Examination of Witnesses (Questions 1-19)
SIR JOHN BOURN KCB, MR TIM BURR AND MS CAROLINE MAWHOOD
MONDAY 11 MARCH 2002
1. Well, Sir John, I will not say welcome to the Committee of Public Accounts. I will lead off with a few questions and my colleagues may want to ask a few questions as well. The Memorandum and the Estimate that we have got from you show an increase in the net provision sought for 2002-03 of £2.4 million in cash terms. That is the extra you are asking for. It is five per cent higher than last year. What is the reason for this increase?
(Sir John Bourn) Well, Chairman, the reason is that first of all the Government plans to spend six per cent more money next year on its range of programmes and there is a relationship obviously between the total central government expenditure and the cost of auditing it. Secondly, the nature of the audit has changed as the government accounts are presented in resource terms so that each of the 558 accounts I will audit in the next financial year contain five statements and, as well as that, the accounts will contain a statement of risks and how the accounting officer proposes to handle them. So the whole business of auditing the accounts becomes more complex because the accounts have become more complex. In addition to those which are the main reasons why we require more money, of course we shall continue to produce for you 50 value-for-money reports and all the other things like handling correspondence from MPs and the public. In cash terms that goes up as well. So it is essentially £2.4 million extra, as you say, and it is because the Government spends more, the accounts are more complicated, and there is an inflation of 2.5 per cent to be taken into account.
2. On the point that you mentioned on resource accounts, I understand in 2002-03 that the NAO plans to audit 550 accounts. That is 100 fewer than planned for 2001-02. Can you explain why this change-over from appropriation to resource accounts has had this effect? As you are now going to be auditing 100 fewer accounts why do you still pray in aid the fact you are making this change-over for justifying an increase in expenditure?
(Sir John Bourn) Yes I can do that, Chairman, because although there are fewer accounts, down from 649 in the current financial year to 558 in the next one, the removal of the appropriation accounts, which are essentially income and expenditure accounts, a penny notebook system of accounts you could say, to accounts which have these five statementsa survey of resource outturn, an operating cost statement, a balance sheet, a cashflow statement and a statement of resources by objectiveseach of these statements has to be looked at and therefore each one is more complicated. So although in total it is fewer accounts the appropriation accounts have been replaced by more complex accounts.
3. Last year you said, "If I am asking for more money I shall give you more savings". Your Department has saved the taxpayer £8 for every £1 spent in running the office and you say that is still your objective. So if you are spending another £2.4 million next year are you going to save eight times that amount? How is it going to work out?
(Sir John Bourn) Yes I am.
4. Thank you very much. That is what we want to hear. Can I ask you about these value-for-money studies which each cost about £188,000. Do you set a target at the beginning of the year for those value-for-money studies and how do you control them during the year? How do you control the cost during the year and through the lifetime of the study so that it does not run out of control?
(Sir John Bourn) When we decide to do a study we take a view of how much it will cost to do it and also of in (at least broad terms) what contribution it could make to the savings' target. Not every VFM study we do will produce savings. For example, we did not set out to do a study of hospital acquired infection with the idea that that would save money. In order to achieve eight times the cost of running the office we have got to have enough studies which are going to produce money savings. We look for enough studies to do that and then each of the Assistant Auditor Generals, who are responsible for a range of the business, knows at the beginning of the financial year what studies they are going to do, how much money they have got to do it and what results are expected, whether they are results in money savings or whether they are results in public welfare of other kinds.
5. Can I ask you a question about staffing. You are asking for another net increase for staff costs of £1.2 million over last year. You have had a very constant level of staff of 750 over many years. So what is the reason for this increase? Is it because you are having to deal with the competitive market, inflation, what is behind it?
(Sir John Bourn) Yes, it is essentially dealing with both those things, very largely inflation but of course, I am not a price setter in a pretty competitive world, certainly as far as the professional accountants that I employ are concerned. If they were not working for me, even though the market may be a little less than it was last year, it is still a good market and they could go and get jobs elsewhere. So I always have to have regard to having rates of pay which are reasonably competitive, particularly for people in their late 20s and early 30s when you have got people who have qualified with two or three years' experience and who are attractive to other people and who are at the time in their professional lives where if they were to move from the public sector to the private sector that would be the most advantageous time to do it. So I am concerned to be able to provide a competitive salary, although not of course throughout their lifetime because people will not earn with me what they could earn with one of the larger firms. But I have to provide a competitive package and that is really what I am seeking to do and what I have been able to do with the Committee's support and the Commission's support in the last few years.
6. You have a real problem. You have a first-class training package, more people coming out of the universities, you train them up, and they are under tremendous pressure to go out in the private sector where they can earn much higher salaries because they can go and work for Ernst & Young and there is nothing you can do about that, is there? Give me a flavour of what you are paying these people in their late 20s and early 30s you have trained up? What are you paying them and what could they earn outside, just as a matter of interest?
(Sir John Bourn) I have been paying these people something of the order of £40,000 a year.
7. That is what they are earning by the age of 30?
(Sir John Bourn) Yes. That is not out of line with what they might get if they were to move. So I am really saying to them you are not losing anything by staying with me and I am giving you more interesting work. There is also of course the incentive that made them join us in the beginning anyway. People who come to us are people who are really interested in the public sectorrather the kind of discussion we had earlier with people from the scientific communitythere are a lot of people who do want to work in the public sector who do want to work for us. The point is you cannot make the sacrifice, if that is the right word, between staying with us and going somewhere else too great for people at a time when family responsibilities are developing, although I cannot hope, as I look at the Ernst & Young Annual Report and see that the 411 partners in the UK Ernst & Young had an average return of £449,000 a year, to match that.
Chairman: Why are we in this business, I wonder!
Mr Gardiner: Peanuts. We are the monkeys, that is why!
8. Do you want to say a word about Sharmanand Sharman is going to go through and there will be a lot of extra workand the extra pressure and extra cost this is going to place on you?
(Sir John Bourn) Of course, we have not been able in the Estimate to include a figure for the work on Sharman because the rules are that you cannot put in your Estimate money for contingencies. The biggest expense that we will get through Sharman is the audit of the-non-departmental public bodies. However, they are feepayers so the money which non-departmental public bodies are now paying to the professional firms which are auditing them, they will pay to us, so it will not create for the Committee and the Commission any great increase in resources. The increased resources will come in through extra appropriations in aid. There will, of course, be extra expenditure on the audit of the information systems underlying the public service agreements targets, and it is difficult at the moment to say what that would be. I will, of course, be able to say much more clearly to the Commission when I come to them in the summer but, as I see it today, that something perhaps of the order of another £1 million or so will enable us to do that. So the resource implications of Sharman should not be too great. What, of course, it will be is a challenge for us to take on this work and make a success of it, having thought very carefully about it, as we have of course about the Committee's concern at the "away day" for some extra sessions, the four to six extra sessions a Parliamentary session that you are concerned with, and I am confident that we shall be able to rise to the challenge of providing those extra reports. So really for the extra things coming from Sharman it is neater to get it through appropriations in aid than having to ask for a Supplementary Estimate, which I would not have liked to have had to do.
9. Just quickly so we can grill Sir John viciously! Expansion of expenditure by six per cent by the government does not give anyone the right to say their expenditure should go up proportionately, because if we were to give a six per cent or ten per cent rise to all staff working in the public sector it would mean no more audit work at all, would it, so there must be some underlying reason why? Is it the nature of the departments that changes?
(Sir John Bourn) Yes and that is absolutely true, Mr Jenkins. For one thing I am not asking for the whole six per cent, I am only asking for five and, of course, it is not all salaries, as you rightly say. If you look at the range of activities which are undertaken by the departments they are infinitely various and, of course, as well as that, as I say, it is the extra complexity of the accounts which is also relevant.
10. This is something I find even more strange. I would have thought by now that a lot of the accounts would be on computer systems, IT operated, and therefore quicker and easier to go through?
(Sir John Bourn) If you have the accounts on computers, which as you rightly say you do, you have of course to take off the information and we have the ability; that is not the difficulty. The difficulty is that each of the accounts will consist of these five statements that I mentioned. For example, departments are going to have balance sheets which are things which they have not had before. A balance sheet involves a degree of judgment in compilation and evaluation of its assets and liabilities which just never existed under the old system of appropriation accounts where it was cash in and cash out.
11. When these do exist, they are real, and it is quite a rapid response to go through it year after year or quarter after quarter because you know you have got a figure there and you have got a procedure for evaluating that figure that has become accepted so, surely, resource accountancy while difficult at the start should get easier quicker and use less resources?
(Sir John Bourn) You are right to say it is at the starting phase so it takes money as departments wrestle with things they have never done before. I would certainly hope and expect that auditing the resource accounts does become simpler and more straightforward with experience. I do not think it will ever be automatic for the reason that you said, governments change in what they donew departments, agencies, bodies are set up, old ones die, responsibilities are moved around and transferredand those things which are always complicated will be more complicated still when you are disaggregating complex accounts and putting them together in new ways for new organisations. You are right to say that, although I would not necessarily say in future years I will be asking for a sum of money extra necessarily more or less in line with government expenditure.
12. So we will be looking for a reduction in the cost of audit.
(Sir John Bourn) You are getting reductions in the cost of audit in terms of the extra benefits from the IT we have and the extra benefits in the auditing methods. The fact that I am talking about an increase of five per cent does reflect to a degree the fact that the audit is done more expeditiously and efficiently today than it was in years past so year by year we will do it better.
13. In our reports, and we have a plethora of reports that the Department looks at and does, one gets the impression, and correct me if I am wrong, that the reports and work expands to fit the money available. Would that be true?
(Sir John Bourn) No.
Chairman: Very good answer, Sir John!
14. How much extra is there for MPs' and public correspondence. How much do you intend to put into this? This itself becomes circular because you may be triggering off reports by this very correspondence.
(Sir John Bourn) Indeed, yes. The amount that I am spending in this financial year on correspondence from MPs and members of the public is £1 million. I estimate that I will need an extra £100,000 next year because some of this correspondence, you are right to say, develops into reports. For example the report that the Committee took last week on the Teesside Development Corporation came from correspondence and from Members of Parliament coming to see me about it. That is what its origin was. Of course, one had to look into what was involved and the points that Members had brought to me. When I could see it was a really big subject it was translated, as it were, from the world of Members' correspondence to the world of value for money.
15. Can we get one guarantee, Chairman, that the replies and answers we get from Sir John are quicker than the ones we get from the departments?
(Sir John Bourn) Yes.
Chairman: That is two marks, is it? Mr Davies?
16. Just a couple of quick questions. Firstlyand you may not be able to comment on thisthis process of you providing us information to interrogate witnesses and us interrogating you on the Public Accounts Commission and then people on the Committee of Public Accounts doing the same seems to be a bit strange because obvoiusly I want you to do a better job with more money. I want to make that coment in passing. It is a constitutional point I guess. Have you asked for enough money, to be honest, because the situation here is that you have just put up the money by five per cent, at a time, as you said, when the expenditure is going up, but the qualitative change in resource accounting in this next year may be a big blip in your expenditure because of the learnoing curve of departments and the extra resources you will need to help them through that period. I would imagine that the profile of expenditure would rise much faster and therefore we could expect rightly a fall in future years down to a normal level. My concern here is that there will be so much cost involved in that change that there will be no hunger to look at new areas emerging from issues such as PPP and other things the Government is doing where this Committee will want to look at those things. I am concerned about that. In terms of the amount you give to your auditors, I think they do a tremendous job and they provide value for money, but again as we move towards more PPP it may well be the case that private contractors look more towards recruiting more aggressively from your stock of people who have got this knowledge of the public sector partner and the relationship and they will be able to get value back from appropriating those people in a way that we have never seen before. Is there any risk management or contiguency plans for that? Could you comment on those two points? Not the one about accountability because I think that is another issue.
(Sir John Bourn) On the point about the extra implications of the resource accounts, for the last couple of years we have, in fact, been running the two systems together. They have been dry runs really of resource accounts, together with appropriation accounts. Not having to do the appropriation accounts at all will release money which will go towards coping with what you rightly say are the increased demands of resource accounts. On the question of the development of the nature of our work and the chance that people in those areas which may be particularly attractive (ie, people who work in the PFI and PPP areas), that is a managerial challenge. I will have to want them to stay with me. It is partly money but it is partly the interest of the work. If I may say soand not because I am before you this eveningmembers of my staff very much appreciate direct contact with members of the Committee, meeting you and hearing what you care about. The idea that they are really serving members of the Committee and the Committee itself rather than abstraction is a big plus for me in keeping them. So one must not be complacent about it but in managing your staff you do not just think, "Here is the pay rate, there is an appraisal every six months, they must get on with it." You must think about how to do it all the time. You must think about the extra training that they have. You must think about the opportunities for their professional development, and that is certainly what I try to do. I am certainly not in the business of saying because resource accounts are a challenge I am not going to look at new things or at new ideas that you give me or that we may come up with ourselves. If you ever settle into the assumption that you have got it right, the balance between subjects and financial audit and value for money, if you ever think you are in a steady state, you are dead. You have to recognise that you have got to move on.
17. Two very quick things. The first is you mention you would get eight times the cost of savings in the future. I believe in the next year or two we should be aiming for much more than that. I think in resource accounting, in terms of being able to manage one's assets effectively and optimally, departments should find opportunities to use their resources more effectively and we should be able to point the way forward. In addition to the extra cost to you I would have thought there are extra savings opportunities in the short term. Finally, I would like us to see in this new arena of PPPs a tension between Parliament and the Executive and value for money, so that we continue to push the boundaries for financial access to prove financial value for money and Parliamentary scrutiny. The concern would be that if you are completely overwhelmed in the short term by this, we will take our eye off the ball.
(Sir John Bourn) It is a good point to make and one of which my colleagues and I are aware, but we have not taken our eye off the ball.
18. I agree with Mr Davies on this point about whether you are spending enough. It is the only time I will ever ask a witness this question: are you spending enough? The increased figure of 5 per cent looks like a calculation, these figures are rounded up or down, and 5.024 per cent is horribly, horribly rounded down. Also the human resource line which goes up by 3.85 per cent just on staff costs, when you say earlier on in the Report that salaries of central London qualified accountants rose last year by between five and six per cent, if you are only estimating a 3.5 per cent increase in the human resource bill that assumes you are going to have fewer auditors over that period. Are you spending enough? Are you doing enough to ensure that the excellent quality of work that I have seen continues? Is there a pressure on you from your Permanent Secretary colleagues that, "Really, old chum, you should keep the figure down to five per cent"? Is there some kind of ethereal pressure on you or is it your own assesment of what is feasible to keep it down to five per cent?
(Sir John Bourn) It is my own assessment. Permanent Secretaries were my colleagues once but I left the Civil Service to become the Comptroller and Auditor General and I have no pressure from them as to my budget. It is my assessment and I am as confident as I can be that I will in the next financial year do all the things that I have said I will do and there will be no fall-off in quality. I think the kind of points that have come out of the discussion will be relevant when I come to Mr Williams and his colleagues in the Commission in the summer and when I come back to you next year. I may well be asking for some more because I know I have your encouragement to do it. I am not trimming this money because I am anxious in some way not to be appear to be unreasonable. Obviously the C&AG has got to try and run things in a tight ship and it is right that I should do that, but I am confident that I can do it in the next financial year with this money.
19. Does this mean a reduction in the number of financial professional staff?
(Ms Mawhood) There is a small reduction in professional staff. But you of course will also notice there is an increase of other running costs which includes employment of consultants, so that is people who are working directly on our studies and on our financial audits. It is just the way you are required to categorise expenditure by the rules that does not give you a full picture of how much money is spent on direct work.
(Mr Burr) It flows partly from the recommendation of the Sharman Report that we should contract out rather more of our work.