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Financial Issues Advisory Group Report
 
 
ANNEX I
 
CONSULTATION PAPER ON THE FUTURE OF THE PUBLIC AUDIT SERVICE IN SCOTLAND - SUMMARY OF RESPONSES
 
Purpose
 
1. This Annex summarises comments received in response to FlAG's consultation paper on the future of the public audit service in Scotland.
 
Level of Response
 
2. The Consultation paper was distributed to fifty five organisations. These included the NAO and Accounts Commission, organisations representing the various areas of the accountancy profession, representatives of consumers, industry, local government, the NHS, trades unions and other Scottish NDPBs. Twenty two organisations responded including one body who was not on the circulation list (the Public and Commercial Services Union). Three of the respondents had no substantive comments to make. There were therefore, nineteen organisations who submitted substantive comments.
 
The Responses
 
3. The responses were wide ranging covering comments on issues raised in the consultation paper as well as a number of other issues. The key points made are set out below.
 
Comments on Issues raised in the paper
 
4. The consultation paper sought views on:
  • the statutory certification of accounts;
  • value for money audit;
  • delivery of audit functions;
  • delivery of audit;
  • NHS audit arrangements;
  • consideration of audit reports by The Scottish Parliament; and
  • oversight of the audit function.
 
Statutory Certification of Accounts
 
5. The consultation paper suggested that equivalent arrangements for the certification of accounts to those used at Westminster should be set out in statute by The Scottish Parliament. In addition, a timetable for the presentation of accounts should be laid down.
 
6. Ten respondents commented on this proposal. Of these, eight simply stated their agreement with what has been proposed. The dissenters were ICAS and CIPFA. The ICAS position is that the term "statutory certification of accounts" does not reflect current practice in Westminster and that the phrase should be clarified. ICAS considers that this would acknowledge that at present the audit covers vfm audit, legality matters, fraud and corruption considerations, grant claims, etc in addition to certification of the accounts. (FlAG has subsequently revised its recommendations to take this point into account.)
 
7. CIPFA is concerned that a simple replication of the Westminster arrangements would fall short of what is required. The Institute believes that the arrangements for Scotland should extend the provisions of the Auditor General to match those of other statutory audit agencies so that there is a general right of access to the relevant records of contractors carrying out functions for audited bodies. CIPFA proposes that this should include an enforceable right to inspect bodies in receipt of public money, so that the regularity and propriety of transactions with the audited body and the audited body's vfm arrangements can be checked.
 
8. In addition, CIPFA proposes that all executive NDPBs and local public spending bodies should be bought within the same public audit framework that is presently applied in local government and the NHS.
 
Value for Money (vfm) Audit
 
9. The consultation paper raised the issue of whether or not the auditor's role should include the "validation of output and performance indicator's.
 
10. Thirteen organisations commented on this aspect of the paper. A number of divergent views are apparent. Those with substantial reservations were:
 
10.1 HIE: This body takes the view that validation unacceptably extends the role of the auditor. However, HIE makes it clear that its definition of "validation" incorporates a role for the auditor in setting policy. This would appear to be a wider use of the term than FlAG is proposing.
 
10.2 ICAS also seems to take a view based on a broader definition than that proposed by FlAG. The Institute sees "validation" as an extension of the present arrangements whereby auditors examine the arrangements for the production of indicators. However, ICAS also states that under the present provisions, auditors are already encouraging audited bodies to improve their performance. The main concern that ICAS has is that the word "encourage" (as used in paragraph 16 of the consultation paper) is not a technical audit term and thus people may be misled by its use. No other respondent raised this point.
 
10.3 Scottish Further Education Unit: This body is of the view that validation should be by invitation only.
 
11. Six respondents supported the consultation paper's s proposals that vfm audit should include validation. These included CIPFA, ACCA and COSLA. All six made it clear that (in line with the consultation paper's thinking on this point) "validation's' should not give the
auditor a role in the selection of indicators. The only consumer organisation to comment on this aspect (The Scottish Water and Sewerage Consumers Council) also came down in favour of validation - without any restrictions on the term's definition.
 
12. Scottish Enterprise also indicated that the definition of "validation" required clarification. It took the view that it would be appropriate for an auditor to comment on whether a particular performance indicator was suitable. However, it is of the opinion that the auditor should not be able to offer an opinion on what the level of achievement against that indicator should be since this was thought to give the auditor a role in setting policy.
 
13. A variation on the theme was proposed by the National Board for Nursing, Midwifery and Health Visiting. This organisation has suggested that vfm studies should be made through internal audit arrangements, with the AGS having a remit to validate performance indicators and comment on the overall effectiveness of an audited body's vfm policies and programmes.
 
14. The Accounts Commission also commented on this proposal. It made the point that the present model for agreeing a certain number of national performance indicators for local government should remain. This is a view that FlAG supports.
 
Delivery of Audit Functions
 
15. The consultation paper recommends that the present arrangements for integrating financial and vfm audits should be continued.
 
16. Eleven organisations commented on this proposal. Though one respondent is somewhat delphic on this point, all comments were in favour of a continuation of the arrangements as suggested. However, FlAG may wish to note that whilst supporting the principle of integration, two respondents (ACCA and HIE) were of the view that the reality of the situation is that financial and vfrn audits are often insufficiently integrated at present. COSLA suggested that some vfm studies could involve professionals from areas other than accountancy.
 
Delivery of Audit
 
17. The consultation paper proposes the merger of the current staff of the NAO in Scotland with the Accounts Commission to form a single audit delivery agency (Audit Scotland). The paper suggests that both the AGS and the Accounts Commission would commission work from this agency and from private sector auditors. The paper notifies consultees that FlAG intends to consider in more detail the issue of how Audit Scotland would relate to the AGS and the Accounts Commission.
 
18. Eighteen organisations commented on this aspect of the paper. Fifteen of these supported the creation of a single delivery agency. Some of the support was however qualified as follows:
 
18.1 The Accounts Commission stated that it would need to have direct control of commissioning and resources under the new arrangements.
 
18.2 Care would be needed to ensure that Audit Scotland was not a remote and bureaucratic agency (ACCA).
 
18.3 Early discussion of the proposal to amalgamate is needed in order to ensure that the interests of staff are guaranteed. (Accounts Commission, Public and Commercial Services Union).
 
18.4 HIE and Scottish Homes had concerns over reporting arrangements, especially if Audit Scotland was required to report both to the AGS and the Accounts Commission. (The other respondents did not raise this point.)
 
18.5 CO SLA noted that the arrangements must guarantee adequate resources for both the Accounts Commission and the AGS.
 
19. Whilst in favour of a single delivery agency, ICAS does not adhere to the model set out at Annex C of the consultation paper. Instead, the Institute proposes that Audit Scotland should report to the AGS and that the AGS should be responsible for audit across the entire public sector, including health and local government. Thus local government audit reports would come before The Scottish Parliament. This contradicts present arrangements designed to protect the separate constitutional status of local government. ICAS sees a new role for the Accounts Commission as a body independent of the political process which would report into the public domain matters arising from the audit of organisations that involve front line services such as the NHS.
 
20. Scottish Enterprise has no reservations as far as the creation of a single audit delivery agency is concerned. However, the view was expressed that, should private sector auditors take on an audit of Scottish Enterprise, they would need substantial briefing because to date, the audits have always been carried out by NAO staff.
 
21. Scottish Natural Heritage (SNH) accepts that there are merits to the idea of a creation of a single audit delivery agency. However it also has severe reservations due to the differing nature of the AGS and Accounts Commission. Therefore, SNH suggests that Audit Scotland should support only the AGS at this point and that the question of a merger should be revisited once the relationship between The Scottish Parliament and local government has been clarified.
 
22. CIPFA is the only body to come out firmly against a merger. The Institute quotes from the Nolan Committee stating that "the existence of two bodies supervising the audit of different bodies provides a valuable creative tension which can only serve to raise standards".
 
National Health Service
 
23. The consultation paper proposed that the AGS should commission NHS audits.
 
24. Eight organisations commented on this proposal. Five of these, including the Health Board General Managers, were in favour of this change. The other organisations in favour
were the NAO, Scottish Homes, SNH and the Staff Side (i.e. the Public Commercial and Services Union).
 
25. As discussed above, ICAS is of the view that all public sector audits should be commissioned by the AGS. It takes the view that, should this not be possible for legislative reasons, the existing arrangements should continue.
 
26. CIPFA came out against this proposal, stating that the current division of duties are appropriate.
 
27. The Accounts Commission also rejects the proposal for the following reasons:
 
27.1 The role of the Audit Commission in auditing the NHS in England and Wales has recently been evaluated and the present arrangements have been continued. The Accounts Commission is of the view that there are no substantial differences in the environment north and south of the border and that any decision to change the arrangements for audit in the NHS should be considered in a UK context.
 
27.2 The Commission is of the view that paragraph 25 of the consultation paper implies that that present audit arrangements for the NHS have resulted in duplication. The Commission is of the view that there is little or no duplication in the work of the Commission and the NAO in auditing the NHS.
 
27.3 The NHS is presently going through considerable organisational changes. An additional change of this nature would therefore be unwelcome.
 
27.4 There is an increasing amount of co-operation between local government and the NHS. Therefore it is sensible to use the same auditors in each sector.
 
Consideration of Audit Reports by The Scottish Parliament
 
28. The consultation paper recommends the establishment of a powerful public audit committee that would perform broadly the role of the PAC in the House of Commons. It would consider reports from the AGS concerning financial audit and any matters concerning regularity and propriety. However, the paper suggests that vfm reports from the AGS might be better considered by the appropriate subject committee in The Scottish Parliament.
 
29. Thirteen bodies responded on this point. All were agreed that there is a need for a powerful Audit Committee but there was a split as far as the role of subject committees is concerned. A number of respondents came down in favour of tasking the Audit Committee with the consideration of all reports issued by the AGS, including those on vfm issues. The main argument in favour of this division of work is that the committee will be able to look at the vfrn aspect of cross cutting issues eg Private Finance Initiative and make recommendations that are applicable across government. The NAO in particular comes down in support of such an arrangement. Other supporters are:
 
29.1 ICAS - with the proviso that subject committees should not be denied access to audit reports. The Institute is of the view that members of a Audit Committee would be better placed to consider vfm and other financial matters than subject committees whose experience would be limited to a single area of government;
 
29.2 HIE - who recognise that subject committees can bring in additional expertise but are concerned that their existence might dilute the work of the Audit Committee; and
 
29.3 SNH - who take the view that, though there may be exceptions, a wide-ranging Audit Committee will normally be best placed to consider an audit report.
 
30. CIPFA takes a different view. It believes that the subject committees will have the necessary expertise to consider vfrn reports. Scottish Homes also support the view that the Audit Committee's remit should be limited to financial audit, regularity and propriety and governance issues.
 
31. The remaining six respondents take what is perhaps a pragmatic view, i.e. that both the Audit Committee and a subject committee might at times wish to consider an audit report.These include:
 
31.1 The Public and Commercial Services Union - who make the case for the development of clear guidelines to set out the remits of the various committees.
 
31.2 SEPA - who take the view that audit reports should be available for subject committees to consider.
 
31.3 The National Board for Nursing, Midwifery and Health Visiting - who support the idea of a mechanism to direct audit reports to the appropriate committee.
 
31.4 The Scottish Water and Sewerage Consumers Council, COSLA and the Health Board General Managers.
 
Oversight
 
32. The consultation paper notified consultees that FlAG is considering the need for a small Commission to oversee the AGS. The paper makes it clear that such a Commission would not jeopardise the independence of the AGS.
 
33. Eleven organisations responded. With the exception of ICAS, which sees no need for an additional body (though it does believe there should be a revised role for the Accounts Commission) the responses were generally supportive. Particular comments were as follows:
 
33.1 The Accounts Commission would welcome further discussion of this point and (in view of the size of the spend on local government and health) suggests that it should have representation on any body that is established.
 
33.2 Scottish Homes makes clear that the supervisory commission should not oversee the work of the AGS. It should mirror the remit of the Public Accounts Commission at Westminster so that its remit would be to:
  • appoint an accounting officer for Audit Scotland (the AGS);
  • appoint auditors for the AGS, Audit Scotland and the Accounts Commission; and
  • examine any estimates prepared by the AGS and lay these before The Scottish Parliament.
 
33.3 SNH prefer the model of an advisory panel of MSPs and external members rather than a supervisory commission. This is to ensure the independence of the AGS.
 
33.4 The Health Board General Managers make a request that the name given to any such body should clearly distinguish it from the other commissions and committees involved in the financial aspects of government in Scotland.
 
Other Issues
 
34. The consultation paper has also prompted comments on a number of other issues on which responses were not specifically sought. These are set out below.
 
Arrangements for Access and Explanation
 
35. Six organisations expressed views on the rights of access and explanation to be enjoyed by public sector auditors. Views were as follows:
 
35.1 The NAO makes a case for providing the AGS with statutory powers of access. The NAO is of the view that these arrangements should extend to all public bodies and those local spending bodies that receive "significant public funds". The arrangements should also encompass any persons holding or accountable for relevant documents eg contractors. The NAO suggests Section 100 of the Local Government (Scotland) Act 1973 as a model that could be applied across the public sector.
 
35.2 The Accounts Commission recommends the extension of the Public Audit Model to all public spending bodies in Scotland. CIPFA concurs on this and the Institute is concerned that the consultation paper does not include a right of access and information for the AGS to all public spending bodies (although FlAG has subsequently considered this issue). CIPFA considers that the audit arrangements for Local Public Spending Bodies should be incorporated in the review with the intention of instituting a common code of audit practice. Whilst being of the view that all bodies using public funds should be open and accountable, CIPFA recognises that the operational environments for different bodies and in particular the extent of public interest in their activities is variable. CIPFA has concluded that there is a need to agree what arrangements should apply to bodies at different points on the public interest spectrum - this should probably be based on the extent to which a body uses public funds. The Scottish Water and Sewerage Consumers Council also takes the view that the Public Audit Model should be applied across the whole public sector.
 
35.3 ICAS suggests a public audit framework that similarly would cover all public spending bodies. Its framework is intended to ensure that, amongst other things, the ability of the auditor to follow the public £ should be unrestricted. This is intended to bridge what the Institute sees as a gap between the public perception of the auditor's duties and the current statutory obligations of auditors in some areas of the public sector.
 
35.4 Scottish Homes is of the view that the rights of the AGS to carry out vfrn examinations, along with inspection rights, should be clearly defined and applied to all audited bodies.
 
Internal Audit
 
36. Three respondents referred to the absence of any reference to the role of internal audit in the consultation paper. ICAS felt the paper should refer to the need for a strong internal audit function in the public sector. ACCA suggested seeking the views of the Chief Internal Auditors Group and pointed out that internal audit can make a major contribution to vfrn; especially when a good relationship with external audit is developed. The Institute is of the view that the role of internal audit under the best value regime needs defining. Finally, the Institute states that further improvements could also be achieved through a wider use of audit committees in the public sector.
 
37. The National Board for Nursing, Midwifery and Health Visiting took a slightly different view, suggesting that there may be a role for commissioning vfrn studies through internal audit. This could be complemented by the AGS whose remit could be to validate performance and efficiency indicators and to comment on the overall effectiveness of an organisation's vfrn programme and procedures.
 
Appointment of AGS
 
38. Both the Accounts Commission and the Public and Commercial Services Union make a case for an early appointment of the AGS and prompt discussions on the establishment of Audit Scotland.
 
Terminology
 
39. ICAS has some reservations about the terms "audit" and "auditor". The Institute also suggests that the meaning of the phrase Public Sector Audit Model as it is and will be applied in Scotland should be clarified. Such clarification should, the Institute believes, make reference to the relevant Audit Practices Board codes. Finally, ICAS suggests that public sector proforma accounts should be standardised to ensure that the Companies Act 1985 and the UK Accounting Standards Board pronouncements are followed (subject to the particular circumstances of the bodies concerned). It is of the view that this could be done by the issue of an Accounts Direction, which could also be used to specify the arrangements for audited bodies to follow when lodging accounts.
 
Economy and Efficiency of Audit
 
40. HIE suggested that economies can be made through increasing the use of private firms in public sector audit. Forth Valley Health Board is of the view that any new structure for public sector audit in Scotland should have the aim of improving the efficiency of the audit function so that demands on audited bodies are reduced. The Accounts Commission stresses the need to contain audit costs and meet public expectations.
 
Water Authorities
 
41. The Water and Sewerage Consumers Council suggests that Annex C of the consultation paper should reflect the size, importance and accountability to Parliament of the Water Authorities.
 
Separate Accounting Arrangements
 
42. The Scottish Arts Council makes a request that future legislation will enable Audit Scotland to audit both the work which will be funded by The Scottish Executive and that which is funded from National Lottery Funds which are controlled through the Department of Culture, Media and Sport.
 

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