Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, December 21, 2017

Official Report 599KB pdf

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Section 22 Report

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“The 2016/17 audit of the Scottish Police Authority”

Item 2 is evidence on “The 2016/17 audit of the Scottish Police Authority”. I welcome to the meeting Caroline Gardner, Auditor General for Scotland, and, from Audit Scotland, Stephen Boyle, assistant director; Carole Grant, senior audit manager; and Mark Roberts, senior manager. I invite Caroline Gardner to make an opening statement.

Thank you, convener. I am presenting the report “The 2016/17 audit of the Scottish Police Authority” under section 22 of the Public Finance and Accountability (Scotland) Act 2000. I would like to draw the committee’s attention to three issues that arise from the audit and are highlighted in my report.

The first issue is the auditor’s opinion on the SPA’s annual report and accounts. This is the fourth section 22 report on the SPA that I have prepared for the Parliament and it is the first time that the auditor has not expressed a modified opinion on the SPA’s accounts. That reflects improvements in financial management and financial leadership within both the SPA and Police Scotland.

The second issue relates to financial sustainability. In 2016-17, the SPA overspent its budget by £16.9 million, which was accommodated by underspends elsewhere across the Scottish Government’s budget. The overspend would have been larger if the SPA had not received £13.6 million as part of the negotiated settlement that terminated the i6 programme. I have been recommending for several years that the SPA and Police Scotland prepare a long-term financial strategy. It is encouraging that they have now done that, but this work confirms the scale of challenge that the two organisations face in achieving financial sustainability. The SPA does not anticipate achieving a balanced budget until 2020-21, and it expects to return to a deficit position after that. That financial context will make achieving the vision that is set out in the policing 2026 strategy very challenging.

The third issue relates to both governance and transparency and value for money. The report sets out instances of unacceptably poor governance and poor use of public money relating to the appointment of temporary staff, the approval of relocation expenses for a deputy chief constable and the decision to make the role of the chief executive of the Scottish Police Authority redundant during 2017-18. We will examine the detail of that decision during the next annual audit of the SPA.

I welcome the progress that the SPA and Police Scotland have made in improving financial management and understanding their financial sustainability. However, the scale of the challenge facing the two organisations remains daunting in terms of the scale of the change that is required; the changes in leadership, which are continuing at the moment; the integration of the British Transport Police functions into Police Scotland; and the severe financial constraints that I have mentioned.

Alongside me are Stephen Boyle, who is the appointed auditor for the SPA, together with Carole Grant and Mark Roberts. Together, we are happy to answer the committee’s questions.

Thank you, Auditor General. I hear what you say about exploring the chief executive’s redundancy in a future audit but, given the significant public interest, I suspect that we will want to explore some of that with you now. I kick off by asking you to clarify paragraph 22 of your report by explaining exactly how the SPA “unnecessarily” incurred an extra three months’ salary costs in respect of Mr Foley.

Certainly, convener. I will ask Stephen Boyle to talk you through that in a moment. I want to clarify my comment about the 2017-18 audit. The decision was made during 2017-18 and the payments will not appear in the accounts until the end of that financial year, which finishes in March 2018. We have included the matter in our report because we recognise that it is of significant interest to the committee. We will do our best, but there will be some bits of it that are not yet closed off.

Good morning. We set out at paragraph 22 and elsewhere in the report the decision-making process that the SPA went through in respect of the ultimate early retirement and associated payments for the now former chief executive.

If I may step back a few months, the decision that the SPA took was in respect of the critical Her Majesty’s inspectorate of constabulary in Scotland report on the forensic services in the SPA and the recommendations that it included. At that stage, the SPA board decided to act on that report and, principally, it sought to amend the reporting line for the director of forensic services from reporting to the chief executive to reporting to the board. As a consequence, the board took the view that the scale and size of the chief executive’s role was reduced and, in their minds, that led to a redundancy discussion. The SPA board considered an options paper at a closed meeting on 7 June, and that was the point when it sought to recognise the change in reporting line and the change of the role. At that stage, it also sought to engage in a consultation process with Mr Foley.

There are two points about the judgment that we have made and the resulting decisions. The first is about the exchange of correspondence that took place that led to the decision making. We felt that, to reflect good governance standards, a decision of such magnitude should take place at a formal board meeting.

Secondly, as we conclude at paragraph 22, an additional three months’ salary was incurred unnecessarily. Our judgment on that point is based on the fact that the SPA took a decision to pay Mr Foley’s notice in full, for six months. What we have not seen is any evidence or any reflection of a discussion about whether it could reasonably have asked Mr Foley to work his notice period. The SPA board was very clear that it felt that it was very important to retain the services of an accountable officer and to retain access to Mr Foley’s knowledge of the organisation in respect of the accounting arrangements, and it felt that that led to ambiguity about his potential leave date from the organisation.

In our judgment, we reflected on the previous history of the organisation. In every year of its operation—some of its difficulties in concluding year-end financial reporting matters are well known to the committee—it has always met the year-end statutory deadline of laying its accounts before Parliament by the end of December. In our view, the decision-making process was not in evidence as to whether it could have sought to conclude Mr Foley’s employment with the organisation but allow him to work his notice period. We thought that there was some merit to that in gaining access for his interim successor to have some form of handover arrangement.

That led us to the judgment that we set out in the report regarding Mr Foley leaving the organisation on 30 November 2017. Had he worked his notice period, that would have taken him up to February 2018 at a point where the board reached a conclusion for Mr Foley to leave the organisation in August. Instead, six months forward from November takes us into May 2018. That is where we arrive at the difference of the unnecessary three months’ additional salary costs.

That is a very helpful explanation, but it invites quite a number of other questions. Let me try to unpack some of this before moving on to bring in some of my colleagues. There are two separate issues here. One is the decision that is made in respect of Mr Foley’s package and the other is some of the questionable financial decisions made, I believe, by Mr Foley himself. Am I correct in saying that Mr Foley was the accountable officer?

Yes.

Would some of the questionable financial decisions about paying for people’s tax bills and so on, which you unpack in your report, have been taken by him?

They were, and the report is clear about both the personal decision making and the fact that the accountable officer takes responsibility for those in any case.

Okay. Were none of them reported to the board?

Certainly the payment of relocation expenses was not, and we say that in the report. I think that the others were not, but I ask Stephen Boyle and Carole Grant to confirm that.

We did not see any evidence that the other examples were reported to the board.

Okay, so we can safely assume that Mr Foley took those decisions or was aware of them. Thank you—that is helpful. I am interested in who took the decision in the case of his own package if it was not taken in front of the full board. Mr Foley was the accountable officer, so it would be inappropriate for him to take that decision. Who took the decisions behind closed doors?

The decisions were taken by the SPA board. We are clear that the decision was taken by correspondence. The decision-making around that point was initiated at a closed board meeting, so a board meeting was held but, from what we have seen from the papers for that meeting, it was more about the change in the role and in reporting lines as a result of the HMICS forensics report. Once the board was clear that it wanted to proceed with a change of accountable officer arrangements and the chief executive role, that led to a series of email exchanges with the chair and vice-chair. Once they had settled on the fact that they were going to proceed with a change in role, the decision making on Mr Foley’s financial arrangements to leave the organisation was also taken by correspondence.

So this never went for a final decision before the full board. What you are telling me, if I have picked you up correctly, is that there was a series of emails between the chair and the vice-chair.

I apologise, convener. It was not just the vice-chair and the chair, but all the board members. All the board members were invited to express their views. As we touch on, the decision was taken over the summer months, when many of the board members and others would have been on holiday, but our judgment was that, nonetheless, a decision of this importance merited a full board meeting.

In all your experience as an auditor, have you ever seen anything like this before, where decisions of this magnitude and sensitivity are done by email?

No, convener. I think that we would have expected a full board meeting to consider such a decision.

May I add to that briefly, convener?

Of course.

As well as the question of there being a full board meeting, on which I fully agree with Stephen Boyle, the other point that he makes in his annual audit report and that I make in the section 22 report is that part of the purpose of such a meeting would have been to consider all the options that were available to the board rather than simply the proposal that was finally agreed. We have not seen evidence that that occurred.

That is interesting. The matter is clearly sensitive. Under our next agenda item, we will move on to consider severance and settlement agreements. I am curious to know whether it is normal practice that something of this sensitivity would be reported to at least the sponsoring department. Did you find evidence of the Scottish Government being consulted on or advised of this whole process in any way?

We did. We have seen email exchanges from the vice-chair to the justice department advising it of the progress. We are not clear that we have seen all of the email trail, and that is something that we will follow up on, but nonetheless we have seen evidence of the Scottish Government being consulted and made aware of the decisions that the SPA board was taking.

I am curious to know whether that information is in the public domain. You mentioned the justice department, which is a big department. Who was the email to? Was it to the director general of the department?

I am not sure whether that information is in the public domain. If I can perhaps provide a bit more clarity, I think we would say that it was to senior civil servants in the policing division.

Okay. I do not know whether it is possible to have access to those emails. I think that the committee would be very interested in the source of the information you have received, because that is central to exploring what actually happened in terms of decision-making.

You will be aware that the committee has had a number of section 22 reports on different organisations and, when we have come to question those who were responsible, they have either received settlement packages or taken early retirement, as is very much the case with the Scottish Police Authority. The committee has concluded that we do not want to see public bodies reward staff for failing. Given that that is the committee’s view and that you identify poor governance and poor use of public funds, do you believe that Mr Foley should pay any of his settlement back?

09:15  

The first thing to say is that I entirely understand the committee’s concern about this. These are significant amounts of public money and I say in my report that the governance failings are unacceptable.

It is hard for us to give you a clear answer to your specific question, not having seen the options that the SPA board considered. We know what it finally agreed but we do not know whether it considered alternatives and, without having that information available to us, I do not feel able to express a view at this point. The committee may want to follow up on that with the SPA and the Government.

Let me put this in a different way. Paragraph 22 of the report, which you have explained, suggests to me that at least three months’ salary could have been saved. Never mind how the actual settlement was calculated, that three months is an overpayment.

I have no doubt that the Scottish Police Authority board could have structured the agreement that it came to with Mr Foley in a way that avoided payment in lieu of notice that was not worked. That is very clear. Whether other options were available to it that might have saved the public purse money and fulfilled the governance concerns that I think you are alluding to is a different question.

Let me start on a positive note. You said that there have been significant improvements in some aspects of SPA governance. Will you expand on that?

My specific comments were about improvements in financial management and financial leadership, which have been at the core of the concerns in the previous section 22 reports over the past three years. I will ask Stephen Boyle and Carole Grant to give you a flavour of the improvements that they have seen, which meant that they did not need to modify the auditor’s opinion on the accounts this year.

Last year’s independent auditor’s report on the annual report and accounts drew attention to weaknesses in the non-current assets, particularly the quality of records and associated explanations. We have seen a big improvement in that in this year’s audit, a consequence of which has been investment in key skills in that area, while record keeping has also improved. Carole Grant, our colleagues and I have received the explanations that we requested for all of our inquiries. Over the year, in our engagement with the SPA, we have seen an improvement in the quality of the finance team. Notwithstanding some issues that we mention in the annual audit report, that meant that all of the opinions that we are required to provide were unmodified.

I turn to the issue of relocation expenses and so on, which has been highlighted in the report. One DCC received a payment of £18,000, which seems to have been to cover travel expenses and temporary accommodation. In the report, you say that it came under relocation expenses—presumably that is the correct place to put it.

A payment of £18,000 was made in 2014-15 for travel expenses from the base from which the officer was moving, and temporary rental expenses. An additional payment in 2016-17 was for the sale and purchase of a permanent residence, plus the tax liability on it. The payments were all within the umbrella of relocation expenses under the policy for senior officers.

Was the £53,000 the tax liability on the officer’s residence?

It was the tax liability on the relocation expenses.

I am confused, because I have been through this in the private sector and tax never appeared. Could you elaborate on that?

Certainly. Police Scotland’s regulations for senior officers entitle officers who relocate to take up a post to claim reasonable expenses for relocation. That is not defined and it is not capped, which the SPA has since recognised as being a problem and has opened negotiations with the police—

Is it normal in the public sector for such expenses not to be capped?

It is not normal. In most organisations there is a cap, which is generally about £8,000—significantly lower than the figures that we are seeing here. That is the level at which Her Majesty’s Revenue and Customs accepts that the benefit is non-taxable. Payments above £8,000 are taxable. The policies in place at the time provided that the SPA would cover the officer’s tax liability on the relocation expenses that were incurred.

It sounds very generous. Is that a long-standing policy?

It is. I will ask Stephen Boyle and Carole Grant to talk you through the detail.

In the case that you are referring to, Strathclyde Police policy was used, because the SPA and Police Scotland did not have a policy at that point. The Strathclyde policy had been in place for a number of years.

Why did they pick the Strathclyde one? Was it more generous than the others?

I do not know the justification behind the selection of that specific policy. It was deemed to be appropriate at the time.

We think that it is likely that the Strathclyde Police policy was used in this example because, as Carole Grant said, the SPA did not have a policy. When the officer joined in 2012, the SPA was forming and setting up its policy arrangements. The Strathclyde policy did not have a cap on it, but it contained provisions about a timeline. One of the key points that we make in the report is that the policy has an 18-month time limit. As we have tried to capture in the report, we made the judgment that because the timeline, from the appointment through to payments being made as recently as 2017, exceeded the 18-month limit, it would have been better if there had been some governance of the decision making that accompanied the case.

A reason is given here for the claim exceeding 18 months. Does that mean that the expense was incurred all that time ago? Was the officer out of pocket during that period?

No. The officer moved home at the start of 2017. The sale of the house went through in January and the purchase of the house shortly after, so there was no time limit on the payments.

There was a payment of £18,000 for travel and temporary accommodation. However, relocation expenses were £49,000. That seems an awful lot. What did it comprise?

I can break it down a bit, if that would be helpful. Just under £15,000 related to the sale of a property in England. About £34,000 was related to the purchase, the largest element of which was the land and buildings transaction tax, which was about £30,000.

Was that all paid for?

Yes.

Wow! I would not mind a job in the police service. That is very generous.

You have stated here that

“relocation payments of this magnitude do not represent a good use of public money.”

Will you elaborate on that?

I am not sure that there is much more to say, Mr Beattie. In many public bodies there is a provision for relocation expenses to recruit the best candidate for a job. That is appropriate. There is generally a cap on the amount that is available, which usually matches HMRC’s cap for when taxable benefits come into play. The £120,000 is a significant amount of public money. As Stephen Boyle said, the transactions took place a long time after the officer had taken up post. Although the then chief executive felt that it was within his authority to authorise the payments, Stephen Boyle, as the auditor, and I, as the Auditor General, felt that that was at least questionable and should have been put to the board for decision; it was not.

Nothing went to the board on this officer’s payments, despite the size of the pay-outs.

It was authorised by the then chief executive.

Do you consider that it was handled in a regular manner at the time?

The policy did not contain a cap and there was not a definition of “reasonable expenses” within it, so it is not possible on those grounds to say that the make-up of the payment was wrong, but the policy that was being applied included an 18-month time limit that was exceeded by some margin. Given that and the amount of money involved, it would have been appropriate to have gone to the board for authorisation of the payments. That did not happen.

Given that it did not, and there seems to be a history of this, did the chief executive’s delegated powers give him the authority to approve the payments?

He believed that they did. The scale of the payment and the fact that the timescales applied were outside the limits of the policy are at best questionable. That is why I brought the matter to the attention of the committee in the report and why Stephen Boyle raised it in his annual audit report to the SPA.

You have made it clear that none of that went to the board prior to the payments and so on being approved. Was there any subsequent reference to the board?

Stephen Boyle will want to talk through that.

There have been board and SPA audit committee discussions about the payments but, from what we have seen, they have been generated by our own annual audit reporting. I think that the SPA’s audit committee recognised in its discussion of the matter that there is some scope to tighten up the arrangements in that regard. We welcome that process but, specifically, we have not seen any evidence that there has been a discussion yet at the SPA board or, more directly, at the SPA’s people committee, which would be the best place for that. I imagine that that is where the SPA intends to take its revised arrangements in 2018.

The report states:

“The 2016/17 relocation expenses payment was processed as a BACS payment rather than through the payroll system. It had been coded incorrectly ... as childcare vouchers.”

Obviously, there was a tax implication there. Was all the tax paid by the SPA?

The tax was eventually paid but, as you said, the payment was miscoded originally and paid through the Bacs system rather than through the payroll system. Stephen Boyle and Carole Grant can talk members through the detail of what they found.

Was that cost met by the SPA?

Yes.

When we drew the SPA’s attention to the relocation payment that we had recognised, it built that into the tax and national insurance return that it was doing. That was built into those calculations.

Just to clarify, was it Audit Scotland that found the error?

The payment had not been included in the tax and national insurance calculations until we drew it to the SPA’s attention.

I do not know whether it is included in the tax figure that we have or whether it is an additional tax payment that is not evident.

It is the figure of £53,000 that is included in our report.

It is included in that.

That is the figure. Yes.

Were there any penalties?

No, there have been no penalties.

Obviously, it is a concern that those errors take place. The report says that Mr Foley

“and the chief financial officer of Police Scotland ... made insufficient efforts to ensure that the remuneration report in the annual report and accounts were free from error and omission.”

Will you expand a little bit on that?

The committee will recall that my predecessor drew attention to the fact that compliance with the financial reporting manual had been an issue for the SPA and that that triggered reporting to the committee previously on the need to improve financial leadership in the organisation. In the report, we commented that we think that that has happened.

One of the key points in the year is the audit committee receiving the unaudited annual report and accounts before they are presented to the external auditors for us to commence our detailed testing of the accounts before the conclusion of the audit process. Both the accountable officer and the chief financial officer expressed to their audit committee in their meeting that they had gone through the annual report and accounts and were content that they were complete and represented a significant improvement on previous years. We subsequently discovered that they had been familiar with those transactions and that those transactions would very clearly have to feature in the remuneration report in the annual report and accounts. That led us to the judgment that “insufficient efforts” had been made to ensure that

“the annual report and accounts were free from error and omission.”

09:30  

Good morning. Colin Beattie covered quite a lot of that issue, but I want to pick up on it. I am struggling to understand the point about the Strathclyde policies. From the report, it looks like the Scottish Police Authority had no policy in place that covered those payments or expenses or that would have allowed them to be met. Was it legitimate to refer back to Strathclyde police authority policies, given that Strathclyde police authority no longer exists?

That is primarily a matter of timing. The Scottish Police Authority came into being on 1 April 2013 and the deputy chief constable concerned took up post at the end of 2012. At that point, there was no SPA to have policies, and the offer of appointment included a standard provision that said that reasonable expenses for relocation would be available.

Does Mark Roberts want to talk through how the different regulations interact with one another?

The overarching piece of legislation is the Police Service of Scotland Regulations 2013, which set out the terms and conditions for senior police officers in a general sense. Beneath that are the standard operating procedures. In this case, they were the old Strathclyde police authority’s operating procedures. When the deputy chief constable was appointed, those procedures were in operation, and it would have made sense to use one of those standard operating procedures, as the SPA could not have existed or have had its own procedures in any sensible way at that point.

What is the status of those Strathclyde policies now? Can they be picked off the shelf and applied to other situations?

The SPA has been in existence for a number of years, and it now has its own policies in place for senior officers, officers and civilian staff, which it works to. As the Auditor General has said, the SPA is looking at revising its own policies on senior officers’ relocation expenses in light of what we reported in the audit.

Okay. I appreciate the timing issue in respect of DCC Fitzpatrick’s appointment. Would the SPA have been in breach of contract if it had not met those expenses?

There are two elements to that. One is that the policy is clear that reasonable relocation expenses would be reimbursed. There was neither a cap on that nor a definition of what “reasonable” would include. That seems to me to be quite a loose policy, although it is commonly applied to senior officers in the police service. As Mark Roberts has said, the SPA has said that it will revisit that and look to renegotiate it with the police negotiating board.

The second issue is the timescale. The Strathclyde standard operating procedure that was used had an 18-month time limit in it, which was disregarded by the then accountable officer on grounds that we do not think are strong enough to justify making a payment of such a scale outside the time that the policy lays down.

Is it correct that the relocation expenses add up to £67,000?

Plus the tax liability of £53,000.

Is that considered to be reasonable?

As I said in response to an earlier question from Colin Beattie, I think, many public bodies have a policy that allows the repayment of relocation expenses, and most of them have a cap, which is generally about the level of £8,000. That is the same level at which the HMRC starts to regard the amount as a taxable benefit. In that context, £120,000 feels like a large sum of public money.

Given the cap that applies elsewhere, is this the first time that you have seen a payment of that scale? Is it exceptional?

It is exceptional. I think that Stephen Boyle said in response to an earlier question that he has not seen a payment of that size. There is the caveat that the same policy applies to senior police officers across the United Kingdom, I think; it certainly has done in Scotland elsewhere. Does Stephen Boyle want to add anything to that?

As the Auditor General has suggested, we know from our preparation and research that there are examples in other parts of the UK of significant relocation payments having been made for senior officers, but I have not seen anything of that scale outside a police setting.

Okay. I think that many people will be quite shocked that the former chief executive made that decision in isolation and signed off very large expenses at the stroke of a pen. Colin Beattie asked about the board’s involvement in looking back at the decision. Is the board concerned about the delegated powers that are afforded to the chief executive? What other powers did the chief executive have that perhaps we do not know about?

You would need to ask the board that question. We know that it is committed to reviewing that particular policy. You would need to explore with it the question about what view it has taken of the chief executive’s actions. In some ways, that question fits with the convener’s previous questions about the options that it considered in agreeing his early retirement.

 

We have heard evidence today that the accountable officer clearly demonstrated poor financial judgment in signing off some of these packages. However, I am conscious that your report is for 2016-17. Did he exercise poor financial judgment before that?

This is the first time that the audit has identified issues of this scale. As you know, we have in previous reports highlighted different examples of poor governance in the way in which board meetings were being held and so on, but payments of this type have not come through in the audit work. A caveat that I need to give is that an audit is not designed to uncover every possible element of bad decision making that might have taken place; it is a risk-based approach that uses professional concepts of materiality to give assurance in specific terms. I cannot absolutely confirm that what you have referred to has not happened, but it has not been identified in previous years’ audit work.

Given what we know from the audit work for 2016-17 and the clear risk with regard to previous behaviour, will you now go back and look at this issue?

I expect the SPA to do so on the basis of the audit report that it has received from Stephen Boyle and his team this year, and I think that that will form part of what Stephen Boyle and the team will look for in the 2017-18 audit.

That was helpful. Up to now, the SPA has not been proactive; instead, it has addressed any of this only in reaction to your reports. Given the behaviour of the chief executive as the accountable officer in 2016-17, I am very keen that it looks back at this.

Throughout this process, the terms “redundancy” and “early retirement” have been used interchangeably, but they are two very different animals. Can someone explain to me why those terms are being used interchangeably?

They should not be; as you have said, they are very different things. Our broad understanding is that there were two elements to the agreement reached between the chief executive and the SPA; first, departure under the terms of the SPA’s normal early retirement scheme, which entitles him to a sum of money that has been reported by the SPA but which has not yet audited by us, plus a cost for the strain on the pension fund; and secondly, a separate payment for six months in lieu of notice, which was triggered when he left at the end of November this year. With the caveat that we have not audited those figures yet, those were the two elements that we understand made up the agreement.

So what was the reason for the chief executive’s employment being ended? After all, redundancy is something that is done to him, while early retirement is something that is done by him.

I would refer you to the earlier answer about the board’s decision to change the status of Mr Foley’s role. It came to the view that because forensic services would no longer be part of the chief executive’s remit, that represented a significant diminution in responsibilities and led to a change in circumstances. It is very clear that, in the consultation that it went through with Mr Foley, his subsequent departure was in the context of an existing approved early retirement scheme, and his departure costs are partly in respect of that. On top of that was the board’s decision to allow Mr Foley to leave the organisation on a given fixed date instead of his working a six-month notice period, which resulted in a six-months’ payment in lieu of notice.

I do not quite understand that. Let us say that the board started from the position that the role was redundant—on best case, we will give it that. There was a diminution in responsibility, which meant a redundancy situation; at some point, the role was going to change, the post would be redundant and there would be payments associated with that. However, it sounds as though what has happened is that, at some point, there was a discussion and someone said, “If we change the reason for dismissal to early retirement, we can manipulate the payments.” Is that a fair statement?

I am not sure that I would recognise all of that. We would look to clarify whether by virtue of Mr Foley’s membership of whichever pension scheme—I assume that, because he was a civil member, it will have been the local government pension scheme—and his age, the circumstances leading to his departure would have allowed him to gain access to his pension arrangements. I might need to come back to the committee in writing on the specifics of the distinction between redundancy and early retirement.

I would like you to do that, if you do not mind, because the distinction seems quite important.

You said that the decision was taken through correspondence among the board. Has there been any explanation as to why it was done that way? Is that usual?

The explanation provided to us was that the board was keen to expedite the process. As the HMICS report came out in June and no board meetings were planned over the summer months, it felt that it was appropriate to proceed and provide organisational clarity. On that basis, it came to the judgment—though not, we think, an appropriate judgment—that it was able to take this decision by correspondence led by the chair and the vice-chair among all the board members.

Is there any indication as to why it was keen to expedite the process?

From the discussions that we have had with the SPA’s vice-chair, who led the process on the board’s behalf, it appears that the board was keen to provide organisational clarity—I think that that was the phrase that was used. In choosing to do that, it had two options: it could, with Mr Foley’s consent, put in place an accelerated process to allow it, in its judgment, to complete the process by August, or it could engage in a 12 to 14.5-week consultation period, which as it has set out is typical and the right of any affected employee. However, that would have gone for a much longer period. That led the board to the second driver behind its decision: clarity and value for money.

Leaving aside the payment in lieu of notice, I note that there was a payment—an ex gratia payment, if you like—of £43,470 for early retirement, as I think it is called in the report. Do you have any idea how that is broken down? What elements form that payment?

I apologise, Mr Kerr—we do not have that detail. However, that is the work that we intend to focus on when we report on 2017-18.

I understand.

In summary, we apparently have an individual for whom a process to get him out of the organisation has been, for whatever reason, expedited; however, you have discovered that this individual appears to have breached the procurement rules with regard to the financial position; has approved expenses out of policy and out of date; and appears to have paid personal tax but, for whatever reason, has failed to log it properly. Is there any evidence that the board—or, indeed, anyone else—looked at this and asked why a performance management process was not being run?

09:45  

As we were coming towards the audit’s conclusion, I inquired of the vice-chair whether there were any other avenues that the SPA could go down in respect of these matters and drew to her attention what we were intending to report to the SPA in the annual audit report on the matters that you have referred to. She made it clear that there were no other alternatives or avenues that it was able to pursue other than what it had pursued.

What do you mean when you say that there were no other avenues that it was able to pursue? There are always other avenues that one can pursue.

Quite, but in its judgment there was no evidence or records to support an alternative approach.

Forgive me, but I would suggest that there was an awful lot of evidence to say that another option might have been considered by the board. Was the board not aware of any of this, or did it take a decision that it was not actionable?

I am not sure that I was sighted on all of the decision making in the board. I have referred to my conversation with the vice-chair about what we were intending to report in our annual audit report and whether there was anything that might cause it to pause and consider alternatives. She was clear that there was not.

For the avoidance of doubt, is it correct to say that, during this process and while the early retirement package was being built, the Scottish Government was fully apprised and aware of what was going on and allowed it to go through without pulling it back?

We were in receipt of some correspondence between the SPA and the Scottish Government that, from the SPA’s perspective, alerted Government to its progress with the process of Mr Foley’s departure.

Which suggests that the Scottish Government was apprised of what was going on.

Yes.

I would like to shift the focus slightly to one element in your report on information and communications technology and the policing 2026 strategy. In paragraph 28, you quote the Scott-Moncrieff report from September this year, which said:

“conditions do not yet exist within Police Scotland to provide a satisfactory level of comfort that sufficient technology delivery capability is in place to support the delivery of Policing 2026.”

Could you give us a bit more background on that and on where you see the ICT strategy in Police Scotland?

As the committee knows from its previous work, the policing 2026 strategy vision is heavily reliant on ICT to transform the way policing is carried out, and we have therefore tried to keep a close eye on progress. I will ask Mark Roberts to pick up on where we are with that now.

The current intention, as we understand it, is that the new ICT strategy will be brought to the SPA in March 2018, and Police Scotland has brought in external support to complement the existing ICT function in developing that. We see that as very much a critical step in implementing and realising the vision in the policing 2026 strategy, but that strategy is only the first step. Implementing it and making it real and meaningful is the critical next step, and that will require a significant amount of investment and additional resourcing to be put into the capacity of that function. The next key milestone will be the presentation of that strategy in March 2018.

The i6 programme was not a particularly pleasant experience for anybody. What assurance do you have, if any, that we have the capability and skills at the top of the organisation to develop a sound new ICT strategy to deliver that in the future?

Over the past year, there has been investment at a senior level in bringing in experience from outside for major change programmes. I think that the lesson has very much been learned that it has to be much more of a modular activity, rather than trying to do one major ICT programme that encompasses 80 per cent of policing activity. We have seen over the past year the rollout of a national custody system as a discrete part of that. I think that there is progress in doing that. The evidence of external support being brought in to help with the development and implementation of strategy is also encouraging.

You have not made any recommendations specifically about that in the report. We will see the strategy presumably next year, but will you be having a look at that, particularly because of the experience that we had with i6?

One element of the annual audit process will be to look at ICT. There will be a component that discusses the progress in ICT in the report that Stephen Boyle will make to the SPA next year

Can I go back to the question of Mr Foley for one minute? You talked about the options being considered on 7 June. Was there a paper? Was the matter considered verbally? Do you have access to that paper?

Yes, convener. A tabled presentation was made to the SPA board on that date.

Listening to the evidence here that I assume the board would have been aware of to some degree, I wonder whether one of the options considered was to dismiss John Foley on the grounds of incompetence.

No, I do not think that it was.

Interesting.

Can I clarify the timeline in all of this? Am I right in saying that the first decision was the one by the SPA board effectively to downgrade the job of chief executive because it no longer carried the additional responsibility for forensics? Is that right?

That is correct.

Having taken that decision, the board entered into discussion with John Foley about his departure.

Yes.

Before I go into the John Foley thing, which I have a couple of questions about, I note that Mr Foley has been replaced by Kenneth Hogg but I do not know what his job title is.

If I remember correctly, it is interim chief officer.

What salary was Mr Foley on?

I will tell you exactly. It is reported in the annual report and accounts. It was a salary of between £115,000 and £120,000 per annum.

According to the press, Mr Hogg is on £120,000. Is that being paid for by the SPA or by the Scottish Government?

That would be met by the SPA.

Where is the logic in replacing a chief executive whose position is downgraded and is on £120,000 with somebody with far less responsibility—which you would think would mean far less remuneration—on £120,000?

We will turn our attention to the specifics of the payment arrangements in looking at 2017-18 and come back to the reporting of those at that stage.

It seems highly illogical to me.

It is another reason why we would expect to see a series of options being considered by the SPA board.

My second question is to get the timeline right on the decision about retirement, redundancy or whatever. Presumably, the first option was retirement and a date was agreed with Mr Foley for his retirement.

Mr Foley’s leave date from the organisation was ambiguous because the board was very keen to retain Mr Foley’s service through to the conclusion of the audit of the annual report and accounts. It was provisionally scheduled in the expectation that the audit and the annual report and accounts would be laid before Parliament by the end of October. Subsequently, due to the complexity of some of the issues before you today, the audit was completed at the end of November. As we say in the report, in our judgment, given that the annual report and accounts had always been laid before the statutory deadline of the end of December, we felt that the decision to pay Mr Foley’s notice period in full was not a robust judgment to make.

Was he paid for both retirement and payment in lieu?

Can you repeat the question?

Was he paid both his retirement lump sum and, on top of that, payment in lieu?

Payment in lieu of notice was triggered in full and it was agreed that that would be enacted on the actual date that Mr Foley left the organisation. That payment will happen with effect from 30 November and, as I understand, will be paid this month.

When did he physically leave the organisation?

He physically left on 30 November.

So he is getting six months in lieu after his retirement.

That is exactly the judgment that we make in the report. We have not seen any evidence why the timeline for Mr Foley physically working his notice period should not have started in August, when the decision was made formally by the board, rather than starting with effect from the end of November.

All the decisions that Mr Foley appears to have taken in relation to the deputy chief constable and other matters were taken by him under delegated powers, and that is a contentious issue. Did he consult the chair or the vice-chair or the chair of audit before making any of those decisions?

We are not clear that Mr Foley consulted the chair of the audit committee or the vice-chair. In respect of the relocation payments, Mr Foley has advised that he consulted both the now former chair and the chair before that, given the length of time involved. Regardless of that consultation, it was still our view that the decision would have been better served if it had taken place either in a formal committee environment or at the full board.

The concentration has been on the chair and the chief executive, but this is quite a big board. I think that I am right in saying there were about a dozen or 14 members of the board at the time all this was happening. Has any non-executive director complained about the governance arrangements and about having major decisions made by correspondence instead of at a board meeting?

We have not seen any evidence of complaints to that effect.

It does not surprise me, unfortunately. I think that the role of the non-executive directors needs to be called into question as well. They have sat and allowed all this to happen and not done their job. Did the Scottish Government at any point raise concerns about the governance and the way in which these decisions were being reached?

Not to my knowledge, but that may be a question for the SPA and the Government.

How often is the chief executive position in a public company redundant?

It is unusual, for very obvious reasons. Public bodies require a chief executive; that person is usually the accountable officer. I recall many years ago when I was controller of audit reporting on a case in local government where exactly the same thing had happened and different but serious governance concerns were raised. It can sometimes happen where the scope of the job changes significantly, but we would expect to see a full options appraisal with proper costings and then proper board approval before it happened.

For the avoidance of doubt, are you saying that that has not happened here?

Not in this case.

This was not clear to me from the report and it is something we will be looking at later: was the early retirement enshrined in a settlement agreement?

No, we do not think that it was. We think that the early retirement component of Mr Foley’s payments is in respect of an already approved voluntary redundancy/early retirement scheme, and the payment in lieu of notice is with reference to one of the standard operating procedures of the SPA, which gives the board the option to terminate an employee’s employment with immediate effect, which is in effect what happened here, rather than having them work the notice period.

I understand. There is no settlement agreement and therefore no confidentiality clause. For the avoidance of doubt, I have one other question on the payment in lieu of notice: are you aware whether this was a taxable payment and whether tax was paid in full on it?

We have not audited the payment yet; it is something that we will return to in relation to 2017-18.

Grand. Thank you.

For clarity, can you confirm that in your work you did not find any fraud or illegal act?

10:00  

Correct. We have not discovered that.

Given what Liam Kerr was saying about breached procurement rules and out-of-policy payments, how close to being a fraud or an illegal act did you consider those payments to be?

We gave full consideration to that and we took the advice of senior colleagues. Our audit is subject to a peer review to test some of the key judgments, including on those payments, and it came to the judgment that the payments were regular and did not represent fraud. We are clear that the relocation payments were, as Mark Roberts said, consistent with the Police Scotland regulations and with the DCC’s letter of appointment to the organisation.

You give an opinion on regularity. These sound like irregular situations, given that you have raised them here and we have discussed them. I think perhaps that the term “irregular” might be in common use here. Why is your opinion not qualified?

As you say, a key part of our opinion is on the regularity of expenditure. We were satisfied that the relocation payments, in particular, were regular and that they were consistent with the laws and regulations governing those in respect of the Police Scotland regulations. In respect of the other elements that are captured, there are two components. First, it is important that they are key matters emerging from the audit and we have reported them through the Auditor General’s section 22 report and my own annual audit report. Also, the concept of materiality applies within this frame. The materiality for the audit—forgive me one second—is—

While you are finding that, I will say that materiality, of course, is not just a number.

Quite.

Whether it is omission would be of interest, shall we say.

The overall materiality for the audit is £14.1 million. Nonetheless, as you quite rightly say, Mr Bowman, a specific element of our work is to capture the accuracy and completeness of the remuneration report, for example. As we referenced, the annual report and accounts that were presented to the SPA’s audit committee excluded the relocation payments from the remuneration report. Had they not been subsequently included, that most likely would have had an impact on our audit opinion. However, the fact that, as we see from the annual report and accounts, the amounts were subsequently corrected and properly disclosed allowed us to come to that judgment—and one that we tested to make sure that we were satisfied in its completeness and soundness.

In paragraph 8, you talk about something not being

“value for money in the use of public funds”

and in paragraph 12 you talk about something not being

“a good use of public money”.

Do those terms mean the same thing?

Essentially, yes. Those are judgments on those points. We are saying that we are not satisfied that something has been a good use of public funds, not that it ought to have led to a qualification of the audit.

So it is just a slight variation in the wording.

Yes, that is correct.

How do you make that judgment? It is not a technical term, is it? There is no set rule as to what is good or not good?

That is correct. It is a judgment from our collective experience and what we see across the public sector and is based on the importance of the good use of funds. In those examples, I think that we referenced what is the norm for payment to directors within the organisation and the fact that such amounts should be disclosed. In particular, we did not consider the £106,000 that was paid to the interim director of people and development for four months’ work to represent a good use of public money. Equally, the payment of nearly £200,000 to the interim chief financial officer for Police Scotland for 10 months’ work, in the context of the other senior finance officers in the organisation being paid considerably less than that on an annual basis, led us to the judgment that that did not represent value for money.

Putting yourself in the place of management at the time and what was facing them, you would have done something different.

Not necessarily. We recognise the importance of financial leadership. Particularly in the case of the interim chief financial officer for Police Scotland, when the organisation sought to procure those services and ended up with a secondment from PricewaterhouseCoopers, the terms of engagement suggested that the salary would be around an annual figure of £100,000. The amount that was paid ended up considerably more than that and led us to the view that it was not good value for money.

Can I put this in context? At the point that these decisions were being made, the SPA had been in existence for more than three years and was still operating with interim senior officers in key financial positions. The fact that permanent staff had not been appointed over that period had led to problems with financial management and financial leadership and were still leading to the incurring of significant amounts of expenditure, which is why I took the view that I did in my section 22 report.

When you decide whether you have a modified opinion or even any opinion, you tend to rely on board representations and you have trust and faith in the board. Given what we have heard about your concerns about the board, you do not seem to have had that, yet you gave a clean opinion.

That is correct. We considered the need to keep that under review in setting our audit plan at the start of the year. In the annual audit report, we draw attention to some of the weaknesses in the control environment in the organisation and—

Is that in the financial statements?

It is in the annual audit report.

But I am talking specifically about the financial statements and, from those, it seems that everything is fine.

In terms of how that report led to the opinion and the work that we needed to do to gain an assurance, it led to a considerable increase in the volume of substantive testing. Carole Grant may wish to say more about how that manifested itself.

On the financial statements, obviously, the governance statement picks up on the control weaknesses in the environment. We built in significant audit testing, which was needed to give the required assurance that the accounts were not materially misstated.

Do you have faith in the board?

We are clear that, with some of the judgments that we have reported on today, it would have been better if they had been visible to the board so that it could test them. Specifically on Mr Foley’s departure, we report that the board’s decision to make that decision by correspondence was not a good one.

I have one final question. What board representations have you replied on? We hear that perhaps the board was not fully aware of all matters.

One of the audit procedures that we undertake is to receive representations from the accountable officer, notwithstanding the issues that we have discussed today. We also take the representations of the audit committee and those charged with governance about the completeness and accuracy of the financial statements. As Carole Grant mentioned, that takes us only so far. The main thing that we did was to extend our detailed sample testing to derive the assurances that we felt were necessary to produce the opinion on the accounts.

I am sure that, next time, you will take account of Mr Neil’s comment on some of the board members.

Before I bring in Colin Beattie, I want to pick up on something that Mr Boyle said. If I picked him up correctly, he seemed to suggest that some of Mr Foley’s package has been paid but some remains to be paid. Could payment be stopped if the SPA chose to do so, or is it part of a contractual agreement?

To take those issues in reverse order, we understand that the payment is part of a contractual agreement. As of today, we do not know whether the payment has been made. We know that Mr Foley left the organisation on 30 November and that the payment in lieu of notice was due to be paid in December. I am not sure whether that physically has now left the organisation.

Thank you.

I want to quickly touch on something that has already been talked about: the appointment of temporary senior staff, which is a fairly substantial budget item. Looking at the governance over that, to what extent was the board involved in the appointment of those people? For example, I see that the charge for the interim director of people and development was £1,000 a day, which is a lot of money. I presume that that would have been a board appointment.

I may not have all the detail on the appointment of the interim director of people and development, so I may need to follow up on that with the committee. The main judgment that we made was on the value for money and the extent of the costs for four months’ work rather than the specifics of the decision-making process.

Obviously, there was a concern about governance—it keeps coming out—and about decisions being made that were perhaps not properly discussed and assessed by the board. I am keen to know whether it was simply Mr Foley that made that decision or whether it was a board decision.

The interim people director was a Police Scotland appointment rather than an SPA appointment. We understand that the process was led by the deputy chief officer of Police Scotland through a recruitment agency to produce candidates and make the resultant appointment.

I highlighted that example because it involved was £1,000 a day. The Police Scotland interim chief financial officer was a little cheaper—although not much—at £950 a day, and the figure was £350 a day for the SPA interim chief financial officer.

I have another quick question. For the post of interim SPA chief financial officer, John Foley made someone an offer, but it was retracted. Do we know why? Was the board involved in that? Was there transparency around how that came about?

We understand that Mr Foley led that recruitment and appointment process, working with the procurement department in Police Scotland. We highlight it because of the non-compliance with policies and the importance of such things that we would typically expect. The SPA’s policy is that a number of employees would be charged with scoring any tender process but, in this instance, from what we have seen, only Mr Foley scored the interim chief financial officer’s appointment.

So the appointment process was flawed in the first place.

We are saying that the issue is compliance with the policies. The policies are not in any doubt; the issue is the associated compliance with those policies.

Do we know the reasons why the offer was retracted?

I do not know the position on that. That might be a question for the SPA to confirm.

Do we know whether the issue was referred to the SPA board?

I apologise, but again I would need to get back to the committee on that point.

Thank you.

Willie Coffey has a small supplementary.

Maybe I have missed this during the discussion, but where was the SPA’s internal audit in the process? Did the SPA have an internal audit team and, if so, did that team give all this a clean bill of health?

Scott-Moncrieff is the internal auditor for the SPA and its work covers a number of areas across the SPA and Police Scotland’s business. We rely on Scott-Moncrieff’s work, which is of a high standard. We have noted that it, too, has produced some very critical reports of the SPA’s and Police Scotland’s arrangements. To refer to one of the other questions, as a consequence of Scott-Moncrieff’s work, we were led to the judgment about some of our own approach, particularly the increase in substantive testing.

Was Scott-Moncrieff critical of the whole approach and were its comments, recommendations or otherwise ignored by the board?

The internal auditors produce an annual report on the organisation, and that too highlighted significant weaknesses.

But those points were not actioned, taken up or accepted by the board.

The arrangements that the SPA and Police Scotland have for monitoring and following up audit actions have improved and are improving. There is a detailed discussion and log of any matters that are brought to the attention through audit reports and those are subject to detailed discussion at the audit committee. As the Auditor General suggested in response to a previous question, auditors will report what they find based on the scope of the work and the planned programme of activities. Certainly, we are clear that Scott-Moncrieff’s reports are full and complete and we continue to place reliance on them.

Thank you.

Before I wrap up the discussion, I have one further point of clarification. When the SPA announced on 24 August that Mr Foley had opted to take early retirement, it stated:

“Although the CEO role becomes redundant from 1 September 2017, the Board has given consideration to the most appropriate point for the accountable officer responsibilities to transition, including seeking the view of Audit Scotland.”

What did the board ask you, what did you say and did it listen to you?

We will take that between us, and I will kick off.

I took a phone call from the vice-chair of the SPA board on 24 July, in which she told me that the board was reviewing the scope of the chief executive’s post on the basis of Her Majesty’s inspectorate of constabulary’s recommendation about forensic services. I thanked her for letting me know, I said that of course we would need to audit that and I asked her to liaise with Stephen Boyle as the appointed auditor of the SPA.

Stephen, do you want to pick that up?

10:15  

I met the vice-chair in August, when she talked us through the timeline and process that had been gone through to date. We asked her to provide us with some of the evidence to support the decision-making process and she provided us with some emails and more information on the timeline. That was provided to us in mid-September.

At that point, did you question the information that you were provided with?

We went through the evidence and used that in the compilation of our report. I then had a further phone call with the vice-chair in mid-October.

As well as being the recipient of the information, what did you say back to the vice-chair of the SPA?

In that discussion in October, in light of what we had seen, we particularly brought in the other matters that are before you today and considered whether that prompted the board to pause and reflect on any of that before making its final decision. The vice-chair was clear that it did not.

So you made recommendations to the board and it did not stop and think about what was happening. Is that a fair comment?

Yes.

Thank you very much—that is helpful.

I have been around in politics for a long time, but this is probably the most shocking example that I have seen of financial mismanagement and poor judgment—poor judgment about accountability and poor financial judgment—by an accountable officer, in this case Mr Foley. We have heard about eye-watering sums of money and extraordinary expenditure signed off by him without reference to the board. I very much look forward to Audit Scotland’s 2017-18 report, which I hope will be robust and will look back at whether such practice happened before 2016-17, because I am sure that it did not just arise in one financial year alone.

Given that the Scottish Police Authority and Police Scotland face huge deficits of £47 million in the coming year and £35 million the year after, and in the long-term financial projections, I find the situation frankly shocking and incredible. The committee will of course reflect on the evidence that we have had today, for which I thank the witnesses very much.

We will take a short break before we hear from our next witnesses.

10:18 Meeting suspended.  

10:22 On resuming—