Official Report 196KB pdf
We move swiftly on to agenda item 2, which is Audit Scotland's annual report and accounts for the year to 31 March 2008 and the auditor's report on the accounts. As we know, the commission is responsible for securing the audit of Audit Scotland's accounts, and has contracted Haines Watts the chartered accountants to undertake that. We now have the auditor's report for 2007-08. Later, we will have an opportunity to take evidence from HW.
For the record, let me state that I have no advantage over you, as I am also feeling slightly weary. I could not resist staying up last night.
Before we get on to the meat of our questions about the annual accounts, I would like to ask you about a matter that is not directly related, involving coverage in the Sunday Herald on 19 October about Audit Scotland's budget and international development work.
I am grateful for the opportunity to do so. I am conscious of the time, so I will not take more than a moment or two.
Thank you, Mr Black. Modern structures of government and emergent democracies certainly require good governance and robust audit arrangements. I am happy to move on, unless members have any questions.
I welcome all the work that Audit Scotland has done, not least the work in the international sphere that you mention.
Yes, there are reasons. I invite Russell Frith to give you the definitive explanation.
The figure of one third refers to the value of financial audit work, so it does not represent the full scope of the audit work: it is the audits of the annual accounts, rather than, for example, the performance audit studies that come before the Audit Committee. It is one third by value, but it is more like half by number of bodies. That is because, for example, all 39 relatively small further education colleges are audited by firms; none is audited by Audit Scotland teams. The balance in the size of audits is that the Audit Scotland team does relatively more larger audits and that firms do relatively more smaller audits, particularly of further education colleges.
The accounts show that you spent £1.362 million on purchasing fixed assets against an original information technology budget of £451,000. Will you give the background to what appears to be a significant discrepancy?
The biggest element of the fixed-asset expenditure was completion of the refurbishment of 18 George Street. That was not in the original budget for 2007-08, as it had been in the budget for 2006-07, when we had expected to do the work. We did not do the work then, so we carried forward the expenditure through end-year flexibility in the autumn budget revision last year. In effect, that was added to the budget of £500,000 or so for IT stuff.
My final question might not really arise from the annual accounts. In a sense, the pension provision is historic. I am conscious that a large part of the assets that make up that provision are equities. What might happen with that, given the current financial background?
As you can see from the balance sheet, the net pension position moved substantially during 2007-08, from a net deficit of £2.6 million to a net surplus of £3.3 million, which reflected the significant increase in stock market values over that period. It is obvious that if market values stay as they are, I expect that number to reverse again by the end of this year, but this year's position will be complicated by the fact that a full actuarial evaluation is taking place.
For our purposes, I am interested in whether that is likely to produce a significant call on public funds to balance out the position.
If a deficit arises, it is typical for the actuary to assess it every three years and to recommend a contribution rate to recover it, usually over a fairly long period. The period that the Lothian pension scheme uses is 20 years, so any deficit is unlikely to lead to a significant short-term additional call.
I will ask general questions. I am aware that Audit Scotland's income depends on how far advanced audits are at the end of each financial year. Audit Scotland has said that its billing timetable might mean that significantly more fee income is received in one financial year than in another. In its continuing dialogue with Audit Scotland, the commission has discussed how that situation could be improved. Pages 35 and 46 of the annual report and accounts show that operating income rose by 6.8 per cent, largely as a result of fees that local authorities paid. Will our guests explain further that increase and the extent of the year-on-year fluctuation? I understand that the figure in 2006-07 was substantially reduced from that in 2005-06, even after the restatement to cover VAT issues.
Between 2007 and 2008, the volume change in the position that was reached at the end of March did not, on average, alter significantly. Most of the difference in the income relates to the inflationary increase in fees of about 3 per cent, plus the slight increase in the fee income that was earned above the indicative levels. Some auditors undertook additional work, for which they charged, which raised the total income by another 1 or 2 per cent. The difference in the two completion rates at 31 March was only 1 or 2 per cent.
On a positive note, I am aware that 90 per cent of audit fees were agreed within a specified timescale, which is an improvement on the previous year's rate of 56 per cent. What measures were taken to make that improvement? Is that improved rate expected to be maintained in future years?
The improvement was caused largely by stressing to all auditors the importance of agreeing fees as soon as practicable. It is also fair to say that the audit fees that were agreed during the year were relatively straightforward, in that there were only small changes in the audit scope or number of audits. It was a fairly stable year. We hope to maintain the level, although one or two changes that are coming through may delay some agreements this year. One example is the scope of work on international financial reporting standards.
Audit Scotland states on page 13 of the annual report that it has reduced staff numbers by 2.5 whole-time equivalents, generating savings of £54,000. However, note 2 to the accounts on page 41 states that the average number of staff directly employed during 2007-08 increased by 11 from the previous year and agency staff increased by three. Page 41 shows salary costs increased by 4.8 per cent over the year. How can those statements be reconciled? Have additional posts been created or have vacant posts been filled?
The measure of the average number of whole-time equivalents that is used in the annual report refers to the average number of people who we have in post during the year. We have published that figure in previous annual reports, and it is different from the number of posts in our establishment in any year, which is higher. In the current year, the number of posts in our establishment is 293 whole-time equivalents, but the average number of people who are employed in the year, as noted in the annual accounts, will be lower because of turnover, vacancies and so on.
Let us move on to staff turnover. I notice that staff turnover was significantly higher in 2006-07 than in 2005-06: 8.5 per cent compared with 2.2 per cent. No figure appears to have been provided for 2007-08. Why is that?
The figure for 2007-08 calculated on the same basis as previous years is 7 per cent. I would need to flick through the paperwork to see why it has not been given.
I am always interested in sickness levels. Audit Scotland's sickness rate of 8.11 days per employee is below the national average for public sector bodies, but it is an increase on previous years—it was 5.3 days in 2006-07 and four days in 2005-06. Is there any explanation for that increase? I know that you have an absence management strategy.
The increase is due to a combination of things. There has been a greater focus on reporting sickness absence. Our staff are dispersed over a range of working locations. During the year, we fully introduced an electronic time-recording system for all staff. Part of the shift that you mentioned is accounted for by the more accurate capturing of sickness absence data as well as by slight peaks in sickness absences in the winter and spring periods, when we seem to be susceptible to catching colds and the flu. We have focused our attention for some time on ensuring that we capture data quickly, and our new time-recording system ensures 100 per cent coverage of everyone and a way of matching up sickness absence records with time-recording records. We now cross-reference and analyse that information.
I want to stay on the subject of staffing. On the general strategy, we have covered the increase in staff numbers and the use of temporary staff, and have touched on the use of private firms. You have some discretion on what work you put out to private firms and when you might use temporary staff as opposed to recruiting permanent staff, but what is the strategy? When would you use temporary staff in your organisation and when would you recruit permanent staff? When would you use an external firm to do work? What drives the underlying trends in numbers?
The temporary staff tend to be mainly agency staff who work on audits. Perhaps Russell Frith will comment on that.
Short-term temporary staff tend to be used in two areas. They are mainly used to deal with peaks of work on final audits over the summer months. We are careful to ensure that we use such staff only when we cannot use our own staff, because there are risks in using temporary staff, as they need to be managed to ensure that we get the quality work that we need. Short-term temporary staff also tend to be used in corporate services—we have had short-term staff on reception, for example.
I would like to return to the issue of the discrepancy between the number of posts in the establishment and the average number of people in post, which was raised earlier. I understand what you said. You mentioned a faster recruitment rate. Given staff turnover, recruitment costs seem to have tailed down at a faster rate than might have been expected. In light of what you said, it is difficult to see that a reduction in the number of posts in the establishment can really be classed as an efficiency saving. Surely the real measure is not what you could have spent but what you actually spend. Have I misunderstood your explanation?
Taking permanent posts out of the establishment means that we are saying either that we are not doing that work any more or that we have found another, more efficient way of doing it. I think that it would count as an efficiency saving. That is a slightly different point from the turnover issues and the movement within our workforce over the course of the year. We would not be using temporary staff to replace the posts that we have deleted, if that is what you are asking.
The £54,000 that is mentioned on page 13 is therefore a saving resulting from the reduction in staff by 2.5 posts that were filled but which no longer exist. Is that correct? Is it a cash saving, as opposed to simply the deletion from the establishment of 2.5 posts that were not filled?
The posts were deleted from the establishment. The posts were not filled at that point, but they had been in the past.
It strikes me that, if it is to be counted as a real efficiency, that £54,000 should be a real reduction in costs, rather than a reduction in what the costs would have been if the posts had been filled. To suggest that the deletion of those posts is a saving is, perhaps, putting it too strongly. It might be better to consider that to be a potential saving. If another organisation were to suggest that that was a real efficiency saving, would you accept that?
In the public sector, yes, we would, provided that the organisation was being consistent. Our benchmark for efficiencies over the long term is movements in budgets from one year to the next. Provided that the organisation is consistent in that approach and starts from an agreed baseline, it is a fair way of proceeding.
So your assessment would be of a movement in budgets rather than a movement in actual expenditure.
Yes, provided that that is the consistent base over a period of years.
The point that we are trying to make is that the actual spend in year will vary with turnover, so that cannot be seen as an efficiency measure. What matters is the movement in the budgeted establishment.
I said earlier that we now have an establishment of about 290 staff. When we began, we had an establishment of around 220 staff. Although the staff numbers have grown, the support services have not grown at the same pace, so the ratio of HR staff, for example, to the people whom they support has grown over time—we have provided the relevant figures to the commission previously. We have found different ways of managing the workload and delivering services and support so that the costs of supporting staff have not grown at the same pace as the numbers of staff. We monitor over time the ratios of support staff to our core business staff, and benchmark accordingly.
My question might stray a little bit from the annual report, but it concerns a matter that is mentioned in it.
We have not yet formally considered that, but we are doing on-going work around our internal financial systems, and are looking to continue to improve the rate at which we process payments. We are on an improvement journey in that area.
I thank our witnesses for giving lucid and coherent evidence this morning, despite the late night that Mr Black has confessed to having had.
I confirm that that is the case.
I invite you to make an opening statement.
I am the responsible individual at HW Chartered Accountants for the audit of Audit Scotland, which means that it is my ultimate responsibility to ensure that we have complied with all the professional standards that have been set out by our institute. We are a firm of registered auditors and chartered accountants and we have, for the past three years, acted on your behalf in the auditing of Audit Scotland, following our appointment as a result of a competitive tendering process.
That is helpful. Neither of my colleagues has any questions, so you are getting off lightly, as I have no questions, either. Thank you very much. We appreciate that you had a long journey to get here.
Not at all—it was a pleasure.
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