Audit Committee, 26 Oct 2004

Meeting date: Tuesday, October 26, 2004

Official Report 190KB pdf

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Section 22 Reports

For agenda item 4, I invite the Auditor General to brief the committee on section 22 reports. Perhaps we need some preamble to put the reports into context before we go into the detail of each one.

Under section 22 of the Public Finance and Accountability (Scotland) Act 2000, I have the power to make reports on the audited accounts of public bodies in Scotland. Section 22 reports are very much tied to the audited financial statements of public bodies, so they are not full performance audits. They address matters that are raised from the audited accounts—they do not range more widely than that—so the extent to which they go into detail about the underlying causes and effects is quite limited. However, in the section 22 reports that I make from time to time as the years roll on, it is right that I take the opportunity to alert the Audit Committee to matters of significance that arise from the audited accounts.

In practice, what happens is that, if the final audit report that I receive from the auditor contains a matter of significance, I will make a section 22 report to accompany the accounts. The report and the accounts go to Scottish ministers, who have the responsibility of laying the accounts along with my report. That means that there can be a gap of even a few weeks between the conclusion of the audit and the section 22 report being laid, but that matter is entirely under the control of Scottish ministers. I do not control the flow of the reports out of the system into the public domain.

It seems right that, at the next appropriate meeting after such a report has been laid, I alert the committee to the fact that a section 22 report exists on a significant matter. That will give the committee the opportunity to consider the report and to advise on whether there is anything else that it wishes to be done.

For the record and for the benefit of those who are listening or watching, I remind committee members that, because section 22 reports contain matters of significance that arise from the accounts, it will be the committee's practice that such reports will be an item on our agenda once they have been laid. That will give the Auditor General an opportunity to explain the report and it will give members an opportunity to hear his briefing and to put any questions to him. That will now be our standard practice to allow those deliberations to take place.

Shall I take each of the section 22 reports in turn?

Yes. Start with the report on the 2002-03 audit of the National Library of Scotland.

I issued the report on the National Library of Scotland accounts because ministers did not lay the accounts for financial years 2000-01, 2001-02 and 2002-03 within the statutory deadline of nine months after the end of the financial year to which the accounts relate. Due to some significant staffing difficulties in the NLS, especially within the finance function, the preparation of the accounts and the completion of the audit were delayed. The situation was quite unsatisfactory for a period, but I am pleased to say that the audited accounts for financial year 2003-04 were laid on 29 September 2004, which is well within the statutory deadline.

The National Library of Scotland appointed a part-time consultant to help in the preparation of the accounts. It also appointed a full-time assistant to the head of finance, who will have the task of preparing the annual financial accounts. Therefore, the situation has improved significantly but, in view of the obviously unsatisfactory situation in previous years, I have made the section 22 report to inform the committee.

That provokes me to ask a simple question. What procedure, if any, exists to deal with situations in which the accounts are late or have not been laid by ministers? Is there any early warning system for that or do MSPs simply have to ask questions constantly on the whereabouts of the information? Is there any automatic switch that requires ministers to say that they have not yet laid the accounts?

There is no automatic procedure whereby the committee would be advised if audited accounts were late. Indeed, the absence of any such procedure is the reason why today is the first time that the committee has heard about the situation that has existed in the National Library of Scotland for the past three years or so. If a significant issue were to delay the laying of a major account—such as the accounts for the health service—I would use my overview reporting powers to alert the committee to the situation at an appropriate point in the cycle. Alternatively, in a case like this, it might be more appropriate for me to refer to the issue in a section 22 report that accompanied the accounts of the Scottish Executive as a whole.

In relation to something of this scale, however, it would probably be inappropriate—measured against what we call the materiality or the significance of the issues—to draw the matter out at the level of the Executive because the activity is comparatively small in the context of the National Library of Scotland's system.

I thank you for that answer, but it makes me wonder whether there should be some alternative system, in as much as, currently, members of the Scottish Parliament have to rely on whistleblowers to provoke us to ask questions about why something has not happened. I do not wish to resolve that here and now, but it is something that this committee or other members of the Parliament might want to think about at a later date.

If the committee were interested, it would be perfectly possible for us to produce an information note at an appropriate point in the financial year to update the committee on the situation in relation to the audits and the closure of accounts and to highlight any areas in which there were significant slippages against the statutory deadlines.

The committee would find that useful. It would give us an idea of how things stand in relation not only to the large areas such as the NHS but to not insignificant areas such as the National Library of Scotland and other important institutions.

We will now deal with the section 22 report on the 2003-04 audit of the Scottish Prison Service.

As you might expect, the section 22 report on the 2003-04 audit of the Scottish Prison Service draws attention to the report on the Reliance contract that we discussed earlier. For present purposes, I draw your attention to the fact that the report points out that the 2003-04 accounts include a provision of £26 million and a contingent liability of £136 million to reflect the potential cost to the SPS of settling court cases from existing and former prisoners who claim that the conditions in which they were held or are being held breached or are breaching their rights under the European convention on human rights.

The basis for the disclosure being made by the SPS in these accounts is Lord Bonomy's April 2004 judgment in a court case. Lord Bonomy found that considerations relating to overcrowding, the requirement to slop out and general conditions relating to the prison regime were

"capable of attaining the minimum level of severity necessary to constitute degrading treatment and thus to infringe Article 3".

However, I would emphasise that the judgment is not that those factors of themselves represent an infringement of article 3 of the ECHR. What also has to be taken into account is the effect of the prison conditions on the individual prisoner. This particular case does not establish that requiring prisoners to undergo slopping out is, of itself, an infringement of article 3.

There are similar cases before the courts and the Prison Service has been notified that further cases might be brought. However, in each of those cases, the petitioner will have to demonstrate that the prison conditions in which they were held had some kind of negative effect on the prisoner such that they represented degrading treatment.

It is not clear how much expenditure the SPS will be required to incur to settle cases brought by prisoners alleging breaches of human rights—or, indeed, whether there will have to be any expenditure. The Scottish Executive is appealing the decision by Lord Bonomy. If the appeal were successful, the requirement to recognise a provision and the contingent liability would disappear. In recognising the provision and the contingent liability in its accounts, the SPS has acted properly and in accordance with accepted accounting convention. In effect, the provision puts money aside to meet potential future liabilities and, in layman's terms, reduces the organisation's profitability in the year in which the provision is recognised. I am making this report because it relates to a significant potential sum of money, but it is not an expenditure that will necessarily be incurred and it should be borne in mind that Lord Bonomy's decision is being contested.

The NHS has similar problems and has to make similar provisions. Is the practice spreading throughout other public services? Are public resources being tied up in this way across the public sector?

It is the accepted practice of all public bodies to observe normal accounting standards and make provisions and note contingencies if they think that those are likely to occur.

The contingent liabilities have no impact on the body's financial performance for the year. A note is made to the accounts disclosing the fact that the liability might come into effect. The liabilities do not constitute an item in the accounts that would affect the financial performance.

Are there going to be section 22 reports for every organisation that makes a provision of this nature? As Andrew Welsh said, the NHS has to make such provisions. Why treat the SPS differently now as opposed to the way in which it was treated in the past?

I have not treated the SPS differently from any other organisation. If there were a significant provision or contingent liability being made elsewhere, I would draw that to the attention of the Audit Committee.

In relation to the NHS, if an overview of the financial performance of the health service were due to come out, I might refer to a contingent liability in that context. As there was no way of reporting on the matter of the SPS's contingent liability other than through a section 22 report, I have chosen this route.

You have my assurance that any significant provisions and contingencies will be reported in an appropriate way to the Audit Committee.

I presume that "significant" is a relative concept and that a significant sum for the NHS would be much larger than a significant sum for the SPS, given that the NHS spends some £5 billion a year.

That is absolutely true. To take that thought further, an organisation such as the National Library of Scotland might make a provision that, in absolute terms, is a small sum of money but which is significant for its business. Therefore, the judgment is taken relative to the size of the business. In effect, we are talking about matters that would, in accounting parlance, hit the going concern-ability of the organisation.

We will now deal with the section 22 report on the 2003-04 audit of Argyll and Clyde NHS Board and then move on to consideration of the section 22 report on the 2003-04 audit of Lanarkshire NHS Board.

NHS boards are required to remain within an annual revenue resource limit, as the committee well knows. That limit is set by the Health Department. I reported under section 22 in relation to the 2003-04 accounts of Argyll and Clyde NHS Board because the board did not achieve its financial target in that year and, more significantly in this case, because of the auditor's concern that the board is forecasting that it will not balance in-year until 2007-08. By that time, the accumulated deficit will be in the region of £70 million or more. Serious concerns have been raised about the ability of the board to sustain service levels and retrieve the deficit.

The section 22 report is not a full performance audit of the board. As I said, it is a notification of a matter raised in the accounts that is of public concern. However, behind the section 22 report there is a detailed auditor's report, which is a publicly available document. If the committee were minded to take further its consideration of this matter or the matter of Lanarkshire NHS Board's failure to achieve its financial target in 2003-04, more information could be provided. It might be easier for me to answer questions on a subsequent occasion, but we will do our best to answer general questions today if that would be helpful.

Given the response of the Health Department to the NHS overview report, which we heard about earlier, I would have to ask why we are surprised about the situation with Argyll and Clyde NHS Board. Obviously, there are particular issues in Argyll and Clyde and this committee has taken evidence in that regard. From the section 22 report, it appears that Argyll and Clyde NHS Board is still not finding a way through its problems. When we move into private session, we should consider ways in which we can take account of what we have heard in relation to the overview report. I do not want to say too much more at the moment.

If there are no further comments on the report on Argyll and Clyde NHS Board, the Auditor General can speak about the report on Lanarkshire NHS Board.

Like Argyll and Clyde NHS Board, Lanarkshire NHS Board did not achieve its financial target in 2003-04. The increase in the cumulative deficit in 2003-04 indicates that there might be an underlying financial pressure that could affect the sustainability of services in the longer term, although the situation is clearly by no means as self-evidently severe as it is in Argyll and Clyde.

The issue of financial performance, including an analysis of some of the underlying reasons for a failure to achieve targets will, of course, feature as part of my financial overview report on the audit of the NHS, which will be with you before the end of the year. That will give you a more general picture of what is happening across Scotland.

Our concern relates to systemic problems. We need to know what they are and what can be done about them. That needs to be brought to the fore.

The committee is right to be concerned about systemic problems.

I welcome Susan Deacon to the committee.

I apologise for my late arrival.

Your apologies have already been given.

I told the clerks yesterday that I had another engagement this morning.

I was not present for the committee's earlier discussion of the Health Department's response to previous communications, but I would like to endorse Andrew Welsh's comments about systemic problems. I hope that, in examining those problems, we can get to the heart of management practice issues in the health service. We often discuss these issues in terms of the accountability of boards and so on but, in order to understand why certain elements of certain services go belly up financially and operationally, we need to drill down to management practice and capacity in the service. I hope that the work that the Auditor General is doing will provide us with an opportunity to do that.

I support Susan Deacon's sentiments. It is true that much of the financial overview reporting tends to take a top-down perspective. It is also true that when the Audit Committee has engaged with the individual health boards, a different perspective on what is happening in the system has been provided.

With specific regard to Argyll and Clyde NHS Board, I am confident that the past year's audit has given us quite a reliable and detailed picture of financial management and control. We might therefore be in a position to take that to the next level with you, which would go some way to addressing the concerns that Susan Deacon has raised, but that would clearly have to be done with the active engagement of the accountable officer concerned.

If there are no further questions, we can discuss, under a later agenda item, section 22 reports and our response to them.