Public Accounts Commission
Oral evidence: National Audit Office Supplementary Estimate 2022-23
Thursday 3 November 2022
Ordered by the House of Commons to be published on 3 November 2022.
Members present: Mr Richard Bacon (Chair); Clive Efford; Dame Meg Hillier.
Questions 1 - 27
Witnesses
I: Gareth Davies, Comptroller and Auditor General, National Audit Office; Dame Fiona Reynolds, Chair, National Audit Office; and Daniel Lambauer, Executive Director, Strategy and Operations, National Audit Office.
Witnesses: Gareth Davies, Dame Fiona Reynolds and Daniel Lambauer.
Chair: Welcome to this meeting of the Public Accounts Commission on Thursday 3 November 2022, with the National Audit Office, about their supplementary estimate. We are joined by Gareth Davies, the Comptroller and Auditor General, Dame Fiona Reynolds, the chair of the National Audit Office, and Daniel Lambauer, who is pretty much more or less everything else, at least titularly. You are very welcome.
You have given us a request for a further estimate, a supplementary estimate, because of your plans to move to a new building in Newcastle, which I visited with Nick Brown earlier in the year. We are going to come on to that, but we have, first, some questions about your supplementary proposals for the pay award. I invite Meg Hillier to ask those.
Q1 Dame Meg Hillier: We have discussed this before in this forum, because of course you put that pay increase up to a 2% pay award earlier this year and you are now proposing this extra pay increase for audit manager, by an extra 1%.
Gareth Davies: Of staff below audit manager.
Q2 Dame Meg Hillier: Sorry—for staff below audit manager, by 1%. You have talked to us before about trying to bring your lower grade staff up a level. Do you think this is going to be enough to help you retain competitiveness with private sector audit firms?
Gareth Davies: It is certainly true that we have seen very large increases being offered by some of our competitors in the firms. We think that is one of the factors that has led to higher than planned turnover of staff, particularly in our audit principal grade, but also some audit managers. The key issue is focused on the newly qualified stage of our skill mix. We have done what we can within this year’s budget. We have used an underspend. We can explain where the underspend has arisen, but it is essentially because of the higher level of turnover we have had; there were more vacancies than expected, and it has taken longer to fill them. Therefore, we allocated that underspend to this 1% increase for staff below manager. We have targeted it on the areas where we have the highest retention issue, but, clearly in the context of high inflation and cost of living pressures, it is the group of staff that is most affected by that in the organisation as well.
Q3 Dame Meg Hillier: Have you done any modelling of any sort to predict what your hoped-for retention rate will be?
Gareth Davies: Yes, we have. We have modelled our expected turnover for the rest of this year. Obviously, there is not that much of it left now. This may just be coincidence, or it may be good planning, but we have seen a reduction in the number of resignations since it was announced. That may, as I say, just be coincidence, but the number has gone down in the last two or three months.
We think another factor in that, though, is not just what we have done for some staff for the rest of this year; we are currently consulting on a restructuring of our pay and grading framework from next April. People are starting to see those proposals and, again, they are all aimed at improving our competitive position in what is a very challenging labour market for these skills at the moment. Overall, people can see that we are making a big effort. It is not just this in-year increase. We are making a big effort to ensure that we can retain high-quality people and attract new ones.
Q4 Dame Meg Hillier: You said that you have done this out of in-year savings. Can you tell us what those in-year savings are? Also, this will now be a consolidated pay increase; it won’t be a one-off. If you can do it out of in-year savings this year, how are you going to keep funding it in years going forward?
Gareth Davies: It will obviously be part of our proposal to you next year. If we were in a zero-inflation environment it would obviously be a more controversial thing to do, because we would be committing next year. Because we know the current and predicted levels of inflation, we are expecting to come to the Commission with our estimate for next year with a cost of living increase that will easily exceed 1%, so we are not prejudging the decision next year. We know the Government are also considering, at the moment, their civil service increase for next year. We do not know what that figure will be yet, but it will certainly be higher than 1%. We are not binding ourselves or the Commission in an irresponsible way by doing what we have done for the rest of this year.
Q5 Dame Meg Hillier: Okay. Generally, you have had a lot of applicants for your graduate scheme. You hoped that you would have 70 new trainees, but you only made 69 offers, and only 46 of those were accepted. Is there a deeper structural issue about people wanting to go into the public sector?
Gareth Davies: I will bring colleagues in on that. Fiona might want to add to this from her wider experience. First of all, those numbers have improved. We have carried on recruiting to our graduate recruitment programme, and we are now up to 56, so the number is getting better. It is unusual for us not to fill all our vacancies.
The first point to make is that we don’t compromise on quality, so everybody has to get over the quality bar that we set. We will never compromise on that.
The second thing is that we have seen a big change in the graduate recruitment market. It has been largely driven by the pandemic, which has had quite a significant effect. I think I mentioned this the last time we were here. More people are doing a master’s following graduation, which takes a chunk out of the cohort that would normally be available for recruitment. Others are just not sure, after quite a bad experience studying in higher education with the pandemic and lockdowns, that they want to go straight into full-time employment. Fiona, you might want to add to that.
Dame Fiona Reynolds: I have little to add, because I agree very much with what Gareth has just said. We are seeing across the board, in many different sectors, graduates unwilling to commit immediately to long-term employment arrangements. Some of them want to travel. Some of them feel they have been short-changed in their university days. Many of them are staying on for further academic study; there is a lot more churn.
We are obviously focusing, as well, on our January intake. We have different bites at the cherry. It may be, in the future, that it is more of an annual rolling process of recruitment, because this may be a change that stays with us. We are very proud that our graduate recruitment on diversity and inclusion is going really well, but we need the numbers and we are going to have to be quite creative about publicity and recruitment. We go to the fairs.
Gareth Davies: The university careers fairs are operating in person again this year, in a big way, and they haven’t been for the last couple of years. We have been getting a really good response there. Having run our graduate recruitment process virtually during the pandemic years, we are bringing people to our offices as part of our assessment centre process. That is not a straightforward decision, because we are getting some feedback that it might put some candidates off, so we are offering hybrid options to people, to make sure we don’t lose anybody unnecessarily.
We strongly feel that, while there is only one National Audit Office graduate recruitment programme, it is not an identical programme to the ones offered by the big firms; it is about selling the uniqueness of the NAO’s offer. The fact that you can get involved in value for money work, as well as accounting and auditing, is a really big differentiator for us, and clearly the mission and purpose of the organisation are pretty inspiring as well. That is what we are communicating as part of our refreshed recruitment literature.
Q6 Dame Meg Hillier: Finally from me on this, given what you were saying—you said this when you were here last time—about people going on to do graduate degrees, will those people think about applying to the NAO, or does your graduate—
Dame Fiona Reynolds: They might. It is much more common now for people to have a master’s and then the same career trajectory. It might be in the civil service. It might be in private business. It does not necessarily change their choice or expectations, but it is a delay of a year or more in the process.
Daniel Lambauer: May I add some numbers? For the recruitment centres we are now running in November and December, we already have around 200 applications, so the numbers applying are not necessarily the problem. What we are seeing more, this year, is that people are deciding at the very last moment. Sometimes when an offer has been made, they get multiple offers to go to competitors. I think the attraction is not necessarily the issue. It is more the following it through to the end.
Gareth Davies: And pay. To the point we are discussing, for the first time we are falling behind the starting salaries being offered by the big four, and obviously when we come back in March with our estimate for next year, we will be reflecting that.
Q7 Dame Meg Hillier: We have to agree the estimate for next year, so the consolidated point still stands. Just on that point—it is the last one I am going to ask, Chair—we have had some quite eyewatering figures quoted by City law and accountancy firms. They can always outgun the NAO, but are you seeing examples where that gap is really wide, and you are never going to bridge it?
Gareth Davies: It is. Clearly, they operate, to some extent, in a price-sensitive market themselves, and if we are heading into an economic downturn, the market conditions will be less favourable to those firms. They certainly cannot be reckless, because they have to look ahead and say, “Well, this might be necessary now, but will it be a very different labour market in 12 months’ time?” I think some of that caution will start to come in there; but yes, in the meantime we are falling behind, and hence are looking—
Q8 Dame Meg Hillier: What sort of figure?
Gareth Davies: Both in what we hear from the firms on their pay and what we see in their prices to us—a very good, direct source of evidence—we are seeing between 8% and 10% increases. We are not going to be able to compete with that, hence we are working hard on the rest of our offer to our employees, but, as I say, I don’t think that is sustainable for those firms in the long term. I think this is a temporary squeeze. We obviously need to use the tools that we have to respond to that, but we cannot do it all through pay.
Dame Meg Hillier: I am sure that has been heard by the media watching. Thank you.
Q9 Chair: Interesting. I want to bring Clive Efford in on the property in a moment, but two points: first, your point about thinking long term reminds me that the civil service itself stopped its own fast stream programme, which was a surprise to many. I am not sure if that decision still stands, but it was a decision that was taken, and it raised a lot of eyebrows.
Gareth Davies: It was. In fact, the current year’s intake did happen. It is next year’s that was called off. I know that was under review with the change of Prime Minister and Chancellor. If there has been a decision on that, I am not aware of it yet.
Q10 Chair: Before we come on to Clive, I want to press you a little more on this question about recycling in-year underspend. The Treasury tells us, in its letter to us, that, because of the long-term implications, the civil service is not allowed to do it. Do you think it is appropriate for the NAO to do it—to increase pay in this way—when the civil service cannot?
Gareth Davies: Clearly, we do not do it lightly. I agree with the general rule, of course, which is not to pre-empt decisions that are to come. We just find ourselves in an extremely unusual position with double-digit offers being made to our staff by our competitors. It was either do this, or watch more of that happen. Accepting that it is unusual, but being very confident that next year’s cost of living increase will have to be more than 1%, so we are not jumping the gun in a way that will be difficult for either us or the Commission in April, this felt like a responsible thing to do. It is not responsible for us to be unable to complete our audits and to have big delays in our programmes.
Q11 Chair: You are talking about people coming into the office. Are you confident that you can calibrate upwards your exposure to the graduate recruitment market more than you otherwise might, in order to make sure that you get the catchment of graduates you need? Do you mention the ability to work in and with Parliament as part of that package?
Gareth Davies: We absolutely do. We have more to do on selling the benefits as fully as we can, so we are working on that, but those things are all mentioned. Again, it comes back to investment. If you look at some of our competitors, what they do, frankly, better than us at the moment is use of social media, and understanding the social media used by today’s 21-year-olds, which are not the ones that we use, and heavily using things like Instagram to communicate with potential recruits, using videos of existing trainees describing their experiences. We will be doing more of that, but, again, some of it is quite expensive and we will do what we can within our resources.
Q12 Clive Efford: Very briefly to follow up on that, before we go on to the premises in Newcastle, are there other areas in the civil service that could make the same argument, that they should be using in-year underspends, because they have a highly competitive employment market too?
Gareth Davies: We are unusual in that our main competitors are the big, well-funded private accounting firms. Of course there are finance professionals in the civil service, but that is all we are. I think the head of the FRC quoted as a figure the other day that we are the seventh largest audit firm in the country. That is who we are competing with. That makes us very unusual, if you compare us to the civil service, who obviously have professionals across a range of disciplines, and people who are career civil servants. For a concentration, if there is an uptick in the demand for accountants and auditors, we suffer significantly more than the civil service.
Q13 Clive Efford: Okay, thank you for that. Could I move on to the premises in Newcastle? Did you consider any locations other than Newcastle? Would it have made sense, for instance, to relocate to Darlington, where the civil service has relocated in large numbers?
Gareth Davies: A couple of things about that: first of all, we are in Newcastle, and obviously that is where a lot of our staff are based. That is where they have built their lives and have families, work and school, and so on, in that area. One of the factors you have to take into account is the disruption to our existing staff—the very high-quality, dedicated people we want to retain. It is not a trivial journey from Newcastle to Darlington; I worked in the north-east for quite a few years myself. That is one factor—the risk of losing people who do not want to relocate or do not want a long journey to work and back every day.
The second factor is that I do not think it would be appropriate for the Government’s auditor to share the Treasury’s offices. I think that would be unhealthily close. While we spend a lot of time meeting and working on our audits with the bits of Government that we audit, it is a good rule for us not to be co-located with them. For example, our London office is deliberately slightly separated geographically from the string of Government Departments in Whitehall, for good reason.
The practical reason of not disrupting a high-quality team with the risk of losing good people and the more philosophical reason about independence of the auditor are the two big ones. The other one, I would say, is that there is not a significant price difference either.
Q14 Clive Efford: You told us at a previous Committee that you were considering another office outside London. Are you still considering that? Is that still on your mind?
Gareth Davies: It is in our longer-term thinking. It is not an active plan, as we said at the time, and that has not changed. We do not have an active plan. Essentially, we are watching very carefully what Government do, and we want to make sure that our footprint, first of all, is good value for money. Any new office comes with fixed costs, which we have to be very clear are required. We talked about the west midlands at the previous hearing and there is obviously some movement in DLUHC to Wolverhampton. If that becomes a bigger shift—at the moment in the north-east it is not just the Treasury; HMRC and DWP have significant offices in Newcastle—and if we get that kind of concentration of big audits in the west midlands, we shall have to think seriously about it, but we are not there yet.
Q15 Clive Efford: You have chosen a space in the Newcastle Helix development. What does the Newcastle Helix development, or the Spark in the Newcastle Helix development, offer particularly that made it your first choice?
Gareth Davies: We had a list of six possible offices in Newcastle that met our criteria of accessibility, quality and size, but also sustainability. As we have said before, the NAO has a target of becoming net zero as an organisation by 2029, so this move is really important for that objective as well. That gave us a list of six to assess against those criteria.
The Spark came top of that, quite clearly. It is good, new accommodation. It is not luxurious. It is not over-spec’ed for a body like the NAO, but it is good quality. Clearly, part of us attracting good people is to have somewhere professional for them to work. It is slightly larger than our current space. It is about 10% larger than our current space, which fits our longer-term plans to shift the proportion of staff who work for the NAO to a slightly bigger proportion based in Newcastle than there is now. That is because it is lower cost for us to employ staff in the north-east; our retention rates are higher there because we face less of the intense competition that we do in London; and it is just healthy anyway for there to be a slightly better balance between the two offices. For those reasons, we are building in that extra space. It is exactly the size we were looking for, and did well on all the other criteria I mentioned.
Q16 Clive Efford: Is that why you didn’t seek to renegotiate your current premises, because you are looking to expand?
Gareth Davies: Partly, but it is more that they are no longer good enough for us. There has been no investment in improving sustainability at that office. There is a change of ownership coming, and we are very unclear about the plans of the new owners, so we could not be so confident that we would set up a new lease there and be able to achieve our net zero target by 2029. We already know we can do that with the Spark. That is the biggest factor that led us to want to change.
Q17 Clive Efford: Did you just say that your focus of recruitment is going to be in the north-east, more than—
Gareth Davies: Not more; I said we would shift the proportions. Currently, of the roughly 900 people who work at the NAO, 140 are based in the Newcastle office; 140 out of 900, and we want to see that shifting. As I say, the space is only 10% bigger, so we are not talking about vast change. One illustration of our thinking is that a trend in some firms has been to concentrate, say, technical work in a specialist team located in an office outside London. That is an option we have not done in quite that way before; but to give us those kinds of options, which would be good for quality, because of the concentration of expertise, but good for cost as well, is why that additional space is useful.
Q18 Clive Efford: You are asking for an additional £3.7 million in this supplementary estimate, to cover the cost of the new Newcastle office lease. What steps did you take to maximise value for money in deciding on and negotiating the Newcastle Helix development lease?
Gareth Davies: I will bring Daniel in on the process we followed, but most of that figure is the capitalisation of the entire length of the lease. The changes to the accounting standards—IFRS 16—which are happening across Government as well as the private sector, mean that you put the full cost of the lease on your balance sheet as soon as you enter into it, which is a big change. It is an accounting requirement. It is not that we will be spending all that cash in the current financial year. Daniel, do you want to explain the process?
Daniel Lambauer: Yes, I will give a breakdown of the figures. For the right of use assets—the capitalisation of the lease—it is £2.6 million of the capital; and for this financial year the leasehold improvement area—where we need to fit out the space in this financial year—is around £700,000. In terms of the process, we negotiated an 18-month rent-free period under the 10-year lease with the Spark. It is actually better than the renewal of the lease was offering us, by around six months. It has a lower service charge as well, so if you put that together, the price per square foot of the building is slightly cheaper than the current building, or what we were offered for the renewal of the lease.
In terms of the fit-out costs, we have so far got from a designer we have used before—professional people—a good cost estimate, but it is just a cost estimate. We are going through a competitive procurement process to work with a company to put the details to it. We hope to get a better price—a lower price—through the procurement process, as you would expect from a competitive tender. Then we will work through the company we employ, individually, on detailed design features, to ensure that we optimise all the costs and don’t have any big individual items that are over the top. We are reusing all the furniture we can in the design, to the value of £300,000. We are reusing what we can. There are certain things we have to get. It is a completely blank space. We have to build meeting rooms, kitchens, fit out all the IT equipment, move our VC over, and so on. That is how we are trying to get the best value.
Q19 Clive Efford: And £700,000 of that is specifically the furniture and fittings in the new office. How did you arrive at that figure?
Gareth Davies: The £700,000 is the fit-out cost, so that is building the meeting rooms and the kitchen; essentially, it is a shell at the moment, so we have to put in all that structure.
Q20 Clive Efford: And that is part of the £3.7 million.
Gareth Davies: Yes.
Q21 Clive Efford: And £1.2 million is the total cost of the furniture, fittings and refurb, yes?
Daniel Lambauer: Yes, over the lifetime of the project. We are only asking for the supplementary for what we have to spend in this financial year. For what we spend in the next financial year, we will come back to the estimate process, but the total cost of design, fit-out, furniture and the IT wiring is £1.2 million. That’s correct.
Clive Efford: Okay. We have to ask these questions because if you can’t get value for money, what hope is there for anybody else? Thank you.
Q22 Chair: Can you remind us, on a typical year run rate, once it is set up and the fixtures and fittings are done, what is the annual rent? What is the annual cost of this lease?
Daniel Lambauer: Over the 10-year period, with the rent-free period, the rent plus service charge per square foot is £30.63.
Q23 Chair: Per square foot. What is that in total?
Daniel Lambauer: Oh, in cash.
Gareth Davies: It’s about 10,000 square feet.
Daniel Lambauer: Yes, 10,337 square feet.
Q24 Chair: So you multiply one by the other.
Daniel Lambauer: Yes, around £300,000 a year.
Dame Meg Hillier: The Chair was just checking you can do the maths.
Q25 Chair: I have a couple more. There is obviously a risk around this in terms of disruption to your important statutory audit processes. How will you mitigate and minimise that risk of disruption?
Gareth Davies: We have moved offices before in Newcastle, and we use a removal firm that is used to office moves of this kind. It works very smoothly, so the teams pack up by a particular Friday and they go to the new office on the Monday. Their boxes are by their desk and they just have to unpack them. That service is pretty efficient and works smoothly.
Q26 Chair: You have people who work over the weekend—unlike road maintenance in the United Kingdom.
Gareth Davies: And of course nowadays, as we have shown, we have been able to work without any office at all for big chunks of the last two or three years. We do not want to do that, but if it is necessary for people to work at home for a day, there is no problem in them doing that.
Daniel Lambauer: Our people are actually quite excited about this. We have a good comms and engagement plan with our people in Newcastle. We have involved our people in how the design should look and I think they will work very well together to ensure that there is no disruption. They are very much looking forward to the new building.
Q27 Chair: It sounds very exciting, and having visited your old building I can see, frankly, why you wanted to move. Once you are in situ, I think the Commission would like to pay a little visit, perhaps later in the spring, when the weather is improving.
Gareth Davies: You are very welcome.
Chair: Are there any other questions from colleagues? No, in which case that brings to a close this public session. We have one or two further things we would like to discuss later, but thank you very much for your attendance. We look forward to seeing you again in the near future.