Public Audit Committee, 25 Feb 2009

Meeting date: Wednesday, February 25, 2009

Official Report 189KB pdf

---

Principles of Public Audit

We have a consultation paper from the Auditor General and the Accounts Commission on the principles of public audit. I invite comments from the Auditor General.

I will be brief. The Accounts Commission and I feel that the document is necessary. It is an attempt to capture, in plain English and within a reasonably short document, the elements of how we work together and how we expect the audit process to be undertaken in the public interest, while balancing the expectations of all our stakeholders—including this committee—that we undertake the process of holding to account robustly and seek to improve it.

Section 5 of the document is a reminder of our respective roles and of how we work together. In section 6, we have tried to capture the five fundamental principles of public audit that we think are important for the public interest. Those are perhaps of particular interest and relevance at the moment, in view of the recent events in the private sector—in the banking sector in particular—and the concerns that have been expressed about the effectiveness of oversight and assurance in the private sector.

In the public sector, the first principle is that the public auditor should be independent from the bodies that are being audited. In other words, they are appointed by me for audits in the larger part of the public sector—David Watt, who is here this morning, is a case in point.

The public auditors are remunerated through a system that is independent of the body that is being audited, which is a good thing. The audit is also much wider in scope than is the case with the auditing of private companies or private organisations. It does not involve only an audit of financial statements; we consider issues of legality and standards, and the arrangements that public bodies have in place to prevent and detect fraud. The committee has received reports on that area of our work in the past. The public auditors make a contribution to the audit of value for money and best value and to performance audit. I just wanted to capture that for the committee.

We have put the document out for consultation, in order to provide our principal stakeholders with a high-level statement of how we undertake the work and how we attempt to ensure that it is robust, independent and fit for purpose. It is a bit of an abstract document but, nevertheless, it is right that the committee is made aware of it. We will be pleased to receive any comments between now and the end of March.

It is a very useful document—it sets out some important principles.

You commented that the auditors are fully independent from the organisations that are being audited. In a country as small as Scotland, there is often overlap, and many of the large accountancy companies, in the way in which they now operate, have arms other than just audit functions. Is there a danger—notwithstanding the fact that the auditors may be separate from the other parts and activities of those companies—that there could be a degree of compromise if the same holding company is doing other work for an organisation that is being audited by the auditors from that company?

My Audit Scotland colleagues and I are very much aware of the importance of ensuring that independence, which is why it is a first principle. I will explain how we do that. Appointments are offered every five years. In the course of that exercise, Russell Frith, our director of audit strategy, conducts a pretty robust review of the interests and the other work that they do in audited bodies of any companies that might express an interest in working with us. A great deal of care is taken in audit appointments to avoid such conflicts of interest. To put it bluntly, if a company provided high-level consultancy or advisory services to a public body, there is no way that that company could become the external auditor.

Scotland is of a sufficient scale that we can keep an eye on such things. It is a matter that we take extremely seriously. We expect the auditors to operate to a code of audit practice, which is explicit and robust on what they are expected to do. I can give the committee an assurance that, in all the years that I have been doing this work, there has never been an instance when I have felt that an audit opinion or audit analysis has been compromised in any way.

There is a very important point here. I accept what Robert Black has said. However, when the mutuals were demutualised and investment banks and other banks were brought together, a lot of people expressed concerns about conflicts of interest, but they were all brushed aside and pooh-poohed—everything was apparently okay. Look what has happened, however.

The convener has made a very good point. Accountants used to be auditors who got on with financial matters. Now, they are involved in a whole range of things. They bid for public sector contracts and do a range of consultancies and so on. We ought to look into that. I accept Robert Black's assurance, but we should consider that area rather more carefully in the future.

As I said, the convener made a very good point: there could be a conflict of interest. KPMG, PricewaterhouseCoopers and other firms say that they have Chinese walls between the people who do accountancy and those who do consultancy, but it is easy for such Chinese walls to become—what is the word for when things pass through?

Porous?

That is right—porous. We really need to look into that. I am not sure how we do that, but the convener has fired an important warning shot.

We now have a statement from the Auditor General on the record that that does not in fact happen—and, I presume, will not happen.

Yes, you have my assurance on that.

I recognise the concern that is being expressed, which is entirely reasonable. We are due to go to a retendering of the audits in a couple of years' time. I shall make a note of the matter and I shall ensure that—if the committee is interested—Russell Frith is able bring you a paper at some stage, describing how the process operates. That might provide the assurance that you are seeking.

That would be useful. Thank you.

The convener's comments remind us that eternal vigilance is required. We all rely on the integrity and judgment of Audit Scotland. As far as I am concerned, there should be no no-go areas for Audit Scotland in its sphere of operation. Quite rightly, it seeks neither fear nor favour. What the committee has heard further underlines the fact that Audit Scotland is the auditing exemplar that other organisations are following. We owe it a deep debt of gratitude for that.

I have a question about the audit function. As I understand it, it tends to stop short, at recommendations to the public sector or whoever. Is there a case for revisiting and strengthening the powers that the Auditor General has—with powers of compulsion, for example? Over the past 22 months, as I think Stuart McMillan mentioned, there have been many examples from across the public sector of non-compliance and of not following up on audit recommendations—and even of not responding to surveys. That must detract from the Auditor General's good work. Mr Black, have you a view on whether you should have more powers of compulsion—an ability to instruct or require bodies to act and follow up on the recommendations that you painstakingly make?

I acknowledge the concern. As you can imagine, my colleagues and I occasionally—more than occasionally—feel a degree of frustration. If we bring reason and light to an issue, and improvement does not happen when one thought that it would, that can be frustrating for us. However, I have a very clear view on this: the auditor must not take over the role of management in any circumstance whatsoever. We may have particular skills in analysing evidence, but we are not accountable for the running of health bodies, local authorities or bodies such as VisitScotland. Those bodies have their own management to do that. It would seriously compromise auditors if their recommendations on public bodies were mandatory.

One of the strengths in having the Scottish Parliament is that, as Stuart McMillan said, scrutiny is more open and more robust. This committee is particularly well placed, as you have demonstrated on many occasions, to hold senior public sector managers to account if they decline to take up recommendations that you and we feel would lead to better public service.

The audit process is not the whole story. We are part of an accountability process. We provide what we hope is robust and objective evidence, information and analysis, and then we pass the torch to you.

A few moments ago, George Foulkes mentioned a couple of companies. Those organisations, as well as others, are global players in the accountancy and audit fields. I assume therefore that the situation in Scotland is replicated in other European countries, small and large. Does Audit Scotland consult its partners in other countries on the processes that you use, before you bring companies in to do work for you?

I offer a qualified yes to that question. There is great benefit to us in having partnership arrangements with firms, subject to the constraints and checks and balances that I described earlier. The firms have experience across the whole of the United Kingdom and beyond. It has on occasion been very helpful indeed to be able to draw on their knowledge of work in, for example, England. That has been especially helpful when we have been working in the performance audit sphere. In future, it will be increasingly valuable for both parties to compare performance and systems in England and Scotland.

With that, I draw this part of the discussion to a close. I thank the Auditor General for his contribution.

Meeting continued in private until 12:17.