Finance Committee, 21 Nov 2006

Meeting date: Tuesday, November 21, 2006

Official Report 144KB pdf

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Budget Process 2007-08

I thank John Swinney for convening the first part of the meeting and I thank members for choosing me as convener. I look forward to following in the footsteps of Des McNulty, who convened the committee ably.

For the second item on the agenda, we have with us Margaret Jamieson, who is the convener of the Scottish Commission for Public Audit. Last week, we considered the SCPA's report on Audit Scotland's spending proposals and agreed to invite Margaret Jamieson along today so that we could gather more information.

The SCPA's responsibility is to scrutinise Audit Scotland's proposals and to make recommendations to Parliament by laying a report. Because the Finance Committee has overall responsibility for scrutiny of the Executive's draft budget, by convention we include the SCPA's report in our report. There is a written agreement between the committee and the SCPA, a copy of which is in the committee papers. As the clerk's cover note says, the SCPA will try to answer our questions and make available information on its scrutiny of Audit Scotland's proposals.

I am delighted that Margaret Jamieson accepted the invitation to attend this meeting and I ask her to give us a verbal report on the SCPA's deliberations, before I invite questions or comments from members.

Thank you. I congratulate Wendy Alexander on her appointment as convener.

Thank you for inviting me to provide details of the SCPA's scrutiny of Audit Scotland's 2007-08 budget proposal. I trust that members have seen the SCPA's report and Audit Scotland's budget proposal. The annexes to the SCPA's report include a word-for-word record of commission meetings and supplementary written information from Audit Scotland.

It might be helpful if I provide background information on the work that was undertaken to scrutinise the proposal before I talk about the recommendations in the SCPA's report. The SCPA first took evidence from Audit Scotland on its estimated expenditure for 2007-08 on 26 April. The meeting focused on efficiency savings and increases in staffing levels. Audit Scotland then provided a supplementary written submission, which included additional information on efficiency savings.

The second evidence session, at which the Commission scrutinised the details of Audit Scotland's bid, took place on 27 September. That meeting involved further questioning on efficiency savings and staffing levels but also focused on senior staff salaries and pensions liability, which had emerged as an issue. The supplementary evidence that was provided by Audit Scotland after the second meeting provided additional detail on the basis for senior staff's salary increases, the basis for the 38 per cent increase in income from local authority fees and copies of correspondence on pensions liability.

The SCPA's report made a number of recommendations; I will talk through the issues behind them. The report recommended that Audit Scotland provide

"a break down of targets for planned efficiency savings (analysed between cash releasing and time releasing)."

The commission considered that its scrutiny would be aided if Audit Scotland would provide such information, given that Audit Scotland has provided detailed information to the Executive on what constitutes good practice in measurement and recording of time-releasing and cash-releasing savings. In addition, Audit Scotland noted in evidence a number of cash-releasing savings that appeared to have emerged as a result of events that were outwith Audit Scotland's control; for example, there was no longer a requirement to audit Argyll and Clyde NHS Board. The commission therefore considered it important for Audit Scotland to provide a breakdown of planned savings and additional savings that had not been anticipated.

Another recommendation related to pensions liabilities. The Auditor General for Scotland advised the commission of a liability of £300,000, which Audit Scotland considered had arisen from difficulties with the Scottish Public Services Ombudsman Act 2002. Audit Scotland told the commission that, according to legal advice, liability in relation to former Scottish commissioners and one other member of staff, who were in post before the post of Scottish public services ombudsman was established, remains with Audit Scotland. The Auditor General for Scotland told the commission that before receiving that legal advice he had thought that liability would lie with the SPSO. In its report, the commission expressed concern that Audit Scotland did not factor the liability into its budget for 2007-08 or inform its external auditor about the liability. The report also noted the commission's intention to pursue the issue. The SCPA will hear evidence from Audit Scotland tomorrow.

I understand that members have seen a copy of a letter that I received from the SPSO yesterday, which gives the SPSO's perspective on the issue. I read the letter with interest and although I have not yet had an opportunity to discuss it with my colleagues on the commission, I am sure that they will, during tomorrow's meeting, be keen to pursue the issues that it raises.

The commission asked Audit Scotland about the basis for senior staff salary increases of around 8 per cent in 2004 and 2005 and a further increase of 3 per cent in 2006. The commission made no recommendation on the matter, because it was satisfied by the information that Audit Scotland provided and because the issue does not directly relate to the 2007-08 budget. Supplementary evidence from Audit Scotland described the independent market-salary benchmarking exercise that was undertaken during 2005, which formed the basis of the pay increases. The increases appeared to the commission to be comparable with salary increases elsewhere. Additional information on the issue is detailed on page 33 of the SCPA's report, in annex B.

The final recommendation related to increases in staffing levels. The commission has observed year-on-year increases in the staffing complement at Audit Scotland and has on a number of occasions sought evidence on the basis for the increases. The commission agreed to keep a watching brief on proposed changes to the staffing complement before such changes are implemented. It recommended that, in the interests of good governance, Audit Scotland should notify the commission of any proposed increase in its staffing complement, or of any restructuring, in order to allow the commission to consider the justification for the plans when it is appropriate to do so.

The final recommendation is part of a number of monitoring measures that the commission seeks to introduce as a result of the findings of the Finance Committee's inquiry into accountability and governance. The committee's inquiry report set out the governance framework for the Scottish Parliamentary Corporate Body to follow in exercising its role in relation to commissioners and ombudsmen. The commission welcomes the framework. The SPCB has powers in relation to commissioners, such as the power to approve additional staff, but the legislation that established Audit Scotland and the post of Auditor General for Scotland does not confer on the SCPA parallel powers in relation to Audit Scotland. The commission's draft legacy paper contains a number of suggestions for future working practices, which seek to mirror the SPCB's governance arrangements, if that is possible and appropriate within legislative constraints. The SCPA will also discuss that matter tomorrow.

The commission's draft formal response to the Finance Committee's inquiry sets out changes to commission procedure that have been made as a result of the committee's recommendations. The SCPA will discuss the procedures tomorrow.

I hope that that overview of our work and findings has been useful. I set the SCPA's recommendations in context by noting that Audit Scotland's budget proposal represents a 3 per cent increase on last year's proposal, based on a general price inflation assumption of 2.5 per cent. The commission requested evidence on the reason for the above-inflation increase and received assurances that the difference can be attributed largely to increases in depreciation costs, offset by decreases in employer's pension contributions.

I will be happy to provide further clarification on the SCPA's report today or in supplementary correspondence. Although I will answer for the SCPA wherever possible on the nature of its scrutiny of Audit Scotland, I will not answer questions on specific details of the figures in Audit Scotland's bid, beyond pointing the committee towards information that is provided by Audit Scotland, because direct scrutiny of the bid has already taken place during SCPA meetings.

I thank you for your helpful evidence on the SCPA's scrutiny role. Members of the committee will welcome the fact that the SCPA is proactively reviewing its governance and reporting arrangements. I ask members to be mindful, when asking questions, of the need not to trespass into what is properly the SCPA's procedural role.

Why is the SCPA satisfied with the Auditor General for Scotland's response to its questions about salary increases? Margaret Jamieson referred to page 33 of the SCPA's report and said that there were salary rises of about 8 per cent in 2004 and 2005 and a further increase of 3 per cent in 2006. However, according to the table on page 34, which sets out details of the senior salaries review body settlements, there was 3.7 per cent "average earnings growth" in 2004; a 4.2 per cent "average base pay award" in 2005; and an "average individual award" of 3.35 per cent in 2006. Do you agree that the salaries are running well ahead of inflation?

The situation could be as Andrew Arbuckle describes it. However, Audit Scotland told us in evidence that it had gone to an external organisation because it was concerned that it could not retain or recruit staff in certain areas and it wanted to benchmark salaries for those posts. That was the reason for rates of increase that were above inflation and higher than the rates of increase in other public sector organisations. That is detailed in the information that we have provided.

My reading of the minutes of the SCPA meetings is that the Auditor General said that salaries were benchmarked on the basis of confidential information, which is all a bit non-transparent.

Information would have been confidential under data protection legislation in order to protect individuals—the information would have gone as far as to say, "Officer A got whatever salary and officer B got whatever salary." We could not further break down the across-the-board figure that we were given without identifying the exact amounts that individuals got.

I want to get a flavour of the process that the SCPA adopts in relation to the efficiency agenda. I see that you clearly challenged Audit Scotland about its contribution to the broader efficient government programme. When the SCPA scrutinises the budget proposals, do you stand back and consider savings per pound of expenditure by Audit Scotland in the context of the broader public sector? Do you do such benchmarking, or do you consider only Audit Scotland's internal savings?

We consider only Audit Scotland's internal savings. There is discussion on the matter that Derek Brownlee raised, but it takes place in the Audit Committee. The SCPA was conscious that Audit Scotland expects public agencies to achieve a certain level of efficiency, through internal and external audit processes, so we thought that it was prudent that Audit Scotland should indicate what it would achieve, so that there would be commonality and we could say with hand on heart that Audit Scotland is making a contribution as well as ensuring that others in the public sector are doing so.

I do not want to put words in your mouth, but were it felt that Audit Scotland could deliver more savings on a broader cross-public sector basis if it had more resources, would it be for Audit Scotland to bring the SCPA a resource plan to scrutinise rather than for you proactively to suggest such a move?

I do not think that we would actively encourage Audit Scotland to do that.

You made a point in your opening statement that is referred to in paragraph 21 of the SCPA report, which states:

"in the interest of good governance, the Auditor General should write to the Commission with notification of any proposed increase in Audit Scotland's overall staffing complement".

Although I welcome that good practice—controlling staff numbers is a significant part of any budget control—I am a bit surprised that it is being mentioned only now in the monitoring framework. Has that been explored previously in the budget process or has there been no direct supervision of staff numbers?

That has never been a priority because there was a settling-in period then a restructuring of Audit Scotland. Only now do we see some levelling out and stability. There were also some gearing-up issues at Audit Scotland in the roll-out of best value throughout the public sector. We believe that Audit Scotland is now stable, which is why we want to monitor its staff numbers into the future.

Is there not also an argument for saying that if Audit Scotland has reached stability, a testing regime should be put in place to guarantee that all existing staff are required for purpose, rather than saying to Audit Scotland, "If you want to increase your staff numbers, tell us"? As part of the efficient government agenda, which Derek Brownlee asked about, should not there be pressure from the SCPA on Audit Scotland? Should not you ask it, if you see that it wants to increase staff numbers or keep them the same, whether it is certain that its practices are efficient enough and that it is monitoring its caseload effectively to guarantee that the public purse is being protected?

Derek Brownlee should be assured that the commission will look closely at Audit Scotland's staffing information and that we will scrutinise extremely carefully any case that is made to increase or decrease staff numbers in the future. That will be part of our legacy paper and we will also talk to the auditors that we employ to ensure that Audit Scotland is as efficient as the organisations that it audits.

Neither in the Audit Scotland budget proposal nor in the verbal description of its efficient government agenda has Audit Scotland quantified the savings from the "deletion"—their word, not mine—of another director, from the delay in replacing computers or from the reduction in consumption of paper and energy. Are there any plans to get hard numbers for those savings from Audit Scotland?

That is part of the on-going work that we are going to undertake. We want to know about inefficiencies and whether the savings are time-releasing or cash-releasing. Perhaps Audit Scotland did not have sufficient information to give us about those savings when it attended previous evidence-taking sessions, but we will put the marker down that we want that information at future meetings.

That marker is healthy, given that only £160,000 of the tangible savings that Audit Scotland lists, which amount to £499,000, were the result of action that Audit Scotland took of its own volition. The savings of £160,000 were achieved by reducing the management team, whereas other savings arose from the abolition of national health service trusts and the dissolution of NHS Argyll and Clyde, which were external factors. What charge did NHS Argyll and Clyde pay for audit before it was dissolved?

I cannot tell you.

It just seems that £75,000 seems a bit light—

From my perspective as a member of the Audit Committee, rather than the SCPA, I know that a charge is levied across health boards. One year a board might have more hours of audit than an adjoining board—there are swings and roundabouts. However, that is not an issue for the SCPA.

In an opening gambit on efficiency savings in its budget proposal, Audit Scotland said that efficiencies would be

"redirected towards better services or returned to audited bodies."

Has any cash been returned to audited bodies?

Not so far.

Jim Mather covered some of the points that I was going to make about efficient government. You said that many of Audit Scotland's efficiency savings were fortuitous rather than planned. However, Executive departments claim to have made significant savings—perhaps more time-releasing than cash-releasing savings—and the Executive claims to have beaten its target for efficiency savings. Did Audit Scotland tell you that it planned to make savings of a certain amount? If so, does the figure that it gave you match the figure that was achieved?

As I recall, Audit Scotland's efficiency savings were stumbled on and not planned. No contribution to the efficiency agenda appeared to feature on Audit Scotland's internal radar, which is why we flagged up the matter. The Executive asked every public organisation in Scotland to make a contribution, which should include the Scottish Parliamentary Corporate Body and Audit Scotland. Our role is to ensure that the issue is given serious consideration.

I commend the SCPA for its approach.

Paragraph 6 of the SCPA's report states:

"Total resource requirements for 2007-08 represent a 3.0% increase on last year's proposal and are based on a general price inflation assumption of 2.5%."

When we took evidence from the Scottish Parliamentary Corporate Body on its dealings with commissioners and ombudsmen, it said—if I remember rightly—that its approach is to assume a zero budget increase, so the budget is constructed from the ground up and is then subject to scrutiny by the SPCB. In other words, there is no assumption that there will be an increase in costs, based on price inflation or any other factor. What process did the SCPA follow? Did you ask Audit Scotland to work from a zero budget, or did you assume that there would be an increase in costs in line with inflation?

We did not ask Audit Scotland to construct its budget in any way. That is entirely a matter for Audit Scotland, which must consider its development and provide us with a budget. When Audit Scotland gives the commission a figure, it is incumbent on us to satisfy ourselves that Audit Scotland will have sufficient funds to enable it to undertake audits throughout the public sector. We must report to the Finance Committee. We do not operate in the way that the SPCB operates.

Have you considered adopting the approach that the SPCB has adopted?

No.

Are you concerned that the increase on last year's funding appears to be based on general price inflation?

I would expect that to be the case: after all, we must bear it in mind that the work that Audit Scotland is required to carry out in the public sector is moving up a gear. For example, not only is this is the third year of the best-value regime in local government, but the process is now being rolled out into the whole public sector, including further and higher education and the national health service. I and the SCPA are satisfied that the 3 per cent increase will take account of all that work.

Do you agree that basing year-on-year funding increases to organisations on inflation is not necessarily the most strategic approach that can be taken?

I do not give Audit Scotland its budget; I simply recommend to the committee whether it should be approved.

As there are no further questions, I thank Margaret Jamieson for her very full written evidence and comments. I think that you will have picked up the committee's strong support for the SCPA's recommendation, which, as usual, will be reflected in our budget report in due course.