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SP Paper 443

1st Report, 2005 (Session 2)

Audit Scotland’s Expenditure Proposals 2006-2007

Presented to the Scottish Parliament and published pursuant to section 11(9) of the
Public Finance and Accountability (Scotland) Act 2000
10 November 2005

Membership:

Margaret Jamieson (Convener)
Brian Monteith
Cathy Peattie
Margaret Smith
Andrew Welsh

Assistant Secretary to the Commission:
Clare O’Neill

Audit Adviser:
Andy Munro

Report on Audit Scotland’s Expenditure Proposals 2006-2007

The Commission reports to the Parliament as follows—

1. In terms of section 11(9) of the Public Finance and Accountability (Scotland) Act 2000, the Scottish Commission for Public Audit (“the Commission”) must examine Audit Scotland’s proposals for its use of resources and expenditure for each financial year, and report on them to the Parliament.

2. The Commission received a copy of Audit Scotland’s expenditure proposals for the 2006/07 financial year on 29 September 2005. The Commission subsequently met on 26 October 2005 to take evidence on the budget proposals and Annual Accounts and Report on Accounts for the year to 31 March 2005 from Mr Robert Black, Auditor General for Scotland; Mr Russell Frith, Director of Audit Strategy, Audit Scotland; and Ms Diane McGiffen, Director of Corporate Services, Audit Scotland. The Commission requested additional written information from Audit Scotland, which was provided by the Auditor General on 4 November 2005. We thank Audit Scotland for its cooperation in providing evidence to us.

3. A report of the evidence session on 26 October 2005 can be found at appendix A. Appendix B contains a report of the 1st meeting 2005 of the SCPA on 25 May 2005.

2006/07 Budget Proposals

4. Audit Scotland’s Total Net Expenditure for 2006-07 is £25,191,000. Its estimated income from charges to audited bodies is £18,798,000. The total resource requirements (expenditure which is payable out of the Scottish Consolidated Fund) are £6,901,000: a net operating cost of £6,393,000 and capital of £508,000. (Table 1 in appendix 1 provides more detail on Audit Scotland’s resource requirements.)

5. The total resource requirements represent a 5.8% increase on last year’s proposal and are based on a general price inflation assumption of 3%. The Auditor General informed the Commission of a further increase in the amount of non-chargeable work undertaken by Audit Scotland which requires to be resourced through parliamentary funding. This is primarily due to the creation of the transport agency and the introduction of whole-of-government accounting and will cost approximately 2% of Audit Scotland’s net funding requirement.

6. The 2006/07 budget proposals include a 4% reduction in the budgeted expenditure for approved auditors from £5,744,000 to £5,502,000 on last year’s submission. The Auditor General explained that this is partially attributed to the change in how national performance audit studies are carried out and represents a transfer of resources from approved auditors to Audit Scotland’s performance audit group. Performance audit and consultancy costs have risen to £1,159,000 from £684,000 budgeted in last year’s submission. (Table 2 in appendix 1 provides more detail on the subjective breakdown of running costs.)

7. The Commission sought further information from Audit Scotland on a number of matters such as Audit Scotland’s progress with best value auditing across all sectors, fees charged by Audit Scotland to audited bodies and progress on the reappointment of approved auditors.

8. The Commission recognises the statutory framework for local government which requires a best value audit every three years. Although there is no statutory requirement in other sectors, the Commission is pleased to note Audit Scotland’s development in rolling out a new modernised audit approach across other public sectors through its priorities and risk framework. The Commission acknowledges that savings are not expected at this stage of the roll-out but looks forward to savings in future years.

9. The Commission notes that audited bodies have some flexibility in negotiating their respective audit fees. An indicative audit fee is set for each audited body however this can be negotiated up or down by 10%. Accordingly, subject to agreement between Audit Scotland and the audited body, lower risk organisations can benefit from lower audit fees. The Commission notes that more audited bodies are beginning to push for lower fees where they have demonstrated better control systems and have had few adverse audit comments in previous years.

10. The Commission notes Audit Scotland’s contribution to the efficient government steering group and recognises the work being carried out in this area. The Commission is pleased to note a further 5% reduction in fees charged to most mainland NHS Bodies in 2006/07 on top of the 5% reduction in last year’s proposals.

11. As stated in the budget proposals, a current business priority for Audit Scotland is to finalise new appointments for the period 2006/07 to 2010/11. Audit Scotland updated the Commission on its progress and the Commission notes that recommendations for the new audit appointments will be made in February 2006. Audit Scotland confirmed that the overall split of work between approved auditors and Audit Scotland’s in-house teams will not significantly change. The Commission is pleased to note the proposed changes and also that the appointments will be made with a view to further improving joint working and community planning processes.

12. A current development priority for Audit Scotland is to review how it assesses the impact of its work. The Commission notes that measuring the impact of financial audit work is a challenging area; notes that work is on-going in this area and looks forward to an update at a future meeting.

13. In the budget proposal Audit Scotland split their expenditure on Audit Strategy and Corporate Services as 50% direct cost and 50% indirect cost or overhead. The Commission sought clarity on the basis of apportionment between direct and indirect costs. Audit Scotland explained that the proposal was submitted in a previously agreed format however, the Commission believes the current format may not be in sufficient detail to enable full scrutiny of Audit Scotland’s indirect costs. The Commission has agreed to work with Audit Scotland to improve the format of future budget proposals with regards disclosure of direct and indirect costs. (Table 3 in appendix 1 contains details of Audit Scotland’s direct and indirect costs submission.)

Annual Accounts and Report on Accounts for the year to 31 March 2005

14. The Commission then considered Audit Scotland’s annual report and accounts for the year to 31 march 2005. The Commission noted that an unqualified audit report was issued by Audit Scotland’s external auditor Mazars LLP.

15. The Commission sought further information on the number of staff employed by Audit Scotland. During 2004/05 an average of 274 staff were employed against an average of 242 in 2003/04. The Auditor General advised that this was principally due to the recruitment of best value specialists and the replacement of agency and temporary staff with permanent staff. The Auditor General confirmed that Audit Scotland’s headcount at October 2005 was 279 staff.

16. The Commission noted that Audit Scotland’s overall staff costs in 2004/05 were £12,820,000 against a budget of £11,717,000 previously advised. This variance was primarily due to additional costs of £977,000 arising from retirement benefit scheme costs. Audit Scotland advised that these additional costs were in respect of the full and permanent cost of staff early retirement which occurred as a result of the restructuring of Audit Scotland’s business in 2004/05. The Commission sought further information on these costs and Audit Scotland explained that these costs were for the early retirement of 6 senior members of staff. The amounts paid in respect of the staff members granted early retiral fall into the following bands:

£1k - £100k 2 Staff
£100k - £200k 2 Staff
£200k - £300k 2 Staff

17. The Commission noted that, as at 31 March 2005, Audit Scotland was operating with net current liabilities. The Commission sought assurance that this position does not give cause for concern and that Audit Scotland can manage its working capital position. Audit Scotland assured the Commission that the net current liabilities position on 31 March 2005 was a managed position which is achievable since Audit Scotland receives funding for the year ahead early in the new year. The Commission sought and received further assurance that Audit Scotland did not experience any cash flow difficulties during the year.

Conclusions

18. We draw the Parliament’s attention to the observations made and recommend that Audit Scotland’s bid for a budget of £6,901,000 for the year 2006/07 should be approved by the Parliament.

Appendix 1

Table 1: Summary of Audit Scotland’s resource requirements

Summary of resource requirements    
     
  2006-07 2005-06
  £(000) £(000)
     
Accounts and governance 17,359 16,698
Performance audit 7,610 7,010
Other 222 333
     
Total Net Expenditure 25,191 24,041
     
Income from charges to audited bodies 18,798 18,009
     
Net Operating Cost 6,393 6,032
     
Capital 508 493
     
TOTAL RESOURCE REQUIREMENTS 6,901 6,525

Table 2: Subjective breakdown of Audit Scotland’s running costs

Subjective breakdown of running costs:

 

 

 

 

 

 

2006-07

2005-06

 

£(000)

£(000)

Employees:

 

 

   Salaries and temporary staff

10,815

10,178

   Employer's oncosts

3,059

2,806

Total employee costs

13,874

12,984

 

 

 

Approved auditors

5,502

5,744

Performance audit and other consultancy

1,159

684

Training and development

561

278

Travel and subsistence

846

817

Recruitment & Other Staff Costs

268

332

Professional Subscriptions

44

41

Premises

1,429

1,256

Office expenses

588

605

IT

392

364

Publications and media

283

304

Depreciation

319

505

Cost of capital

20

40

 

 

 

 

 

 

Total Audit Scotland expenditure

25,285

23,954

 

 

 

Accounts Commission costs

159

162

Sundry income

(253)

(75)

 

 

 

Total Net Expenditure

25,191

24,041

Table 3: Direct and Indirect Audit Scotland costs

 

Total

 

Direct Costs

 

Indirect Costs

 

Budget

 

Budget

 

Budget

 

Budget

 

Budget

 

Budget

 

2006-07

 

2005-06

 

2006-07

 

2005-06

 

2006-07

 

2005-06

 

£(000)

 

£(000)

 

£(000)

 

£(000)

 

£(000)

 

£(000)

 

 

 

 

 

 

 

 

 

 

 

 

Audit Strategy

687

 

646

 

344

 

323

 

343

 

323

Approved Auditors

5,502

 

5,742

 

5,502

 

5,742

 

 

 

0

Audit Services

8,880

 

8,376

 

8,880

 

8,376

 

 

 

0

Performance Audit

5,304

 

4,599

 

5,304

 

4,599

 

 

 

0

Corporate Services

4,677

 

4,366

 

2,339

 

2,183

 

2,338

 

2,183

 

 

 

 

 

 

 

 

 

 

 

 

Total audit-related expenditure

25,050

 

23,729

 

22,369

 

21,223

 

2,681

 

2,506

 

 

 

 

 

 

 

 

 

 

 

 

Commission members

159

 

162

 

 

 

 

 

 

 

 

Audit Scotland board

13

 

13

 

 

 

 

 

 

 

 

Auditor General

222

 

212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross expenditure

25,444

 

24,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundry income

(253)

 

(75)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Expenditure

25,191

 

24,041

 

 

 

 

 

 

 

 

 Annexe A

Scottish Commission for Public Audit Wednesday 26 October 2005 [PDF]

Annexe B

Scottish Commission for Public Audit Wednesday 25 May 2005 [PDF]

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