Examination of Witnesses (Questions 20-39)
SIR JOHN BOURN KCB, MR TIM BURR AND MS CAROLINE MAWHOOD
MONDAY 11 MARCH 2002
20. Good explanation. It is odd is it notand this is just a "by the way" commentthat you audit £650 billion of expenditure which is about 40 per cent of GDP and you do that with 750 accountants whereas the other 60 per cent of GDP is audited by the whole accountancy profession, which begs the question are the general audits (not the value for money audits) that you do regularly thorough enough?
(Sir John Bourn) The audits are done by professionally qualified people auditing by the standards of the Auditing Practices Board. I have just introduced for this year putting ourselves under the microscope perhaps is too strong a word, of the Joint Monitoring Unit of the ICAEW which looks at, as you know, the standard of professional firms. So as well as the professional responsibilities of members, as well as the auditing practices standards, as well as our external audits looking at us, we have the JMU looking at us as well. Again, I am anxious to show that the audit we do is as good a quality as the accountancy and audit profession in the United Kingdom.
21. What is the level of materiality on an average set of accounts that you do? It will vary from department to department but what kind of figure are we talking about, £2,000 or £20 million or £100 million?
Chairman: What was that?
Mr Gibb: It is where you ignore a figure because it is irrelevant. If you are auditing ICI it could be £1 million; if you are auditing a government department it might be a lot more than that.
(Sir John Bourn) As you rightly say it varies, but generally something of the order of two per cent would be the figure. Of course, for something like Ministry of Defence procurement expenditure that is still a high figure. What one does do, as any professional auditor does, is take account of the risks involved. We are more attuned to levels of risk in defence procurement, in construction, in areas where you have a lot of buying and selling of things, compared, shall we say, to an organisation like the Treasury where the greater part of the expenditure is on wages and salaries for a relatively well-defined number of people.
22. So you do not think there will be much benefit to be gained from halving the materiality level across all your audit and increasing the number of staff commensurate with that? Would that achieve any greater discoveries of misappropriation?
(Sir John Bourn) I do not think so. I have thought about this. One of the reasons, of course, why it is so is that in our reports on the accounts we do have the opportunity to go beyond the reports done under company law, which is to give a true and fair view. We can comment short of a qualification on areas of weakness that we have discovered or which have been drawn to our attention by whistleblowers or by our work, so we are able in the financial audit to cover more than the degree of materiality necessary for a true and fair view. Of course, if one were to halve materiality it certainly would be quite a considerable increase in resources. I do not think, given the kind of reports we are able to do, that would be justifiable. Again, I think you cannot just think on materiality levels for all time, you do have to think about them.
23. That is very helpful. I have two more quick questions. It says in paragraph 2.11 that a programme of periodic reviews of audited bodies' activities is undertaken to identify areas where there are potentially significant risks of irregularity. There were huge areas of irregularity, if you recall from the excellent social security report that you did. Is there a case for saying on things like social security fraud we ought to be doing more periodic reviews? How periodic does "periodic" mean in paragraph 2.11? Should we be doing annual reports into social security fraud if it is so huge?
(Sir John Bourn) We do on the accounts produce an annual report and we have, in fact, another report in the progress of being worked up on social security looking at a suite of fraud areasit is Social Security, it is the Revenue, it is Customsand we are looking at fraud across all those areas and we will be bringing to the Committee a general analysis of each of those areas which will pick up what has been done and come out in the annual reports.
24. 2.18 concerns whistleblowers which you just touched on. This came into force on 2 July1999. How many whistleblowers have you heard from in the last 12 months?
(Sir John Bourn) In the last 12 months, if you think of whistleblowers as people who telephone the hotline, it is something of the order of 30 or 35. If you look at whistleblowers who write us a letter or people who go to their Member of Parliament who then comes to us, it is about 150.
25. Have those led to any interesting reports?
(Sir John Bourn) Some of them certainly have. I suppose the biggest most recent one is the one that I mentioned which was the Teesside Development Corporation. Some of the shenanigans in Health Service trusts have come from whistleblowers. Also some of those reports we have done on educational institutions have come from whistleblowers. We always have to be careful of them because some are based on spite and jealousy and some of the most extraordinary communications you could imagine that we would receive.
Mr Gardiner: We get them all the time.
(Sir John Bourn) You get them all the time; I know. As the Committee's work and our work become more well-known, you will get more whistleblowers.
26. Do you have to waste an awful lot of time on correspondence from people who do not understand the sort of work you do or for example from MPs trying to pressurise you to do things which they know perfectly well you cannot do?
(Sir John Bourn) We do get letters from people. People write to us about local government and we indicate to people where they should go to instead of me.
27. Does that take a lot of time dealing with?
(Sir John Bourn) Not a straightforward thing you can see clearly like the accounts of Walsall Borough Council or something like that. That does not take long to deal with. It does not take long when sometimes Members (not members of the Committee of course) do try and get me to do something which actually is an assault on Government policy and I have to say that you should go to the Secretary of State on a thing like that. Again that does not take very long. There was one that we had which was a letter from a constable in the Ministry of Defence Police who was very much concerned about the allocation of houses in the Ministry of Defence Police. In essence, he thought he should have a bigger house than he had. He produced an enormously complex letter bolstered by references to a lot of rules and regulations about the world of Ministry of Defence Police. At first you were not sure whether there was really something in that or not. We did a reasonable amount of work on that. In the end I had to say to this man that while he was obviously unhappy he had not been dealt with wrongly. That is a case where in a sense you could say we put perhaps more resources in than would have been ideal, but I do feel that everybody who writes to us should get a proper reply so they do feel that their letter has been properly considered. Another area where I get cases which I do not really get into is students who claim that they are entitled to a higher class of degree than the examiners have awarded them.
Mr Rendel: We all felt that!
Mr Gardiner: Speak for yourself.
Mr Bacon:I was going to say, speak for yourself!
(Sir John Bourn) Unless it is something that appears to be procedures in the university that it might be reasonable to look at, I try not to get into that. So while I try to say, "I want to run this and discuss this with the Commission because it is £1 million for doing it", I want to do it in a way that people will feel they can write to the National Audit Office and they get a reply back which has been written by a human being and has tried to say something sensible to them.
28. Two factual questions. One concerns the proportion of work which is currently being done by outside auditors rather than your own people?
(Sir John Bourn) On the financial audit it is 17 per cent and on the value-for-money audit it is something like 20 per cent.
29. And what are the relative costs of doing it inside and outside?
(Sir John Bourn) The relative costs are that if I could not get it done outside for the same price as I could do it inside I will not put it out, so the costs are no greater.
30. I thought you said you were being encouraged to put it out more.
(Sir John Bourn) That is right.
31. Is that regardless of the cost or will you still stick to the point that you will only do it outside if you can get it done outside as cheaply?
(Sir John Bourn) I hope I will be able to stick to it because I have not had any problem about it. We have contracts with a large number of firms. There are 12 or 15 different firms doing it, the big five of course, but also others as well, and I ask them to tender for the work and they overwhelmingly put in prices which are in line with what I could do it for myself.
32. That surprises me somewhat because you would think there was a profit margin in there and it makes it sound rather as if you are being a bit inefficient with your own people.
(Sir John Bourn) No, in fact they so much want to work for me that they will be prepared and know they must put in a good price. That is not just a flippant answer. I think firms do like to feel that they have a chance of working for the National Audit Office because I never found any of them not wanting to do it. Of course, they do not have to bid, they are not forced to do it. We do not have any problems about putting work out, but we will not pay over the odds to have it done.
33. One question which I suspect is something I may have misunderstood concerns the Supply Estimate where you have got voted capital items of £1 million, although the outturn two years ago was rather more than that, but the capital sums you have got in your Plan show rather more in a year1.3, 1.4, 1.5.
(Ms Mawhood) That is correct. At the time that we did the Plan we thought we were going to classify more of the IT expenditure as capital expenditure rather than current or administrative expenditure. It is the way in which you classify capital expenditure.
34. So the capital which looks like a lovely round figure £1 million worth of capital, that is a genuine figure and not just something plucked out of the air?
(Ms Mawhood) No, it is genuine figure. It is a round figure. If you are dealing with £1 million to £1.1 million, it is difficult to be absolutely precise at the beginning of the year exactly how much your capital is going to cost.
35. A final point, you said it was nice for your staff to have a chance to meet us and that a lot of your staff enjoyed meeting us. We meet and talk to very few of your staff. I do not know whether you would like to put in your budget some money for a large party for 750 staff to meet us all! That is one way in which you could increase the expenditure in the way the Committee is trying to push you. More seriously, how often do your staff get the chance to have a training course which perhaps the Chairman or another member of the Committee addresses on how we see it from our point of view?
(Sir John Bourn) In fact they do and members of the Committee and the Commission do address training courses, particularly for the graduates who have just joined us. Opportunities of course to meet you arise. We put the name and telephone number of the person who ran the study in the briefing. There are opportunities to meet. I know it is not always possible for Members to take them up but the opportunities are there. Again on some of the correspondence issues I always encourage colleagues who may not be quite certain about a letter we have had from you to find out what is your particular worry. They might ask you some questions or get in touch with you.
36. Even so out of 750 that must be a fairly small proportion?
(Sir John Bourn) Yes of course. It is the case that you will not meet the support staff, you will not meet the staff who are working abroad, so I take the thought that perhaps there is some way in which we might think about how the people who do not in the ordinary course of business have the chance of meeting you might have some opportunities to do so, and it is a good point.
37. I have just one observation and one question. The observation is I agree with Geraint Davies that you are lucky that you are not before the Chief Secretary and that you come before us, because we are going to nod through, I suspect, your five per cent increase in budget and I am not sure the Chief Secretary would, but there we go. You make a lot of your 8:1 savings. If you look at your Corporate Plan they seem quite erratic. You get £124 million out of your PFI works and then £30 million out of your Prison Service work and presumably there are some things out of which you do not get any money. How can you be so confident of hitting the 8:1 target when it seems fairly random what your reports might yield?
(Sir John Bourn) When I first decided to set this target I did wonder if I would be able to keep it up over a period of years. Indeed, we started off aiming for seven times. What you find, as of course a number of those examples show, is you get money out of small nitty-gritty kinds of things. You might be selling off some land or buildings that are not being used. It might be getting departments to chase up the people who owe them money. Sometimes it is getting them to calculate grants efficiently and correctly so a lot of the savings are out of small amounts of money. The main reason why you can go on from year to year is through the volatility of the government machine. I do not think that if government departments were in a settled form and were doing the same programmes year after year that the scope for finding these savings would ever be eliminated, but I think it would reduce out of the diminishing volatility of government. That is one of the things that has struck me while I have been doing this. The government machine is always changing. Departments are growing, dying, expanding, contracting and a lot of the scope for savings comes out of change because change often does imply extra money being spent by just setting it up and engineering it.
38. Are they real savings, by which I mean, for example, for the Prison Service you claim your report saved the taxpayer £5 million in terms of early retirement on ill-health grounds where levels have fallen and the average level of sickness absence has been reduced. If we went to the Prison Service and said, "How did you get those savings?" would they say, "Oh, the National Audit Office, thank God they came in and sorted us all out", or were these things happening anyway?
(Sir John Bourn) We agree these figures with them because it would not be right to quote them unless you had the substantiation of the auditee. So that is what we dowe agree the figures.
Mr Osborne: I will take your word for it.
39. I have got one observation and two questions. The observation is that your entire budget is roughly the same as the overspend on the implementation of the National Probation Service Information Systems Strategy, which was just one little blip in the catalogue of incompetence and waste that George and I and Nick, as new members of the Committee have seen just in the last six months. It seems to me entirely credible that an extra £2.4 million will yield eight times that in extra savings. I come back to Mr Gibb's and Mr Davies' questions about whether you are doing enough. One listens to Rachel Lomax saying she is losing £4 billion but she is not sure where and the Health Service, which is losing between £7 billion and £10 billion in fraud, which was a figure I quoted in this Committee before. I asked an NHS trust chief executive whether he thought it was a roughly accurate figure when I was visiting a local hospital in my area on friday and he said it sounded about right to him. That is £11 billion, plus the money that Customs & Excise seems to hose around an all directionswe saw £858 million being lost in one report on fraud on alcohol duty and £450 million to £900 million, Customs and Excise are not quite sure which, in another report on fraud relating to hydrocarbon oils. Even if you take the lower figure from the fraud in the Health Service you are still getting some £12 billion to £14 billion going south somewhere. It does seem to me that with a bit of a quantum leap, perhaps hiring in consultants or hiring in extra staff, you could have a serious shift in the number of value-for-money reports that you are able to churn out and the number of stones that you are able to turn over and the number of worms that you are able to uncover underneath them and that you might be able to save substantially more money. Do you think there is potential with substantial extra resources to achieve substantial extra savings? The second question is about materiality because it is very evident when you look at DWP, the Work and Pensions area, and I was looking at one of the area benefit reviews, in terms of quantifying what their fraud, and official error, and customer error, were that some of their charts did not have numbers in them at all, they had percentages because if you spend £100 billion then £3 billion is a lot of money but if it is only three per cent it does not look so bad in the little table, and the area benefit review is stuffed full of charts with low numbers of percentages, which is presumably to make it look to the casual eye as if they were not such large sums of money. In Customs & Excise, again, Mr Broadbent frequently refers to the fact that you have to understand the scale of Customs & Excise's activities and therefore if they collect £102 billion it is not so bad if they lose the odd £1 billion here and there. Again, it goes back to my first question about whether you should or could do more. Perhaps I should let you answer that and then I have got one more quick question.
(Sir John Bourn) Of course, with a bit more money we certainly could do more output. The money is hypothecated around the concept of the total number of accounts plus the 50 value-for-money studies. There is no doubt that if you and the Commission wanted 100 you could have them and of course it would still be cheap at the price and we could certainly do more work if that were required. Of course, there will be more work following the away day and the desire for some more sessions. On the scale of activities in relation to the levels of fraud, if you take Work and Pensions, under many views of materiality you would not get a report from the external auditor at all. It is because we see this as important and we see the endemic weaknesses in social security systems that we bring out the estimates of fraud which we make and which we agree with the Department and, of course, you will see from our reports that we do not have this roseate view that these savings are really very small percentages; They are vast amounts of money and of course they mean losses to individual human beings.