of the Office. He would be subject to the professional standards and systems of internal and financial controls determined by the Board.

REMUNERATION

66. To reinforce the independence of the C&AG from Government, the current C&AG's level of remuneration follows that of a High Court judge and is paid out of the Consolidated Fund. While I can see that this achieves the objective of independence, I do not believe it benchmarks the position of Auditor General against the appropriate peer group in seeking to attract high quality candidates to the position. I would favour the Chief Executive's remuneration being set by the Public Accounts Commission based on advice by the non-executive members of the NAO Board, which itself would take advice from its Remuneration Committee. The Remuneration Committee would provide an evaluation of the performance of the Chief Executive in the management and leadership of the office and should seek expert external advice on relevant benchmarks in both the public and private sectors.

RESTRICTIONS

67. The Chief Executive should not be allowed to take up any external paid employment without the explicit agreement of the Public Accounts Commission.

The Chairman

68. I propose that the Chairman be a Crown appointment following approval by the House of Commons, where the motion is moved by the Chairman of the Public Accounts Commission with the agreement of the Chairman of the Committee of Public Accounts.

69. The Chairman, which would be a non-executive position, would be remunerated for working the equivalent of two days per week. I suggest the Chairman be appointed for a period of three years, subject to one term renewal.

70. He would be responsible for leading the board and its effectiveness in discharging its responsibilities. I would expect the Chairman to maintain relationships with key stakeholders and to provide evidence to the Public Accounts Commission in its oversight of the NAO. The Chairman should be sufficiently informed to be able to provide advice, if requested, to the Chief Executive in the exercise of his personal responsibility to form audit judgements.

The NAO Board

STATUS

71. The board should not be part of the Crown. It should employ its own staff who should not be Civil Servants or officers or employees of the House of Commons.

COMPOSITION

72. The board would be a unitary board comprising both executive and non-executive members, but with a majority of non-executives, one of whom would be the Chairman. There would be fewer executives on the board than are currently on the Senior Management Board. I propose that the board be composed of eleven people, as follows:

Chairman

Chief Executive

Chief Operating Officer (responsible for finance, human resources, technology, operations)

2 further executive directors (who could be styled Deputy Auditor Generals or Managing Partners with perhaps one being responsible for financial audits and one for Value for Money studies, depending on how the Chief Executive decides, with the board's support, to organise the Office)

5 non-executive directors

Chairman of the Audit Commission

73. A non-executive director would not be an employee of the board, but would be subject to the internal standards and code of conduct.

74. In Section 7 I have discussed the relationship between the NAO and the Audit Commission. It is in the public interest that there should be closer and more formal contact, collaboration and cooperation between these two bodies. I propose that the Chairman of the NAO should sit ex-officio on the Audit Commission and that the Chairman of the Audit Commission should sit ex-officio on the board of the NAO.

ROLE OF THE NAO BOARD

75. The role of the board would be to oversee the activities of the NAO, but not to form judgements on individual engagements, which would be reserved to the sole discretion of the Chief Executive in a personal capacity. I anticipate the functions of the Board would include:

76. Setting the strategy of the Office. For example the board would consider the overall balance of work between its core responsibility for financial audits and Value for Money studies of central government departments and other assignments where it may be required to enter competitive tenders, such as overseas work and, from April 2008, audits of UK companies in which the Government has an interest. The strategy would also include setting the criteria and parameters for the balance of work between that performed in-house and that contracted out to third parties.

77. Establishing the priorities of the Office on an annual basis and publishing a work plan on which it would invite comment from interested parties. Of course it might be necessary to reprioritise work during the year as events require and as the Public Accounts Committee may propose. The Chief Executive would select and perform engagements which are consistent with the board strategy and would discuss with the board other work he considers important in the light of circumstances. I believe that for the board to be effective and to take the appropriate responsibility for the governance of the NAO it should determine the overall strategy and allocation of resources to general areas of activity.

78. Supporting the Chief Executive by providing appropriate resources for him to carry out his responsibilities.

79. Overseeing the proper implementation of domestic and international standards of auditing in the conduct of financial audits and Value for Money studies.

80. Approving the systems of internal and financial controls to be applied throughout the Office and the oversight for the monitoring of the proper implementation of such controls by the Director of Internal Assurance and the Audit Committee of the board.

81. Approving the annual budget submitted to the Public Accounts Commission for their consideration. As a public body, the NAO should be under a legal obligation to conduct their affairs in an economic and efficient manner.

82. Evaluating the risks faced by the NAO and the mitigating steps taken, including risks to its reputation.

83. Approving policies related to human resources such as personal objective setting, code of conduct and reward. Specifically the board should establish transparent processes over the appointment and remuneration of senior staff. The board should delegate responsibility for making recommendations about the remuneration of executive directors and the framework for rewarding other senior staff to a Remuneration Committee.

84. The board should report on its work in the NAO's Annual Report in accordance with the Combined Code.

APPOINTMENT OF BOARD MEMBERS