Meeting of the Commission

Meeting date: Wednesday, November 17, 2010

Official Report 469KB pdf

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Audit Scotland Budget Proposal 2011-12

Agenda item 4 concerns consideration of Audit Scotland’s detailed budget proposal for 2011-12. The commission will report to the Parliament on the proposal and forward a copy to the Finance Committee so that it can consider it as part of its wider scrutiny of the Scottish Government’s 2011-12 draft budget.

I invite Mr Black to make a brief statement.

Thank you, convener, for the opportunity to say a few words. What I am about to say echoes aspects of the discussion that we had earlier. My colleagues and I in Audit Scotland are absolutely committed to getting costs down as far as possible and as quickly as possible, but we must balance that with the need to deliver robust and independent audit and comment on significant issues. Determining how far we can go in doing that requires a professional judgment.

The commission was interested in having not only a detailed budget proposal for the coming financial year but an indication of our long-term intentions. Therefore, we have attempted to give a detailed budget proposal for 2011-12 and outline projections for the following three financial years. Broadly speaking, I think that that marches in step with the timescale for the comprehensive spending review.

I reiterate one point that came up in earlier discussion: we are not starting now; we started earlier. We have already frozen pay and undertaken selective freezing of our establishment. We are also working hard on various other efficiency initiatives. That means that, from this November, audited bodies will see real reductions in their audit fees. Russell Frith will be able to give you more information on that as you require.

Moving forward from that start, through the budget proposal, we will be able to reduce the costs of audit by 7 per cent in real terms in 2011-12 and to continue that into future years. Overall, we propose to reduce the cost of audit over the four years coming up by just under 17 per cent in real terms. That is the net cost reduction that will have to be recovered from fees and from the Parliament.

I place on record the fact that, because we started early, the reduction in fees from this year onward will actually be just under 20 per cent.

We have provided as much detail as we can in the budget submission but, as ever, we will do our best to help you with any detailed questions that you may have.

Is the reduction in the cost of audit intended to come through in total in the reduction in the cost of Audit Scotland, which is not quite the same thing?

Yes. We are reducing the cost. The scale and timing of the reductions might vary within year and across the four-year period, but the direction of travel is the same for the cost of Audit Scotland and the cost of audit.

Will you give us a flavour of the implications of that? Hugh Henry touched on the point that the quality and impact of audit are particularly important at this difficult time. Are you able to reduce the cost without reductions in the quality and effectiveness of your audits?

It will be a challenge, needless to say—and so it should be. We have invested quite a lot over the past few years in IT. Russell Frith will be able to help if you are interested in that. We have introduced a new system of electronic working papers to underpin all the audit work. That will certainly generate efficiencies, which are planned into the budget. It will also bring about enhancements in quality through the speed and focus of the work that is undertaken.

We have always committed to training and developing our staff and there is no doubt that we see the benefits of that. I can see it in the quality of the reporting that I get these days.

Looking to the future, the current plan is to remove 47 posts from our establishment over the next three years, starting now and rolling forward. We are confident that we can achieve the first part of that in this financial year through the freezing of vacancies and the natural turnover of staff.

It is fair to say that, going ahead, we will need to be vigilant to ensure that the scope and quality of the work does not fall off. However, because of the investments that we have made in the past and new ways of working on risk assessment and so on, colleagues in Audit Scotland are confident that we can deliver the required reduction without putting the quality of the work at too much risk.

11:30

As I understand it, there was an increase in audit charges because of the introduction of international financial reporting standards. I think that it was intimated to the audited bodies that costs would go up by 6 per cent to cover that. Will you describe the relationship between those pressures and what we have just been talking about?

IFRS came in first in health and central Government. It was new for everybody, including professionals in the audited bodies and Audit Scotland. It was certainly necessary for extra money to be injected into the budget to allow the tooling up, the investment and the resource to allow that to happen. It is fair to say that, subsequently, quite a lot of learning has been going on throughout financial provision in Scotland and so we thought that we could deliver our end of the IFRS business within our existing budget. In effect, we might call that a cash efficiency saving, because we are going to do it within existing resources. Russell Frith can say more on that.

I will build on what the Auditor General has said. We did indeed increase the charges to health and central Government bodies for the implementation of IFRS. This year, we are reducing the charges halfway back again to reflect the fact that there was a peak of work during the implementation and, although there is an increase in the continuing work, it is less than the full amount. The 6 per cent figure is now down to 3 per cent.

For local government, we have been able to do the work within existing resources, because IFRS came in a year later for local government and we have learned from the experience with health and central Government. Also, one of the most complex aspects of IFRS was implemented a year early by local government. That was the private finance initiative and public-private partnership accounting.

Is the net result no increased cost for local government and a 3 per cent increase, ultimately, for health and central Government? I think that you said that the cost for health and central Government was 6 per cent halved.

Historically, it was 6 per cent. We are now reducing it back down again.

It is a reduction.

Yes, and then 7 per cent below that in real terms as you go forward in budget. Have I got that right? Probably not.

The 7 per cent will include an element for that part of our work.

You mentioned that you might well be able to meet the required reduction in staff this year but that you do not know what might happen in the future. Is there a possibility that staff will anticipate that you are going to offer an early retirement and early severance scheme and delay leaving in order to benefit from an enhanced scheme?

First, there is no immediate evidence of that at the moment. The staff turnover levels are sustaining themselves at a somewhat higher level than we might have anticipated during the year, so there is no objective evidence of that.

Secondly, as Diane McGiffen will be able to describe in more detail than I can, we are pitching the voluntary early retirement scheme at a level that will be attractive enough to encourage some people who are towards the end of their careers to go, but not so attractive that people might apply for it purely because they see a financial benefit. A huge amount of work has been done on that, and work is continuing. We are in negotiation with the union, so I guess that the amount of detail that we can give today is limited. However, I ask Diane McGiffen to give Mr Henry an indication of our approach.

I will explain a couple of things just so that we are all clear. We are looking to reduce our staffing by 42 over the four-year period, and the reduction that we are seeking in the first year is about 17 staff.

Because of the recruitment freeze that has been targeted this year, we have already secured the staffing reduction that we need for the whole of the financial year that we are discussing today.

With our trade union, we are currently discussing the range of ways in which we can reduce staffing overall through a voluntary early release scheme, not an early retirement scheme. As the Auditor General has said, this year we have experienced a continuing level of turnover—I think that it was about 8 per cent in the most recent quarter—which has helped us with our target of reducing staffing. Our employees are securing jobs in other parts of the public sector where their skills are valued and desired. Particularly at the moment, people with a sound financial background and experience in auditing and so on are sought after.

The early release scheme that we hope to operate this year will have sound governance arrangements around it. We will open it up and look to secure the reductions in staffing in the places that we need them. However, we are not considering an early retirement scheme. People will be invited to make their own choices about their retirement timing, their financial situation and so on.

A couple of questions follow from that. First, will the early release scheme involve one-off contributions rather than the annual contributions that the early retirement scheme would also require?

It will depend on the circumstances of each individual employee and the pension scheme that they are in. Generally speaking, it will involve one-off contributions.

Secondly, you say that the skills of the people who are leaving Audit Scotland to go elsewhere are highly desirable. Are career promotion opportunities opening up or are people deciding that it is better to be in local government than in Audit Scotland? Are people leaving purely because they are able to use their skills to move up the ladder?

I think that, most often, people are moving on to career promotion opportunities. One employee left to be the auditor general of the Cayman Islands and others have taken up senior positions in local government. Some people have found that auditing is not what they want to do, and a small number of people will decide to do something else. However, people are leaving mostly to pursue career promotion opportunities.

I have a final question that applies to other public bodies as well as to Audit Scotland. One of my fears about the period into which we are moving is that there will be not just job losses, but a lack of training and development opportunities for young people. Local authorities may continue to provide training and apprenticeships, but organisations such as yours may no longer provide training opportunities for graduates. Will those opportunities be affected, or will you protect your ability to train the next generation, which we will need at some point?

We are fully committed to continuing with our graduate training programme. We think that it is not only essential for our organisation, but that it makes a significant contribution to the development of financial skills for the public sector. That is how we view it. Not everyone who undertakes their training with us will stay with us, but they will make a contribution to the public sector. Indeed, we are this week advertising for the next intake of our graduate training programme.

We have also developed some student placement programmes with colleges and universities. We have someone on a student placement with our IT team at the moment and we are considering other options. We are committed to continuing to invest in learning and development. It would be very counterproductive of us to do otherwise.

I wish to clarify the point that you are reducing the number of staff this year by 17, and by 42 over the next few years.

It is 42 in total.

You are saving more than £1 million in staffing costs in this coming financial year, yet you say that you are able to provide the same level of activity as in the past. Is that right?

The budget that is before you is based on the same level of activity, audit and so on. The possibility of the volume of work that is required from us increasing significantly is not taken account of in the budget proposals. Similarly, if there was to be a reduction in the scope of the work that is required from us, we would have to revisit the matter. We are able to do that, for some of the reasons that the Auditor General mentioned earlier.

We are benefiting significantly from investment in the new ways of working and technology that have been put in place in our biggest business group, the audit services group, which comprises about 150 people.

Over the past while, we have been putting in place an electronic working papers project and a way of working that has now been fully rolled out across the organisation, and we are now able to reap the benefits of that.

We have discussed the streamlining and simplification of the best-value programme. We are doing a range of activity on best value, but we have reduced the size and shape of the best-value audit.

Across our performance audit work, which you will be more familiar with, we streamlined and restructured the group and the teams in April this year, so that we could benefit from pooling together a range of data analysis and data collection resources and skills in one place, as well as streamlining and simplifying some of that work.

It has been an on-going journey for us. We did not start it simply in response to the current financial situation, but we have been able to benefit at this point from some of the work that we have put in place in past years.

If I may be the devil’s advocate, the question might arise why you could not have done this earlier.

There are a couple of reasons. The electronic working papers package is only just now being used across all the audits, so the efficiencies that arise from it were not available before. We had not rolled out the training and support for it and we had not made everyone familiar with it. We expect the efficiencies that we get from it to build up, year on year. We have been taking a measured approach to the introduction of the package. We have learned from one sector that has been using it and then implementing it with a shorter learning time thereafter, having resolved some of the difficulties that arose initially. We have built that up steadily so that we could introduce new ways of working without compromising delivery while doing so.

We have always balanced maintaining delivery and quality with changing the way in which we work. We do not have the ability to stop doing what we do so as to switch to a big-bang approach to making change happen.

The stage of development of the best-value audit has been an important factor, and the on-going consultation on areas of focus for the performance audit programme has enabled us to focus on projects and work that will make a difference.

We are very much committed to ensuring that Audit Scotland stays at the forefront of auditing standards, and the budget is based on ensuring that we deliver a high-quality audit. We have restructured our business groups, and Russell Frith’s role in relation to the quality of audit across the public audit regime has been enhanced, so that we maintain consistency of judgment across that regime. That includes our own directly employed staff and the firms that work with us. Next week, we are bringing together all those partners in delivering audit for a sector meeting, at which we will be setting out with all of them the challenges that lie ahead and discussing with them the aspects of quality and focus that we need to maintain.

We hear and share your concerns about ensuring that the quality of audit is maintained.

11:45

I am just imagining an Audit Scotland report on Audit Scotland. In many of the reports that you have put to the Public Audit Committee, it has been clear that during times of increasing expenditure and the availability of more public funding the resultant improvement in services has not been at the same level as the increase in the money going in. In other words, we have not got an adequate return on the money that was put in. Equally, is it an unfair criticism to say that new ways of working are found only when public bodies are put under pressure to save money?

It is not an entirely unfair criticism. Maintaining tight financial discipline is intrinsically a good thing throughout the public sector. If you read the Official Report of previous meetings, you will find that I have said that we in audit need to be responsible with the resources that we demand of the Parliament. By and large, if you take out inflation, our real costs have not moved ahead significantly over the past number of years, except when new requirements have been placed on us.

I will give you two examples. The first is the best-value regime, which was enshrined in an act of the Scottish Parliament and required us over a period of three or four years to produce an entirely new form of reporting for each of the 32 councils in Scotland, to develop that and to migrate it to police and fire authorities, which we are still doing. That was a significant new burden that had to be resourced. Secondly, we took on the audit of Transport Scotland, which was a large new commitment. I am prepared to suggest that, if those commitments are stripped out, our resource requirement has not increased significantly above inflation over the years.

I would like to think further ahead. I hope that, eventually, we will get back to the days of growth, with more money available in the public sector. One of the lessons that we should learn from what you are saying is that we need to ensure that there is a return on any extra pound that is put into the public sector and that the money is not just used to make everyone better off, without improving the efficiency and effectiveness of the service that people in the public sector provide. Are you looking ahead to see whether there is work that you could do on that, or is the matter outwith your responsibility?

It comes back to a conversation that we had in a meeting of the commission some time ago about the extent to which Audit Scotland should be explicit about the opportunities for cost reduction and the release of resources. Over the many years in which we have produced reports, we have identified significant areas in which there is less than adequate evidence that services have improved as a result of major injections of resources.

There are no further questions. I thank Mr Black, Ms McGiffen and Mr Frith for their helpful evidence this morning. As always, it was interesting and illuminating.

11:48 Meeting continued in private until 12:14.