| 1. EXECUTIVE SUMMARY |
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1.1 This chapter summarises the
main conclusions reached by the Financial Issues Advisory Group (FlAG).
The Group was set up the Secretary of State for Scotland in February 1998
with the task of proposing rules, procedures, standing orders and legislation
for the handling of financial issues by the Scottish Parliament. FlAG adopted
several key principles which underpin its work. These are listed in detail
in section 2 of this report. In summary, the objective of FlAG is to ensure
that the Scottish Parliament's finances are managed in a way that is open,
accessible and accountable to the people of Scotland. FlAG has considered
a wide range of public finance issues. Its report is also wide ranging and
covers the main aspects of public finance. Its report contains recommendations
on the following main issues:
- terminology:
- budgetary procedures;
- accounting arrangements;
- public accountability; and
- audit arrangements.
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| The recommendations
are summarised below. |
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| Terminology |
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| 1.2 At the moment, the management
of Central Government finances makes use of a very specialised vocabulary
that has slowly developed over many years. Though there are those that find
this language useful, the definitions of some of the terms used are sometimes
open to debate even amongst public sector finance specialists. More importantly,
the use of specialist jargon makes it difficult for lay people to understand
the financial affairs of Government. |
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| 1.3 Though finance is not a subject
that lends itself to simple language, FlAG recommends that the Scottish
Parliament uses plain English where it is possible. In addition, FlAG recommends
that specialist terminology is replaced by the use of standard accountancy
terms. FlAG hopes that these changes will make it easier for those MSPs
and members of the public who do not have a financial background to understand
how the financial affairs of the Scottish Parliament are managed. This report
attempts to set an example by not using government accounting jargon. As
a further aide to understanding, a glossary of terms is at Annex A of the
main report. |
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| BUDGETARY PROCEDURES |
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| 1.4 Having studied the budgetary
procedures of Westminster and a number of overseas legislatures, FlAG has
developed a possible budget framework for the Scottish Parliament. It is
based on an annual procedure designed to provide the Parliament with the
opportunity to scrutinise the Executive's expenditure proposals and to monitor
the financial performance of |
| the Executive, whilst at the
same time providing the stability and flexibility needed by those responsible
for spending public money. |
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1.5 Whilst the
budget process will call for plenary debates within the Parliament, many
financial management functions will be co-ordinated by parliamentary committees.
FIAG recommends the key committees should be as follows.
- Subject Committees. FlAG expect that there
will be a number of committees responsible for specific areas of the
Parliament's business such as transport and housing. While such committees
will primarily be involved in policy development, they will also have
an interest in financial matters. For example, subject committees should
have a role in making recommendations on spending priorities and considering
value for money reports that concern their area.
- Finance Committee. The Finance Committee
should be responsible for addressing overall budget priorities and for
the presentation of budgets. It will be required to consider the views
of Subject Committees and individual MSPs as well as the expenditure
proposals of the Executive, from whom it should be independent. The
Finance Committee's conclusions should form the basis of plenary debate
on budget matters, the results of which in time should inform the Executive
plans.
- Audit Committee. reports on those
The Audit Committee should also be independent of the Executive. It
should take the lead in considering financial audit spending bodies
that are accountable to Parliament. These include the Departments of
the Executive itself, NDPBs and Health Service bodies. It should also
consider vfm reports that cut across different subject areas. At times
it will be necessary to consider these reports jointly with the relevant
Subject Committee.
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| The Budget Process |
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1.6 FIAG's general aim has been
to propose a process that will be less dominated by the Executive than is
presently the case. This should enable the people of Scotland and their
elected representative to have more of a say in setting priorities for expenditure.
The main report covers this aspect of FlAG's recommendations in more detail;
but the process recommended by FlAG is based on three stages. It is designed
to provide a timetable around which constructive dialogue between the Parliament
and the Executive can take place with the objective of agreeing a budget
for the year ahead before it begins. The stages are as follows:
- Stage 1. Stage 1 in the process will be
a discussion on strategic priorities for the following financial year.
It cannot begin until the financial process of the previous financial
year have been concluded. It is therefore likely that this stage will
start in March or April. For example, the consideration of strategic
priorities for the Financial Year 2001-2002 will have to wait until
Financial Year 1999-00 is complete. Stage 1 in respect of expenditure
for 2001-02 would therefore start in April 2000.
- An important part of the Stage 1 process
will be consultations with the people of Scotland. In particular, FlAG
expects that a review of strategy and priorities will enable interested
parties such as local authorities and pressure groups to make their
case to the relevant subject committee. Committees will therefore need
to set aside resources to deal with this aspect of their work.
- FlAG recommends that Stage 1 should be
based on consideration of the Executive's annual report. This document,
which would be published by 20 April, would outline budget proposals
for the next financial year and provisional plans for the following
two financial years. It would provide the basis for discussion by the
Finance and Subject Committees and a subsequent plenary debate which
would inform the development of detailed budget proposals by the Executive.
- Stage 2. FlAG recommends that Stage
2 of the process should begin with the Executive publishing a preliminary
draft budget for the financial year ahead. The figures may be subject
to later change, if for instance, (as may be the case) Westminster takes
decisions in November that will affect the size of the total budget.
Stage 2 would be a more detailed discussion on spending priorities,
etc than was possible in Stage 1. It would enable MSPs to comment on
the detail of proposals, and put forward alternatives. The process could
lead to the publication by the Finance Committee of a report on the
Executive's proposals which could then be debated in plenary. The recommendations
from this debate could then be taken into account by the Executive in
its detailed budget proposals which would be ready by January.
- Stage 3. FlAG recommends that the
Scottish Parliament should aim to complete this (largely formal) part
of the process some weeks before the new financial year begins. This
is to help local authorities, grant-aided bodies, etc who will wish
to finalise their own plans. FlAG recommends that Stage 3 should be
based on the consideration of a detailed budget which should have been
published by the Executive by 20 January. The budget should have taken
into account Parliament's views made at Stage 2 of the process. However
it should not be mandatory for the Executive's proposals merely to follow
on from those previously prepared. New proposals could, if necessary,
also be submitted at this stage. Consideration would entail, amongst
other things, a plenary debate on the proposals. There will also need
to be a prior vote on the Tax Varying Power if its use has been proposed
by the Executive.
During Stage 3, there will be opportunities
for the Executive to amend its proposals. However, FlAG recommends that
non-governmental amendments are prohibited at this time - these should
be made during stages 1 and 2 when there will be better opportunities
to debate fully the Executive's spending proposals. Stage 3 therefore
will primarily be concerned with obtaining formal parliamentary approval
for a budget that should be in accordance with the priorities indicated
by Parliament at Stages 1 and 2. However, even at this stage, committees
should be able to seek clarification from officials and the Executive.
At Stage 3, the Parliament should decide either to accept or to reject
the proposals that have been made.
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| 1.7 The process that FlAG is
recommending will therefore promote more public involvement and much more
scrutiny by Parliament of the Executive's spending proposals than is presently
the practice under the Westminster system. It is also designed to ensure
that no expenditure takes place without the authority of Parliament. These
procedures should not however be seen as an opportunity to rely on financial
procedures alone. Instead, FlAG recommends that the Parliament's standing
orders make sure that spending can only take place when financial legislation
and policy legislation (giving the underlying authority to spend) are both
in place. |
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| 1.8 Although it is important
to agree a budget before the start of the new financial year, there will
be times when this is not possible. FlAG therefore recommends a procedure
to permit the Administration to continue in the event that Parliament has
not approved the Executive's budget by the beginning of the financial year.
FlAG is keen to avoid any implications of a "budget crisis" in
the event that a budget is not approved on time. Therefore, FlAG recommends
that in this situation, there should be a procedure to provide the Administration
with sufficient funding to allow it to spend on individual programmes up
to the amount actually spent in same month in the previous year until a
budget has been agreed. |
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| The Budget Documents |
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| 1.9 FlAG has considered what
the formal budget documents ie the documents placed before Parliament at
the Stage 3 might look like in future. An example is at Annex E to this
report. The Group has concluded that it would be helpful if the documents
were structured to reflect the organisation of the Scottish Administration.
FlAG hopes that the suggested format will be relatively easy to follow,
enabling both MSPs and other interested parties to understand and comment
on them. A key aspect will be the opening statement which sets out the scope
of the proposed budget. This part of the budget (which is known in Westminster
as the "Ambit") should be incorporated into the resulting legislation.
In addition to the scope, FlAG recommends that the budget documents should
be supported by a supporting narrative which should explain any points which
cannot be clarified in the main budget document. |
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| 1.10 FlAG has considered the
amount of detail that should be contained in the budget documents. The Group
concluded that information should be disaggregated to the lowest level that
is compatible with the need to maintain an overall picture and to avoid
constraining the Executive's spending flexibility. |
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| Changes During the Year |
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| 1.11 No matter how carefully
the Executive prepares its budget, there will always be a requirement to
change spending plans as the year develops. FlAG has therefore prepared
a framework around which in-year changes can be made. The intention has
been develop a process which is easy to understand, that provides for effective
scrutiny by Parliament but that also gives the Executive the flexibility
needed to make best use of the funds that are available. FlAG proposes that
the Executive should be able to move up to 15% or £50m (whichever is smaller)
of the funds allocated to a Budget Section (one level below main programme
in a Departmental Budget) without seeking Parliamentary approval. Transfers
between Budget Subheads (subdivisions of a Budget Section) should be unrestricted.
Budget transfers should, however, be reported to Parliament on a periodic
basis. Transfers outwith these categories, for example, transfers between
Departmental Budgets, or transfers between Budget Sections in excess of
the limit, should need the authority of Parliament. FlAG therefore recommends
that procedures are put in place that would enable the Executive to seek
authority routinely for budget transfers. |
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| 1.12 FlAG recommends that the
documentation of budget transfers should be sufficiently clear as to permit
meaningful scrutiny by the Parliament. In particular, the transfer proposals
should contain information on expenditure to date so that the Parliament
can consider the effectiveness of the money that has already been spent
on the programme concerned. |
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| 1.13 FlAG has concluded that
expenditure proposals and performance should be monitored on an annual basis.
However FlAG recommends that Administration managers who make savings in
one financial year should (in most circumstances) be able to retain these
funds and spend them later on. This, FlAG believes, will encourage managers
to seek the best possible return on their investments and will discourage
profligate spending at the end of the financial year as managers attempt
to use up their allocated budget. Any sums carried forward under end year
flexibility arrangements would need to be included in budget approvals,
or more likely, as budget amendments in the following year. |
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| 1.14 Similarly FlAG recommends
that managers should be encouraged to make the most of appropriate income-generating
opportunities. Consequently, the Group has concluded that in general, revenue
generated by programme managers should be credited to the area concerned
so that increased levels of expenditure can be sustained. However, one-off
receipts from the sale of capital assets (perhaps above a specified limit)
should be subject to different controls and revenue from such activities
should be given up. |
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| Financial Legislation |
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| 1.15 FlAG has already referred
in paragraph 1.7 to the need to ensure that expenditure should only take
place when policy legislation has been followed up with appropriate financial
legislation. In addition, FlAG has considered what type of financial legislation
will be needed. The Group has concluded that the annual budget should be
approved by means of primary legislation. This is necessary if the Executive's
spending proposals are to be properly scrutinised before they are authorised.
However, there are concerns that the use of primary legislation for this
purpose could result in unwanted delays in agreeing the budget. FlAG is
therefore recommending that the Parliament develops standing orders that
will modify the procedures used (eg on the tabling of non-government amendments)
for progressing financial legislation. This is to ensure that the budget
proposals are given proper scrutiny but are not subject to unnecessary delay.
Changes to expenditure limits during the financial year should, FlAG thinks,
be made using secondary legislation. |
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| ACCOUNTING ARRANGEMENTS |
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| Resource Accounting and Budgeting |
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| 1.16 Westminster is in a process
of moving away from a cash-based system of accounting to a system
of "resource accounting and budgeting" (RAB) which is based on
accruals |
| accounting principles as practised
by most private sector organisations in the UK. This is intended to encourage
the Parliament and Executive to consider the real level of resources used
instead of merely looking at the amount of cash spent each year. Local authority
accounts will however continue not to be submitted to Parliament. Details
of the new system are at Annex F. |
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| 1.17 FlAG has given some thought
to the relative merits of cash and resource based systems and has concluded
that RAB gives a better overall picture than is possible when using a cash
based system. Therefore FlAG recommends that the Scottish Parliament adopts
RAB. There is however a timing issue here because UK government departments
will not be fully implementing RAB until the Financial Year 2001-2002. The
Scottish Office however, has already begun to develop its resource accounting
capability and is due to produce fully audited accounts in a resource account
format for the Financial Year 1999-2000, during which time, the Scottish
Parliament and Executive will come into being. |
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| 1.18 FlAG has concluded that
it would not be logical for the Parliament implement RAB at the same time
as Whitehall because this would mean operating for a while on a cash basis.
Therefore, FlAG recommends that, wherever possible, the Scottish Parliament
and Executive start with RAB systems. This will require the use of both
resource-based and cash figures, though resource accounts themselves will
include cash figures on each Department's annual level of expenditure. |
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| Publication of Accounts |
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| 1.19 FlAG recommends that quality
standards for accounts should be considered. The Group has concluded that
the following reports should be published. |
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| 1.20 An interim report by each
Department and Agency of the Scottish Administration should be issued within
two months of the financial year end. This should contain performance management
information on the financial year that has just drawn to a close. These
reports would inform Stage 1 of the budget planning process (see paragraph
1.6 above). |
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| 1.21 Full departmental and agency
accounts (in resource format) should then be produced and submitted to Parliament
at the earliest possible date. |
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| 1.22 A consolidated account (also
in resource format) should then be submitted by the Executive by the end
of December. This information would then be available to MSPs during Stage
3 of the budget planning process (see paragraph 1.6 above). |
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| ACCOUNTABILITY |
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| 1.23 The Scottish Administration
has to be accountable to Parliament for its use of public money. Westminster
has a well-established system of "Accounting Officers" which enables
the Parliament to hold senior officials accountable for the actions of their
staff. FlAG thinks that a similar system should be set up in Scotland. FlAG
recommends that the permanent head of the Scottish Administration is automatically
designated as the "Principal Accountable Officer" and that he
or she should nominate other senior officials to be Accountable Officers |
| own areas of the Administration.
These individuals will be answerable to the Parliament normally through
subject committees and/or the Audit Committee for their actions. FlAG also
recommends that arrangements are put in place to permit managers with specific
responsibility for an issue under review to attend committees when their
presence (in addition to or instead of) an Accountable Officer would be
helpful. |
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| 1.24 In the past, the system
of Accounting Officers has concentrated on examining officials when it appears
that something may have gone awry. FlAG recommends that in future, the system
of Accountable Officers is used as much to share examples of good practice
as it is to establish if an error has been made. |
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| AUDIT ARRANGEMENTS |
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| 1.25 FlAG has made a number of
recommendations on the audit of those areas of the public sector accountable
to the people of Scotland. Much of the responsibility for these will fall
to the Audit Committee whose role has been set out at paragraph 1.5. This
body will consider reports presented by the Auditor General for Scotland
(AGS) and should take the lead in making sure that standards of regularity
and propriety are exemplary amongst those organisations that report to it.
In addition, FlAG sees the Audit Committee as having a key role alongside
subject committees in making sure that the people of Scotland receive the
best possible value for money in return for their investments. |
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| Auditor General for Scotland |
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| 1.26 The Scotland Act makes provision
for the appointment of an Auditor General for Scotland who will be both
independent of the Scottish Parliament and the Executive. He or she will
be responsible for the commissioning of financial and value for money audit
across much of the public sector in Scotland. (Local authorities will continue
to be audited by auditors appointed by the Accounts Commission; and these
audit reports will not be submitted to Parliament.) FlAG is recommending
that the appointment of an AGS should be an early and important task for
the Parliament. |
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| Audit Delivery |
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| 1.27 At present the bulk of the
public sector in Scotland is audited either by the National Audit Office
(NAO) or auditors appointed by the Accounts Commission. FlAG is of the view
that the public sector in Scotland does not justify two main audit organisations.
The Group is therefore recommending a merger between the audit staff of
the Accounts Commission and NAO (Scotland) into a new audit provider to
be known as "Audit Scotland". This organisation will be able to
supply audit services to the AGS (who will also serve as the Chief Executive
of Audit Scotland) and to the Accounts Commission, both of whom will also
be able to procure audits from private sector providers. The establishment
of Audit Scotland is a significant task and FlAG recommends that plans for
this are developed at the earliest possible opportunity. |
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| 1.28 At present the statutory
audit of financial statements, and value for money studies are integrated
as much as the specialised nature of these two different tasks allows. FlAG
recommends that this arrangement should continue. The Group has also concluded
that audit |
| reports should be signed off
by the organisation that undertakes each audit rather than by the AGS (or
the Accounts Commission) who procures it. Audits should, where appropriate,
contain an opinion as to whether or not the audited body has achieved the
performance targets set and reported on by its managers, using the performance
indicators chosen by the audited body. These comments should not however
extend to expressing and opinion on the targets themselves. (FlAG does however
accept that in the local government sector separate arrangements exist for
the setting of national performance standards and that these should continue.) |
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| Appointment of Auditors and
Rights of Access |
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1.29 As far as audit arrangements
are concerned, the public sector in Scotland can be broken down into 3 main
areas:
- central Government bodies
- public bodies, including local authorities,
receiving grants from Ministers; and
- local spending bodies.
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| 1.30 FlAG has made a number of
recommendations about the rights of access and explanation that the auditors
of these organisations should enjoy. The Group has also considered the possibility
of changing the audit arrangements for some of these bodies so that in future,
their audits are commissioned by the AGS. |
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1.31 FlAG commends to the Scottish
Parliament, the Public Audit Model as developed by the Public Audit forum.
This Model sets out independent arrangements for the appointment of auditors
and lays down guidelines for audit practice. It should be applied to all
areas within the Parliament's competence as follows:-
- Central Government Bodies: Legislation
should put in place arrangements for the audit of central Government
bodies by auditors appointed by the AGS. FlAG recommend that in doing
so, the Parliament enshrines the right of access to and explanation
of, any documents as may reasonably be required when undertaking a financial
or value for money audit.
- Public bodies receiving grants from Ministers:
The current audit arrangements for these organisations are mixed. Local
authorities and health boards are audited by auditors appointed by the
Accounts Commission. Audits of NDPBs may be carried out by the NAO or
by auditors appointed by the Secretary of State, company members or
(in the case of further education colleges) by governing bodies. FlAG
has recommended at paragraph 1.33 that all audit appointments for the
Health Service should be made by the AGS. The Group also recommends
that, where possible, the AGS should also appoint auditors for executive
NDPBs set up under statute. FlAG accepts that the Parliament will not
be able to change the arrangements for appointing auditors for bodies
set up under general legislation, such as the Companies Acts. Auditors
should also be granted statutory rights of access to the records of
the NDPBs and health service bodies concerned. The separate arrangements
for local authorities should continue.
- Local spending bodies: These organisations
(such as universities, housing associations and local enterprise companies)
receive money from the Scottish Consolidated Fund second hand through
funding bodies. Again the audit arrangements are mixed. FlAG recommends
that the arrangements should be made more consistent and that the AGS
should be granted statutory rights of access to any local spending body
that is significantly dependant on public funds or statutory levies.
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| 1.32 There are likely to be times
when the Executive will employ contractors to carry out activities on its
behalf. The Executive must be able to ensure that it received good value
for money when purchasing a service. When necessary, the contractual arrangements
should make provision for access to the contractor's relevant records. However,
there should be no overall statutory provision for this. |
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| NHS Audit |
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| 1.33 At present the NHS consolidated
accounts are audited by the Comptroller and Auditor General whilst the audit
of NHS Trusts and Boards is commissioned by the Accounts Commission, which
does not report to Parliament. Whilst this arrangement has been cost-effective,
FlAG thinks there are strong arguments for audit reports on the NHS being
made to the Parliament. This is consistent with the lines of democratic
accountability. This points to auditors being appointed by the AGS. Moreover,
having the Accounts Commission reporting on locally elected bodies and the
AGS on expenditure under the Scottish Executive would recognise the different
position of locally elected bodies. It would also, amongst other things,
help to resolve the present perception of duplication of audit
effort in the NHS. For these reasons, FlAG recommends that in future, the
AGS should have sole responsibility for commissioning audits in the NHS. |
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| Public Audit Commission |
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| 1.34 FlAG is of the view that
a small Public Audit Commission should be established by the Scottish Parliament.
This Commission would not be able to direct the work of the AGS (who must
have guaranteed independence both from Parliament and the Executive) but
instead would consider general questions of accountability and audit, such
as the resources that the Parliament should allocate to audit. It would
also appoint auditors for the AGS and for Audit Scotland. |
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| OTHER ISSUES |
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| Contingent liabilities |
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| 1.35 The Westminster Parliament
has established conventions to limit the ability of Ministers to enter,
without informing Parliament, into agreements with outside bodies that might
result in the future expenditure. FlAG concludes that the Scottish Parliament
should make similar arrangements and recommends that the Executive must
obtain authority from |
| the Scottish Parliament before
entering into any agreement that might result in subsequent spending in
excess of £lm. |
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| The Resource Consequences
of Policy Legislation |
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| 1.36 New policy legislation often
results in additional expenditure commitments. FlAG recommends that legislative
proposals contain as full a statement as possible on the resource implications
so that the Parliament can consider the full ramifications of any decision.
Where opposition or backbench amendments have resource implications, these
too should be made plain. |
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| Temporary spending power for
the Executive |
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| 1.37 The Parliament will on occasion
face requests for additional funding to support sudden unexpected needs.
In most cases, this will be a question of providing additional support to
existing programmes. FlAG recommends that Parliament set aside a Contingency
Reserve for this purpose. |
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| 1.38 At times, the Executive
will seek to spend money on areas for which legislation does not exist.
A procedure is required to enable spending to take place on a temporary
basis until Parliament is able to authorise the expenditure. FlAG recommends
that procedures are developed to facilitate this process and that a separate
Contingency Fund is set up, from which money can be drawn by the Executive
on a temporary basis. |
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| Arrangements for the Scottish
Parliamentary Corporate Body |
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| 1.39 The Scottish Parliamentary
Corporate Body will be responsible for the administration of the Parliament
itself. Its budget should therefore be set in a way that respects both the
rights of the Parliament and the Executive, within a framework of transparency
and openness to the Scottish people. |
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| Monitoring and control of
administrative expenditure |
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| 1.40 FlAG has concluded that
it would be helpful if the Parliament is able to scrutinise the level of
the Executive's administrative expenditure. Therefore the Group recommends
arrangements are put in place that will enable the Parliament to ascertain
the levels of administrative expenditure being incurred in the various business
units of the Scottish Administration. |
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