Public Accounts Commission
Oral evidence: National Audit Office Strategy and Main Estimate 2023-24
Wednesday 8 March 2023
Ordered by the House of Commons to be published on 8 March 2023.
Members present: Mr Richard Bacon (Chair); Jack Brereton; Clive Efford; Dame Meg Hillier.
Questions 1-60
Witnesses
I: Gareth Davies, Comptroller and Auditor General, National Audit Office; Daniel Lambauer, Executive Director, Strategy and Resources, National Audit Office; Dame Fiona Reynolds, Chair, National Audit Office.
Witnesses: Gareth Davies, Daniel Lambauer and Dame Fiona Reynolds.
Q1 Chair: Welcome to this meeting of the Public Accounts Commission on Wednesday 8 March. We are taking evidence from the Comptroller and Auditor General, Gareth Davies; the chair of the National Audit Office, Dame Fiona Reynolds; and the executive lead for strategy and operations, Daniel Lambauer. You are all very welcome.
Mr Davies, in your main estimate for this Commission, you have set out plans that require more staff and more money. Although originally, last year, you anticipated that your staff numbers would drop from 940 to 926, actually, they are going up from 940 to 948, and your overall requirement is going up by around £7 million. Can you expand on why that is the case?
Gareth Davies: Yes, of course. On the number of staff, the big change in our assumptions from last year is on our financial audit staffing. Last year, we expected to be doing less work this year on elements of our audits related to the covid response, and that is still our assumption going into next year. We have taken that volume of work out of our plans for the coming year essentially because the risks are still there in some accounts, but reducing. So we have followed that reduction through, but that has been more than outweighed by an increase required by the change to ISA 315, this new planning standard that all audit firms and organisations, such as us—
Chair: Just to be clear, ISA 315 is an international standard.
Gareth Davies: Yes, international auditing standard 315 requires auditors to develop and record a fuller understanding of the business risks in the organisation that they are auditing. It is obviously a response to failures in the audit world years ago. We are working that through. We had the opportunity to pilot our methodology for it for the first time last year. The reason that our staffing assumption has changed is that we have the evidence of that pilot, which gave us a good idea about the increase that would be required for each audit.
Q2 Chair: I see. So you were not until recently in a position to decide about extra capacity.
Gareth Davies: We knew that some of it would be required; we could not really estimate the volume until we had done the pilots. This is an evidence-based figure that takes us, as you say, slightly above the reduction that we expected from the covid work.
Q3 Chair: I think I am right in saying that the standard has five new inherent risk factors: subjectivity, complexity, uncertainty, change and susceptibility to misstatement due to bias or fraud by management. This arises partly out of things such as the Enron scandal, does it?
Gareth Davies: It does, absolutely.
Q4 Chair: That was a long time ago. Why has it taken so long for this to work its way through?
Gareth Davies: Auditing standards take a long time to develop. It is the same with financial reporting standards. Not just one sector but every economic entity across all sectors has to respond to it. It is being tested well across the world, not just in the UK. I think that the profession has agreed that it represents a genuine improvement in quality rather than just more bureaucracy, so this is being implemented with the full support of the sector.
Talking to our teams who are now doing this for every audit, having piloted it on a few audits last year, the feedback is pretty consistently that this feels like a big step forward. It is not that we did not understand the risks of our audited bodies before, but this is helping us to plan. Particularly in view of our audit transformation plan, which is gearing up for us to use more data analytics and so on, this is taking us into how those internal controls, particularly IT controls, really work in practice. In some cases, we think that organisations are ready for us to start using those techniques, but particularly in the case of Government, there is a long way to go before that is the general rule. But this is a really good way into the kind of data-led audit that we have been talking to you about for some years now.
Q5 Chair: In other words, this is going to improve the quality of the work of your insight teams and knowledge hubs.
Gareth Davies: Yes. The early signs are really promising. As I say, the reaction of the teams doing the audits is that this is a genuine improvement in our insight, rather than just another layer of documentation.
Q6 Chair: You are increasing your value for money team as well, slightly. Can you explain why that is necessary?
Gareth Davies: It is marginal, as you say—a handful of staff. We run a very tight ship on all of our work, but on value for money our teams have delivered this increasingly challenging mix of very responsive work, the latest example being the work that a team reported on recently on the energy support schemes that the Government have had to implement to help people and businesses with bills. From a standing start, that report, which was published in February, allowed the PAC to hold a couple of very insightful sessions on it in recent weeks.
There is more of that, just because there has been more high-speed activity necessary in Government, and we have found that that has actually stretched us a bit too far, so we are essentially building the resilience of our teams and taking the opportunity to strengthen a couple of skills gaps where we have had turnover and we want to bring in some external expertise. As I say, it is a modest increase, but necessary.
Q7 Jack Brereton: You have told us previously about your plans for your Newcastle office. Are you actively recruiting for Newcastle-specific roles?
Gareth Davies: Yes, we are. In fact, with most of our roles we are agnostic on location. We are looking for the best people and if they are available in the north-east, we will definitely hire them there. Sometimes we specifically recruit for Newcastle as well.
As you know, we are moving offices; that plan is on track for us to move in by the end of May. The fit-out is actually under way in that building. The new office gives us about 10% more space compared with the old one. Our plans are to shift the balance of our staff—taking the same number in total, but shifting slightly in the direction of Newcastle to take advantage of that really strong pipeline of both graduate-level talent and experienced people who we bring in at high levels up there. It is a pretty exciting time for the team in the north-east.
Q8 Jack Brereton: Will the people in the Newcastle office be not just at ordinary level; there will be some senior-level grades as well?
Gareth Davies: Yes. One of my executive directors on the management team is already based there. We have several directors—both audit and value for money—based in that office, and it covers pretty much the full spectrum of our value for money hub and financial audit work. It is very much a microcosm of the NAO rather than just doing some niche activity.
Q9 Jack Brereton: In terms of your reasons for doing this, is cost a factor or are there wider considerations?
Gareth Davies: It is absolutely what we need for our business to be efficient and effective. I think we have explained before that our retention levels are higher in the north-east; when people join us there, they tend to stay longer. Also, we have had real success in recruiting junior staff—not just graduates but school leavers as well—through quite a well-established route up in that part of the world. We are just building on that success. It is cost-effective for the NAO, but it also brings a different perspective. The big risk of an organisation like ours is having a kind of London-centric view of everything. It is a really good counter-balance to that.
Q10 Jack Brereton: We have talked previously about potential further regional offices; in particular, we mentioned the west midlands. We are seeing DLUHC in Wolverhampton, and the Home Office is opening in my own area in Stoke-on-Trent. In terms of looking at the west midlands, are you still considering a potential further footprint there?
Gareth Davies: We don’t have any active plans under way. We are focused at the moment on this big move in the north-east; our attention is on getting that right, as well as modernising our office in London. But you’re right, and we are keeping a close eye on how Government itself is relocating, particularly to the west midlands, which has seen some high-profile moves recently.
Our view at the moment is that if it becomes a good decision for the NAO to have a third office, the west midlands is the most likely candidate. We are some way away from having a business case, because we are very conscious of the fixed costs involved in having another base. In addition, clearly there would be a bit more organisational complexity as well in co-ordinating three units.
It might well turn out to be exactly what we need, particularly if it gives us access to a different recruitment market from the two that we currently access. There are lots of reasons why it could be a good business decision for us, but at the moment we are concentrating on delivering the current plan.
Q11 Jack Brereton: Do you envisage that in the future the NAO will be more regionally based than it is now?
Gareth Davies: With our existing responsibilities, I think there would be a limit to that, just because we need to be close to where the work is.
Q12 Jack Brereton: You are also taking on a lot of BBC work, for example, and a lot of that isn’t in London any more.
Gareth Davies: No, exactly. Some of it is in Manchester and some of it is in Cardiff. Our team is planning a week-long visit to Cardiff to do the BBC audit in the next few weeks. You are right: there are plenty of others, but it is about making sure that there is a critical mass of that work in a location that justifies the fixed cost. I think that is going to be the hard-headed business decision for us.
Q13 Clive Efford: Good morning. I have been on this Commission for longer than I care to think—time seems to have flown by. Regularly when you come here to talk about pay awards, you talk about the competition that you are engaged in with the private sector, and quite often you are pleading for a higher pay increase to address that issue. We have had double-digit inflation. We see average pay awards in the private sector of around 10%. You have gone for 4%. What is the rationale behind how you arrived at 4%?
Gareth Davies: For the cost of living increase—this annual increase—we largely based that on the benchmarking data that we have. Essentially, we aim to be competitive in our recruitment market so that we can fill the vacancies. Clearly, if we pitch it too low, we will not be able to do that and we will not be able to deliver on our responsibilities to Parliament. Everything is based on what is required for us to be competitive in these scales.
You will have seen that, as well as the 4% flat increase that we are proposing for next year, we have also completed a pay review—a big, once-every-few-years exercise—with exactly this objective in mind: how do we ensure that we have positioned ourselves to be competitive, crucially at the newly qualified auditor level, which is where we had the most turnover last year? If you remember, we had to respond with an in-year increase for that group of staff last year.
The benchmarking is telling us—clearly, there is always a lag in the data, particularly from other organisations—that with the combination of the 4% plus the 2.2% average cost of implementing the pay review, that puts us in a competitive position again. It puts us back to where we were before the last year and a half, which saw particularly rapid pay increases in the private firms. We are confident that this pitches it about right. If you take the two together, that pitches it about right and makes us competitive.
The good news from our point of view and hopefully that of the Commission is that the worrying increase in turnover at our audit principal grade that we saw last year, which went up to the mid-20 per cents at one stage, has come back down to our target level of just under 20%. Obviously, there is still some turnover, but the worrying gap between that and our target has closed. We are not complacent about that at all, but we think the combination of the 4% and the pay review that we are recommending really does meet the expectations of our staff when they qualify and will allow us to retain the people who want to stay with us. Some people who left us last year actually did not want to leave, but given the cost of living pressure on everybody at the moment, they could not ignore the higher pay they were being offered. We cannot let that situation persist for very long, so we think this is a good, responsible but well evidenced increase.
Q14 Clive Efford: Can I push you a little more on that? It still sounds like a big gap to me. I get what you say about the review last year for newly qualified accountants and the 1% that you paid within the year. Your pay review—2.4% plus the 4%—still leaves a gap in your overall pay envelope. Are you not fearful that that is going to leave you falling behind as years go on?
Gareth Davies: I will bring Fiona in here in a second. On pay, we operate as a steadier employer than the private sector. We do not see the violent upswings that we saw last year; nor do we see the big retrenchments that you will see in the private sector when the economy turns against their business models.
Clive Efford: Is that an economic forecast?
Gareth Davies: Luckily that is beyond my pay grade. From experience, having worked in the firms as well, the deal at the NAO is it may not match the very high increases in a boom year, but neither will you see the retrenchment, particularly the cutting back on volume that you see when the market turns down in the private sector, so there is a trade-off here. Having said that, we would never take the risk of not being able to fill our vacancies and, at the moment, our graduate recruitment is ahead of last year very significantly, so the signs are that we will be able to fill those vacancies at these levels of pay.
Dame Fiona Reynolds: From the board’s perspective, this is a bit of a balancing act. We are in competition with the private sector, but we are also looking very much at the public sector, not just our auditors but others moving within the civil service and to us. We are keeping an eye on a number of markets, and, of course, trying to present you with an affordable and sensible package. This is a small net increase in staff, for very good reasons, as you have heard.
We think that along with pay, there are other reasons why people feel loyal to and want to work for the NAO. There is motivation in the sense of fulfilling a vital public service and feeling actually very inspired by the way our work in received, both within Parliament and outside it. That adds to what in the jargon is called the employee value proposition. That is horrible wording, but it means: you work for an organisation because you care about what you do. We are not taking that for granted; it has got to be worked at.
We think what we have presented to you is a balanced package. We could easily have said to you that it needs to be more, but, looking at the evidence, we felt we have struck the right tone.
Q15 Clive Efford: This is my last question on pay. You have a statutory responsibility to have a regard to the civil service pay award. How have you taken that into consideration, given that the 2023-24 pay award has not been published?
Gareth Davies: We are always in that position because we go first. It is obviously a big advantage to our staff to see the increase in their April pay packets, rather than have it backdated several months later—particularly now, when cash matters. The downside of that is that we have to make a bit of a stab at where we think a reasonable level is. Our track record shows that we have been pretty good at predicting those levels—not that we have any inside information. We have not been a long way adrift. We saw the Government’s submission to the pay review body looking at civil service pay, which was published a week or two ago. The opening submission to the pay review body is at 3.5%. Obviously, the pay review body will take into account other evidence from unions and others, so who knows what they will recommend. But the Government’s opening bid as part of that process reassured us that we were not a million miles away.
Q16 Clive Efford: I said that was my last question, but that prompts me to ask one more thing. Taking into consideration that you have had industrial action and the Government already have 3.5% on the table, if it went above 4%, what position would you be in then?
Gareth Davies: Our pay bill is going up by 6.2% next year, as the pay review is in there. We would compare it with what has actually happened to people’s salaries, because a significant number of people are going to get a lot more than 4%—that is the point. That includes those who benefit from our catch-up arrangements, where their progression has been too slow through the grade in recent years, and also the new grade, which provides a development opportunity for our newly qualified staff. We have to look at that package in the round against wherever the Government end up.
If we find ourselves adrift in a way that is proving really problematic for us, as we did last year, we have a track record of responding to that, so we would have to do that again. We would rather not; we would rather get it right first time, and we have put a lot of work into that.
Q17 Chair: I want to bring Dame Meg Hillier in on this question of the new pay grade. However, pertinent to what Mr Efford was saying, we have a recent letter, dated 3 March, from Michael Burke, the convenor of the Public and Commercial Services Union, making exactly that point. He says that there are negotiations ongoing; I obviously cannot expect you to comment on the results of those negotiations before they have happened. What you have just said, I think, is that if the circumstances warranted it and the negotiations were successful, there are circumstances in which you might consider coming back for a supplementary estimate if you needed to.
Gareth Davies: Of course. That is always the case when there is a lot of volatility in the external environment—as there still is. The estimates of where inflation will end the year vary widely, as you will have seen. In that situation, we need to reserve the right to come back to you and make a case for more resource, if it is required. The thing that drives us all the time is the ability to deliver our responsibilities. That is the key test for the board and for my management team. We will not risk being unable to deliver what Parliament requires from the NAO; that is the bottom line.
Q18 Dame Meg Hillier: We have talked a lot about keeping people; one of the things that you have introduced is a grade between audit principal and audit manager, to keep up with the private sector. How do you predict that is going to go in terms of retaining staff, and are you going to have any issues of differential between the top experienced audit principals and this new post in between?
Gareth Davies: We spent a long time explaining our thinking to the staff as part of the informal and formal consultation on this. The response has been very positive. Staff agree that it would be a big improvement on our current situation. Essentially, what has driven us to it is that the audit principal grade is very long. In my experience of working in the firms, it is too long. It can feel like a long time from qualifying to becoming an audit manager. I am used to that happening much more quickly for many people.
We are calling the new grade “audit manager”, and the higher audit manager grade is now the “senior audit manager”. That reflects the spread of difference in our audits. If you are leading a team on a simple, straightforward audit, you would be expected to be a senior auditor who was at the bottom end of the audit principal grade. If you are doing the same team-leading role but on the BBC or the MOD audit, or some of our large and complex audits with lots of extra professional challenge in them, you would now be an audit manager in our new grade. You would be paid in a way that reflects the higher value of the job that you are doing for the organisation, and the professional development that has been necessary to get there.
There are now two steps, if you like. As you qualify, you get some lead experience on the simpler audits and you demonstrate your capability to move up. Maybe in a couple of years, realistically, you will be promoted to audit manager and demonstrate that you can gain experience on the larger audits. You can then be a senior audit manager, taking full management responsibility for some of our more complex audits. That is how it works in the firms, and that is how we expect it to work here too.
Q19 Dame Meg Hillier: What is the difference in salary potential between someone who maybe sticks at the audit principal grade for longer because they want to do that, but they have more experience, and someone who comes in as an audit manager?
Gareth Davies: As part of the changes we are making, we are guaranteeing progression to the midpoint of all our grades within two years, in the case of the senior auditor and audit manager grades. Is that right, Daniel?
Daniel Lambauer: Yes, that’s right, so it is two years on the grade to get to the midpoint. To give you the two salary ranges, roughly speaking, the audit manager grade would be around £7,000 more at the midpoint than the audit principal range. Obviously, we are still negotiating and we will be proposing them.
Q20 Dame Meg Hillier: So if someone was just starting as an audit manager and someone had got to the top of the audit principal grade, that would be quite close.
Daniel Lambauer: Well, we have a principle as well that when you are promoted from the audit principal grade to audit manager grade, you start at a minimum of 10% up. So you can’t fall down, so to speak.
Dame Meg Hillier: Okay, to maintain the differential.
Daniel Lambauer: That’s right, and then you have a guaranteed progression to the midpoint of that range in two years’ time.
Q21 Dame Meg Hillier: This is obviously financial audit. Have you considered doing similar for value for money?
Gareth Davies: We looked very closely at it, because that would have been the neatest thing to do, but the work doesn’t lend itself to that; the nature of it doesn’t have that same difference. Studies vary in size but not that much. The distinction I was making between the small and straightforward audits and the large and complex audits is a very big difference in the financial audit world.
Dame Meg Hillier: Between a Government Department and an agency?
Gareth Davies: Exactly. We looked very hard to see whether we could make the same distinction for our value for money work, and we really couldn’t. We would end up with a real problem of justifying grade differences without the justification in the work. That doesn’t mean we have ignored the retention and development of our value for money staff. We have significantly improved the grade ranges for our analyst and senior analyst value for money staff—the equivalent of the principal auditor in the financial audit range. The audit managers in value for money have become senior audit managers, in the same way they have in the financial audit range. We have done a lot to make it fairer on progression, and to reflect the fact that our ranges need to be higher to be competitive in our recruitment markets for value for money as well.
Daniel Lambauer: If I may, I will add that if you are a senior analyst, so the first grade, that is the equivalent grade to a qualified accountant. The midpoint in the new ranges would be about £60,000. You would then be promoted to senior audit manager, the same as VFM. The midpoint there is in the £80,000 range. So while you don’t have the middle manager grade, you will be promoted up. There may not be as many opportunities, but it is a smaller pool. There are definitely advantages in that service line; we haven’t forgotten them at all.
Q22 Dame Meg Hillier: What if someone is working across both? What if they are working in value for money but they are doing financial audit too? You do have a few people doing that. How do you manage it?
Gareth Davies: That used to be very common. It is less common now, but we still have plenty of colleagues who do that. We are working out exactly how we manage that. It depends where they come from, which service line they started in and how it develops. Our principle is to make sure there are no barriers preventing somebody pursuing the career that they are interested in with the NAO and where their skills take them. We will make sure there are no barriers moving from financial audit to value for money, or the other way round if they are suitably qualified to do the financial audit.
Q23 Dame Meg Hillier: Does that mean that if you are a financial auditor from the start you are on a better trajectory?
Gareth Davies: The principle behind that is that the market for those two disciplines is very different, so we have had to deal with that—we could not pretend it wasn’t. You can map out this three-stage progression of a newly qualified auditor. It is only a two-stage progression for a value for money specialist, but the opportunities are still there. We still expect a proportion of our financial auditors on qualification to say they are interested in moving to our value for money work, and we do not think there is a barrier. There is not a pay barrier to doing that.
Q24 Chair: Around one fifth of your audit is outsourced. Last year it was £11.1 million. It is now going up to £13.1 million, which is not only £2 million extra, but an 18% increase. On 6 February, you told the Public Accounts Committee—we were rather concerned about this—that you might look towards bringing more of this in-house, which would presumably give you more flexibility generally inside your current envelope with the pay negotiations. Is that something you are now seriously looking at?
Gareth Davies: Yes. We always keep it under review. We are doing a particularly focused review this year, which is under way, but it is too early to talk about where we end up. There has been a big change in the private sector audit market. Fees have gone up significantly for private audit fees in the commercial world, and the firms we contract with are not prepared to do public sector work without passing on the higher costs that they have incurred, in the way we were discussing earlier, to their clients. We have seen a big increase in the price for the job. There is also a volume increase as well, in the same way as there is for us. Firms are having to deal with ISA 315 in the way we are. On the cost increase, about half of it is volume and half of it is price.
Q25 Chair: So long as the taxpayer continues to own banks that have huge balance sheets full of complex derivatives, there is that added cost of auditing them for the taxpayer.
Gareth Davies: There is, but we need to respond to the change in the price of that work. Previously there has been a pretty robust economic case for our outsourcing 20%. There are lots of other reasons we do it, including access to the firms and seeing how they operate their methodologies. The ability to develop good relationships helps us develop our organisation in lots of ways. So there are good reasons. It is also a good benchmarking test of our own value for money. What this tells us at the moment is that the NAO is extremely good value for money in this phase, but I would be cautious about losing altogether the benefit of outsourcing that we have now.
Q26 Chair: Sure. The point surely is well made that the learning that you get from outsourcing, as long as it is translated in-house, is something you should probably be trying to do on an ongoing basis, but 20% feels quite a high number. Presumably if it is one sixth or one seventh, you would still get those benefits.
Gareth Davies: There are lots of considerations here. One is that the market would still need to be attractive to the firms, so they do need a critical mass to make it worth their while focusing on this sector, because you need Government specialist auditors. We have to be careful. Let us for the sake of argument say that we wanted to outsource half as much—10% rather than 20%. We would have to make sure that that was still going to produce attractive packages of work at the best possible price from the firms.
Q27 Chair: How many firms do you use?
Gareth Davies: It is about six on the framework at the minute?
Daniel Lambauer: Yes, six or seven on the framework.
Chair: So it is a call-off contract—
Gareth Davies: We could manage with a smaller number, but this is risky. Our work forms a part of the business case for having a public sector team in the firm, so we have to be careful that we do not make it unviable for more firms to have a public sector team, because nobody forces them to do that. We have seen very big problems in the local government audit market, from becoming completely dependent on the firms—
Q28 Chair: I want to come on to that specific point later in this hearing. On the argument about specialist skills, there are always going to be specialist skills that are necessary to buy in, because you are not going to keep every single skill in-house just in case or for the occasion, but surely some of them are specialist skills that will be there for the long term. In those circumstances, the rationale for bringing that in-house and getting the specialist skills under your own umbrella surely becomes much stronger, doesn’t it?
Gareth Davies: We keep that under review all the time. If you take, for example, the topic we have discussed with you a lot on audit quality, which is financial instruments, that was an area the NAO had very little knowledge of a few years ago. By force of the kinds of changes you have described in Government balance sheets, we have had to become much more expert in that area, so now we have a financial instruments team led by a director, with audit managers and others. We have increased the resource going into that, so we are developing our own expertise there quite quickly. We still need to buy in higher-level expertise to support that team, but the balance has already shifted to in-house on that.
We do that in all these areas every year. We assess, “What is the demand for this now? Can we develop that in-house in a way that is more cost-effective, and where do we do it?” We think there will always be a need for this, because new areas come along as well, which we will need to develop over time.
Dame Fiona Reynolds: The board sees this as an opportunity to stand back and review exactly that point—where we need to build specialist expertise. There are issues like digital, which we are very conscious are becoming much more central to every—
Q29 Chair: You have just appointed a new non-executive director for that very reason.
Dame Fiona Reynolds: We have, and we are delighted with his early start. This is an opportunity to stand back from this historical relationship of 20% and say, “What should it be in the future?” I am sure that there will be an element, for all the reasons that Gareth has said, but it is a good opportunity to review skills and to look at the way in which, over the last two or three years, we have been enhancing our skills through the hubs and through our knowledge areas of development. It is an opportunity as well as a cost management issue.
Q30 Clive Efford: Could you update us on progress with transitioning to the Newcastle office? Are you in line with the cost expectations you set yourself? How did you go about anticipating how much space you would use?
Daniel Lambauer: Yes, we are in line with cost expectations. We are also in line with timescales and fit-out costs. This is a completely empty floor, and fit-out has started in the last two weeks. It is still a challenging timetable. We are hoping to move in at the end of May or the beginning of June. As building work continues, we are going to firm these up fully. As you know, with any fit-out work, including with IT equipment, we are relying on external suppliers to deliver on time, but we think it is a doable timetable and we are working very hard to move in that timeframe.
Your second question was about how we determined the space. I think we discussed this previously at the Commission, but we knew our current lease would expire on the building we are in, and we started looking some years ago at what were, roughly speaking, similar spaces in the Newcastle area. At that time, there was not an incredible amount of choice, but there was some choice available. That building—the new Spark building, which is now filling up all the other floors—was a good combination of similar space and gave us a canvas to really do a modern and, in particular, sustainable office. The business case was also heavily stacked towards ensuring that we contribute to our net zero target as an office, going forward.
Q31 Clive Efford: Just to cap that off, given the lead-in times for identifying space and adapting it, you are confident that the space that you have identified and created for yourself is adequate for your needs?
Daniel Lambauer: Yes. It is 10% larger than the previous space, which is deliberate because, as we said, we had some strategy to rebalance, as the C&AG explained before. There are various ways you can configure that floor space if you really have to go beyond that, but we are confident that it is sufficient for us.
Q32 Chair: And you are effectively the anchor tenant. You said there are others coming in now, but you are the anchor tenant. Is that right?
Gareth Davies: We are the second, aren’t we?
Daniel Lambauer: Yes. I think there are seven floors in the building. There was a legal company that moved in first. We are the second tenants, by complete chance, because another tenant that was announced publicly—Leonardo, a contractor—is moving in as well. So it is filling up very well. We have just been up there not long ago to have another look. I think it is a great space, and our people are really excited in Newcastle.
Chair: The Commission enjoyed its visit to Newcastle the last time, but we feel another is due so we can check for ourselves that things are all right.
Q33 Dame Meg Hillier: Could you update us on the audit transformation programme? You updated the Public Accounts Committee, but perhaps you could update the Commission.
Gareth Davies: Yes. This is our biggest investment and change programme. I have already talked about the first part of that, which was to develop a new methodology to cope with the change in auditing standards. That was piloted last year. It is being implemented for all our audits following really successful three-day training sessions for every auditor. They were an innovative way to get people used to a new methodology with real worked examples and doing the training in your actual audit teams and so on. It has gone very well.
That is the first phase. The next phase is the development and implementation of the new audit software platform that will replace our current audit software. Although we have a new methodology, it largely plugs into our previous audit software platform, so we want to replace that. We are working with a firm called Tisski, which is our development partner in that, and we are on track to pilot the new platform in the next few months with a view to rolling it out with similar training sessions to those I’ve mentioned next autumn. So, on course, on budget and so far, the early signs are that we will get the non-financial benefits from this that we sought when we started. We have already talked about some of the quality points on the new ISA.
Let me give you an illustration of what a more data-led and more IT-based audit system will give us. Last week, we asked for an analysis of all the audits that are on the system to show us the ones in which the audit teams have identified a financial instrument as a significant audit risk. Before, we would have had to write round every audit team and get an email back telling us which audits fell into that category and so on. That system can now be interrogated centrally, and it took five minutes to come back with the answer of a full list of all the audits where that particular risk exists and what we are doing about it. Immediately, it is helping us with the kind of management decisions we were discussing earlier, such as, “How big is the demand for this specialist expertise and how much resource do we need to have in our central team to support those audits?” That is just a small example, but it is the first tangible evidence that this is going to transform, first, our understanding of the audit risks and, secondly, our ability to manage the organisation efficiently with that information.
Q34 Jack Brereton: I think this question is particularly for Daniel. It is around your rental income from the surplus space in your London offices. Currently, only 60% of that is rented out. Why have you not been able to fill the remaining 40%?
Daniel Lambauer: Just in terms of numbers, as of this coming April we will have seven floors of the potential 12 rented out. Unfortunately, one of the tenants is a public sector tenant whose tenancy is coming to an end. Because of audit ethical reasons, we cannot renew that tenancy, so in May, we will be down to six floors again.
We have found, like many other organisations, especially in the Westminster area, that the market is very competitive. We had a good amount of viewings and some very close calls in terms of making firm offers, but not all of them have translated into offers. Having said all that, in the last four or five months we have had another tenant moving in—NHS Providers, which is very happy with the building. We have just secured another, which is starting in April.
Being on the prudent side, we think that renting out two more next year will be realistic. That is in our estimate at the moment, then two more the year after and the year after. If we do more than that, it will be a big bonus, but it has been challenging in the current market with lots of flexible working and home working, organisations are just not making the decision to move.
Q35 Jack Brereton: How are you marketing this space? Are you doing enough to get those floors out there so people are aware of the potential to rent this space?
Daniel Lambauer: Yes. We have a professional agency marketing on our behalf. We meet them regularly, all the way up to the C&AG, to adjust our marketing strategy. We have done building improvements based on feedback. For example, some people said our lift lobby no longer looks very modern, so we are modernising that. We make sure that we heavily market our common spaces as well. Next year, in our capital budget, we also have plans to improve the VC equipment in the auditorium, because that is not a big draw. You can use the big meeting room spaces as well. We have also adjusted where we need to be, if it makes sense with the length of the tenancy and the price point. Also, after a suggestion by the chair, going more for the charity and third sector market, we may need smaller spaces. In fact, we just had a charity doing a second viewing the other week, and we are quite hopeful that at some point the viewings will materialise into firm offers.
Q36 Jack Brereton: Are you looking at other marketing companies who could publicise some of this space to try to get it filled?
Daniel Lambauer: If we are unhappy with the agent, then yes, as you would expect from us, we will look around. We are always looking at different ways of doing this—managed workspace providers. In the end, it doesn’t always add up for our responsibilities, as well as the economic case.
Q37 Clive Efford: You are coming to the end of the third year of your strategy. You set your goals back in 2020. Looking back, is there anything you would change about the goals that you set yourself?
Gareth Davies: Actually, no, because we were very careful not to make them subject-specific. Obviously, we didn’t know about covid when we set them. Those objectives have helped us to improve the NAO’s agility, capability and impact. It was a good choice, actually, to focus on the quality and impact of our work and the extent to which we make the lessons from that work more readily available. We don’t expect people to plough through eight reports on procurement to learn about good procurement; we do that for them, with different kinds of outputs. All that has worked really well, I think. Building on my predecessor’s work to make the NAO’s VFM capacity responsive turned out to be absolutely essential both in the pandemic and since. For all those reasons, I think we did have the right objectives. The internally focused ones to focus on our people agenda were absolutely right, as well. We have seen how much impact the past few years have had on organisations’ engagement, morale and levels of sickness. It has affected organisations in every sector. Our staff have performed amazingly well throughout that period and have really delivered for the taxpayer. Making sure that we are working hard on things that will make it a good place to work and that we look after their physical and mental health and their professional development were absolutely the right objectives to have. We have a lot more to do on those, but I think it was a good selection at the time.
Dame Fiona Reynolds: I will add that there is a substantially new board since the strategy was agreed; there is only one member who was there at the time. The really good thing that is clear is how supportive the entire board is of the strategy. We spent a lot of time challenging ourselves, asking, “How well is it going? Where are the difficulties?”, and on the things we can celebrate. In fact, we are just beginning to think about reviewing the strategy as the end of the five years approaches. I think you will probably see quite a lot of continuity. It is very early days, so we have not made any decisions yet, because the strategy is working so well for us. One of the main areas where it is working well, frankly, is parliamentary support for our work, whether that is through the PAC or the insight and help that we give to MPs in particular and the Select Committees. I think we have a lot to celebrate. There are issues emerging that we will have to do more on, but that is for the future.
Clive Efford: Do you mean recognition for what you do supporting PAC and so on?
Dame Fiona Reynolds: Recognition for what we do, exactly.
Q38 Clive Efford: It has been a hell of a three years—especially the last two, perhaps—with covid, the fuel crisis, the cost of living crisis and the war in Ukraine. Has that made you look at how you set your priorities? When you reflect back on that and think, “Were we resilient enough in terms of our fuel capacity and fuel storage and all the rest of it?”, has that made you rethink how you go about planning things?
Gareth Davies: In the last year and a half, we have been talking a lot about resilience—resilience of public services, and the country’s resilience. As we found, it is a whole system, so you can’t just focus on public services alone.
A legitimate bit of self-criticism from us is that there was no NAO report that pointed out the inadequacy of the Government’s plans for a pandemic of the kind that we ended up experiencing, because all the plans were essentially rooted in the health and public health world, rather than in the economic impacts. Obviously, we were not the only people not to spot that, but part of our function should be to challenge how the Government is preparing for major risks. It is tricky stuff, of course, because what good value for money looks like in being more resilient is a controversial and untested area in lots of ways. It certainly isn’t spending lots of money on spare capacity that cannot be afforded.
How do we make our systems more resilient? We need a bit more imagination about some of the risks that the country faces. We are underestimating the impact of risks in many areas, one after another. There is something about the robustness of the risk planning process, not just in Government but in the wider economy. We obviously have a contribution to make there, around the value for money of better resilience, and we are also working with other experts in the field. That is probably the key area that we are focusing on, having had that experience.
Q39 Chair: That is a very interesting point. The fact that there might be a global pandemic had been No. 1 on the Government’s risk register for many, many years. I remember that from when I was on the Public Accounts Committee many years ago. Are you saying that you are now going back to the Government’s risk register and looking at the top hits, and then thinking hard about what you should be doing now to analyse them?
Gareth Davies: Yes, exactly that. Obviously, the Government has done that itself, too, with a big focus on national resilience, a new plan and so on. We absolutely have decided to pick a national risk and really push at the depth and robustness of the scenario planning that has gone into it. We then test whether it just exists on risk registers on paper or whether it has led to improvements in resilience across the systems.
Q40 Chair: My local council—or, rather, the neighbouring council—bought a golf club in my constituency. I am fairly sure the prospect of golf becoming a criminal activity was not included in their risk planning.
On the question of energy—you referred to this briefly earlier—the Government spent a very great deal of money in a very short period of time on the energy support schemes. Could you say a little more about the impact that has on your audit work?
Gareth Davies: We agreed with the PAC and its Chair that we would carry out a responsive piece of work that was largely to make sure a clear summary of how that had been approached was in front of the Committee so it could take evidence from the officials responsible. We did that between November and February, so it was a very fast piece of work. We looked at how the risks had been identified at the start of this. Clearly, there were some very significant risks around the targeting of the scheme—how do you target it so that public money is being used where it is needed but not where it is not needed? Officials were very clear at the time that it had to be a universal scheme so that it could be delivered at the speed required before the higher bills hit. With that came the risk of what economists call deadweight—spending public money that might not be needed by some better-off households and businesses.
We examined that trade-off and how it was managed. We also looked at the fraud risk. This is a good example of where the Government learned from the pandemic experience. The team at BEIS, as it was then, that was responsible for this brought in the Public Sector Fraud Authority from the Cabinet Office and the Treasury to help it identify the fraud risk right at the start and build in appropriate controls. That was a big improvement on the pandemic experience. It was a good example of where the learning had been transferred. Those are the kinds of issues that we covered in our work. As I say, the PAC then held two sessions with witnesses from the affected sectors and from the Government to probe how that had been approached.
Q41 Dame Meg Hillier: I should put on the record, Chair, the gratitude of the Public Accounts Committee for the very quick, responsive work that the NAO was able to do early in covid and on energy bills. Obviously, there is a challenge for you, Mr Davies, with the quick, responsive stuff, as you are also looking at the wider, longer-term risk stuff, which is something that we in Parliament are interested in. You also have your value-for-money work, which is the bread and butter that has to be done. Within your resources, are you sure that you are getting the balance right? Is there any risk to any of the elements, because all three are important, although two have risen in importance in recent years?
Gareth Davies: That is the thing that I spend most of my time doing in my job: testing that balance from all angles. As you say, there is responsive work versus long-planned work, because both are important, but also coverage of the different parts of Government spending—obviously, that is a huge field to cover—and making sure that we do not lose sight of long-term value-for-money impacts. I am thinking of the big infrastructure schemes and the Government’s net zero programme—long-term investment that is designed to prepare the country better for heading off higher costs in future.
That is what I spend a lot of my time doing with our teams—making sure that we have not missed any significant emerging risks, or that we have not allowed ourselves to be pulled away from important long-term strings of work. A good test is that I am never quite satisfied that we have got that right, because if I ever was, I think that might mean that we are not challenging enough the balance that we are striking. Yes, it feels like a constant irritant in the system that we always check that we are not being pulled too much in one direction and will regret it later.
Q42 Dame Meg Hillier: Picking up on what Dame Fiona said about engagement with Parliament, I have seen an increase in inquiries directly to me about whether the National Audit Office could look at x, y or z, so I sometimes explain the role a bit—obviously, we would direct them to you as Comptroller and Auditor General, because with your letters patent you have absolute authority on all such matters. Have you seen an increase in requests, and have you seen any pattern in those requests? With an election looming—well, not looming; it has to be by the end of next year anyway—there tends to be a bit of a drive. This is an election that we know about, whereas the previous ones in your tenure we were unaware of.
Gareth Davies: There has been an increase, not just for that reason, although I am sure that that will happen in the next year or year and a half. An interesting area to highlight, where we have had plenty of requests from MPs—members of the Committee and non-members—is the impact of regulation on their constituents. It has been a strong emerging theme, and one of those areas where I have had to be quite careful that we have not become an all-purpose complaints service for anyone dissatisfied with a regulator.
Partly, that was triggered by a piece of work that we did on how we had come to the situation where so many members of the British Steel pension scheme had been mis-sold the move out of the scheme into private pension arrangements. In that case, we looked at the role of the FCA as the lead regulator—again, a very useful PAC session flowed from it. In the wake of that, we had various requests. Just last week, we published a report on a perhaps less well-known example, but an older one: the privatisation of part of the Atomic Energy Authority and what happened to the pensioners in that case. That one dates back a long way.
We are not an ombudsman or regulator ourselves, but those cases come to us because they have fallen down the gaps between existing statutory structures. The MPs involved, when they have understood the impact on their constituents, have said, “Actually, this is something that Parliament needs to be better aware of, because it suggests that we haven’t got these arrangements right.” Two years ago, I would not have predicted that as an area of impact for the NAO, but we have been able to respond to two or three of them. They are focusing attention on whether we have got the coverage of such risks to consumers, pensioners and so on right.
Q43 Dame Meg Hillier: There is a risk there. I have been looking particularly at the most recent one with your staff. One of the challenges is that a whole slew of things like that are out there, and the National Audit Office cannot absorb them all. Do you see some other body having to take something on, once you have identified it? You have done two now, and I have heard about a third that someone has concerns about, which dates back even further than the Atomic Energy Authority one. You cannot rectify—you are not an ombudsman—so do you see a part of Government where that sort of work ought to be channelled to? Is that part of your thinking in picking up—
Gareth Davies: In the end, it would have to be the lead Departments responsible for policy in that area. Many of the regulators are interested and willing, but constrained by their statutory remit and so on. In the end, it would be a matter for Departments.
As with quite a lot of our work, it is about doing enough to illustrate the issue, but not just loading more examples of the same point, because we can make better use of our resource than doing that. Also, I say no to a lot of things, because clearly we are resource-constrained. That is one of the considerations I have in mind: what is in the public interest here?
This may be an interesting case in its own right, but actually those principles are already well established by our previous work, and we are not going to add anything to that. We certainly cannot become a failsafe ombudsman for cases that the rest of the system has not been able to pick up.
You are right that we have to be careful, but in that case, for two fairly small pieces of work, we have made quite a significant impact.
Q44 Jack Brereton: We are aware of the things you have been doing to try to improve the accessibility of some of your work to both Parliament and the public. How effective do you think they have been?
Gareth Davies: We are testing that in our questions to both MPs in our annual survey and the audited bodies we work with. The feedback has been positive on the last survey—we are getting the results in shortly on the current year. We will obviously track that very closely.
We have had good feedback on our new website, which launched in the last year. It had been a long time since that was updated, so we have been able to make it much easier to search and more intuitive. The search terms that people look for when they are trying to find a piece of NAO work now deliver much more reliable results, and the feedback on that has been very good.
We have continued that supply of lessons learned reports, which we write in as engaging a fashion as we can for practitioners. They are not particularly designed to support scrutiny sessions, but they are intended to be in the hands of the manager who is given a new programme to manage and to learn the good practice lessons we have picked up from similar programmes.
The combination of an updated website and a constant stream of a new format of reports seems to be making a difference.
Q45 Jack Brereton: Is there more that you think you can do, or that you are planning to do, to improve on this?
Gareth Davies: Definitely. The question is about using our resourcing to do the things that have the highest impact. This is a good place to mention our hubs, which are where we gather our subject matter expertise, if you like. Rather than our sector expertise on health and defence and so on, this is where we gather, say, our digital experts, procurement experts and so on.
Those hubs are having a big impact on the quality of our output in those areas. They are now bedding in pretty well; they have been established for about two years, so I would expect to see their impact grow now that they are maturing as functions.
Dame Fiona Reynolds: It is fair to say that our departmental overview is one of the things that has turned out to be particularly useful—not necessarily for audit or value for money but simply acting, for some very large Departments, as a well-referenced source of information.
The use of the hubs and the development of that generic knowledge management function has been a real success in the NAO. There is lots more, potentially, where that came from. Ultimately, it is of course a matter—
Jack Brereton: Is that feedback from—
Q46 Chair: Sorry to interrupt. Could you just finish that sentence, Dame Fiona, because I did not hear the last bit? “There is a lot more where that came from for”—
Dame Fiona Reynolds: There is a lot more demand for those products. This comes back, of course, to the C&AG’s responsibility to manage the workload pressures; he has ultimate authority over what we do.
As the board is seeing, there is the need and demand from the PAC for a steady supply of value for money reports, and more Select Committees are interested in our work from a wider perspective—we do a little bit for them—so the demand is there. We are constantly in this juggling act of how to balance demand against the resource we have, but ultimately that is the responsibility of the C&AG.
Q47 Jack Brereton: And the feedback from Members of Parliament has been positive.
Dame Fiona Reynolds: It is positive; it is remarkably positive, actually. Clearly, the covid period was one of very high visibility for our work, and we are all very proud of what the NAO was able to do.
What is interesting is that that is not stopping. Covid itself is less front-page news—certainly on those aspects—but actually the energy supply report is a classic example of a new, urgent need. I suspect that we are in that world where there will always be those urgent needs.
At the same time, as the world gets more complicated and the challenges become more intricate, I always find it interesting how multiple Departments end up being involved in looking at carbon net zero—that is one example, and public health is another—where it is not a simple analysis. We need to be able to do those things.
Q48 Chair: We only have a couple of questions left. I want to bring in Mr Efford, who is very concerned about net zero and the climate crisis. Before I do that, I would like to pursue a little further this question of the knowledge hubs. In his book “The Art of Public Strategy”, Geoff Mulgan talks, in some footnote in the back that I have a habit of sticking my nose into, about the fact that after seven years in the centre—in the Cabinet Office, the Treasury and No. 10—he felt that he personally was the sort of corporate memory, which is a huge indictment of the system. I remember reading this and thinking that it was exactly how I felt after 16 years on the Public Accounts Committee: why wasn’t this knowledge captured? I seemed to remember more than they did when they were on their fourth or fifth permanent secretary over what was obviously a long period of time. He said that he put a case for knowledge management to the Treasury. It would have cost around £3 million, and it was inevitably turned down. Are you saying that your knowledge hubs might develop into the kind of tool that, had the Treasury said yes, they might have had access to many years ago?
Dame Fiona Reynolds: What I am saying is that we are finding them invaluable. I think that has been a real success story for the NAO—having this internal source of insight and knowledge of issues that are emerging, which I think it was very difficult to deliver before we had those collective groups. I am not drawing any wider conclusions from that.
Q49 Chair: No, but, C&AG, plainly, you are also potentially an in-house management consultancy for much of the public sector in central Government and its agencies. If this knowledge is so valuable, it ought to be valuable to them, oughtn’t it?
Gareth Davies: I always resist the description of us as consultants. The way I put it is: we have a very important audit job to do, on both the accounts and value for money, which is our prime responsibility, but doing that well means that we have a responsibility to make available the knowledge that we pick up in doing that.
Chair: Yes, that’s a better way of putting it than consultancy.
Gareth Davies: You can tell that is a well-practised line. What I was going to say is that, first of all, Government is doing some of this itself. The Manzoni agenda of setting up Government functions where they concentrate professional expertise and knowledge in specialist areas and the cult of the amateur is challenged in Departments by relying on those central functions has developed pretty strongly.
Q50 Chair: Even though Mr Manzoni has moved on?
Gareth Davies: Yes. Clearly, that is still the purpose of those operations, and they are maturing—at different rates, I think it is fair to say, but they are maturing. That is one area where that works particularly well, but the crucial thing then is how you marry that kind of subject matter expertise on to your sector specialists—defence, health and so on. We are working very hard on that. Obviously, we are much smaller than Government, so it is much easier to test these things at our scale. The most exciting things that we see happening are where our defence experts plug in with our digital hub expertise. We produced a report on Defence Digital, which demonstrated that we understood the Department and its challenges really well, but also best practice from digital in other sectors.
Chair: For a moment I thought you were going to say “better than it did”.
Gareth Davies: That is where this really works: where you combine the experts in the sector with the professional expertise. That is the prize. Government still has a long way to go in making that connection, but we do see good examples.
Q51 Clive Efford: I commend you for your target of being net zero by 2029. I suspect that is not just because it is the right thing to do but because you are going to be auditing a lot of people on climate change and if they turn around and say, “Well, what about you?”, it is the right thing to do in that respect as well. You have described climate change as perhaps the ultimate challenge for UK resilience. Given that, do you think that you have devoted enough resources to that issue?
Gareth Davies: I think so. We have made it a significant part of our programme because it is a significant part of the Government’s programme, so it is not a policy decision on our part; we are tracking Government policy on that. We started off with a big review a couple of years ago about how the Government are organising themselves to deliver net zero. That was influential on how BEIS, as the lead Department at that time, set about this challenge in co-ordinating across the whole of Government.
We followed that up with deeper dives into specific areas, such as the infrastructure for electric vehicles and the planting of trees. We have just published a report recently on the decarbonisation of the power supply. You will be able to see a net zero thread through a chunk of our programme—hopefully a proportionate chunk of our programme. Quite often now you will find that there is a net zero question to be asked on a topic that is actually focused on something else, and we do not miss those opportunities either. This is adding up to quite a body of work from us.
On the financial audit side, we are gearing up for what we expect to be—it is already happening in the private sector—a requirement to provide audit assurance on carbon budget statements and other emissions statements in accounts in the future. This is already a significant programme of work for the NAO, and we will make sure that our activity is proportionate to the Government effort on this.
Q52 Clive Efford: How far can you go in forecasting the cost? A lot of what climate change necessitates is action now to prevent X—a devastating impact on a public service, the economy, an industry or whatever—happening in the future. How much of your work can be, “If you do not do that, this is going to happen”?
Gareth Davies: An important point to make there is how we relate to the Climate Change Committee, which does a lot of the economic analysis as part of its projections of the carbon budgets. Essentially, the Climate Change Committee assesses the trajectory needed in all these areas of decarbonisation across the economy, and we certainly will not be duplicating that. We audit the Government’s performance in meeting their own objectives based on those challenges set by the CCC. As part of that, we are bound to learn which bits of this are proving to be good value for money and which are not.
We also have to deal with that thing that auditors are always challenged on, which is how you audit innovation. How do you avoid audit being seen as a dead hand of low-risk spending, when part of the stated plan for net zero requires technologies that have not yet been developed? For example, it is very important that we do not look suspiciously at R&D spending and challenge whether it was sensible, when we absolutely need new technologies to make progress in these areas. We are grappling at the moment with ensuring that we are seen to be able to cope with the fact that innovation is necessary and desirable, that there are good ways of managing the risks of R&D spending and that that is how we should audit it. I am very keen to head off a myth that I hear a lot: “We could not take a risk there, because the NAO would have been critical of us.” It is really important that we knock that on the head.
Q53 Clive Efford: Absolutely. Your push for net zero by 2029 involves retrofitting—I assume that it is retrofitting, and that you are not going into a new building—a heat pump system in your London offices. I have looked at heat pump systems quite a lot in relation to housing. For them to work, they require very efficient insulation. How challenging has retrofitting an office block been?
Gareth Davies: Significantly. Daniel might want to add to this. We set that objective for the reason you said, which is that everyone else is having to challenge themselves on this, so we must. But we have also done it because it is the best way of learning about these challenges. Rather than read it from a textbook and then ask a Government Department how it is doing its job, it is much better that we have had to grapple with the reality of it ourselves. Building heating will be a big one, and the carbon footprint of travelling to work will be another big one. Our supply chain is also very complex. How do you ensure that you have a net zero supply chain? That is not straightforward without much more assurance about the statements from your suppliers than we have at the moment. Working through this target is proving to us how difficult some of this is going to be.
Dame Fiona Reynolds: Before Daniel comes in, I should say that retrofit is the absolutely essential requirement; most of the buildings that are going to be occupied are already built. There is increasing collaborative work with other organisations, including my old one, the National Trust, and Historic England, to help businesses provide a path through this very difficult technology. Daniel will talk about the challenges that we face, and they are difficult, but I think that it is a collective exercise on which there will be increasing focus. Retrofit has to be a big part of the plan.
Daniel Lambauer: Two points. The first is on energy efficiency. That is something we have been focusing on for many years now, looking at the insulation of the building. We have an energy efficiency rating of C at the moment, which, for a building of our age, is quite good. We are trying to see what more we can do, which is absolutely essential for heat pump technology.
On the heat pump itself, we took some early steps this year by getting a couple of experts in to understand, in principle, whether the answer was just, “There’s no space at all for what you need.” That was not the case, so we are now procuring for a feasibility study, which is the next step—more in-depth expertise to really look at where it would go, what we would need to do and what the costs are. Obviously, we would then come back to you with some firmed-up proposals in our capital budget, were that to be the case.
Fiona has been great at giving us lots of contacts; we are talking to lots of other organisations as well, including internationally. In fact, we just talked about it among us while preparing for the hearing. There is a lot of work on that, and you are spot on: for us to become net zero in our operations, it is absolutely vital that we can make that work.
Q54 Chair: I am going to move on, because we hope to finish by half-past 10. It is now 12 and a half years since the then Government abolished the Audit Commission. It took two years to do it. In the last 10 years, I think it is fair to say that we have seen a steady decline in the quality of what is going on in the local government audit space and, indeed, several episodes of crash and burn. One thinks of Thurrock, Croydon, Northamptonshire and so on, and we now see more and more audits getting further and further behind. There is work going on: the Government said it wants to create a new system leader through a new Audit, Reporting and Governance Authority, but this seems to have been delayed. Given the importance of this and the growing nature of the problem, are you looking at devoting more resources to it?
Gareth Davies: We did a report recently on the latest state of play, and there is an upcoming Public Accounts Committee session on it shortly—[Interruption.]
Chair: Dame Meg is waving the report.
Gareth Davies: But you are right in your characterisation of the situation. It is not acceptable, and important parts of public money are not being audited on a timely basis—that is the fact of it. In defence of my former colleagues working on this work in the firms that do local audit, there are still some really good people with genuine expertise and commitment to getting this right in that field. It is crucial not just that they are retained, but that more people join them in those firms to do that work.
Q55 Chair: Quite, and it is the case that more firms are more cautious about doing the work now because of the problems and the lack of remuneration.
Gareth Davies: The crucial step was the recent procurement that Public Sector Audit Appointments ran. They were able to secure auditors for the next five years, which did not look like a given at one stage. That was quite an achievement, but at a price, and the price was a very significant increase in the cost of the work that Government is going to have to fund local authorities to pay. It is not the place to do a 12-year post-mortem on all these changes, but certainly some of the initial cost savings have been reversed by that—but necessarily, to ensure that the firms found this a viable part of their business to pursue and continue to invest in.
You are right about the new role for the FRC when it becomes ARGA, and they have made a very good appointment of a former colleague of mine, Neil Harris, who has taken on the role of leading their work on becoming the system leader. That is now established in shadow form, and DLUHC has agreed a memorandum of understanding with him and with the FRC. So there is progress, both on procurement and on the system leader arrangements, but there is a long way to go. This backlog is going to take some shifting.
Q56 Chair: Who is responsible for this, ultimately? Is it the permanent secretary of DLUHC, or is it the Treasury?
Gareth Davies: The regime is the responsibility of DLUHC, yes.
Q57 Chair: At the moment, it looks like there is drift. I am glad to hear you say that there is some progress under the bonnet, but it does not feel like it is going to get to a conclusion very soon.
Gareth Davies: I think the big advantage of the new contracts will be that they address the price reductions that were regarded as going too far in local audit. It now feels to me like a fair price for the job from this distance. Therefore, you can expect the discipline that used to exist on the firms to perform to the timetable required, which was very strict—we literally never missed these deadlines for many years in the past—to return. I think it will be a reasonable expectation: “You are getting a fair rate for the job; we now require you to resource this work in the way required.”
There is a really important point to add to that, which is that it is also a responsibility of local authorities. There is good evidence that the finance function has hollowed out in local authorities, under the same kind of market pressure as the audit firms have experienced, which is the difficulty of retaining and recruiting qualified people. But this won’t work if you just shout louder at the auditors. It absolutely needs a recommitment from local authorities, at both the member level and the officer level, to take this part of their responsibilities more seriously, prepare high-quality accounts that can be audited quickly and give proper assurance to taxpayers.
Q58 Dame Meg Hillier: There are an awful lot of outstanding audits; according to your own report, 12% of local government bodies have not had their audited accounts published for 2021-22. I wonder whether you could outline what your fears are. You have councils having to set new budgets without having an audit opinion on the previous year’s budgets, and in some cases on two years’ budgets. I should stress that it is not just councils; it is fire authorities, police authorities and others. You can’t predict the risk from your height, because you are not involved in every detail, but do you want to explain in financial terms what that means for council tax payers?
Gareth Davies: Late accountability clearly comes at a risk. Audits do turn up mis-statements in accounts and problems that need correcting, and obviously, if you are doing that late, that is a problem.
There is a more qualitative problem that is important to mention as well. This is reflected in feedback from the sector—both from members and officers and from auditors in local government. It has become a commoditised audit product, and we have lost the conversation that the district auditor would have with the leader of the council and the chief financial officer ahead of the budget setting, to say, “That’s an incredibly risky investment that you’re proposing to go into there. Have you thought it through? Can I see the risk assessment?” I think that the professional respect involved in that arrangement in the past led to better governance and better decision making. We have lost a bit of that, I think, in the commoditisation of the audit.
Q59 Dame Meg Hillier: You mean because the payment is being made to the firm that has to produce the—
Gareth Davies: Well, I think that senior people are spending less time with—actually, you will hear lots of treasurers in local authorities saying, “I don’t see the partner of the firm in the way that I used to see the district auditor. I certainly don’t have the quality of conversation that I used to have.” Of course, there are honourable exceptions to that. There is also the fact that the auditor could be a very useful buttress to the treasurer if something unwise was being proposed in the council.
It is interesting to see that mechanism start to re-emerge in one or two places. There was a well-publicised fallout in Bournemouth recently, and the leader of the council who resigned blamed the auditor for getting in the way of a budget decision. I took that as actually quite an encouraging sign that the audit process was working. I have no idea about the facts of that case, but it is just good to see some proper tension in the system, which used to exist and we worried that that had been lost.
Q60 Dame Meg Hillier: We have the issue of audit problems, but we also have the combined authorities. I actually spoke to all those elected Mayors when they were first elected, encouraging them to think about the audit arrangements. This is perhaps a bit beyond your remit, but do you have any thoughts or comments about how that works, given that there is endless talk on both sides of the political divide about more devolution at different times? What are your thoughts about that? I can see some big risks in that area as well.
Gareth Davies: The more money and real spending power that gets devolved to city regions and elected Mayors, the higher the expected accountability and standards of audit for those areas. I don’t think you can do it just by adding up the audits of the individual councils in a combined authority area. There has been talk about the model of public accounts committees for city regions—a greater Manchester PAC, for example. That would need proper resourcing to be effective and it would need some ability to take a view across the city region on how the money is being used. I don’t know what the policy prescription for that is, but it is an important area to pay attention to.
Chair: Thank you. That is a very interesting discussion, and I am sure it is one we will return to. That concludes today’s evidence session. Thank you all very much for coming along today. The Commission will now deliberate in private.