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Chamber and committees

Public Audit Committee

Meeting date: Thursday, January 20, 2022


Section 22 Report: “The 2020/21 audit of the Scottish Government Consolidated Accounts”

The Convener

Welcome back. Item 3 on our agenda is consideration of “The 2020/21 audit of the Scottish Government Consolidated Accounts”. I am pleased to welcome three people from Audit Scotland to give evidence on the report: Stephen Boyle, who is the Auditor General; Michael Oliphant, who is an audit director; and Helen Russell, who is a senior audit manager of audit services.

We have a series of questions, and we will try to get through as much of the report as we can. However, it makes sense to us that we give the report due consideration, and it may be that we come back again in the coming weeks to have a further evidence session on this important report.

I begin by asking the Auditor General to make an opening statement.

Stephen Boyle (Auditor General for Scotland)

Many thanks, convener. Good morning, everyone. I present the report on the 2020-21 audit of the Scottish Government under section 22 of the Public Finance and Accountability (Scotland) Act 2000.

The Scottish Government’s annual consolidated accounts are a critical component of its accountability to Parliament and to the public. The consolidated accounts cover more than 90 per cent of the budget that was approved by Parliament in 2020-21. They report the amounts that the Government has spent against each of the main budget headings and the reasons for any significant differences. They also show the assets, liabilities and other financial commitments that the Government is carrying forward to future years.?

My independent auditor’s opinion on the consolidated accounts is unqualified, which means that I am confident that they present a true and fair view of the Government’s finances, and that they meet the legal and accounting requirements.

I will highlight three areas from my report. The first area is budget performance. The previous financial year is the first in which the Government’s spending and funding to support the Covid-19 pandemic response is reflected fully in its financial performance. Net spending for the year was £50.1 billion, which was £580 million less than the approved budget, which is an underspend of 1.1 per cent. The budget was £10.7 billion more than the previous year’s budget, which is equivalent to 27 per cent, reflecting the significant additional sums of public money that were committed to the public response to the pandemic.

In the accounts, high-level details are provided on how money was spent during the year. However, my report highlights the need for the Scottish Government to be proactive in publishing comprehensive Covid-19 financial reporting information that clearly links budgets, funding announcements and spending levels. That will help to increase transparency in areas of significant parliamentary and public interest.

The second area is financial management. My report provides an update on the status of the Scottish Government’s financial support and guarantees to private companies such as Burntisland Fabrications Ltd, Ferguson Marine Engineering Ltd, Prestwick Airport Ltd and the Lochaber aluminium smelter. Those interventions have not delivered the expected outcomes and are unlikely to deliver value for money.

The Scottish Government is taking action, which is based on my predecessor’s recommendations, to develop a framework that will outline the principles for and approach to future decisions on investment in private companies. That should help the Government to provide assurance to Parliament over its strategic objectives when entering into any future agreements.

The third area is financial reporting. The Scottish Government is committed to a revised timetable for the development of devolved public sector accounts in Scotland. That will happen in two stages. The account for the first stage is expected to be provided for audit this spring; the account for the second stage, which will incorporate local government spending, is expected towards the end of the year. I note that commitment and I urge the Government to deliver progress swiftly on that revised timescale.

As ever, convener, Michael Oliphant, Helen Russell and I look forward to answering any questions.

Thank you very much indeed. We have a long series of questions. I begin straight away by inviting Sharon Dowey to ask her questions on one of the themes that you have identified: financial management.

Sharon Dowey

You mentioned the tracking of Covid-19 spend. Scottish public sector expenditure in 2020-21 changed significantly from initial plans due to the response to the coronavirus pandemic. In-year changes to budgets, which were primarily due to the additional Covid-19 funding, were reported via three budget revisions—in summer 2020, autumn 2020 and spring 2021. The summer 2020 budget revision gave a good level of detail on the allocation of the Covid-19 Barnett consequentials that had been received by that time. However, the subsequent budget revisions in autumn 2020 and spring 2021 gave much less detail on the allocation of further Covid-19 Barnett consequentials and it has proved very challenging to track how additional funding that relates to the pandemic has been allocated and spent.

I have three questions. First, the pandemic has highlighted weaknesses in tracking in-year changes to spending plans. How can reporting be improved to enable better scrutiny of in-year changes to spending plans, even if those are on a less significant scale than in 2020-21?

Stephen Boyle

Thank you very much for that question. I am happy to start. In a moment, I will invite Michael Oliphant to come in, because I am sure that he will want to contribute as well.

First, we recognise the sheer volatility of the situation. The scale of change in spending is really stark. An additional £10.7 billion or so was spent this reporting year on top of the original budget. That is hugely significant.

We welcome some aspects. The presence of three additional budget change mechanisms during the year helped to improve transparency. We would also point to the 300 or so spending announcements. That was unprecedented in scale.

Perhaps it is the case—this has led us to the conclusion in the report that there needs to be a stronger mechanism to connect the budget to spending announcements and then to what is reported as spend—that the arrangements that were in place before the pandemic did not really lend themselves to that level of volatility. In-year financial reporting helps with that.

Ultimately, it is a matter for Government to determine the mechanism by which it wants to report changes, whether that be through quarterly statements or in-year accounts, and so forth, to enable tracking and transparency of spend.

I add that the Government has improved aspects of its financial reporting in this set of accounts. The performance report includes details of Covid spending and analyses that by various levels and by portfolio. However, it is still challenging to track Covid spending to its outcomes through the portfolio basis by which the Government’s accounts are constructed. Consequently, there is perhaps scope for the Government to look at the mechanisms by which it reports on high-level changes, be those due to Covid-19 or due to other aspects that might follow.

I pause to check whether Michael wishes to add anything.

Michael Oliphant (Audit Scotland)

The Auditor General has outlined the key issue, which is the thread that exists between the budget, the in-year spending announcements, the budget revisions that you pointed out and the spending against the budget. It can be very difficult to see those amounts moving throughout the year, particularly when we get to the point of looking at the accounts.

The accounts are presented in line with the requirements of that year’s budget act and of the financial reporting manual, so there are restrictions within which the Scottish Government has to operate. We are encouraging the Government to be more proactive when it comes to some of the other information that it can provide, particularly on, as we note in the report, the significant additional sums that have been applied to the budget this year.

The significant parliamentary and public interest in Covid spending has shone a greater spotlight on that. It is really important that the Parliament and the public are able to see the clear line from budget announcements through to in-year spending announcements and to what has been spent against the budget at year end.

Sharon Dowey

Thank you. That matter has been raised before—getting out the money as quickly as possible has caused issues in relation to showing where the money has ended up. It might have been allocated to a department for one thing but then used for something else, because of the need for urgent action.

I go to my second question. Is the Auditor General aware of any plans by the Scottish Government to present a comprehensive report on changes to budgets and final expenditure as a result of the pandemic? If not, would such a report be helpful, and when could it be expected?

Stephen Boyle

I am not aware of any plans. However, I will invite Michael Oliphant or Helen Russell to speak if they are sighted on any plans in relation to a comprehensive additional report that would be, as Ms Dowey described it, over and above the outturn statements that the Cabinet Secretary for Finance and the Economy gives to the Parliament and the annual consolidated accounts that the committee is considering today.

To answer Ms Dowey’s question directly, we always welcome additional transparency. That is one of the conclusions that we reach in the report, reflecting the circumstances that we have seen through the Covid pandemic—and perhaps before that, too. My predecessor regularly made the point in her reporting that the consolidated accounts really go only so far in helping the reader of the accounts to understand how well the money is being spent. In relation to the connections that she made—which I have continued to promote—between the national outcomes and the public spending that contributes towards them, it is still too hard to track the benefits and value that come from public spending.

Ms Dowey and the committee will be familiar with the fact that Audit Scotland has produced three tracker reports on Covid-19 during the pandemic to try to bring additional clarity and transparency to the scale of spending. In an ideal world, the Government would have been in a position to report publicly on how public money is being spent on Covid-19-related spending.

Ultimately, it is a matter for Government to decide how best to communicate its spending and what that has delivered, over and above the statutory limits of the annual report and accounts. However, we always welcome additional reporting that brings transparency to how our public money is being used.

Did you say that someone else was coming in on that?

Stephen Boyle

My apologies; it is probably back to you.

Okay—thank you.

Finally, will you provide further assessment of the funds committed to and spent on the Covid-19 response?

Stephen Boyle

Yes, we will. We will report in a few months’ time through a section 23 report on the use of Covid moneys during the pandemic as part of our planned reporting. We will also continue to report through our annual audit of the Scottish Government, and through our forward work programme, on how well Covid money has been spent.

I will reiterate one aspect of evidence that we have given previously. It will become harder and harder to differentiate between what is and is not Covid-related spending as the pandemic continues. We have seen in some of the budget statements from elsewhere that that differentiation is no longer being made—for example, the United Kingdom Government no longer makes that differentiation. It is up to the Scottish Government to make its own choices and determine how long it wishes to report on Covid-related spending. However, for the time being, our work in that area will continue as we look to bring transparency to public spending.

One aspect that is highlighted in the report, especially in and around Covid-related payments, is the question of fraud and risks of fraud. Willie Coffey has a number of questions on that subject.

Willie Coffey

I will ask some questions relating to the Covid-19 business support scheme and the commentary in the consolidated accounts relating to fraud, potential and otherwise.

We know that, in trying to be as helpful as possible, the distributing of funds was a very quick process. We also know that that brought with it greater risks. Will you give us a little bit of an overview of how you feel that that process has gone?

Stephen Boyle

Of course. The pace at which money was passed out, by necessity, to different parts of the economy was mentioned a moment or two ago. In our report, and in the Government’s consolidated accounts, we focus on two of the large business support schemes. The first scheme is the business support fund grants, which covered the small business support grant and the retail, hospitality and leisure grant. The second scheme is the strategic framework business fund, which included the retail, hospitality and leisure top-up grant. In total, those two schemes accounted for about £1.6 billion of public spending. The pace of distribution of that money had to be quicker than would normally be the case for public bodies awarding grants outside the public sector, because of the sheer scale of the challenges of the pandemic and the pace at which those occurred.


In our report, we concluded that, by necessity, the Scottish Government has had to accept additional risk around fraud or error in the distribution of that money. At a headline level, the Government’s assessment is that between 1 per cent and 2 per cent of the spending will be attributable to fraud and error. Therefore, a figure of between £16 million and £32 million is likely to have been spent in a way that was not in accordance with the associated laws.

I will say one last thing about that, although I am happy to say a bit more about the measures that the Government and its partners took to mitigate fraud. Our arriving at the figure of £16 million to £32 million required us as auditors to form a judgment about what that meant for the accounts. We looked at whether the accounts were fairly stated and whether there was a question about the regularity of that amount.

Of course, £16 million to £32 million is a hugely significant amount of public money that has not been spent properly. However, with regard to the overall materiality of the Government’s accounts of £50 billion, as we have mentioned this morning, we are satisfied that the accounts are fairly stated and that there is no question of my altering my audit opinion on the accounts.

Willie Coffey

That is very helpful. With regard to whether a proportion of the money was fraudulently obtained or disbursed in error, is any attempt being made to recover any of that money? Whether or not it was fraudulently obtained, are we in a process of trying to recover that, or is that just one of the casualties of the circumstances in which we found ourselves?

Stephen Boyle

Attempts are being made to recover the money. I will hand over to Michael Oliphant in a moment to say a bit more about the steps that the Government and other public bodies are taking. Michael might also want to say a bit about some of the evidence that the Government took in arriving at its judgment about the overall scale of the risks.

It is important to say that the mechanisms that the Government and other public bodies had in place to guard against fraud, as well as some of the arrangements that it had in place pre-pandemic, served them relatively well. I caveat that, because I do not want to give the committee the impression that losing up to £32 million of public money is a positive result. However, we were able to protect against additional fraud. In our report, we state that around £3 million of fraud was actively prevented because of some of the anti-fraud mechanisms that were in place.

We are satisfied that the Government has been clear and transparent on that aspect of the accounts and in relation to the anti-fraud mechanisms that it has in place. I will invite Michael to speak about some of the steps that the Government took and the steps that it is now taking to recover amounts where it thinks that there was error or fraud.

Michael Oliphant

There is some key data on the application process. Across the different schemes, between 14 per cent and 30 per cent of applications were rejected. That is important, because it suggests that a good control framework was in operation to stop fraud almost immediately.

As Stephen Boyle mentioned, there were almost 2,200 cases of detected or suspected fraud across all local authorities in relation to those schemes. That leads to an estimate of the value of likely fraud prevented of between £7 million and £11 million, based on average grant amounts. It is also important to note that only 100 cases actually resulted in wrongful payments being made.

Mr Coffey asked about recoveries. Yes, recovery action is under way. At the end of the financial year, just over £1 million had been recovered. I am aware that about 115 further recovery cases are under way. It is absolutely the expectation that, where payments have been made as a result of fraud, suspected fraud or error, those amounts should be actively recovered.

Willie Coffey

In asking my next question, I am thinking of one of the lessons that we have learned as an audit committee over the years. If local authorities are involved in a process such as this and something is going on—fraudulent claims to the authority, for instance—are they quick to share that intelligence among other authorities, so that they can be alerted to possible similar activities, or do they not do that? Have they even had have time to do that during the pandemic? It seems as though they might have done so and that they have collaborated fairly well to minimise the impact. Is that the case, would you say?

Stephen Boyle

That is a fair assessment, Mr Coffey. There are two components. One is that local authorities have well-established networks of anti-fraud arrangements. Audit Scotland plays a part in that, through heads of anti-fraud and internal audit. You alluded to the committee’s familiarity with the national fraud initiative. All those aspects have set building blocks in place for strong collaboration to guard against fraud.

We witnessed that in real time during the early stages of the pandemic. Where organisations intervened to stop attempted fraud, intelligence was shared across public bodies—that is, local authorities and other bodies that were distributing grants. It is reasonable to conclude that the established arrangements worked well and were then enhanced during the pandemic in an attempt to minimise—albeit not prevent entirely—some of the fraud numbers that we are reporting.

Are there any new lessons to be learned from the accelerated process of disbursing public funds and safeguarding them for the future? Are there any lessons that we can learn that would offer us more protection?

Stephen Boyle

There is more opportunity for us to learn lessons and to reflect, having come the best part of two years through the pandemic. The arrangements in place are stronger now than they were at the early stages, and building on some of the established networks has served organisations well. Those bodies that were familiar with distributing grants to other bodies outside the public sector were able to draw on that.

It is clearly a matter for Government to determine which bodies are best placed to distribute funding and whether that is done on a portfolio basis, as that is the nature of how money flows through, or whether funding is given to organisations that are familiar with distributing it.

There is probably scope to think about deploying grants to organisations—in that that is what they do—rather than necessarily saying that they have to follow a portfolio spending pattern. As ever, you would expect us to say that we encourage lots of reflection and lessons to be learned, not just by Government but by all public bodes that have been involved in the pandemic. Through our own work, we look to contribute to that as we continue to report and through our next Covid-19 update.

Thank you both for those answers.

Craig Hoy wants to come in on this issue of fraud as well.

Craig Hoy

Good morning, Stephen. I do not want to put you on the spot, and I am not sure how good your live tracking presently is in relation to the new round of business support, but about £375 million of support for business was announced in December. The general impression that I am getting through my postbag and from talking to people in hospitality businesses and suchlike is that the money is slower in going out the door than it was before.

On Tuesday, the First Minister said:

“we are working with local authorities and other agencies to get the money out the door and into the bank accounts of those who need it as quickly as possible. However, there are checks and processes that have to be applied to guard against fraud.”—[Official Report, 18 January 2022; c 22.]

Do you have any impression of whether it is taking longer to process this current round? Is that because lessons have been learned and further checks and balances have been put into the process? Could there be other reasons for the delay in this round of disbursements?

Stephen Boyle

To be clear, Mr Hoy, I do not have any up-to-date information on the number of £375 million and how well that is going, beyond what I have heard the First Minister say in the chamber.

There is a balance, and I will offer this perspective on it. The Government needs to continue to get money to where it needs to go as quickly as possible, while using some form of checks and balances, which need to feel proportionate, in order to guard against ineffective use of public funds. Unfortunately, I do not have up-to-date information from local authorities or other public bodies about how that is going. Again, I invite Michael Oliphant and Helen Russell to come in, if they have anything that they wish to add.

Michael Oliphant

No, I have nothing to add to that. The Scottish Government has learned a lot of lessons over the course of the past year on how to deploy those funds quickly, but minimise the risk of fraud and error. Over the course of the past year—the year that we looked at as part of the audit—the controls and arrangements improved as the Government learned lessons. That could be one element but, until we look at that as part of the current year’s audit, there is not much more that we can say in relation to that.

Thank you.

Colin Beattie, do you want to come in on the issue of social security fraud, or has that been covered already?

Colin Beattie

I would like to touch on one or two aspects of that, as well as European structural funds.

Obviously, there have been concerns in the past about the risk of fraud around social security payments in Scotland. However, a large part—more than £3 billion—of the expenditure is administered by the Department for Work and Pensions, under our agency arrangements with Scottish ministers. Therefore, as far as we—and probably Audit Scotland—are concerned, we are not able to establish what the levels of fraud and error might be. However, based on the levels of fraud and error that are reported by the DWP for the benefits that have been paid overall, Audit Scotland has estimated that overpayments in Scotland could amount to £65.4 million. That is a lot of money. How is it accounted for? Does it come back to us as a notional loss? How does that work?

Stephen Boyle

Our report today covers fraud in relation to the distribution of Covid funding, as well as the Social Security Scotland accounts, which are consolidated into the Scottish Government accounts. That is why we are reporting them here.

The numbers that you mention are reported in Social Security Scotland’s accounts and are exactly as you describe. There are still two sets of arrangements for how benefits in Scotland are paid out. Some are paid directly by Social Security Scotland, and others remain with the DWP, which acts as an agent on behalf of Social Security Scotland. For the components that relate to the DWP distributing the benefits, the DWP has estimated that there is a range of fraud or error of between 1.5 and 5.2 per cent of the total funds. That has helped the DWP to arrive at an estimated error, as you said, of £65.4 million.

We have two things to say about that. One is about the audit perspective on that and the other is about the recovery component that you asked about. The auditor’s view is that that £65.4 million of public spending is not compliant with the associated laws and regulations and, therefore, that impacted the regularity opinion on the audit and reference was made to that. The DWP will continue to undertake the recovery of the amount, as people’s circumstances change and it is made aware of that. The committee will be familiar with the fact that the benefits agencies—the DWP and Social Security Scotland—can make arrangements to recover benefits that have been overpaid, whether that is due to fraud or error, and that process will continue.

Michael Oliphant or Helen Russell can say a bit more about the level of error, which is not a brand-new issue. In terms of arriving at a robust and reliable estimate, the committee might recall from previous evidence that some of the DWP’s estimates date back around 20 years, if memory serves me rightly. That was an initial part of the story about why there were concerns about the quantification of the fraud and error. I will invite Michael Oliphant to update us on where the DWP has reached in terms of a reliable estimate for Scotland’s level of fraud and error.


Michael Oliphant

The estimates are more up to date now. Previously, it was very difficult to get an estimate because the data went back to the 1990s—1996 is the year that I seem to recall. Things have changed but the estimate was not reliable at the time.

Across the range of schemes that are delivered by the DWP, the error rate ranges between 1.5 per cent and 5.2 per cent. That is applied across the different schemes. The carers allowance has £15.4 million of fraud and error. The personal independence payment, which probably accounts for the largest part of the £65.4 million overspend, has £24.4 million. Action will be taken to recover any payments that are made as a result of fraud or error.

Colin Beattie

The fact is that we know if an error has happened only when it is identified. You are just talking about estimates. Are they figures that we should be concerned about? Are they figures that have somehow have to be accounted for? How does it work?

Stephen Boyle

As Michael Oliphant confirmed, you can be confident that the figure is robust. The 1.5 per cent to 5.2 per cent is a range that applies to a different range of benefits. It is not a scale that applies to one category of benefits; there is a number of different benefits within that.

The quality of the information about a person comes from the quality of the disclosure that the person makes when they enter the benefits system and claim benefits. There is no 100 per cent pre-verification check when people claim benefits, and that means that the DWP, and now Social Security Scotland, have to accept a level of risk when they award benefits. Perhaps it is the same as payments to businesses, Mr Beattie, in that money from the benefits system needs to get to claimants as quickly as possible. Social Security Scotland has stated that, as part of its compassionate ethos, money should get to where it is needed quickly. That also means a level of risk.

To answer your question directly, I do not think that you should be concerned about it. What matters is that the amounts are disclosed correctly and that, when an overpayment of benefits is identified, effective and robust arrangements are in place to recover that, certainly when it is attributable to fraud.

Colin Beattie

Do we have an actual figure for how much is written off? We are not talking about a write-off figure here; it is just an estimate of what the losses might be, based on past experience. Do we have an actual figure for that? We obviously have figures for sums recovered and actions taken, but some is irrecoverable. How do we identify that?

Stephen Boyle

I do not have a figure immediately to hand. Michael Oliphant or Helen Russell might have that number at their fingertips. If they do not, we will come back to the committee in writing with how much is written off each year. However, you are right to say that the estimated £65.4 million is not a write-off; it is an estimate of likely fraud. The process of arriving at a write-off takes many years of attempts at engagement, recovery terms, and trying to locate people. There will always be amounts that cannot be recovered, whether that is because of benefit claimants passing away or leaving the country, or because their financial circumstances will never lend themselves to repaying those benefits. That is just the nature of it—these organisations have to absorb that level of risk.

Again, I will pause and invite Michael Oliphant or Helen Russell to say whether they know the number that Social Security Scotland has written off.

Michael Oliphant

It is not a number that I have to hand but, if it is available, I am sure that we can provide it to the committee. As the Auditor General mentioned, there is a time lag involved in that, because it takes time to identify an overpayment in individual cases, and there is an investigation into whether that overpayment was made in error or because it was a fraudulent claim that requires police action. Sometimes, those can be very sensitive cases because of the nature of the payments, so there is an important aspect about how the agency would go about recovering that amount, particularly from those who are among the more vulnerable in society.

Colin Beattie

I would certainly be interested in seeing the write-offs figure, and I am sure that the committee would be, too.

I will turn to a different subject. The European structural funds programme is in suspension. That is not a new thing; going back over the years, those European structural funds programmes have been put in suspension quite frequently. The reclaim payments are obviously still done through the European Commission. A risk has been identified that, once the suspension is lifted, the payments might not be able to be reclaimed in full. There is a fairly chunky write-off in 2021 of £16 million and a provision of £28.7 million in relation to future underrecovery of payments. I am a bit concerned about the fact that the programme is going to end in 2023 as a result of the UK leaving the EU. Can you summarise the issues that led to the European structural funds programme being suspended? What issues remain to be resolved in order for the suspension to be lifted?

Stephen Boyle

I am happy to start and I invite colleagues to supplement my response. Unfortunately, that is not a new issue with regard to the European structural funds and the Scottish Government’s arrangements to comply with the European Commission’s guidelines and requirements.

My understanding is that it is notoriously difficult to comply with some of the European Commission’s requirements, and that a lot of countries hit that problem.

Stephen Boyle

I think that that is true. I am a former auditor of the common agricultural policy, and the requirements to receive European grants—as was—were onerous but, at the same time, they were very clear and specific. Effectively, if you wish to receive European grants, you have to follow the European Commission’s rules. The Commission regularly sent its own auditors to sample check compliance for the payments and they found that the Scottish Government and, particularly, some of its partners—a wide network of bodies who were involved in the distribution or were claimants of the European structural funds—were not following the rules, to put it simply as that. That led to suspension arrangements. At that point, the Scottish Government took a decision to continue to pay some of the funds out of its resources, while it took significant steps to enhance the arrangements, so that they met the Commission’s requirements. Following subsequent audits and suspensions being lifted, we have got to the point where, as we said in our report, there has been the write-off of £16 million and a further provision, as Mr Beattie noted, of £28.7 million of potential underrecovery. Therefore, significant amounts of public spending will not be recovered or are at risk of not being recovered.

There has been a difficult story for the Scottish Government in relation to its compliance, the audit and the suspension, and it is now looking at the non-recovery of tens of millions of pounds of public spending. What happens next involves the community renewal fund and levelling up, and the associated arrangements for compliance. The Government must be able to have in place the arrangements to demonstrate compliance so that it does not bring any further exposure or risk to public spending.

Michael Oliphant has also been closely involved in this issue and might want to say something.

Michael Oliphant

I have a little to add. Mr Beattie mentioned the problems that arose with regard to the structural funds, which arose from the very strict rules of the European Commission. It had concerns about the implementation of the management and control system and whether the expenditure was valid after weaknesses were found in validation checks. The Scottish Government has had to undertake a long process to reassess those claims to ensure that the weaknesses are addressed and that the validation checks will satisfy the European Commission auditors and the Commission itself. Once there is that level of satisfaction, there will be a process to go through for the Commission to lift the remaining fund—the European social funds—out of suspension.

The Scottish Government is part of the accounting around that. It needs to be realistic about the likelihood of being able to recover those amounts. That is why the amounts that have been mentioned have been written off or earmarked for future write-off in this year’s accounts.

Colin Beattie

From memory, in past circumstances where there have been similar suspensions, it has turned out to be the delivery agency that has failed to comply, and the Scottish Government has been left to sort that out. Is that the case again?

Stephen Boyle

That has been a feature of some of those suspensions. The Scottish Government and its partners have been agencies and, when the Commission’s auditors have looked at the situation, they have not confined themselves only to the Scottish Government but have also looked at some of the cases that the agencies have been involved in. That was part of the story of why they were not satisfied that the rules had been followed sufficiently, which led to the suspension, so it is not only a Government issue.

Colin Beattie

What are the implications of the ESF programme ending in 2023? If the Scottish Government has not been able to clean it up and reclaim any funds, does it simply become a dead loss? If so, are there other financial implications behind that?

Stephen Boyle

We can answer only so far on the longer-term implications. It will perhaps be for the Government to better explain its understanding of how the arrangements will end in 2023. However, it has written off the £16 million so far and provided a further nearly £29 million, which indicates that there is real uncertainty that it will recover those amounts.

Looking to the future, whatever the UK arrangements are for stepping into the space that the structural fund occupied, I am sure that the Government will want to be satisfied that it has the assurance and compliance arrangements solidly in place so that it does not fall into the circumstances in which it found itself in relation to the European funds.

Colin Beattie

You have touched on my final question, which is about the new UK Government funding programmes. In the past, you have said that there was a lack of clarity about responsibilities for the replacement funds and that you were in discussions on that. Has there been any progress? Do you have a better understanding of what your role will be in monitoring those funds?

Stephen Boyle

I am not able to give the committee the precise clarity in relation to the roll-out of the successor arrangements that you or I would have hoped for at this stage.

It is also important to note that, as part of its arrangements, the UK Government will give grants directly to local authorities, including some Scottish local authorities. We are still in discussion with the Government and the other UK audit agencies to confirm how the associated assurance and audit arrangements will work, so I am not yet able to answer on how they will operate. It is safe to say that the audit regime will not replicate precisely the one that the European Commission sought for the distribution of structural funds and agricultural funding. That is an appropriate thing to say. There has to be a reasonable level of assurance and audit activity around that, but it does not necessarily need to mirror what went before.


Colin Beattie

Given the timing and the fact that some funding has already been made available, it seems inappropriate that we have no idea about what the audit requirements will be in connection with the matter. Do you have any timescale?

Stephen Boyle

As the committee knows, my role is to audit the funds that are approved by the Scottish Parliament. Our audit role for European funding was part of a syndicate and agency arrangement on behalf of the National Audit Office to audit European agricultural funding in Scotland. That is not a statutory component of my role, so I will be led in part by the discussions for the distribution of the successor arrangements that take place between the Scottish Parliament, Westminster and the respective Governments, which will be the larger driver behind the associated audit and assurance arrangements.

We will, of course, continue to stay in touch with the other UK audit agencies on whether we will be requested to undertake audit when the funds are UK led. However, at the moment, I do not have clarity as to how that will unfold, unfortunately.

The committee will be interested in those arrangements when the matter is resolved. Perhaps you could come back to us when you have some clarity so that we also understand what is happening.

Stephen Boyle

I am happy to make that commitment.

We now have some questions on a—[Inaudible.]—area of governmental roles, responsibilities and policy, which relates to resource and capital borrowing.

Craig Hoy

I will start by focusing on capital borrowing. In 2020-21, the Scottish Government borrowed £200 million against its capability of £450 million. There was a similar picture with the use of that leverage in 2018-19 and 2019-20. Could the Scottish Government make fuller use of its capital borrowing powers to help to achieve its capital investment priorities?

Stephen Boyle

As you note, Mr Hoy, the Government borrowed £200 million against an annual cap of £450 million during the 2020-21 financial year. Clearly, there was additional headroom left for it to borrow in that year.

Ultimately, it is for the Government to determine how it wishes to structure its borrowing arrangements. We noted in the report that, consistent with previous reporting, it is not immediately clear how the capital borrowing has been used and whether it is identifiable against one particular project or another. Instead, the Government’s response is that it is allocated in totality against its capital borrowing arrangements. We note that there are no specific details about how the capital borrowing was used, but there was headroom for the Government under the confines of the fiscal framework borrowing caps.

Craig Hoy

On your point about how the borrowing is accounted for, would it be realistic for the capital borrowing figures to be supported and detailed in the consolidated accounts or as part of the major capital projects updates?

Stephen Boyle

That is a helpful suggestion for Government. We are always advocating for additional clarity and transparency on how the money has been used.

Michael Oliphant might want to say a bit more about that, but it is not just the disclosures that you see in the consolidated accounts. There are also associated disclosures in the Scottish consolidated fund account, which is the mechanism that is used to receive funding from the UK Parliament, through the Scotland Office and into the Scottish Parliament’s approved budget. That also makes some disclosures in relation to the capital borrowing arrangements. There are a couple of places where disclosures are noted, but we are also keen to see additional disclosures against particular projects, and Mr Hoy’s suggestion about the major capital projects is a good idea.

Michael Oliphant might want to come in for a moment to comment on how that works in relation to the consolidated fund.

Michael Oliphant

I will comment on the point about more details in relation to projects. The rules and framework for the Scottish Government’s capital borrowing powers are outlined in the fiscal framework. The Scottish Government can usually borrow for a term of 10 years, but sometimes for more than 25 years. The underlying assets—in this case, of the projects—define the length of loan and the timescales that are applied.

As we have mentioned in previous reports, we are keen for the Scottish Government to give more disclosures about the specific projects that its loan funding is for. Quite often, the Scottish Government decides close to the end of the financial year how much it is going to draw down against its annual limit. That is a financial management decision that is based on the amount of traditional capital spending that has gone out, the progress of other projects within the capital spending programme and how best the Government can ensure maximum value from the borrowing that it draws down. At the end of the day, it is borrowing and it has to be paid back, so that side of the equation also needs to be factored into the Government’s decision.

Craig Hoy

Finally, I have a three-part question about resource borrowing. Can you give us a flavour of how effective the Scottish Government has been in utilising its resource borrowing powers? Has the pandemic highlighted any concerns about the scale of those powers? Looking back to 2017-18, there was an overestimate of income tax, which meant that the Government could borrow in relation to that. If, year on year, we find ourselves with the same problem, at what point does a forecasting problem become a structural problem? If we continue not to meet the income tax receipts that the Government suggests, do you have any concern that using resource borrowing to balance shortfall might become a structural issue, rather than a forecasting issue? Do you have any concerns in relation to income tax?

Stephen Boyle

Some of the factors that you describe will be under close consideration as part of the review of the fiscal framework arrangements that the two Governments will be undertaking shortly.

You mentioned resource borrowing. This is the first year that the Government has undertaken resource borrowing under the existing fiscal framework. As you suggest, Mr Hoy, that is to cover for an underrecovery of income tax receipts, relative to a forecast that was made for the 2017-18 financial year. It is safe to say that there is always bound to be variability from one year to the next, especially in some of the earlier years of the estimates from the Scottish Fiscal Commission. As those estimates have become refined and even more reliable, I think that we will see less volatility. However, events happen, such as a pandemic, and they will change the nature of likely income tax receipts, because there is more volatility in the job market.

It is for the Parliaments and Governments to determine the nature of the relative powers of the fiscal framework. As many others have said—and I will limit my remarks to this—the fiscal framework was not designed with a pandemic in mind, and the extent to which that translates to fiscal powers increasing, decreasing or staying the same will be decided through discussion, as the Governments go through the consultation and review of the fiscal framework.

Thank you.

The Convener

Before we finish, Auditor General, I highlight that the committee’s attention was attracted by your judgment that it was necessary to spotlight the Crown Office and Procurator Fiscal Service in your report on the Scottish Government’s consolidated accounts. You identify special payments to the tune of £40.2 million that the service had to make in the financial year 2020-21, £40 million of which were payments to individuals following legal action against the Lord Advocate

“in connection with the acquisition and administration of Rangers Football Club”.

By my calculation, 99.5 per cent of those special payments went to those individuals. From an audit perspective, we are interested in finding out whether that gives you fundamental concerns about the service’s financial position.

Stephen Boyle

I will bring in Helen Russell to say a word or two about Audit Scotland colleagues’ audit judgments in respect of that matter, but I thought it necessary to include its financial implications in the Scottish Government section 22 report for a couple of reasons. First, it represents a significant amount of public spending, given that the Crown Office and Procurator Fiscal Service accounts are consolidated with the Scottish Government accounts. I have taken no firm view on whether I will undertake any dedicated reporting on the matter, because, as you know, there is to be a judge-led inquiry into some of the circumstances surrounding the events and the associated payments. However, for the sake of transparency, public awareness and the committee’s interest, I thought that it was necessary to include the issue in the report on this set of accounts.

As for the scale of the case and its implications for the service’s overall financial position, we partly note that in the report. However, I invite Helen Russell to say a bit more about that.

Helen Russell (Audit Scotland)

The £40 million refers to money that has already been spent plus accruals made in the Crown Office’s accounts that have been brought into SG accounts. Just to bring you up to date on the facts, I point out that there are six cases. Two have been fully closed and completed, a third has been settled, and, as I am sure that you will have read in the press, a fourth case has been thrown out by the courts. As a result, two cases remain on-going.

As for the amount that has been spent, £24 million was spent in cash terms during 2020-21, and obviously there has been a lot of news in the press about that. There is also £16 million of accrued moneys to cover legal costs and the costs of the on-going court cases. That makes up the £40 million. I agree with the earlier comment that it is a significant amount of money and note that the cases are on-going.

I hope that that is helpful.

The Convener

Thank you. Are you in a position to give us an estimate of the outstanding exposure to the cases being litigated, given what you have said about one of the cases being settled, two being closed and others still on-going? Do you have a sense of the value of those cases?

Helen Russell

Unfortunately, I am not able to do that. I do not have that kind of detail to hand. Obviously, as cases continue, are looked at and work through the actual court processes, the costs will add up. If it would help, we could make inquiries of the auditor of COPFS and the Crown Office itself about whether they have any more thoughts about the actual costs.


Stephen Boyle

Perhaps I could make a comment, convener. Helen Russell is right, but I would also point out that, as has been mentioned, before some of the more recent developments in the cases, there was a provision of £16 million to cover future costs. As ever, events are unfolding, and that figure will have been reliable when the accounts were signed off late in the autumn of the year. The on-going audit of the Crown Office and the audit of the Scottish Government present an opportunity to report publicly. We will continue to do that, but, as ever, we are mindful of the judicial inquiry into the circumstances of these cases and when we will therefore be best placed to comment further.

That is understood, but your door is still open to further inquiry from an audit perspective into what has happened.

Stephen Boyle

That is right, convener. We will publicly report on the matter where it adds value and increases transparency, and we will keep an open mind on how things are progressing.

The Convener

Thank you very much indeed.

I bring this part of our proceedings to a close by thanking Helen Russell, Michael Oliphant and the Auditor General for their evidence this morning. As I mentioned at the start of the session, the audit of the Scottish Government’s consolidated accounts is an important piece of work, and there are many aspects that we have not had a chance to talk about and put questions on. I hope that, with your co-operation, Auditor General, we will be able to do so in the very near future, because the report contains some very important issues of public concern.

With that, I close the public part of the meeting and move into private.

11:17 Meeting continued in private until 11:42.