Item 2 is on section 22 reports. We will consider first "The 2006/07 Audit of the Scottish Arts Council" and then "The 2006/07 Audit of the Western Isles Health Board". I invite the Auditor General for Scotland to present his report.
As, I am sure, members of the committee are aware, I may make reports to accompany the accounts laid in the Scottish Parliament once they have been audited. I have decided that I should make the section 22 report on the Scottish Arts Council's accounts for 2006-07 to draw to the attention of Parliament the auditor's qualified opinion. The qualification relates to the council's failure to comply with the requirement in the "Scottish Public Finance Manual" to obtain the approval of the Scottish Executive for certain payments that were made to its former chief executive when he terminated his employment. The council made such payments following an approach by the chief executive to leave his post on early retirement.
Thank you. The report highlights a couple of different issues. One is that small publicly funded organisations often have insufficient expertise and knowledge to handle significant sums of money. What systems are in place and what guidance does the Scottish Executive provide to such organisations? What are the rules within which they operate? Are such organisations sufficiently knowledgeable? Are the rules applied rigorously? Should ministers revise the relationship with, and the advice and assistance that are provided to, such organisations to allow them to use public funds?
I agree with the convener, particularly on the second point. I am interested in the Auditor General's view on sanctions. When a public body has clearly breached the "Scottish Public Finance Manual" rules, what sanction applies, other than an auditor making a report to Audit Scotland and the Auditor General reporting to us?
We need to distinguish the relationship that local authorities have with the Scottish Government and treat that as a separate case that is not relevant to the circumstances that we are discussing, because that relationship is different from that which all other public bodies have with the Government: all such public bodies are accountable to the Scottish Government—usually to a particular minister. I am not sure whether the language has changed, but normally a sponsor department looks after a public body's interests.
Am I right to say that the minister's letter was sent after the event?
Yes.
Surely officials in the department must have realised what was happening. They have day-to-day contact with the Scottish Arts Council.
That would best be put to the Scottish Executive—we have no knowledge of informal verbal contact. On the basis of the information that is available to us, we believe that the Executive was not aware in advance that the board was minded to make that decision.
There is a general point to be made, convener. It is not within the competence of the Auditor General—I do not know whether it is within our competence—but everything that we look at seems to be after the event. We are picking up the pieces: we say that taxpayers' money has been badly spent and we discuss whether we should rap people over the knuckles, but how can we prevent such things in advance of their happening?
I accept the point that George Foulkes makes. In my opening remarks I identified two separate issues. First, what can we do to ensure that bodies such as the Scottish Arts Council have regular systems in place, receive adequate support and understand the guidelines? How can we ensure that the officials in the Administration are adequately training and preparing people to know what is expected of them? That is about trying to prevent something from happening.
Will we consider under item 7 how we might deal with the issue?
Yes.
We are discussing matters after the event, although before Audit Scotland existed, none of this was ever known about. One of the strengths of the Scottish Parliament and its investigatory system is that the committee can rely on receiving reports from Audit Scotland. In that way we can, I hope, cure the problems.
Andrew Welsh makes a valid point that echoes the point that George Foulkes made. Administration officials have a responsibility to ensure that there is adequate and proper liaison with such outside organisations, so that we are not left to pick up the pieces after the event. It is not good enough just to allocate the money and say that we will bother with the organisations only once something has gone wrong. Everything must be in place to ensure proper rigour.
I agree with what has been said. I have sat on Scottish Enterprise boards and endured many boring days of good governance. Unfortunately, there is not much of an excuse for what has happened in this case, so we must act strongly.
Both payments were unusual because they amounted to payment of compensation to someone who had intimated that he wanted to resign voluntarily. Neither element was an entitlement.
Further to Jim Hume's question, does the SPFM contain guidance on acceptable levels of remuneration? I know that you said that such guidance did not apply in this case, but are there guidelines about what level of payment is acceptable? It seems that the SAC arrived at two fairly arbitrary and significantly different figures during its proceedings.
As I think I mentioned, one of the problems is that there are no adequate minutes to refer to, from which one could better understand the reasoning of the people on the board when they took their decision. I hesitate to use the word "arbitrary"; I am sure that they thought about what they were doing, but we are not party to what was in their minds because it has not been recorded. The fact that the payment was purely discretionary and outside normal provisions means that no guidance would have been appropriate.
Could a case for the defence be that the SAC thought that it was making a saving to the public purse, albeit that it was not following the rules or the proper procedure? It would be interesting to find out what motivation the decision makers had, although they should—regardless of that—have acted within the rules. I hope that we act to receive assurances that the organisation will be run properly. We are talking about the problem of quangos—Scotland is quangoland—many of which appear to operate in their own ways. Before Audit Scotland existed, quangos could do that, but now, thankfully, their actions are picked up in audit. That must be translated into ensuring that the SAC follows proper procedures in its live activities throughout the year.
I understand that, but I suggest that the problem does not lie only with quangos. In Government—I speak as someone who knows what goes on—decisions are often made that are allegedly in the public interest and which should lead to savings, but which turn out to benefit a small group of people who happen to be at the centre of things. That happens in local government, too. There has been publicity recently about the case of one local authority that I am sure is by no means unique in having made financial decisions that were supposed to be about long-term savings, but which happened to benefit a handful of individuals.
The committee has come across the issue before, whereby people in an organisation make genuine efforts to deal with a problem, but lack the experience or the back-up to do so. We have found that in further education. In that case, the Scottish Further Education Funding Council was able to give advice.
Advice would undoubtedly be available from the Scottish Executive should such bodies seek to obtain it. Part of the problem in this case is that, because the Scottish Arts Council did not contact the appropriate department in advance, it could not obtain the best possible advice. It would probably be unreasonable to expect all public bodies in Scotland, including the very smallest, to have in-house advice on all issues.
We have Audit Scotland's report. Has the Scottish Arts Council responded to Audit Scotland officially in its own defence, or has it put its hands up and said sorry?
The Scottish Arts Council has received the final audit report and has had the opportunity to comment on the report that I have made to Parliament. I think the council accepts that the report is accurate. As I think I mentioned earlier, the chair of the council has written to the relevant minister, acknowledging that the matter was not handled properly.
We will return to the matter under a later agenda item.
As the committee will know, a key financial target for any national health service body is that it should not exceed its revenue resource limit, which is the amount of money that a board is allocated to spend on the day-to-day operations during a financial year. For 2006-07, the auditors reported that only one board failed to meet that target—NHS Western Isles. The auditor's opinion for the board highlighted that failure, although the opinion is not qualified.
Western Isles NHS is clearly a troubled organisation and I am concerned that the organisation shows no sign of making things work, either at present or in the future—it seems to stumble from one crisis to the next. From the report that we have just heard and from what we have read, it seems that there are worries about its deficit increasing even further.
A comparison could be drawn between Western Isles NHS Board and the former Argyll and Clyde NHS Board. I accept that the two health boards are different in size but—as the convener will know, being MSP for Paisley South—the former Argyll and Clyde NHS Board got into severe financial difficulties to the extent that it was no longer viable. Most of its functions were then subsumed into what is now Greater Glasgow and Clyde NHS Board, although the jury is still out as to whether that arrangement is the best way forward. I certainly do not advocate that the functions of Western Isles NHS Board be subsumed into another greater health board area, but we should look at other examples—Argyll and Clyde is one, but there are surely others—to establish what problems occurred, what lessons were learned and what measures could be implemented to ensure that the situation in Western Isles NHS Board is fixed and sorted out. The governance issue is probably the most important, but many other aspects will also need to be considered.
The issue is all about providing services for the people in the most efficient and effective way—clearly, that has been a problem in this case. As the convener outlined, the board has very serious problems: continuing deficits; being the subject of a section 22 report for a third consecutive year; serious weaknesses in its governance arrangements; a chief executive who has been suspended; unrealistic targets; and savings that are unlikely to be achieved. There is a catalogue of fundamental problems and our response must match its seriousness.
Thank you. I have no confidence that we will see an improvement if things are left as they are.
I do not disagree with what the convener and other members have said, particularly in relation to Western Isles Health Board. However, the general problem is that such boards receive their money from the Scottish Executive. That money is limited—it is finite—and the Scottish Executive requires the boards to do things that are impossible within those cash limits. That is happening, and it will happen in Ayrshire and Arran—that board has been told to keep the accident and emergency unit open, but also to go ahead with the alternative plans that it was going to implement if the unit was closed. It is getting no extra money—it is being told to do all that within the same budget. We must consider the Scottish Executive's responsibility to make the finances available to health boards so that they can carry out the requirements that central Government—the Scottish Government—imposes on them. That is a cautionary note.
That is an important point, and I hope that it would form part of any investigation or inquiry that we undertake. Do health boards have sufficient resources; are they using them properly; and what are the reasons for the failures? Notwithstanding your more general point, there are issues with the board around management structures and governance. However, your point will be an important part of any further consideration.
When a company gets into trouble, its deficit tends to accumulate through finance charges. It would be interesting to know how much of the deficit in this case is due to finance charges that were imposed because the board was in deficit the year before. Is this a situation in which the board is in trouble, which has led it into a downward spiral that will affect services and be difficult to get out of? Does the auditor know?
I doubt that we have information on finance charges to hand, but the straightforward answer is that that would have had only a marginal impact on the situation. Part of the problem in the Western Isles has undoubtedly been the board's inability to put together a financial recovery plan year on year. In 2006-07, the year in question, it also had a serious problem with end-year budget reporting around September, when it found that it was £1.6 million out. That is not a stable position for a board to be in, and that is an issue.
When you say that it is the only board running a deficit, do you mean that it is the only one running a current deficit or the only one showing any historical deficit?
That is a good question. I think that Barbara Hurst can help on that.
It is the only board that has a current deficit. A number of boards might have an underlying deficit, but they are coping with it. The issue is that the board is having problems coping with its underlying deficit.
That is fine. That is what I suspected.
Another board that comes to mind is NHS Greater Glasgow and Clyde. It is managing through a recovery process as a result of the deficit, which, as Mr McMillan said, it inherited from the former NHS Argyll and Clyde.
I want to follow up the point that George Foulkes made. When you conduct your investigations into some of the problems with financial control, are you able—as part of your remit and with the information that is provided to you—to determine whether part of the problem is that which was identified earlier, which is that there is required expenditure that cannot be met by the allocation of budgets? Alternatively, do you simply consider the budget that is allocated and ask how boards manage within it?
In the annual audit, we look at the management of the budget within the resource allocation. That is what we have done in this case. When we undertake wider-ranging overviews of the health service, we attempt to provide information on the underlying cost pressures on the basis of the information that is available to us. Previous Audit Committees took a lot of evidence from the Health Department at the time on such matters.
Is enough information available about the Western Isles Health Board for you to say whether such pressures might be a contributory factor?
The audit report says that the pressures on Western Isles Health Board are very much what one would expect to see in a health board. They include agenda for change, the costs of the consultant contract and the general medical services contract. They are similar to pressures felt elsewhere. Given the relative remoteness and size of the Western Isles, the board has experienced difficulty for a long time in recruiting and retaining suitably qualified professionals on both the clinical side and the management side. However, we have received no indication that there are special circumstances over and above that of which you would need to be aware.
I will take a question from Willie Coffey, after which I will close off this item.
The most worrying comment in the report is in paragraph 7, which states that the appointment of an acting chief executive
The obvious point to make is that we are talking about a moving picture; the situation will change week by week. However, the auditor has advised that the projected deficit is likely to be higher than it was at the start of the year. Given that the board has had three chairs and three chief executives since the middle of 2006, it would be reasonable to conclude that the board is at risk. Such turnover does not make for strong leadership. There can be little doubt that, to effect a recovery in a challenging situation, the board needs strong, consistent and well-informed leadership.
Is your question one that cannot wait until we deal with item 7, Andrew?
I just want to follow up on the important point that George Foulkes made. There is a difference between adequacy of finance—in other words, whether the finances that are allocated are sufficient for the task for which they are required—and how resources are used. A board could be adequately financed but if there is overstatement of budgets and a lack of effective internal controls, financial management expertise and financial focus, that is more about how the resources are not being used properly. Adequate finance comes under the Finance Committee's remit. However, we cannot ask people to make bricks without straw and an element of audit is to ensure that the resources are adequate. The more important thing is whether there is a corporate management strategy and agreed objectives, and how boards use the resources that they have. That is part of the work of Audit Scotland. If we can help cure the management problems, George Foulkes's point about whether the overall resources are adequate can be judged on its merits. There are management problems that have to be sorted out.
Thank you. We will return to the matter under item 7. I thank the Auditor General for his report.