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1. The FIAG report states that "there is a strong case for merging the current staff of the NAO in Scotland and the audit staff of the Accounts Commission for Scotland to form one audit delivery agency". The Group recommended that this organisation should be called Audit Scotland. FIAG thought that merger was necessary to have an organisation large enough to maintain a centre of excellence in public service audit in Scotland.
2. The Executive agrees with FIAG's conclusion. However, we have had difficulty in developing FIAG's proposals for Audit Scotland’s management structure. We therefore wish to explore the options more fully and would welcome views on those we set out below. We would also welcome suggestions for alternative structures.
3. Any solutions need to be tested against three criteria. These are set out below.
3.1 The structure that is adopted must comply with the requirements of the Scotland Act 1998, particularly those relating to the role and functions of the Auditor General for Scotland. Section 70 of that Act requires the Parliament to legislate for the Auditor General to exercise or ensure the exercise by other persons of financial audit and value for money functions in relation to the Scottish Administration and others funded from the Scottish Consolidated Fund.
3.2 It must ensure that the Scottish Parliament has an audit system that is effective and gives good value for money.
3.3 It must recognise the status of local authorities as a separate, democratically accountable tier of Government.
4. There has been widespread acceptance of FIAG's recommendation that Audit Scotland should be set up and the Executive’s preliminary view is that this would be a sensible and desirable way to proceed.
5. Under the proposals set out by FIAG, Audit Scotland would provide (financial and value for money) audit services to both the Auditor General and the Accounts Commission. Both the Auditor General and Accounts Commission would also be able to obtain services from other auditors. This might be arranged through a (non-statutory) central support unit, separate from Audit Scotland, reporting both to the Accounts Commission, the Controller of Audit and the Auditor General. Alternatively, the Commission and the Auditor General could have commissioning/support units of their own. Audit Scotland would make audit reports to the relevant audit authority ie the Auditor General or the Controller of Audit who would in turn report to the Parliament or the Accounts Commission respectively. (At the same time the auditors would report to the audited bodies.)
6. FIAG proposed a structure for Audit Scotland intended to meet the criteria set out at paragraph 3 above. However, the Executive has encountered practical difficulties with the implementation of FIAG's model. We have therefore set out below 3 options, with their pros and cons. The Executive has no strong views on what the best solution would be and would welcome comments on the options.
Option 1 – Audit Scotland as an Audit delivery Body only.
6.1 This is the model that FIAG put forward. Here, Audit Scotland would merely provide audit services to the Auditor General and the Accounts Commission. Commissioning and other central services could either be provided by a central support unit (see paragraph 5 above) or by units within the Auditor General’s and Accounts Commission’s own organisations.
6.2 This scenario would be consistent with the requirements of the Scotland Act 1998 and it would also protect the separate status of local government. However, it is the most bureaucratic option. It would result in financial transactions between Audit Scotland and the Accounts Commission and between Audit Scotland and the Auditor General. Even with a central support unit offering much of the administrative support needed for commissioning audits etc, this Option would necessitate additional bureaucracy such as a finance department in each of the three bodies. In addition, there would be VAT on all the transactions. It would not be possible to recover VAT on transactions between Audit Scotland and the Auditor General. This could result in additional costs of between £0.5m and £1.3m each year.
6.3 Under this scenario the public audit service in Scotland would require three senior management officials – the Auditor General, the Controller of Audit and a chief executive of Audit Scotland. FIAG noted this additional cost and suggested that it could be avoided by employing the Auditor General as Chief Executive of Audit Scotland.
6.4 This solution would reduce the numbers of senior salaried staff but there are drawbacks. Firstly, it would give the Auditor General significantly more input over the daily management of Audit Scotland than the Accounts Commission. A mechanism would be needed for the Commission to hold the Auditor General to account if it concludes that insufficient resources are being devoted to local authority audit or if the standard of audit was not satisfactory.
6.5 Secondly, there would still be a need for transactions between Audit Scotland and the Auditor General. Thirdly, the arrangement whereby the Auditor General in his/her statutory capacity commissions work from a supplier of which he/she is Chief Executive is awkward. Finally there is the problem that the Auditor General would have responsibility for the audit of Audit Scotland because the Scotland Act requires AGS to be responsible for the audit of accounts prepared by bodies funded from the SCF other than accounts he himself has prepared (the accounts in this case would be prepared by the separate legal body, Audit Scotland).
Option 2 – Audit Scotland as both a Commissioning and Audit Delivery Body.
6.6 Under this scenario, the Auditor General and the Accounts Commission would have no functions other than the consideration of and response to audit reports. Neither would have a separate commissioning capability of their own. Audit Scotland (which would be a separate legal entity as in Option 1) would itself commission audits, either from its own staff or from contractors. The Auditor General and the Chairman of the Accounts Commission might both have statutory membership of Audit Scotland’s management board and the Controller of Audit might be a member of staff. Audit Scotland would provide all those services required by the Auditor General and the Accounts Commission including secretarial and support services. There would be no financial transactions between these bodies.
6.7 This scenario would have fewer administrative and VAT costs than Option 1. It might also be possible to reduce senior staff costs if the Controller of Audit was to be on the staff of Audit Scotland as Chief Executive. It would also provide both the Auditor General and the Accounts Commission with an input into the management of Audit Scotland. (However levels of control might not be identical. For example, it is possible that the Auditor General could chair a Management Board with the Chair of the Accounts Commission as deputy.)
6.8 Though there may be a slight difference in the amount of input that the Auditor General and the Chair of the Accounts Commission would have in running Audit Scotland, this Option provides the means to safeguard the distinctive interests of local government.
6.9 The key difficulty here is that initial legal advice indicates this Option may not fulfil the Scottish Parliament's obligations under the Scotland Act 1998. It would denude the Auditor General of direct responsibility for the exercise of the audit functions, or at least diminish his/her responsibility. It is therefore likely that this solution will not in fact prove practical. In addition, under the terms of the Scotland Act, the Auditor General would still be responsible for the audit of Audit Scotland in this scenario. Clearly it would be inappropriate for him/her to audit a body on whose Management Board she/he sits
Option 3 – Audit Scotland as the staff of the Auditor General for Scotland.
6.10 Under this Option, Audit Scotland and the Auditor General for Scotland would share the same legal personality. This arrangement would be similar to that of the Comptroller and Auditor General and the National Audit Office. Audit Scotland would simply be the staff of the AGS. The Auditor General would therefore combine his/her Scotland Act responsibilities with managerial control of Audit Scotland. Audit Scotland could provide the AGS with the resources needed to fulfil his/her statutory responsibilities so there would be no financial transactions between the Auditor General and his/her staff. Under this Option, it would be possible for the Controller of Audit to be a member of Audit Scotland’s staff (with specific responsibilities for preparing reports on local authorities).
6.11 As at Option 2, the functions of the Accounts Commission would be to receive audit reports from Audit Scotland and to take the appropriate action. There would be no requirements for financial transactions between Audit Scotland and the Commission. Audit fees would be payable by the audited bodies themselves. Under this scenario therefore, Audit Scotland would provide the full range of audit services. Audit reports on the Executive, the NHS, etc would be presented to the Parliament while reports on local authorities would be laid before the Accounts Commission.
6.12 Since Audit Scotland would be merely the staff supporting the Auditor General in his/her functions, there would be no separate Audit Scotland accounts for the Auditor General to audit.
6.13 This structure would meet the requirements of the Scotland Act and is probably the least bureaucratic scenario. Senior staff costs could also be kept to a minimum. It has therefore, much to commend it in terms of efficiency and effectiveness.
6.14 It could be argued that this model does not protect sufficiently the separate status of local government. There would need to be statutory or administrative mechanisms to enable the Accounts Commission to hold Audit Scotland to account. In addition, it might be possible to establish an advisory board for Audit Scotland of which the Accounts Commission could have membership.
7. The Scottish Executive thinks that the continued existence of two separate public external audit services would not be in the interests of the Parliament, the Executive, local government or of the audit bodies themselves. We are therefore keen to see a new structure that will enable Scotland to build on its reputation for excellence in public audit. None of three models set out above offer a perfect solution in terms of all the criteria outlined at paragraph 3. The Scottish Executive’s initial conclusions are that only option 3 meets the Scottish Parliament's obligations to the Scotland Act 1998 and to local government, whilst also satisfying the requirements for economy, efficiency and effectiveness. We seek views however on these options and would also welcome proposals for alternative structures.
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