Report of the Consultative Steering Group on the Scottish Parliament

ANNEX I

FINANCIAL ISSUES ADVISORY GROUP: SUMMARY OF RECOMMENDATIONS

1.1 This Annex summarises the main conclusions reached by the Financial Issues Advisory Group (FIAG). 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. The objective of FIAG endorsed by CSG was to ensure that the Scottish Parliament's finances are managed in a way that is open, accessible and accountable to the people of Scotland. FIAG has considered a wide range of public finance issues. Its report is also wide ranging and covers the main aspects of public finance. The report contains recommendations on the following issues:

terminology; budgetary procedures; accounting arrangements; public accountability; and audit arrangements.

The recommendations are summarised below. The full report is being published separately.

Terminology

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.

1.3 Though finance is not a subject that lends itself to simple language, FIAG recommends that the Scottish Parliament uses plain English where it is possible. In addition, FIAG recommends that the specialist terminology is replaced by the use of standard accountancy terms. FIAG 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. The FIAG report attempts to set an example by not using government accounting jargon.

BUDGETARY PROCEDURES

1.4 Having studied the budgetary procedures of Westminster and a number of overseas legislatures, FIAG 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.

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. FIAG expects that there will be a number of Committees responsible for specific areas of the Parliament's business such as on transport and on housing. While such Committees will primarily be involved in policy development, they will also have an interest in financial matters. For example, subject Committees will probably wish to make recommendations on spending priorities and to consider 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. The Audit Committee should also be independent of the Executive. It should take the lead in considering financial audit reports on those 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.

The Budget Process

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 representatives to have more of a say in setting priorities for expenditure. The main report covers this aspect of FIAG's recommendations in more detail; but the process recommended by FIAG 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 processes 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 1999-2000 is complete. Stage 1 in respect of expenditure for 2001-2002 would therefore start in April 2000. An important part of the Stage 1 process will be consultations with the people of Scotland. In particular, FIAG 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. FIAG 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 current financial year and provisional plans for the following two financial years. It would provide the basis for discussion by subject and the Finance Committee and a subsequent Plenary debate which would inform the development of detailed budget proposals by the Executive. Stage 2. FIAG 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. FIAG 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. FIAG 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 these 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, FIAG 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 either decide to accept or to reject the proposals that have been made.

1.7 The process that FIAG 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, FIAG 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.

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. FIAG 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. FIAG is keen to avoid any implications of a "budget crisis" in the event that a budget is not approved on time. Therefore, FIAG 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.

The Budget Documents

1.9 FIAG has considered what the formal budget documents ie the documents placed before Parliament at Stage 3 might look like in future. The Group has concluded that it would be helpful if the documents were structured to reflect the organisation of the Scottish Administration. FIAG 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, FIAG 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.

1.10 FIAG 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.

Changes During the Year

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. FIAG has therefore prepared a framework around which in-year changes can be made. The intention has been to 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. FIAG 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. FIAG therefore recommends that procedures are put in place that would enable the Executive to seek authority routinely for budget transfers.

1.12 FIAG 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.

1.13 FIAG has concluded that expenditure proposals and performance should be monitored on an annual basis. However FIAG 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, FIAG 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.

1.14 Similarly FIAG 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.

Financial Legislation

1.15 FIAG 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, FIAG 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. FIAG 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, FIAG thinks, be made using secondary legislation.

ACCOUNTING ARRANGEMENTS

Resource Accounting and Budgeting

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.

1.17 FIAG 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 FIAG 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.

1.18 FIAG has concluded that it would not be logical for the Parliament to implement RAB at the same time as Whitehall because this would mean operating for a while on a cash basis. Therefore, FIAG 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.

Publication of Accounts

1.19 FIAG recommends that quality standards for accounts should be considered. The Group has concluded that the following reports should be published.

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).

1.21 Full departmental and agency accounts (in resource format) should then be produced and submitted to Parliament at the earliest possible date.

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).

ACCOUNTABILITY

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. FIAG thinks that a similar system should be set up in Scotland. FIAG recommends that the 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 for their 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. FIAG 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.

1.24 In the past, the system of Accounting Officers has concentrated on examining officials when it appears that something may have gone awry. FIAG recommends that in future, the system of Accountable Officers is used as much to share examples of good practice as it is to establishing an error has taken place.

AUDIT ARRANGEMENTS

1.25 FIAG 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, FIAG 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.

Auditor General for Scotland

1.26 The Scotland Act makes provision for the appointment of an Auditor General for Scotland (AGS) 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.) FIAG is recommending that the appointment of an AGS should be an early and important task for the Parliament.

Audit Delivery

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. FIAG 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 FIAG recommends that plans for this are developed at the earliest possible opportunity.

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. FIAG 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 an opinion on the targets themselves. (FIAG does however accept that in the local government sector separate arrangements exist for the setting of national performance standards and that these should continue.)

Appointment of Auditors and Rights of Access

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.

1.30 FIAG 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.

1.31 FIAG 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. FIAG recommends 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. FIAG 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. FIAG 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. FIAG 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.

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.

NHS Audit

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, FIAG 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, FIAG recommends that in future, the AGS should have sole responsibility for commissioning audits in the NHS.

Public Audit Commission

1.34 FIAG 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.

OTHER ISSUES

Contingent liabilities

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 future expenditure. FIAG 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 £1m.

The Resource Consequences of Policy Legislation

1.36 New policy legislation often results in additional expenditure commitments. FIAG recommends that legislative proposals contain as full statements 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.

Temporary spending power for the Executive

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. FIAG recommends that Parliament set aside a Contingency Reserve for this purpose.

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. FIAG 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.

Arrangements for the Scottish Parliamentary Corporate Body

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.

Monitoring and control of administrative expenditure

1.40 FIAG 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.