CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1884-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

NATIONAL AUDIT OFFICE SUPPLY ESTIMATE 2012-13

WEDNESDAY 7 MARCH 2012

AMYAS MORSE and MICHAEL WHITEHOUSE

Evidence heard in Public

Questions 1 - 42

USE OF THE TRANSCRIPT

1.    

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 7 March 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Jackie Doyle-Price

Meg Hillier

Fiona Mactaggart

Austin Mitchell

Ian Swales

MEMORANDUM FROM THE NATIONAL AUDIT OFFICE

National Audit Office Supply for 2012-13

Examination of Witnesses

Witnesses: Amyas Morse, Comptroller and Auditor General, and Michael Whitehouse, Chief Operating Officer, National Audit Office, gave evidence.

Q1 Chair: Now, I am going to give you a hard time. Your memorandum says you will need 15% less resources by 2013-14. Is that figure real?

Michael Whitehouse: The 15%. is in nominal cash terms. On a real term basis after taking account of current inflation assumptions the reduction is around 22%.

Q2 Chair: In your strategy for 2010-11 and onwards, you were planning to recruit 80 trainee auditors. Hasn’t that gone down to 70?

Michael Whitehouse: No. we continue to recruit 70 graduates a year and 10 school leavers. This remains unchanged.

Q3 Chair: And you will still carry on?

Michael Whitehouse: Yes.

Q4 Chair: May I know a little bit about the scheme? I do not know if you have been running it long enough-you may not be able to answer the question-but may I know what the retention rate is like?

Michael Whitehouse: The model that we work to is the assumption that on qualification we will lose 15% to keep the model going. In fact, at the moment we are running at around about 19%.

Q5 Chair: 19%? Not as bad as the Treasury.

Michael Whitehouse: No, but it reflects what is going on in the general market as a whole. Of course, we will get failure rates at different stages in the examination process-I have not got those figures exactly to hand-but we have a good track record of getting people through the system. Where we do have a bit more difficulty-it was interesting listening to the previous discussion-is on the school leavers. They find it much more difficult. They go through their training, and then they should get on to the main accountancy qualification. That has been more problematic, but we seem to be getting better results with that group now.

Q6 Chair: Looking at appendix 1 to your estimate, there are two things I want to know. First, the bit of the world that we are interested in-value for money-is going down and down.

Michael Whitehouse: The figure, as it should be, is broadly stabilising at around £20 million.

Q7 Chair: It is a bit odd, because you had an estimate for 2009-10 of £32.5 million, and you spent only £21.6 million, right? Am I reading right?

Michael Whitehouse: That is right, yes.

Q8 Chair: Then, if you look over the page, the estimate goes down. You have made an assumption about expenditure, but the estimate goes down. You are at £32 million, then £24 million, and then £21 million; it stays at £21 million.

Amyas Morse: There is a reason for that, and you will remember that we discussed this with the commission. What we did was become a lot more efficient. We cut down the number of words in the Reports, and we started to control the amount of time that people spent preparing the Reports, and that has led to more efficient working. We had a year when we had a gap between the budget and what was actually spent, because the efficiency side of producing the Reports went much better than we had thought, so our costs went down faster. It is not the amount of work or the amount of Reports that went down, but the amount of time and resource that we consumed in doing Reports, and that has now stabilised.

Q9 Chair: Over the coming period, as the Audit Commission winds down and we take up those issues, and as we endlessly talk about the new landscape of public services and the much more complex way in which you will have to assess value for money, I have some concerns about that.

Michael Whitehouse: May I add to that? Amyas is absolutely correct: we had an efficiency drive. At one point in time, our value for money studies were averaging at a cost of about £300,000. The target for this year was £235,000, and we are likely to come out at the year end at £226,000.

Going forward in the strategy, we are assuming that we will produce, by the end of the strategy period, six additional studies on local government issues. We recognise that that will be a different type of product, using data mining techniques much more to get into some of the information that local government has. The resource assumption going forward is for a much more expensive study at around £250,000 upwards. We are segmenting our study base to reflect the fact that, until we get greater experience in local government, it will cost more money. There will be additional studies-around six-by the end of this planning period. We recognise that they will cost more, and we are looking to do them in the most efficient way.

The key driving principle will be how to get access to data in local government to address some of the systemic issues. Drawing on the Audit Commission model, we will have to have some linkages with the audit firms. That relates back to the fact that, if Parliament agrees, we will be setting the audit code, which will give us some leverage over the work that the private sector provider does.

Q10 Mr Bacon: That is one thing, but will you have enough access based on current statute?

Michael Whitehouse: As far as we are aware, the Government intend to introduce draft legislation in the spring; I think the Secretary of State has said that. We are being consulted all the way through, and our lawyers will look at this, but at the moment there is a clear indication that we have support from the Department for Communities and Local Government, and that there will be additional clauses introduced in the legislation to confirm our access. That is something that you are quite right to raise, but we are adamant about the way in which we are taking this forward.

Q11 Ian Swales: I should like to build on that and raise a point that occurred to me when I read the document. I would be interested to hear how you, in your forecast, reflect two major issues that we talk about in this room. One is the demise of the Audit Commission, and the other is the whole issue of arm’s length bodies. You could be slightly cynical and say that you will save money because the more arm’s length bodies we have, the less work you have to do. Actually, we know that is not how we want to see things. The Chair’s expression, "following the public pound", is the one that gives us a lot of concern. What are you assuming about those two things-the demise of the Audit Commission and its impact on your work, and how we get better traction on the issue of following the public pound wherever it goes?

Amyas Morse: The answer is that we have explicitly covered all that. If you look at page 3 of the estimate, at point 6 in the summary, we explain there is additional new work that we have provided for. We give a breakdown there of what that new work will be. Some of it is to do with preparing the code. We have already described the studies that we will do, which are incorporated in our VFM number. As for new work, we have £1.6 million for the cost of developing the approach to the code of audit. We have £500,000 to develop a VFM strategy for NHS foundation trusts, and we recognise that we will have to do something more then. There is another £200,000 for setting up an approach to auditing probation trusts. We are expecting to do work on all of this. As far as we can, we are budgeting to be in a position to do it.

Q12 Ian Swales: I read that as one-off exercises that others would use. Are you saying that that is one-off work, done so that the NAO can do the work in those areas?

Amyas Morse: indicated assent.

Q13 Ian Swales: It is? Okay, that is potentially a huge amount of extra ongoing work that is bound to result in less work in other areas.

Amyas Morse: Well, we are not going to be auditing all those probation trusts. Excuse me, we might be auditing probation trusts, but we are not going to be auditing foundation trusts. We will have to tell their auditors what we expect them to report on, in terms of value for money. Getting a standard method set out is mainly what we are going to concentrate on.

Q14 Ian Swales: Are you saying, with regard to the other part of my question, that you will have a more disciplined approach to getting the audits from arm’s length bodies, and then presumably doing something with them? That must be another big piece of resource needed. Is it? That is a big, growing concern we have had as a Committee, as more of those organisations take hold.

Michael Whitehouse: May I make a distinction with a traditional arm’s length body? In the majority of cases, the Comptroller and Auditor General is appointed auditor to those, so you would have access in the normal way, but when you get into sectors such as the education sector, with the growth in academies, and the NHS and foundations trusts, there is no assumption that the Comptroller and Auditor General would be the primary auditor. The big issue is the oversight that the Comptroller and Auditor General would have of the delivery of that audit service. The leverage that you get is through the right to set the audit code, which would influence what the external auditors do at a local level.

Q15 Ian Swales: Do you get the reports and opinions about all those organisations?

Michael Whitehouse: My opinion-Amyas and I have talked about this quite extensively-is that you could imagine a situation in which we are doing sector reports that give you complete oversight of what has come out of this year’s audit for, say, foundation trusts. The big issue then, where there are systemic issues emerging, is the extent to which we might want to do deep dives into some of those organisations to see how their controls are operating.

Q16 Ian Swales: Will you have access?

Michael Whitehouse: That is the intention, yes.

Q17 Ian Swales: I have one last question before I let others come in. On the issue of arm’s length bodies, will you also be quality-controlling the people who are auditing them? We have just seen Allen Stanford go to jail for I don’t know how many years, and his audits were done by somebody in a one-room flat in Muswell Hill or somewhere. There is a particular academy trust that I have concerns about; its auditors are unknown to most people. Will you engage in that as well, and have quality control? The big concern is that the whole post-Audit Commission world is potentially fraught.

Amyas Morse: We have talked about accountability a lot in this Committee. One of the other things that we will be doing is auditing the accountability statements. If there was evidence that auditors were not doing their job properly-if they were not producing reports on time, or the reports were deficient-or there were problems occurring in trusts, we would go to the Department and say, "You’ve got the power to step in, so step in." It is worth bearing in mind that we will be examining the effectiveness and the accountability statements on a constant basis. We are going to be doing that ourselves. This is not the only show in town. We are going to approach it from two angles.

Q18 Chair: I have some questions on the actual money. I have not been to your office as often as I ought, but I noticed that you are renting out a bit more.

Amyas Morse: We always love it when you do come, Chair.

Chair: I will come more often. You are renting out a bit more, aren’t you?

Amyas Morse: We are trying to get one block of the office rented out.

Q19 Chair: I know that it is a legacy thing for you.

Amyas Morse: As it is a relatively attractive space-it was recently refurbished-we are having pretty good success in renting it out.

Q20 Chair: It does not look very good on the budgety stuff. It does not look as if you are getting loads of money for it.

Michael Whitehouse: Well, it is very early. We have six floors that we are letting out. We have four let now. We are running a little behind, but not much.

Q21 Chair: Where would I pick this up? I do not want "temporary accommodation".

Michael Whitehouse: What we have given you is trend data. If you look at the opening years of the trend data, they relate to the period when the NAO’s building was refurbished.

Chair: I get that.

Amyas Morse: It is when we were decanted.

Q22 Chair: Then it disappears, so where does rent come in?

Michael Whitehouse: Rent will come under income. It is the £19.5 million figure for 2010-11. You can see that it is going up to £20.4 million.

Q23 Chair: Not a lot.

Michael Whitehouse: Well, basically, it is £21.5 million, £21.7 million. We have included fee income from our international audit, and the audits where we charge a fee.

Q24 Chair: I do not know how much you are having to pay for this amazing building in Victoria.

Michael Whitehouse: We have the figures. I can give you a note, if you want a breakdown.

Q25 Ian Swales: While we are on income, do the fee-paying audits, UK and international, earn a profit? In your books, do you make money out of it, or is it simply cost recovery?

Michael Whitehouse: Cost recovery.

Q26 Ian Swales: Full cost? Proportion of overheads and all that? I do not know who these people are whom you audit, but why would you not charge a bit more than cost? It is a lot of money-£17 million.

Michael Whitehouse: Let me give you a breakdown. I have figures here that might be helpful. If you go to page 11 of the estimate, you will see a breakdown of the income. It shows that rental income is going up. The estimate for 2011-12 was £1 million; it will go to £1.3 million in 2012-13. I think the aim is to get to £2 million when we are fully occupied.

Q27 Chair: Who is this?

Amyas Morse: A series of public and private sector organisations.

Q28 Ian Swales: Why would you audit a private sector organisation and not-

Amyas Morse: Sorry, I thought you were asking about the rent.

Ian Swales: Sorry.

Michael Whitehouse: I will answer the first question about who our tenants are. We have GeoPlace, Ordnance Survey, Freepoint Commodities, BMC Software and the Council for Healthcare Regulatory Excellence. We have been very careful about who we let the property to. We want somebody who has close affinity with the public sector. We think it is appropriate to do that. The breakdown of income is on page 11, table 3.

To address your point on charging, on international we aim to get full cost recovery wherever practical. Similarly, we have a strategy to get absolute full cost recovery for all those public sector bodies that we audit at the moment. There is a legacy; for some organisations, we have not recovered full cost in the past. Then Amyas arrived, and we had a new leadership team and board.

Q29 Mr Bacon: What kind of organisations are these?

Ian Swales: Yes, what kind of organisations are we talking about?

Michael Whitehouse: The bodies that we would audit include the regional development agencies. For the British Council we charge a fee-all those sorts of public bodies.

Q30 Chair: You don’t audit Network Rail?

Amyas Morse: We certainly don’t. The answer is that we are now much more aggressive about pursuing full cost recovery. As to your question about international synergy, I remind you that we are one of three bodies that audit the United Nations, for example. The bodies that audit the United Nations are all public sector audit bodies like ourselves, and they charge a reasonable rate, but not the rate they would get from a firm. I think that is quite reasonable, because it is a public interest client.

Q31 Ian Swales: If there were any that you were not recovering full costs from, would you have freedom to just exit and say, "We are not doing this anymore. Have it done commercially"?

Amyas Morse: In some cases, yes, as appropriate.

Q32 Ian Swales: There is an element of saying, "What would their alternative be?", isn’t there? What would they have to pay for that?

Michael Whitehouse: Where the Comptroller and Auditor General is the auditor by statute, there would be no alternative. The general philosophy is that that should be the case.

Amyas Morse: The ones that are paying fees occasionally, quite rightly, have a tendering process. If we think that what they expect us to do it for is unreasonably low, we put in a fee that we think is fair, and if we do not get reappointed, we are fine with that.

Q33 Chair: May I ask about the support that you give to other Committees in Parliament? My colleagues on the Liaison Committee are always eager to have your services, so how do you decide that?

Michael Whitehouse: We have a strategy.

Q34 Chair: Tell us what it is.

Michael Whitehouse: Our strategy is generally to support Select Committees, and to engage with all the Chairs of Select Committees.

Q35 Chair: So you will actually say yes to most demands?

Michael Whitehouse: Where we can.

Amyas Morse: Our strategy is to increase the amount we do for them.

Q36 Chair: Good. The question we have to ask is: how many staff have exited voluntarily? What was the highest payment and the average payment?

Michael Whitehouse: Over the past five years, as part of a general staff reduction and capability enhancement, we have let 70 staff go. Five were compulsory; the remainder we have done through voluntary terms. Wherever we have done that, we have complied with requirements.

Q37 Chair: The highest payment and average payment?

Michael Whitehouse: I have not got the exact figures. I can look in a minute; I am sure it is in my brief. I think the total cost over five years, for just over 70 staff, is around £6 million. What we are looking to do is get a return on that over three to five years.

Amyas Morse: In general, our view has been that we monitor and refresh, in some cases, where there have been core staff there for a long time, and it makes some sense.

Q38 Chair: Do you have a figure now?

Michael Whitehouse: Yes for 2011-12 the highest paid was £69,000. The average was £37,000.

Chair: £69,000 is the average, and the highest, you do not have.

Michael Whitehouse: I do not have that at the moment, but I can get it for you; I just don’t have it with me.

Mr Bacon: It is very modest, compared with the Foreign Office.

Chair: Does anyone have anything else to ask?

Q39 Ian Swales: I have one question that I think I asked last year about outsourcing, which is £15 million, reducing to £14 million. How do you review that? I note that paragraph 29 talks about partner organisations in both the private and academic sectors. How much do you spend in the private sector each year, and why would do you that?

Amyas Morse: This is what I describe as a previous policy requirement that we should use the private sector, partly because the central Government are in a monopolistic position. Having input from private sector organisations makes sure we get access to the way that they would do the work. We get significant knowledge transfer.

Q40 Ian Swales: Does that tend to be firms of accountants?

Amyas Morse: Yes, it is. They are not all big, but they are firms of accountants; that is certainly true. As for academic institutions, they are used to do reviews, most typically to make sure that the quality and logic of our VFM work on a sample basis is satisfactory, because we do not want to be in a position where that is not clear.

Q41 Ian Swales: So is that statisticians, and people like that?

Michael Whitehouse: It is the Oxford Business School and a company called Risk Solutions. They review our work.

Q42 Ian Swales: When you use firms of accountants, they are doing real work, not just providing you with advice?

Amyas Morse: They are doing real work. They are doing contracted-out work. We have reduced the amount because we are working more efficiently ourselves; I have deliberately reduced the amount.

Chair: Thanks very much.

Prepared 15th March 2012