Annual Reports and Accounts: Follow up Information
Letter to the Chair from Stephen Boyle, the Auditor General for Scotland, 4 October 2021
Dear Chair
Thank you for your letter of 6 September 2021, following the Scottish Commission for Public Audit (SCPA) evidence session on Audit Scotland’s Annual Report and Account for 2020/21.
We were pleased to meet with you and your new colleagues on the Commission and very much look forward to working with you over the coming session as we respond to the many challenges that the Covid-19 pandemic brings. Your support and challenge will be invaluable.
You asked for further information in seven areas regarding the Annual Report and Accounts, and this information is set out below. You also referred to an update on Audit Scotland’s property strategy. I will write to you separately regarding this when the relevant considerations and ongoing negotiations are further advanced.
1. In relation to the National Fraud Initiative, whether this should be extended to other bodies and if so, what the impact of Audit Scotland’s resources might be?
The Scottish Parliament’s Public Audit Committee is interested in working with Audit Scotland and the Scottish Government in expanding the number of bodies that participate in the NFI.
We believe that the NFI should be extended. Over the past decade and a half, the NFI has achieved more than £143 million-worth of outcomes for participating public bodies in Scotland, as well as providing assurance about anti-fraud measures and acting as a significant deterrent.
There is a cost for additional bodies participating. The 2020/21 fee charged by the Cabinet Office varied from £1,150 to £14,850 per individual body. This fee is based on the number of records, datasets and previous high-risk matches identified by the NFI for individual types of organisation. These fees are funded by the SCPA through Audit Scotland’s budget.
Audit Scotland’s costs would be developed in our budget in line with any extension of the NFI.
2. Pension liabilities can fluctuate each year (sometimes significantly) – what assessment has Audit Scotland made of the level of pension liabilities which might be incurred in the next financial year and what discussions does it have with the Scottish Government about this issue?
Audit Scotland is required to account for its pension liabilities under International Accounting Standard 19 (IAS 19).
There are two main elements to the position of the liabilities in our accounts.
The first element is the current service cost (see Note 3, page 72, of the ARA), which has implications to our non-cash funding requirement from the Scottish Consolidated Fund. We have discussions each year with the Scottish Government to ensure we can meet this with non-cash Annually Managed Expenditure funding. In 2020/21, our funding was £3 million and the final figure provided by the actuary was £2.9 million.
The second element of the pension liability is the adjustment made in ‘Other comprehensive net expenditure’ (Statement of Comprehensive Net Expenditure, page 64). This relates to the change in assumptions used by the actuary (Note 3, page 72), which takes into account the discount rate, demographics and other factors to estimate the overall liability. This is volatile, as shown by the comparison between 2020/21 to 2019/20 in ‘Other comprehensive net expenditure’.
Audit Scotland has no control over the factors affecting the actuarial assumptions and they are unpredictable and highly sensitive to even marginal changes. For example, a 0.5% decrease in the discount rate can lead to a £19 million adjustment in liabilities (Note 3, page 77). The volatility, unpredictability and sensitivity make it difficult to assess with confidence, and there is no funding requirement for this.
This year Audit Scotland will be in discussion with the Scottish Government to request additional non-cash funding to meet the current service cost element of IAS 19. The SCPA will receive our proposal for an in-year budget adjustment as part of the Spring Budget Revision process.
3. What is the rationale behind the pension liability for former Local Government Ombudsmen and their staff remaining with Audit Scotland?
Prior to the Public Services Ombudsman Act 2002, Audit Scotland provided support services for the Scottish Local Government Ombudsmen. When this Act was reviewed, it was determined that there was no provision for the transfer of pension liability for former Local Government Ombudsmen and their staff to the new Ombudsmen’s office. As discussed with the SCPA at that time, there remains an obligation on Audit Scotland to recognise this liability in our annual accounts. The liability is based on two former Local Government Ombudsmen staff.
4. On page 86, Audit Scotland explains that indications from auditors suggest that remote audit has added approximately 25% to the time and cost of a large number of audits. Audit Scotland has commenced negotiations to agree a settlement for these additional unplanned costs and a provision has been included in the accounts as the financial liability cannot be accurately quantified at present. Please can you provide more information about these negotiations, whether other options (than settlements) were considered to meet these unplanned costs and what happens if all the costs cannot be recovered.
These unplanned costs were a consequence of firms having to change their financial audit operating model overnight to a fully remote audit. The provision in the accounts is based on information provided by the firms to complete the audits remotely. The negotiations have focused on scrutinising these figures to ensure that Audit Scotland agrees they are an accurate representation of the additional costs incurred.
We currently expect that the final settlement will be less than the provision included in the accounts as we look to implement an equitable settlement. With the significant reduction in travel and subsistence expenditure in Audit Scotland and the firms, the most appropriate solution for the additional remote audit costs incurred was to fund this through this budget line and other identified budget savings. This methodology ensures that all costs will be recovered through the Audit Scotland fees and funding arrangements.
5. Please can you provide an update on the timetable for ‘catching up’ on work delayed as a result of the pandemic.
The disruption from the pandemic and its ongoing impacts mean that it will take more than one audit year to completely catch up with delayed work. Our objective is to have achieved that by the start of the new audit appointments.
Regarding the financial audit, the 2019/20 audits were disrupted by pressure on the capacity of staff at public bodies and on auditors. We are still dealing with a backlog of work, which has had an impact on this year. What we are also seeing this year is that the wider disruption to public bodies during 2020/21 is coming through in the audits, as well as new technical issues arising from the significant amounts of Covid-related funding and spending. This means delays in several areas required for the audit to be completed, and our deadlines have been amended in light of that, as shown in Table One.
Table One: financial reporting deadlines.
Sector Pre-pandemic New Deadline
Health 30/06/21 30/09/21
Scottish Water 5/06/21 30/09/21
Central Government 31/10/21 31/10/21
Local Government 30/09/21 30/11/21
Colleges 31/12/21 31/12/21
At this stage, we envision that the earliest the financial audit work will return to pre-pandemic timelines is in the 2022/23 financial year.
Regarding performance audits, we paused and refreshed our performance audit work programme to match the significantly changed priorities, emerging issues and pressures on the public sector. We have completed the early work that was underway prior to the pandemic, while also reshaping some other work. In some cases, it has meant blending it into other performance audit work, and agreeing that some audit subjects were no longer priorities.
We have also moved to a more flexible and dynamic work programme, which is reviewed every three months, allowing us to respond to key issues and to effectively manage our resources. A key aspect of this is that the range of outputs we are producing has become more flexible. This includes shorter reports, briefings, blogs, videos and animations, as well as our wide-ranging performance audits.
More detail is available on the work programme section of our website, along with details about the five core themes our work will cover in coming years:
• Economic recovery and growth
• Policy priorities
• Inequalities
• Innovation and transformation
• Governance and accountability.
We have been clear since the start of the pandemic, and continue to be, that wellbeing is our priority, and we will not compromise that nor the robustness and independence of our work.
Our briefing papers Covid-19: what it means for public audit in Scotland and Covid-19: how public audit in Scotland is responding provide more detail on the principles and approach we have adopted, what we have achieved and our priorities for the coming years.
6. Fees and expenses to appointed audit firms are much higher than budget or prior year expenditure. To what extent have Audit Scotland committed to additional payments to these firms in advance of securing additional fees from those bodies being audited?
As outlined above in response to Question 4, Audit Scotland has been in discussion with audit firms on the reimbursement of the increased costs of remote audit. Remote audit has taken longer in most cases and a final settlement is to be agreed. The provision in the annual accounts was based on the best estimate at the year-end, with the expected settlement expected to be less than this total figure.
There will be no additional fee to the audited body as the agreed fee already paid was based on the full recovery of overheads and pooled costs where our final outturn was less than budget in these expenditure headings (e.g. travel and subsistence, firms expenses).
7. Are there any indications that lower training costs might have contributed to the reduced pass performance which is indicated in the Annual Report?
The lower training costs are due to reduced Learning and Development (L&D) costs across Audit Scotland; ie, all staff, not just trainees. This was due to L&D being delivered virtually, which in many cases costs less than traditional methods. The actual number of L&D days that each staff member had during 2020/21 increased compared with the previous two years, but costs were lower.
In 2020/21 Audit Scotland spent more on professional trainees than in any of the previous four years. Following further review of more data that we received after the annual report was published, the final overall pass rate for 2020/21 was 89%, compared with 84% the previous year and 85.7% in 2018/19. Our exam results are based on a relatively small number of trainees, so the overall pass rate can differ significantly between years based on one or two individuals’ results.
Audit Scotland’s professional trainee scheme is an important part of our resourcing and workforce strategy, with the majority of trainees moving into permanent employment with us after completing their programme. The scheme provides full support throughout the programme, including comprehensive induction, mentoring, cross-team training, peer-to-peer support and opportunities to observe the Scottish Parliamentary process.
There is no doubt that the Covid-19 pandemic disruption has made the examination process more stressful and difficult over the past year. Under these circumstances it is a great credit to the trainees that they achieved pass rates at these levels.
Chair, I trust these responses are useful and provide you with the clarification you and your colleagues seek. As always, we are happy to provide any further information needed.
Yours sincerely
Stephen Boyle
Auditor General for Scotland and Accountable Officer