UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1058-i

HOUSE OF COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

NAO Main Estimates 2013/14

AMYAS MORSE and MICHAEL WHITEHOUSE

Evidence heard in Public

Questions 1 - 22

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Public Accounts Committee

on Monday 11 March 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Guto Bebb

Jackie Doyle-Price

Fiona Mactaggart

Austin Mitchell

Ian Swales

Justin Tomlinson

Gabrielle Cohen, Assistant Auditor General, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.

Examination of Witnesses

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

Chair: Who wants to start? Come on, Richard: you start.

Q1 Mr Bacon: I have a particular interest, CAG, in what used to be called performance management in your strategy. You used to talk about three heads: financial management reporting, performance management and service delivery. That was your strategy a while ago, although not that long ago-since you took over. It had about £7 million attached to it, which I think was taken out of the value-for-money budget and put into that. Is this simply a question of re-labelling, and is that what the "clear insights" is all about, or has there been a change in thinking?

Amyas Morse: No, there has not been a change in direction, thank you very much. We continue to be focused on management information, financial management and understanding the cost of operations. Those continue to be strategic themes for us, as they have been all the way through, and they remain in our strategy document. What we are doing now in our transformational change is just giving effect to what we said in that strategy document, putting ourselves in a better position to carry the strategy out.

Q2 Mr Bacon: You will soon go to the commission for £4.6 million, which is additional-this is the additional bid to fund the restructuring. It involves the early release of 42 staff, and the taking on of 12 new staff. Did you give consideration to taking those people and retraining them, rather than hiring a new bunch of people?

Amyas Morse: Yes, we did. We have been going through a substantial change process for the past three years. By that I mean that we have had about 80 people leave during that time, and we are now at a point where we are reorganising into groups. There are many advantages to doing that, but one feature is that we just do not need as many senior people to run those groups as we did before. Having remodelled the resource quite a bit, we are now at a point where doing it on a voluntary basis does not really work any more. There are a number of reasons for that, not least of which is that the terms for voluntary redundancy have become a lot tighter. If we want people to leave now, we really need to tell them, "I am sorry, but you need to go", to some substantial extent.

The reason why we want to bring some more staff in is that it is part of our approach to want to develop much deeper skills. Although we believe our own people can develop those to a degree, there are some areas where you make it difficult for yourself if you don’t bring in a certain number of people who already have those skills outside. So in some areas we think it would make a lot of sense to have people. It may be that an investigation having one or two people with in-depth and recent investigative experience would be helpful to us. We think the same in corporate finance, and that we could do with some more people there with experience in project management and so forth. Those groups are not necessarily substantial, but they give us a core of current experience that we can use to level our approach.

Q3 Mr Bacon: So there is a list of six: commercial, corporate finance, legal, forensic, procurement and operation. You said there would be a need for fewer senior people. Are the extra 12 you are bringing in mid-career people with current experience that is valuable, or are they senior people?

Michael Whitehouse: What we tend to do is bring in people who have the right experience. They may be mid-career or early in their career. We are not totally wedded to the grade at this point in time. We are more interested in getting the skills in and being able to pay what is appropriate. Some may be directors, but a higher proportion are more likely to be managers. We have a grade structure within the NAO, but I am not wedded to that. We are trying to create a much more flexible organisation that is less hierarchical. We want to let some more senior people go because we want to empower some of the more junior, brighter people who can take this forward. That is not to say that existing staff are not good. It just means that we are changing the shape of the organisation.

Q4 Mr Bacon: Do you see, as part of the new strategy and implementing it, that it will become more common for people-I hate the phrase "pass through" because it is laden with the wrong nuances-to join the NAO, spend a few years there and then go on somewhere else, rather as they are talking about and sometimes doing in Whitehall?

Amyas Morse: For us it is already quite common for people to do that at an earlier stage. We are a training office, so people can come to us and emerge as a qualified chartered accountant, and that has quite a big effect on the way we are organised. We train more people than we want to keep. That is unavoidable, so in a normal circumstance when the market is open we would expect a proportion of the people who finish their training contracts to leave each year-not all of them, but a minority. That is normal.

We are deliberately going to build deeper expertise and skills in our people. We want them therefore to be more attractive. I would be very happy for, and I will encourage, people to go and seed the public sector. I am more than happy to have people from the NAO leaving and becoming part of Departments and so forth. That would be very attractive, and for that to happen more than it has done they need more relevant skills. That is a side benefit of building those skills.

Q5 Mr Bacon: Do you expect that the turnover of the office will go up as a result of these changes?

Amyas Morse: Over time probably, but right now no one has huge spending capacity, so I think I am most interested in increasing secondment activity. We have a very successful secondment at the moment with one of our directors, Andrew Baigent, at the NHS. That is going very well.

Q6 Mr Bacon: I remember a consulting firm head telling me that as a crude metric he looked at about 14% or 15% turnover, so someone staying six or seven years was okay, but once it hit the high teens or 20 he was worried, and similarly if it went down to 11% or 10% he was worried. Is there a similar number or perhaps a slightly different number that you are benchmarking roughly in your mind, or not?

Amyas Morse: I don’t know that we have a number I could quote, but it is very clear to me that at senior levels the turnover has not been enough. It has been a bit of a permafrost for quite a long time. We are grateful for people’s loyalty, of course, but at one point it was quite difficult to promote people. One reason for making a lot of changes is that we felt it was a bit of static environment, and we need people to join us, train, get promoted and move through dynamically. We do not need that to be at a fantastic rate, but we need it to be a healthy rate of progression in the organisation. That is our objective.

Q7 Mr Bacon: When you are talking about secondees, is that secondees in from the private sector or secondees in from Whitehall and Departments?

Amyas Morse: We have had secondees in from-actually, we have just had one from the Cour des Comptes, interestingly enough, a very successful one. I am mostly focused on secondees out. It is not necessarily mutual. I do not necessarily see it like that. I am interested in having accountants with high-level skills that are valuable when they are sent out on secondment and who build their career experience and broaden out their knowledge.

Q8 Mr Bacon: And the destinations for those secondees are mostly private sector.

Amyas Morse: And/or public sector.

Q9 Chair: Your VFM work; that has taken the biggest hit.

Michael Whitehouse: The VFM work is, I think, reducing by about 13%, but we are in the process of redeploying people. One of the things that we want to build up is our investigative work. We have that objective: client insight and investigation.

Q10 Chair: That has taken a hit of 8%.

Michael Whitehouse: But it will still be getting additional money of about £2.5 million to build up its investigative work. We are also changing-

Q11 Chair: I do not understand. I am looking at a table that says that VFM is 13% less and client insight and investigations is 8% less. But financial audit is only 2% less.

Michael Whitehouse: The financial audit reduction reflects the-

Chair: It seems to me-

Michael Whitehouse: Let me just explain. We are moving more work away from performance improvement work, so what used to be the performance improvement objective is reducing because we are doing less work there. That is a reduction, definitely.

Q12 Chair: What do you mean by performance? Is that what I call VFM?

Michael Whitehouse: No, that is not what you call VFM.

Q13 Mr Bacon: I think I said "management". I meant improvement. The obvious question is, is it because the performance has improved enough?

Michael Whitehouse: What we used to have in the organisation is a programme of work called performance improvement work, which was fed by the VFM and financial audit, but was a separate stream of work where you could identify ways you might improve a particular aspect of a Department’s performance. You might look at their risk and produce a document that you would report to the senior people in that organisation. We do not necessarily think that is the best use of our resource. Where we do a piece of VFM or financial work, we want to leverage that to the maximum effect, rather than completely re-starting things from scratch. What that means is that it creates capacity in our performance improvement budget, which we would like to now redirect to the investigative work.

At the same time, our VFM will come down, because we are using client insight much more effectively. When we start a new piece of VFM work-a new study-we do not start it from scratch; we look at what we have done in the past, what our client insight is telling us, so we use that knowledge much more effectively.

I am looking for planning budgets on VFM studies to come down from where there are at the moment at about 25% of the total cost of that study, to about 10%, 15%, possibly less, because you are using that continual understanding.

Q14 Chair: Why could you not do that in the past?

Amyas Morse: Because we have got better at running the organisation.

Q15 Chair: I know everybody is desperate to go, so this might be the last question. From our perspective, as we endlessly say in this Committee, VFM has got much more complex because of fragmentation, and you are going to be doing more in local government. This seems to me just the wrong place to cut.

Amyas Morse: Can I just be absolutely clear? There is a movement between that and increasing investigative work, so we are putting a substantial amount more money in. It is up by £2.5 million.

Q16 Chair: It says minus 8%.

Michael Whitehouse: No. I do not know where that 8% comes from, but we are putting in-

Q17 Chair: In a little table provided to me.

Amyas Morse: We are putting £2.6 million more into investigative work. Remember, we talked about how, in devolved services, you look at the accountability model, and we will test it by going and doing work on the ground to see what is actually going on. Having said that to you, we are now making good on it by moving resource into doing that. We have set up the groups and we have set up the team, and we are going to commit to doing some work which is investigative in style. We will still be doing VFM, but it will be informed by investigative work as well.

Q18 Chair: Okay. All I can say to you is that, while I accept that is what you have said to me, I have been given a little table here, which I don’t get in this document, but is in the briefing note, which shows that it has been cut by 8%.

Amyas Morse: I really promise you it has not been; so I apologise for that. By the time we have the hearing tomorrow, we’ll get that straight.

Q19 Chair: Does anybody want-this is an opportunity for this Committee; we do it at the Public Accounts Commission tomorrow, but it gives you an opportunity-to have a say here?

Amyas Morse: Can you bear one second of me telling you something, if that is all right? It is the point of setting these groups up, just so you get the picture of this on an 80:20 basis. If you think about it, most of the big project management activity in Government and the big contracting happens in MOD, the Department for Transport and DECC, so we are grouping those together and the teams will be looking at all that work on a composite basis, trying to understand the lessons to be learned in each of those three Departments and doing reports, cross-referring them. So the way we will build our expertise is by concentrating the experience that there is there. We are doing the same thing in the centre, by creating a group which combines the Treasury and the Cabinet Office, which is a moderately amusing thing to do.

So we can look at the experience-the function of the centre-in central Government and say, "How does it all work?" and not just "How do each of these separate bits work?" We think we will get a lot of synergy lessons out of that and produce much more interesting comparisons and reports as a result. You don’t need to boil the whole ocean. These things are quite concentrated. What we are essentially trying to do is garner really valuable experience by doing it that way. Does that make sense to you? That is what our plan is.

Chair: Austin, you wanted to ask something.

Q20 Austin Mitchell: I don’t see how you are going to do more work and get better service by reducing the number of staff through this restructuring. What about the restructuring is going to allow you to do that?

Amyas Morse: The model we had before, I think, militated against this.

Q21 Austin Mitchell: Why?

Amyas Morse: We had a model where you had a series of directors spread out across the portfolio, and you had an audit director and a VFM director for each. Let’s say we were dealing with DEFRA: you had an audit director and a VFM director for DEFRA. What they did was whatever studies came up on DEFRA, so the quality of the work that was done depended on what they knew and what they could draw in from the whole of the NAO.

Having these people working together in teams, including across teams which include audit and VFM and will be for two or three Ministries grouped together: you get a much more consistent view and you get much more expertise brought to bear on every single report we do. When you bring it together like that you just don’t need the same top-loading in order to run it. So it is not a question of saying we will be trying to magically do work that we don’t have the resource for doing. What I am just saying is, we are actually just having a sensible model that will work with less senior people. We will simply not require the same amount of direction, because it will be organised in frankly a more efficient way.

Q22 Austin Mitchell: You hope.

Amyas Morse: No, I am very confident of it.

Chair: Good. Well, this really gets properly overseen by the Public Accounts Commission. It is a chance for Members here who are not on that to have a go. So thank you very much.

Prepared 27th March 2013