“Update on developing financial reporting”
Under agenda item 3, we will take evidence from Audit Scotland on the AGS report entitled “Update on developing financial reporting”. I am delighted to welcome Caroline Gardner, the Auditor General for Scotland; Mark Taylor, the assistant director of Audit Scotland; and Gordon Smail, a senior manager at Audit Scotland. I understand that the Auditor General would like to make an opening statement.
The report that I bring to the committee today provides an update on the actions that the Scottish Government is taking to further develop its approach to public financial reporting. The committee might recall that I previously emphasised the importance of comprehensive, transparent and reliable financial reporting in my report of July 2013.
Scotland’s public finances are on the cusp of significant change, with the introduction of new financial powers through the Scotland Act 2012 from today and the prospect of further financial devolution in the future. That is happening at a time when public services are facing considerable pressures from falling budgets and increasing demand. The quickly changing environment for public finances means that the case for financial transparency as part of a strong fiscal framework has never been stronger.
The Scotland Act 2012 and the changes that are anticipated to flow from the Smith commission agreement mean that the Scottish Government will, in the future, be responsible for raising more of its revenue and will have more responsibilities for spending. Its budget will also become more dependent on Scotland’s economic performance, and the amount that it raises through taxation and spends on welfare will be more directly affected by policy decisions in Scotland.
As a result of that, the Scottish Government will have more control over and more responsibility for its finances, which will provide an opportunity for new approaches and will bring new financial risks. Transparent reporting will be more important than ever to support decision making, to safeguard public confidence and to maintain effective accountability. That position is reflected in the Smith commission’s recommendation that the Scottish Parliament should expand and strengthen the independent scrutiny of the public finances.
The Smith commission also called for an updated fiscal framework to support further devolution. Maintaining and enhancing transparent financial reporting of the public finances in Scotland is an essential component in this quickly changing context.
In the light of the new financial powers for the Scottish Parliament, we think that information could be enhanced to show more clearly, for example, how the different elements of funding support total Government spending and how the performance of the economy is affecting budgets, and the financial position of the Scottish public sector as a whole. It is important to be clear that the audited accounts of the Scottish Government and other public bodies already provide a good starting point for understanding their financial position, but they do not show the overall position of the devolved Scottish public sector as a whole, including the balance between funding and spending, and the overall level of borrowing.
We think that consolidated public sector accounts that pull together information in one place on what the Scottish public sector owns and owes overall would provide a better understanding of the financial position. It would give the Scottish Parliament, taxpayers and decision makers a fuller picture of where money is spent and of the longer-term implications for the public finances. The Scottish Government recognises the need to further develop its financial reporting and is currently considering options for the future.
The next step is for the Scottish Government to set out the details of its proposals for consultation with the Parliament. We in Audit Scotland will continue to monitor progress and report publicly as the Scottish Government develops its plans. We will also continue to play our part in helping to develop a high-quality fiscal framework for Scotland that reflects the new financial powers and the related opportunities and challenges.
As always, convener, my colleagues and I are happy to answer questions from the committee.
Okay. Thank you. I will ask the first question. You referred to consolidated public accounts. Will you provide some of the history of why we do not already have consolidated accounts and say what happens in that regard in other parts of the United Kingdom and perhaps further afield?
Certainly. I will ask colleagues to chip in but I will outline the broad picture first. Up until this point there has not been a particularly strong case for consolidated accounts for the whole of the Scottish public sector. What the Scottish Government has been doing until now, broadly, is putting forward a budget to the Parliament that sets out how to spend the bulk of the money that comes through the block grant from Westminster and some small additions from, for example, non-domestic rate income and small amounts of money from other sources. As of today that is changing quite markedly.
From today, the Parliament also has responsibilities for raising taxes, which will be done this year through the land and buildings transaction tax and the Scottish landfill tax, and from next year through the Scottish rate of income tax. The Parliament has some limited borrowing powers from this year, which will increase in the years ahead. The Smith commission set out a clear direction of travel towards more revenue being raised here in Scotland through decisions of the Government and the Parliament and having more responsibilities for borrowing and—it is likely—welfare in future. All of that means that, suddenly, the financial reporting that we have had does not give us a full enough picture to understand the implications of decisions about taxation, the balance between different types of tax, borrowing and, potentially, welfare spending. So, this is very much a moment in time when we think that consolidated accounts become necessary.
It is interesting to note that the Scottish Government already has the power to produce consolidated accounts. There has not been a strong case for using it so far but we think that that is changing quite fast just now.
Mark, do you want to add anything?
I think that this issue came up earlier, but the Scottish Government is quite clear about where accountability lies and that there is an existing set of consolidated accounts for the Scottish Government and different sets of accounts for different bodies. Given the historical situation that Caroline Gardner set out, those vehicles have been felt to be the ones to provide accountability and details on the expenditure of individual bodies. As Caroline said, we are in changing times and, as the level of responsibility increases, there is a real opportunity to bring in consolidated public accounts from here on.
Would it have been considered good practice to do it before, though, or would it have been difficult to pull together such accounts? What has been the barrier to doing it?
I think—
I mean historically, going way back to when the Parliament was formed.
Sure. As I said, back in 1999-2000, there was not a strong case for it anyway, but this is also a field that is changing quite a lot across the UK and globally. For example, the United Kingdom Government now produces whole-of-Government accounts, but it has done so only for the past five years—the fifth set was published just last week. During that period, its ability to do that work has increased and the usefulness of the accounts and of the information that is included has grown and developed.
It is not that the Scottish Government is behind the pace; it is that this is an area in which good practice is evolving quite quickly, and what makes sense for Scotland is also changing. There is clearly a cost to doing this work, but we do not think that it is significant given the benefits. The balance of what we get in return for the effort of producing the accounts is tipped markedly in favour of producing them.
As a matter of interest, to what extent is Audit Scotland working with the Scottish Government on the issue?
We are working quite closely, as I think you would expect. We discuss our views about what good practice looks like and the Scottish Government’s plans, and in our “Update on developing financial reporting” we report on its commitment to developing its financial reporting in this context.
Mark Taylor, as the person who leads the audit of the Scottish Government for me each year, is in close contact with the director general who is responsible for finance and with other colleagues about it, and he might want to give you a bit more flavour of the way we go about it.
It is fair to say that we have been in active and constant discussions about the plans and how they are developing. However, there is an important distinction between our role as auditors and the Scottish Government’s role in making decisions. We put questions to it and make suggestions, and we get into engagement and discussions around that. However, ultimately, it is for the Government to decide and for us as auditors to come in at the back of that to audit how well the system is working from a whole-system perspective.
We have that engagement, but it is important to note that we do not muddle up who decides how this should work.
Given your close relationship with the Scottish Government, do you believe that it is on the path to delivering the enhanced financial reporting that you are looking for?
That is hard for us to say, for two reasons. First, as Mark Taylor said, the Government is responsible for developing its own plans. We know that it is doing that, but we have not had detailed involvement with what those plans look like. Secondly, whatever financial reporting the Scottish Government produces needs to meet the needs of this Parliament, and we understand that there is a commitment to consult the Parliament on how far the reporting needs to go in order to do that.
What we are looking to do is to move the debate forward to help the Parliament to think through what it requires, and to set out our view, as auditors, of what good practice looks like, in order to help to inform that debate.
In your report, you quite rightly focus on the Scottish Government and its need to ensure that there is the greatest transparency. With the delegation of further powers and a much-changed relationship with organisations such as the Treasury, should greater transparency in that interlocking relationship extend to UK bodies?
The short answer is clearly yes. There will need to be dialogue about the extent to which this Parliament needs greater insight into—and, potentially, oversight of—some of the bodies that play an important part in achieving the Scottish Government’s objectives.
However, in broad terms, we are in a position in which the UK Government produces whole-of-Government accounts that include the whole of the Scottish public sector. What we do not have is an intermediate layer of information on the Scottish public sector as a whole for people in Scotland, starting with this Parliament, to use, and for the Treasury, the UK Government and people on the wider UK stage to show an interest in.
I thank Audit Scotland for pushing this agenda really hard, because it is very important. How difficult would it be to produce consolidated accounts?
It would require effort, but we do not think that it is impossible for the Government to do it. The Scottish Government and all other public bodies already produce returns that allow consolidation to happen for the UK whole-of-Government accounts. They are funnelled through the Scottish Government to Her Majesty’s Treasury, and our auditors play a part in providing assurance on them. The missing step is to pull it together for Scotland. More effort would be required to do that, but we are not starting from scratch. A lot of experience has been built up over the past five years as the UK whole-of-Government accounts have gained currency.
When you were describing that, it struck me that, if there are whole-of-UK accounts, presumably that means that we produce whole-of-Scotland accounts, otherwise how could whole-of-UK accounts be produced?
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My colleagues will keep me straight if needs be, but that is not quite the case. Each of the 200 or so bodies that make up the Scottish public sector produces its returns, which is a complicated process. That allows the transactions that go on between individual bodies and between Scottish bodies and UK bodies to be taken out. The information is then transmitted to the Treasury so that the consolidation can happen. Consolidation for Scotland does not happen. That is the additional step that would be needed. However, the information and the processes are all there already.
Broadly speaking, if we decided to have consolidated Scottish accounts, we could do that within a financial year, and it would not be an enormous accounting challenge.
It would be doable. I would expect that, as happens at the UK level, there would be lessons to be learned on the way. I would think that improvements would need to be made to the first set.
Mark Taylor may want to talk about some of the complexities that we think would need to be worked through.
The basic building blocks are there, in that individual bodies prepare information in a broadly consistent form; the challenge would be in putting those building blocks together. Another challenge would be in presenting the right or appropriate information that reflects the Scottish context so that the accounts are not just a dry document that adds up and consolidates figures—although there would be value in that—but are instead a document that has the right commentary, disclosures and notes in it. That is where a bit more investment would need to be put in.
Inevitably, there would be technical challenges. It is not simply about adding up the numbers. One of the main challenges would be to eliminate transactions between individual parts of Government, or between one part of Government funds from another part, identify the exact amounts involved and, even more challenging, who owes who what. Although detailed information is available to all bodies about where their debts are, there are technical challenges in aggregating that up and eliminating some of the transactions. The National Audit Office has identified those challenges in putting together whole-of-Government accounts at the UK level.
As a number of us will recall, we passed the Public Finance and Accountability (Scotland) Act 2000, so we must have envisaged at the time that it would be possible to do this.
On your observation about what is not in the accounts, some schools are not going ahead or are being delayed because of an accounting procedure that is coming from Europe. Is that the sort of thing that could be tidied up by having consolidated accounts? The issue seems to relate to whether the hubcos are on or off balance sheet—that debate seems to have been going on in relation to the UK accounts for a long time. Could we clean up all that by having consolidated accounts?
I will start off and Gordon Smail may want to come in behind me. Because we do not have Scotland whole-of-Government accounts, we do not have clear oversight of all the assets that we have across the Scottish public sector. It is important to know whether those are being maintained or whether they are being allowed to degrade in the face of financial challenges; that information could also help our thinking about how we can make the best use of assets across the public sector. There are also some key liabilities, such as the public sector pension liability for Scotland as a whole. That information appears in a number of different places; we do not pull it together to say what the position is across Scotland. We think that such insights would be very useful, not only to the Parliament but much more widely, for decision making and accountability.
I return to a point that was asked about earlier. Is Audit Scotland aware of whether the Scottish Government is looking at consolidation as part of its entirely correct approach to have more transparency and greater accountability in relation to Government accounts?
That would be a question for the Scottish Government.
Yes, you are right.
Your conclusions on forecasting are very strong. You also make pertinent observations about the Office for Budget Responsibility being independent of Government and therefore able to provide that forecasting. Would it be essential for the new machinery that we have in Scotland—the Scottish Fiscal Commission—to be independent so that it can provide the correct check and balance, irrespective who is in government, as happens south of the border?
Absolutely. The detail of the Scottish Fiscal Commission’s remit is a policy matter for this Parliament. The principles of transparency, non-partisanship and independence that are set out in Organisation for Economic Co-operation and Development guidance are absolutely central. The proposed legislation to put the commission on a statutory footing needs to protect those principles. I know that that is a strong theme in the consultation paper, but those principles are critical, just as they are for our work.
Thank you.
Good morning. Paragraphs 21 to 25 of the report are positive. It appears that, because of the changing financial landscape, the Scottish Government is prepared to look at improving the financial mechanisms. Is that an accurate assumption?
Yes. We have tried in the report—as we do in all our work—to give the Scottish Government credit for what it has achieved, including its good record of financial management so far; the strong financial statements for each of the individual bodies; and the commitment to taking that work further.
In light of the speed of change, we would like the Parliament to be provided with more information on the detail of the Government’s plans and how they will give effect to our recommendations in practice.
At paragraph 28, the report highlights the situation regarding the Scottish budget documents. It states:
“The Scottish Government’s budget will become more dependent on Scotland’s economic performance. The amount the Scottish Government raises through taxation and spends on welfare will be affected by its policy decisions.”
I accept that those comments are accurate. However, the report goes on to highlight that the Government
“has recognised the need to further develop its budget documents and annual accounts to reflect these new responsibilities.”
A Scottish Government of whichever hue may put forward a set of proposals to improve the economic situation in Scotland. However, our budgetary process takes some six months, whereas the budget process at Westminster is altogether different, so last-minute decisions at Westminster may have an effect on Scotland. As a consequence, the budget proposals that a Scottish Government puts forward may be negated or may have an adverse impact.
How could the Scottish Government of the day try to deal with that, particularly with regard to reporting and auditing?
I absolutely recognise the challenge, but I am not sure that we are the people to help you with the answer. We are saying that the need for such budget scrutiny by this Parliament will increase from what it has been in its first 15 years, because of the importance of the taxation and welfare decisions that will need to be taken in future.
It is clear that, in the political context in which we are now working, there are challenges in the way that our process joins up with what happens in Westminster, and in the way in which decisions about matters such as adjustments to the Barnett formula are made. All that requires a great deal of thought and attention by both Parliaments, ideally working together.
We can help you by highlighting some of the elements that we think should be there, such as good practice on fiscal responsibility, on which there is the strong commitment that this Government has made since its election in 2007.
That is helpful—thank you.
Drew Smith will go next.
Stuart McMillan highlighted the issue of forecasting, essentially, for economic uncertainty, and the impact that changes in Scotland’s economic performance would have on the money that would be available to fund public services and other things. To what extent is that the driver of the need for consolidated accounts? Is it the case that we need to know how much we are spending because there is a concern about what we will be taking in in the future?
I do not think that it is a particularly strong driver. The Scottish Fiscal Commission, in its first report, endorsed the Government’s forecasts but also recommended the development of more data and a better understanding of things such as the behavioural impact of taxation changes in terms of likely responses.
What we are saying is very much in line with the conversation that you had earlier with my colleagues from the Accounts Commission looking at the Scotland-wide level. Having an overall picture of what the current financial position looks like helps with making better decisions about tax and other spending decisions.
We know already that, in the UK, the whole-of-Government accounts are a very important input to the OBR’s “Fiscal sustainability report”, which is produced twice a year. The information can be used by other people to help with such decisions rather than necessarily informing decisions directly.
Mark Taylor may want to add to my comments.
As a main advantage, a whole-of-Government accounts equivalent, or Scottish public consolidated accounts, would give an overarching view that would allow you to manage longer-term financial risks. It would allow you to know, based on the decisions that you are taking today, some of the potential implications of those risks down the line, in relation to the liabilities that are carried across the whole system and where assets lie within the system.
In its report “Whole of Government Accounts 2013-14”, which was published in the past week or so, the National Audit Office covers some of the uses to which whole-of-Government accounts, now that they have been available for a number of years, are increasingly put.
One of the key features of such a set of accounts is that it is pulled together in accordance with clear international financial reporting standards and audited. Others, including the Parliament, can therefore use the accounts with real trust in the information that is provided.
On a point of order, convener. I do not usually make points of order. I did not want to interrupt the Auditor General’s comments, but I simply want to put on record that at no point did I use the language that Drew Smith alleged that I used, particularly with regard to the point in question.
We have two options here. Either Drew Smith can reconsider—
I am sorry if I upset Mr McMillan, convener, but I thought that he was referring to the fact that there will be an element of variability in the Government’s future revenue as a result of the decisions that it takes on raising revenue in Scotland. If that is not an accurate reflection of what he meant—
No, it is not.
—I am happy for him to clarify that for the record, if that is easier.
I think that Stuart McMillan has clarified the point, and we can move on. If we need any more information, we can refer to the Official Report later.
Gordon Smail has a point to make in response to Mr Smith’s question.
It is just a very minor point to emphasise the importance of the whole-of-Government accounts and the need for them to be audited. Whatever information comes through the UK whole-of-Government accounts and whatever lies down the road for Scotland, it is important that those accounts are audited and that there is an independent checking process that forms a good basis for discussion in Parliament and which gives other people confidence.
I will tread carefully here, but if I understood your response to Mr Scott correctly, Auditor General—and I hope that Mr Scott finds my rephrasing of the response that he received acceptable—you seemed to be saying that, to an extent, all the information about public bodies in Scotland is already collected but the problem is that that happens at a UK level and is not consolidated on a Scottish basis. Thinking about the previous evidence session, I presume that that includes Scottish local authorities, whose accounts will not be examined at a Scottish level. Because the information already exists at a UK level, I am less concerned about the issue, but is there a tension between pulling this information together and scrutinising it for other purposes? After all, local government and all the bodies that we are talking about are independent. Is there a danger of accumulating information at a Scottish level that should properly be scrutinised and be a matter of concern at the local level?
That is a really important point—I was interested in Mr Beattie’s earlier question on the matter. There is no question but that local authorities in Scotland are responsible for their own finances, including borrowing and other long-term commitments that they enter into, and no one wants to blur that accountability whether for good reasons of principle or because there is a risk of spooking the people who are lending the money.
What we are saying, however, is that, in Scotland as in the UK, local authorities make a significant contribution to the delivery of the Government’s policy objectives and the services for which it is responsible. If a local authority were to find that it could not meet its obligations, the strong likelihood is that the Scottish Government would need to step in not so much to service the debt but to ensure that services could continue to be provided. There is therefore a relationship between the two sets of accounts that we think needs to be recognised in the same way that it is already recognised within the UK whole-of-Government accounts. All UK local authorities are consolidated into that overall picture, and that has not caused any confusion about accountabilities or where the liability sits. What it has done is provide that bigger picture of what the liabilities are, which is what consolidated accounts would do, as well as information about, for example, maturity dates, lengths of loans and other commitments, pensions liabilities and the assets that sit alongside all of that, which gives the whole picture of the risks at the high level as well as at the level of each of the bodies that make up Scottish public services.
That was helpful.
I have no objection to the Scottish Government’s taking the lead to provide the same information at a Scottish level, but are you aware of any discussion that has been had with the Scotland Office on the matter? If the information is accumulated and held at a UK level by the UK Government, would it not be simpler for the Scotland Office to accumulate and consolidate the information for Scotland, instead of the devolved Administration trying to do that separately?
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Given how the devolution settlement is evolving, I think that it is entirely appropriate for the Scottish Government itself to keep ownership of the picture for Scotland and to contribute to the UK-wide picture. The technical administration is already handled by the Scottish Government, working with the Treasury. Our auditors work closely with the Government as part of that process. We are looking for a straightforward pulling together at the Scotland level. That does not happen at the moment but, as Martin Taylor said, all the building blocks are there.
Good morning. I am conscious that audited consolidated accounts take time to produce. However, without worrying about how long it takes, my point is that surely Scotland is at a stage at which we are raising taxation that is to an extent variable and slightly unpredictable, and that therefore our ability as a Parliament to scrutinise our financial affairs is now somewhat time dependent. I have not heard anything about that in this morning’s conversation. What are your thoughts about how quickly we can be provided with meaningful management accounting data, as opposed to getting financial accounting data a year or two later, which I think is what we have previously discussed?
That is a really good question and one that we have been discussing among ourselves and with our colleagues in the Scottish Government. At the moment, the Scottish Government’s consolidated accounts, which exclude some important parts of the public sector, are produced over the summer each year and then audited and laid before the Parliament during the autumn term. To my mind, there is no question but that if the Scottish Government were to commit to introducing consolidated public sector accounts, that process would take longer. For example, the UK whole-of-Government accounts that were published last week related to the 2013-14 financial year, and that is the quickest that the Government has ever done them. The accounts have a six-month lag, and I expect that it would take as long to publish such accounts in Scotland.
That said, as part of our thinking on the issue we have been looking at international experience. For example, the New Zealand Government publishes what are, in effect, monthly management accounts: it publishes at the end of each month its financial position as at that month. That is part of the overall financial management approach that the New Zealand Government takes. That is absolutely an aspirational goal and not something that we think that Scotland should be working for in the short term. However, I think that there is a debate to be had between the Government and the Parliament and other interested parties about what the direction of travel should be and what is a reasonable investment to be making, given all the other things that the Government needs to deliver in the context of the Scotland Act 2012, the Smith clauses and so on. There are decisions to be taken and although we are certainly not looking for perfection in this area, it seems to us that it is important to have clarity around the direction of travel at this stage.
Mark Taylor wants to add to that.
I agree with all of that. It is of course valuable to have information in consolidated public accounts about the current year, but what is much more valuable is information over a long trend period about what is happening over time. Although there is a challenge in getting the most up-to-date information out as soon as possible, the trend information has continuing value. Its real value lies in helping us to understand what is happening with pension liabilities, debt and public-private partnership and non-profit distributing commitments over the longer trend period.
Okay. Thank you. On behalf of the committee, I thank the Auditor General for her presentation.
I suspend the meeting for five minutes.
11:03 Meeting suspended.