TRANSCRIPT OF EVIDENCE GIVEN BY THE NATIONAL
TUESDAY 9 JULY 2002
Members of the Commission present:
Mr Alan Williams, in the Chair
|Mr Roy Beggs||Mr William O'Brien
|Mr Edward Leigh||Mr George Osborne
|Mr John McFall||Mr Andrew Tyrie
|Mr Austin Mitchell|
Examination of Witnesses (Questions
1 - 19)
TUESDAY 9 JULY 2002
1. Welcome, Sir John. It is the first time you have had a
chance to report back to us since we asked you to look more widely
in you work, and we are glad to see that is reflected in the Corporate
Plan. Would you like to give a very brief summation of the key
points, as you see it, and then we will go into questions?
(Sir John Bourn) Yes, Chairman, I am glad to do that.
First of all, just to say that in the just completed financial
year we did achieve our objectives. We audited all the accounts
that we had to do; we did the 50 Value for Money studies that
we were required to do; we answered 320 letters from Members of
Parliament and the public; and we achieved our savings target.
The Corporate Plan before you is essentially divided into
two headings. There is one heading which talks about the money
that is necessary to do the present work plus the adjustments
necessary to take account of the Sharman proposals, now accepted
by the Government, and to take account of extra audits that we
are going to havethe 18 Special Health Authorities that
we shall be taking over from the Audit Commissionand to
do that I am looking for an increase of 6 per cent between the
current financial year and the next financial year and then 6
per cent in the subsequent years.
The second heading under which I have analysed the work is
to respond to the Commission's request to do more work. This,
of course, also echoes the Committee of Public Accounts' plans
to hold more hearings than they have customarily held. The plan
in the present Session is to move up from the average of 40 hearings,
which is what it has been in the last few years, to something
like 55 hearings. So, going from 40 to 55 is a substantial increase,
so I would be planning to do 10 extra Value for Money reports
for that and I would also be proposing to do some extra work on
revenue audit. Revenue has been an area which has suffered particular
difficulties, as the Committee of Public Accounts has concentrated
on: tobacco smuggling; failure to pay the duty on spirits; the
problems about the self-assessment; the coming of the tax credit
schemeall these things could usefully be tackled. So, under
my second heading, I would propose an extra 4 per cent.
So, under heading one I am asking for 6 per cent extra to
do essentially my current work plus the 18 extra audits, plus
a bit for Sharman. But to do the extra things which you asked
me to do, which reflect the PAC's concern, I am asking for another
4 per cent. So, I am asking essentially for 10 per cent increase
and that would take me from £54.7 million net (a 6 per cent
increase) to £56.8 million net.
So, Chairman, I hope briefly that shows how I have approached
the work, as I say, designing a continuing programme and then
what I have done to take account of your requests to me.
2. Thank you, Sir John. We have altered the arrangements
on the PAC slightly so that it will now probably annually have
more hearings. But clearly some of the reports are not going to
be reviewed by the PAC. From the Commission's point of view, is
there any value in terms of increasing government efficiency,
in you producing Value for Money reports which may not be reviewed
by the PAC and receive its recommendations to government but will
contain your own recommendations? Will it be a major disadvantage
if PAC cannot deal with them all?
(Sir John Bourn) I think it is a disadvantage in that
a PAC hearing adds a lot of muscle to what we are able to say.
But not everything is lost. And sometimes, of course, the PAC
decide that there is a report in which there are some recommendations,
but not those at the centre of their interests. But, of course,
the NAO report has been made. We can ourselves follow it up with
the department. The recommendations are good ones which produce
improvements and so, if I am producing 60 and the PAC are holding
55 meetings, it is not many that would not get taken. So, not
all is lost if not all of them can be discussed by the PAC, but
it is of course an advantage.
3. The advantage of a PAC report is that it has the Treasury
Minute in response. Will it weaken the effectiveness for your
Value for Money report, if it does not go before the PAC, and
will not elicit a Treasury Minute?
(Sir John Bourn) Well, I think the ones where it is
especially important to have the PAC are if it is a subject to
which there is a degree of contention. And it is the PAC that
gives the muscle to that and the extra publicity involved with
that and that, I think, creates the head of steam which overwhelmingly
does see that the recommendations that the PAC make in their report
are accepted by the Government. The ones the PAC do not take tend
to be ones which are not contentious which are mainstream management.
There is one, for example, about the formation of the new Defence
College of which Members said, "Well, it is a worthy piece
of work but we are not very excited about it". But it was
the kind of piece of work where we did not have any trouble with
the Department saying, "Yes, as the external auditor you
have made some good suggestions. We take those on board".
So, as I say, Chairman, not all is lost if there are a small number
of the less contentious ones that the committee cannot take.
4. You have taken on these extra bodies for audit. You referred
to the Special Health Authorities, and so on. But that really
will not impose a meaningful extra cost, will it, because you
are able to recoup those costs from the audited organisation?
(Sir John Bourn) That is right, and that is true,
of course, of the Sharman recommendation accepted by the Government
that we should be the external auditors of all the executive non-departmental
public bodies which will bring us another 26 bodies, and we will
get a fee for that, so that is not an increase for which I would
need to ask you for the money to audit.
5. Because you have not been auditing them before, will they
get any sort of priority in terms of consideration for whether
you need to do Value for Money assessments on them, since they
have never had the rigours of Value for Money assessment, and
how will you decide your priorities in relation to those who come
in via the Sharman route?
(Sir John Bourn) We will look at them particularly
carefully and it may well be that in the first year or two a larger
proportion of them will have a Value for Money study. I think,
again, the Committee of Public Accounts will not have had the
opportunity to discuss these bodies at all; bodies like the Environment
Agency engaged in important work in an area in which the Committee
is interested. I think we will have a tendency to look, in particular,
at the new bodies as they come to us.
6. How do you determine the level of fees that will be charged
to these bodies, as an audit fee?
(Sir John Bourn) The fees are essentially determined
by requiring the audited body to meet our full costs. One of the
great strengths of my audit, compared with the private sector
side, is that I do not have to have a negotiation with the Departments
about what the fee is going to be. It is the House of Commons
that provides, over the great range of work, the money to do the
audit. There are, by definition, a number of cases where a fee
is charged, but it is set rather than negotiated, so that is how
it is done.
7. Is it set with any sort of profit margin in it, or is
it to break even?
(Sir John Bourn) It is to break even.
8. Does that apply internationally as well?
(Sir John Bourn) Essentially I am, on the international side,
seeking to break even so the British taxpayer does not subsidise,
but I am not trying to make a profit out of the United Nations,
9. There is an impressive range of activity here and I congratulate
you on it.
(Sir John Bourn) Thank you.
10. Particularly for the enquiries to take up the suggestion
of Members of Parliament, one of which I have benefited from myself.
But I think it would have been helpful in the Corporate Plan if
you had provided tables showing the disposition of financial audit
and Value for Money audit expenditure over the areas that you
go into and give us categories of the audit work. Could you provide
that kind of analysis for us?
(Sir John Bourn) We could provide anything, of course.
The amount you spend on auditing a particular function is very
much dependent on the way in which that function is organised.
If you take defence, for example, the Ministry of Defence has
got 80 separate organisations within it, each of which has a set
of accounts which have to be audited. So you would look at defence,
and you would see quite a high amount of audit expenditure related
to it and you might think, "Well that reflects the special
difficulties of defence". And, overall, of course, the amount
you spend on defence does represent that. But it is a function
also of the way in which the government is organised and the complexities
that lie before that. But, of course, if the Commission would
like to have that we could see what we could do and perhaps produce
something which provided an analysis which took account of the
complexity of the account, the size of the account, as well as
the functional area.
11. I am actually told that in the Resource Account, on page
27, there is a return, table 5Operating Income by Classification
Activitya return of £1,342,000 to the Consolidated
Fund. Why was that paid back?
(Sir John Bourn) That was because we were more successful
than we thought we would be in raising the money from fee-payers.
We have been particularly concerned to get in all the money that
the fee-payers owed us and we had a big drive to do that. In fact,
it succeeded only too well and, under the Rules of Government
Accounting, if you get in more money than you have got as your
appropriation in aid you have got to pay it into the Consolidated
12. Why could you not keep it and use it?
(Sir John Bourn) I would be very happy to keep it
but under the rules, as they now stand, I cannot do that. It does
mean in a sense you are trying to make a sort of estimate within
an estimate. It is not the most useful and productive way to spend
your time. Of course, if I did keep it, that would mean that it
would all be retained in the accounts and you would all know about
it and you would just see that rather than paying through the
Consolidated Fund and then having to ask for it again, I would,
as it were, move it between financial years. But, under the present
system of government accounting, I have to pay it in.
13. Is that not a disincentive for pursuing the fees?
(Sir John Bourn) I have made sure that it is not because
I have made sure that the people in the office know that they
have got to get this money in from the fee-payers. In past years,
sometimes as we got towards the end of the year, there might have
arisen a question as to whether we would get in all the money
which we forecast under the appropriations in aid. I cannot afford
to fail in a thing like that. I have got to get the money in.
And I told the people in the office, "You have got to get
the money in from the fee-payers" and it is an index of their
success in doing it that we got this extra money.
14. If you could keep it, you could not only finance more
Value for Money studies but it would avoid getting silly notes
from the Treasury like the one that we have just had. I think
I commented last year that the Treasury note was churlish. This
year it is just blandly condescending. You are nodding in agreement.
It says, "I suppose we have got to give them money. We hope
they will do all they can to contain future cost increases".
This is just a silly note. You would not have to put up with that
kind of thing if you could raise your money by getting a better
return on fees and plough it back into the service.
(Sir John Bourn) That is certainly true. I always
think, with the notes from the Treasury, they, of course, are
auditees and perhaps they have an interest in suggesting that
there should be less resources devoted to the audit. Perhaps that
is an unkind thought.
I would have thought many departments would be very happy
to have a bland note saying, "Yes you can have an increase
of 6 per cent".
15. Just before you move on, in view of all this money that
has been successfully brought in, could I ask, do you have any
(Sir John Bourn) No.
That speaks volumes.
16. One of the justifications for the increase in the budget
is that public expenditure is growing quite sharply. But I wonder
if there are any particular parts of it, functional areas, which
need more time and attention? I am thinking particularly of the
kind of hybrid area of PPPs and PFIs and all that gobbledygook.
It must be much more difficult to do the work of the office in
respect of those kinds of contracts?
(Sir John Bourn) Well, certainly, Mr Mitchell, you are absolutely
right to say that the whole area of PPPs and PFIs does require
a lot of attention. The Committee of Public Accounts is very interested
in it. We have produced a lot of reports on it. It is an area
where we have had some disputes this year with the government,
and where we have held our line, on Network Rail. So PPP and PFI
is an area requiring special attention. But, generally speaking,
the areas that require special attention are if you have new programmes
or if you have changed programmes. It is volatility in the nature
of the programme that increases the risk involving the financial
management and does require extra attentionfor example,
the formation of DEFRA out of the Ministry of Agriculture and
parts of DETR. It is a policy decision to do it and, of course,
that is a decision for the Government, but when you put together
bits of the financial system of two Departments and seek to integrate
them there is a prospect of some confusion. So it is new programmes,
it is changed programmes, that cause particular attention. PPP
and PFI, you are absolutely right to say that too.
17. I think we have done some valuable work on it but I am
just interested in this: this is a clipping from the Observer,
and it is about the accounting methods used, where there is an
argument between the Office for National Statistics and the Government.
The Government asked the ONS to classify the £9 billion government
guarantees for loans for the new firm as private and therefore
to be kept off the Treasury's balance sheet, but the Audit Office
presumably does not want these classified as private, wants them
classified as part of the budget of the Strategic Rail Authority
and therefore as public expenditure. Am I correct?
(Sir John Bourn) I certainly do want it on the balance
sheets of the Strategic Rail Authority and I have told the Department
and I have issued a press notice to that effect, a copy of which
I gave to the Chairman of the Committee of Public Accounts. I
regard this as a case where there is absolutely no doubt at all
that Network Rail should be on the balance sheets of the Government,
the Strategic Rail Authority or the Department of Transport. And
the reason for that essentially is, if Network Rail goes down,
who will bear the risk? Who will have to find the money to resuscitate
it again? It will be the government. And everything that the auditor
is supposed to do is to look at substance over form. Not to be
traduced by special purpose vehicles, a" la Enron, in setting
up devices off the balance sheet which the people who owe the
money seek somehow to intimate that they do not owe and they really
do. I regard bringing of the Office of National Statistics into
the pictureI respect them, they are excellent economic
statisticiansas an irrelevance to what I am concerned with.
If I put it in this way to make my point, I do not seek to define
gross domestic product or to define what counts as an import or
an export. I am the external auditor and it is for me to say what
is on the balance sheet and what is not on the balance sheet and
it is not for the economic statisticians to attempt to supersede
me. So I do think, and I have said this in Whitehall, that I regard
this as something of a red herring and it may be that, within
the system of National Accounts, the Treasury will wish to regard
it as private sector. But that does not alter my view that it
is on the balance sheet and should be on the balance sheet, and
if it is not on the balance sheet I should qualify the accounts.
18. Just as a rider on that, was I misunderstanding or mishearing
you when you appeared to be suggesting that Network Rail was a
special purpose vehicle?
(Sir John Bourn) I do not believe it is. No. But I
think some people have tried to describe it as if it would be,
or could be, or might be, or should be. But I do not think it
19. If the accounts did include these sorts of risks that
you say the economists are happy with but the accountants are
not, how different would they look? These are large sums of money,
are they not?
(Sir John Bourn) Yes. Well, I have not got the figure
in front of me. I have concentrated on the point of principle.
But it will be on the accounts.