Public Accounts Commission
Oral evidence: National Audit Office Strategy 2025-30 and Main Estimate 2025/26
Wednesday 26 March 2025
Ordered by the House of Commons to be published on 26 March 2025.
Members present: Clive Efford (Chair); Phil Brickell; Sir Geoffrey Clifton-Brown; John Glen; Tom Hayes; Chris Vince.
Questions 1-32
Witnesses
I: Dame Fiona Reynolds DBE, Chair, The National Audit Office, Gareth Davies, Comptroller and Auditor General, The National Audit Office, and Rebecca Sheeran, Chief Operating Officer, The National Audit Office.
Witnesses: Dame Fiona Reynolds, Gareth Davies and Rebecca Sheeran.
Chair: Welcome to today’s meeting of the Public Accounts Commission, on the NAO’s new five-year strategy and main estimates for 2025-26. Could you introduce yourselves for the record, please?
Gareth Davies: Good morning. I am Gareth Davies, the Comptroller and Auditor General at the NAO.
Dame Fiona Reynolds: Hello, I am Fiona Reynolds, and I chair the board of the NAO.
Rebecca Sheeran: Hello, I am Rebecca Sheeran, the chief operating officer at the NAO.
Q1 Chair: You are very welcome. I will start the questioning. You highlighted in your strategy and in evidence to the PAC that you are looking to use your work as a platform to highlight and encourage positive innovation in Government. Do you think the NAO has previously acted as a barrier to innovation and risk taking?
Gareth Davies: No, I do not, but that is a perception that some have certainly expressed in the past—less so recently, but it is still there in the system. We took the opportunity of our new strategy to take that head-on.
Actually, we did that, first, for the positive reason that we think innovation will be an absolutely essential tool for Government as they try to meet increasing demand and tackle increasing risks, but with limited resources. We do not think that just doing the same thing but slightly better is going to cut it in the coming period, so innovation will be essential for delivering value for money for taxpayers. That is really why it is so central in our strategy, which, as you know, is focusing on productivity and resilience in Government.
But, as you suggest, there is also the opportunity to dispel what I think is a myth: that good auditing is somehow a barrier to innovation. The way it has been expressed to us in the past is that civil servants are sometimes reluctant to take risks with public money, because they think they will just be criticised in public in front of the PAC on the back of a critical NAO report. As I said in my speech in February, my experience of the PAC is much more that Members are likely to challenge sustained poor performance by public servants, rather than to criticise well-managed innovation.
Even so, we think that that bears stating very clearly, so we have said in our strategy that our work will recognise well-managed innovation where we find it; we will actually celebrate good examples where we think there are lessons to be learned from them for other organisations. There are examples where we have already done that in recent years, but we will do that more systematically in the next few years.
We will also pick topics where we think there are strong innovation lessons to be learned. We are working on a report to be published in the next few months, for example, on the use of data analytic techniques to prevent and detect fraud across Government. There is huge potential for significant savings by using the available technology. For example, it is very well used in the banks now, but it is not systemically used so much in Government. That is just one example where we think that highlighting successful innovation elsewhere can provide positive lessons for Government.
Q2 Chair: What about a situation where innovation has perhaps not gone as well as had been hoped? I suppose that that will be what influences Departments: if they see the NAO coming down heavy on that, nothing has changed, so how are you going to deal with those situations?
Gareth Davies: Exactly. The big focus here is on the discipline of risk management and setting a clear risk appetite. Good innovation is clearly not just about recklessly flinging public money around. If you take the well-known example of the vaccines in the pandemic, there was obviously a pressing need for something to be done very quickly, and a lot of expertise was quickly brought to bear on the development of vaccines. But there was a lot of risk taken with public money, and there were guarantees to drug companies to cover their losses in the case that the candidate vaccines did not work. We did not report that in a way that came down heavily on those examples.
If you take the audit of UKRI, that research and innovation agency spends a lot of money on research and development across sectors. We are doing a report on how its programme encourages or discourages innovation. Again, we are going to get right to the heart of what well-managed innovation looks like. What we are committing to is to highlight examples of investment in new techniques that have not paid off but still represent a valid and effective use of public money because the lessons from those experiments have been applied to future investments.
Q3 Chair: Dame Fiona, would you say that it has been part of the NAO’s institutional culture in the past to focus on what has gone wrong rather than what has gone right?
Dame Fiona Reynolds: Well, Chair, you have heard me say in the past that my passion is for us to have impact, and you can have impact in a number of ways. We certainly have pointed out, very clearly, where public money has been wasted, or where there have been investments that have not turned out for good. It is very important that we are able to do that, but our new strategy represents our determination to make sure that all our findings—whether on the grounds of money poorly spent or indeed well spent, in the case of innovation—lead to something positive.
Therefore, we are really passionate about having a positive influence on the way that Government plans and spends money in the future. So, yes: learn lessons and be clear. If we do need to say that things have gone badly, we will say so with absolute clarity, but we will turn everything we can towards making things better.
Gareth Davies: I will just add a very topical example. Yesterday, we published one of our lessons learned reports, which was on the use of private finance in infrastructure projects. We have taken all the NAO’s work over the decades on PFI and the PPP schemes that succeeded PFI, to extract the lessons from what were innovations at the time and inform the Government as they contemplate the use of private finance for infrastructure now. That is a great example of taking past innovations, extracting the lessons and putting them in front of the people who will be making policy and decisions on this, so that there is time to get it right, learn from the past and so on. It is a good example of this attitude in action.
Q4 Sir Geoffrey Clifton-Brown: With your indulgence, Chair, I will just make a comment on that last discussion. I think the PAC and the NAO are concentrated too much on criticising what has gone wrong and not on calling out when things go right. The other day in our cyber hearing, when the Cabinet Office had fulfilled its quota of cyber specialists, I actually congratulated Cat Little on that performance. Both of us—the PAC and the NAO—perhaps need a slight cultural change in that respect.
However, to come to my question, C&AG and Dame Fiona, the high-level ambition of the NAO is to support more productive and resilient public services. We are at a time of great change, which could perhaps be done through new technology, in which case the Government have to find money to deal with legacy services. There also has to be a cultural change within the civil service to bring that about. Both things seem to be fairly slow. There are other themes that perhaps go across your Government auditing, such as climate change and cyber. How will you deal with those things in terms of productivity and the presentation of departmental reports and accounts?
Gareth Davies: The reason we have alighted on productivity and resilience is partly because of that. You mentioned two systemic risks that, like all Governments, this Government are having to tackle: climate change and cyber-security. You could add into that public health risks. We have just seen a pandemic, and we have reported on antimicrobial resistance, which is another very significant risk that the country has to tackle. We now know, very painfully, that if those risks are not well managed and the country lacks resilience, they can be very expensive for the Government. There was the £400 billion cost of covid, which is reflected in the cost of borrowing now every year. That is why we have alighted on these as the two value for money themes.
Your examples were climate change and cyber-security. First, we will reflect in individual pieces of work we do on where those risks need to be managed well. We are also continuing our approach of thematic reports across the whole of Government in those areas. As you know from the PAC agenda, we have recently reported on cyber-security across Government and how that risk is being tackled. We have previously reported on how Government is organised to address climate change risks. We will continue with that systemic programme across the national risk register. That balance of resilience to risks with service productivity feels to us to be a good summary of the value for money challenge facing Government.
Q5 Sir Geoffrey Clifton-Brown: And change in technology, to bring about increased productivity?
Gareth Davies: I gave a speech in February that focused on what is likely to drive the productivity improvement we need. Clearly, technology is the big opportunity there. We are seeing that in our own work, and we can say more about that later when we talk about our estimate.
I also said in February that it would be a mistake to think it is all about the technology. It is certainly a very important tool and will need to be used well, but it is also about leadership and skills—the specialist skills to do this well. As we have said many times, anybody can cut spending; it is making genuine efficiency improvements that takes skilled leadership and management. We must not underestimate that.
It is also about how services are organised. It is about the whole-system approach to achieving better outcomes for less money, including the central/local way that decisions are made. But it is also about recognising, across Government, that a lot of the important risks that the Government are taking cut across Departments. So getting the right system organisation for delivering greater efficiency is also crucial. Technology is essential, but there is more to it than that.
Dame Fiona Reynolds: On the strategy, the challenges the Government and the country face are really serious. In many ways, you might feel that it is a heroic ambition for the NAO to include improving public services, and the resilience and productivity of public services, at the heart of our new strategy, but that is very much about recognising that we have an insight across Government into the way that money is spent well, badly, inefficiently or in ways that do not understand the consequential impacts, which are often unseen at the initiation of a programme or project.
What we feel is that we have a lot more to add by bringing together all the insights from our work and our experience, and by helping Government, more proactively, to solve these problems. They will mostly be a combination of things. It will not be a matter of technology alone. It is a lot about leadership, experience and learning—the cumulative knowledge as a result of having watched over the last years the way that money is spent or not.
It is important to understand that our strategy is a real step change in the way we are going to use our insights, but also in our relationship with Government, in offering solutions and offering our experience more proactively. We are very proud of that, but it is clear that it is a cultural change for us, as well as for those in government.
Q6 Sir Geoffrey Clifton-Brown: Clearly, all your work is dedicated towards securing the way public money is spent. We are just about to have a step change in the way local government is organised. We know very well the problems with local government auditing at the current time, let alone what might happen in the future. Billions are going to be transferred from central Government to local government—to these newly created combined authorities. Is there a danger that we start to lose control of the way that public spending is organised?
Gareth Davies: Certainly, the quality of management, risk management and financial management needs to be commensurate with the responsibilities that are being passed to these new structures. With greater responsibility and larger amounts of money, you need stronger systems and better assurance.
As you say, the state of external audit in local government at the moment is nowhere near where it will need to be to deal with that properly. The Government is legislating at the moment to bring in a local audit office, to strengthen the local audit and get back to where we should be, which is timely, robust audited accounts. That is just a basic requirement, before we get into complex risk management.
But then, as you say, if significant amounts of money are going to be devolved to these new structures locally, the governance, management and financial management in those organisations need to be strong. There is an opportunity, actually, with the smaller number of bigger organisations, to recruit and retain the talent needed to do a good job of that in financial management, but that will not happen automatically.
The sector has a big responsibility here to understand the importance of a pipeline of well-trained, well-experienced financial managers and to make sure that finance is not treated as an admin function that can be cut when cuts are needed. You have highlighted a really important point—that the quality of financial management in those new structures needs to be commensurate to the risk.
Q7 John Glen: On that point, your answer reflected the concern around managing money in new entities, but what you may have is a variable geometry across the country, with three or four existing unitaries fusing some functions and transport and infrastructure investment into a new entity. Do you have confidence that you can address the issue of duplication, with combined entities having clear functional responsibility against their legacy home organisations? One of the roles that you surely must be able to fulfil is in respect of sort of value for money around that aggregation decision.
Gareth Davies: Of course, our responsibilities do not extend to auditing individual local authorities on either accounts or value for money. It was very carefully delineated at the time that the Audit Commission was abolished that the NAO could look only at how the national systems apply at a local level. This does open up an opportunity to address the issue you raised. Greater Manchester is regarded as the most developed arrangement where you have unitary authorities collaborating on sub-regional topics like public transport—
John Glen: We need to learn the lessons from good practice.
Gareth Davies: I do not think that even Greater Manchester would say that everything has been equally successful. We are thinking about whether we could play a useful role in extracting some of the lessons there, both positive and negative, to inform how the more immature structures could usefully go about that new task.
John Glen: That is encouraging. Thank you.
Q8 Phil Brickell: Part of your strategy talks about increasing influence not only with the Public Accounts Committee but with departmental Select Committees. Your work with the PAC is well known and well understood, but to what extent do you think more could be done to support and work closely with departmental Select Committees?
Gareth Davies: We do regard ourselves as being here to serve Parliament as a whole. Clearly, PAC is statutorily the main focus for the NAO’s work, and the Public Accounts Committee has first call on the reports we produce, which I think is well understood.
The issue is then about prioritisation within our total resources, because clearly—like everybody—our resources are finite. What we try to do, first of all, is to make sure that we have good links with every Select Committee in the House of Commons. Since the election I have met every Select Committee Chair outside PAC, including the Chair of the Environmental Audit Committee, with which we have a pretty close working relationship already.
We are continuing our programme of secondments. Between eight and 10 NAO staff at any one time are on secondment to Parliament, nearly all of them on the staff of different Select Committees. That is a very well-established and well-received operation, which is obviously very good for the development of our staff but also very well used by those Select Committees.
We respond to requests for briefings, both private and public, from Select Committees. I will give evidence in public to the Housing, Communities and Local Government Committee in April, off the back of our report on local government financial sustainability. That is a typical example of the way in which we support the work on individual Select Committee inquiries.
I have had opening meetings with every Chair to ensure that we then have a good dialogue and a good channel of communication, so that when they spot something we are doing that they are particularly interested in or they would like to ask us to help with a particular topic, there is easy communication in both directions.
Q9 Phil Brickell: You mentioned finite resources, which we will come to slightly later, so I do not want to pre-empt that, but do you have the resources to do as much engagement and work with departmental Select Committees as you would like?
Gareth Davies: “Enough” is a subjective concept in all this. We certainly think we can make a meaningful contribution to the other Select Committees outside the PAC with the resources we have, which are set out in our estimate. Could we productively use more? Yes, of course we could. But given the pressure on our resources, as you have seen in the rest of the estimate, this feels like an appropriate balance for us to strike. As I say, I think the other Select Committees are genuinely positive about the contribution that we are able to make, even with the resources we now have.
Rebecca Sheeran: Might I give an example of the support we give to other Select Committees? In the last year we have produced 18 tailored reports for Select Committees. That includes our programme of departmental overviews, which give an overview of departmental finances, and they have all been quite well received.
Q10 Phil Brickell: That is very helpful. Finally, to what extent do you think there is a synergy to be gained around working more closely with the House Service—for instance, with the Scrutiny Unit—to look at the spending review, for example?
Gareth Davies: Rebecca, might want to add to this. We have a good relationship with the Scrutiny Unit and the House of Commons Library. Again, we have had exchanges of staff in both directions. We give talks at their events and they give talks at ours, and we collaborate on individual pieces of work where, for example, there is a topic that we are currently working on and they become aware of that, and want to engage.
Rebecca, do you have anything to add?
Rebecca Sheeran: No. I just emphasise that we have quite a long-standing secondment relationship with the Scrutiny Unit, which is probably our key point of close working.
Q11 Chris Vince: Your report states that main estimate is set to increase by £8.9 million compared with the current financial year. I understand that is in part due to new auditing responsibilities, but it would be useful to know the balance in that increase between new audit responsibilities and meeting the demands of advanced audit standards. Also, will you give more detail about the £1.5 million for “one-off costs of new work”?
Gareth Davies: There is a lot in that question, but that is the heart of the estimate, so I will take you through the big chunks of it. The first one is audit quality. We have been on a long journey to improve our audit quality in response to new auditing and regulatory standards. Audits, in both the private and public sectors, are unrecognisable from five years ago. We have worked very hard on that, in the face of some quiet challenging feedback from the FRC’s inspections of our work in the previous couple of years.
I am pleased to say that the results the FRC will publish in the next few weeks show a very significant improvement, so much so that every audit of ours that they have inspected from the ‘23-24 audit cycle has met the required standard. This is the first time the NAO has been in that position, so we are doing something right on audit quality. It is not time to declare victory on that until we see it sustained over many years, but the investments are paying off.
This estimate includes £2.5 million to complete that series of investments, particularly, this time, in respect of the specialist advice we need to meet the regulatory standards on complex judgments in the account—financial instrument valuation, actuarial valuation, property valuation and so on—for which, nowadays, the auditing standards require independent expertise to be applied in support of the audit. The first chunk is about completing the journey on audit quality.
As you said, we are being required to audit new organisations—that is not a voluntary choice on our part. Those organisations include new public bodies—for example, we are auditing the accounts of the Infected Blood Compensation Authority for the first time this summer, as well as a significant part of Cabinet Office’s arm’s length bodies, and a handful of other new ones this year, with more to come next year.
There are also bodies that already existed but that are coming inside the public sector boundary, so we are required to take over the audit from their private sector auditors. By far the biggest examples are the train operating companies, four of which are already inside the public sector boundary, with the others slated to move across by next year.
This is a good example of where things have moved on since we produced the estimate. As you will have seen in the estimate, we budgeted for two of those new organisations for ’25-26; it now looks like there will be five or six—the final number will be confirmed very shortly. As that became clear in the last few weeks, we have done a lot of planning to see how much of that we can accommodate with this estimate.
The answer is that it will not be easy, because these are large organisations. Train operating companies such as South West Trains and Greater Anglia trains are big organisations, and there are fairly significant audit risks in those audits. That will need us to gear up significantly, beyond the amount we had expected. We regard that as a productivity challenge to the NAO. We need to absorb as much of it as possible in this estimate, but we did not put a big contingency in here at all.
We may have to come back to the Commission later in the year with a supplementary estimate, if it proves to be untenable, but we will do our very best to accommodate as much as possible through productivity improvements. That is not just a bland promise: we are seeing some tangible productivity improvements coming from our investment in technology, which I can share with you later. New work is another pressure, then.
When the train operating companies come across, they will pay us audit fees, so the costs we need to reflect in the estimate are the set-up costs that we do not pass on to the companies themselves. That is our long-standing practice. As we familiarise ourselves with, for example, a new sector—it is not the choice of the train operating companies to appoint us as their auditors—it has always been our practice to absorb the set-up costs in the first year. Thereafter, they will cover their own costs through the audit fees. However, some of the new public bodies do need to be paid for entirely out of the estimate—for example, the audit of the Infected Blood Compensation Authority will be funded by the estimate.
The final chunk of budget pressure for next year is our pay award. Clearly, every employer has to pay the extra national insurance contributions, but our pay award is based on our benchmarking of how we maintain a competitive position. As we have discussed with the Commission before, we are in direct competition for qualified auditors with not only the public sector but the private firms. Our pay award estimate is arrived at through very careful benchmarking of what it would take to maintain our turnover at current levels. We are, for the first time in many years, seeing good retention rates, and we are determined to keep it that way in the interest of quality and delivery.
Q12 Chris Vince: On the £1.5 million, I will rephrase my question based on what you just said. I was going to ask is whether we should expect to see that in future estimates, but the simple answer to that is that it depends on whether you get any work, doesn’t it?
On staffing increases, I am a visual learner, so I am particularly interested in graphs, and the graph shows that the prediction has gone from 843 staff to 1,127. I recognise that a lot of what you just said is probably part of the reason for that. At the moment the graph is going up; do you predict there will be a time when that will level out and plateau?
Gareth Davies: You have to start an answer to a question like that with “All other things being equal,” but it is based on what we know at the moment. Of course, the Government have started announcing the abolition of public bodies as well as the creation of public bodies. If you take NHS England, for example, there will not be any impact in the year we are talking about here, because there will still be the audit of that system to carry out over that period, but in due course it will depend on what structures replace NHS England. That could have the effect of reducing our workload.
For example, if more is aggregated into larger units, that reduces audit workload, because we audit to a level of materiality, so we will not have to test at such a low level if there are a smaller number of large organisations. I assume that the NHS will not be the only bit of government that is reorganised in that way, so we are keeping a very close eye on and tracking closely the future workload implications of the restructuring of public services and Departments.
At the moment, we think that, all other things being equal, it will not go any higher than that. The reason why it is going up in the next couple of years is partly the new work. It also important point to mention the fact that we are insourcing some of the work that we have previously outsourced to the firms. That is because the price differential has become quite severe, partly due to the way that the firms’ own economics have developed. They are concentrating their work on larger, riskier and more complex entities. Essentially, we now agree with the firms, and they agree with us, that we cannot afford to use them for straightforward public bodies in the way we did in the past, so we are insourcing the more straightforward organisations.
To give you an illustration of the productivity gain from that, for the nine audits we have insourced for the current year, we have been able to budget for half a million pounds less than we would have had to spend if they had continued to be outsourced. So this is a serious productivity improvement for the same audit quality.
Where we will still need to outsource our work is for audits of a very specialised type, for which we do not have enough resources to maintain a specialist team. A good example of that is UK Export Finance, which essentially has an insurance structure. We expect to have to continue to outsource that, because developments in auditing standards for insurance-type organisations are now very complex. We will continue to outsource where we have that requirement.
Our plans over the next two or three years are to move our outsourcing down from around 20% to 15% of our audits. That will save us around £1.5 million a year by the time the process is complete, but to do that we need a headcount increase ourselves so that we can deliver that work more efficiently. The volume of the work and the insourcing are the two reasons for the headcount improvement.
Q13 Chris Vince: I have one more question. I am reassured that you said auditing public bodies is the straightforward bit, rather than the complicated audits. In a practical sense, you have London and Newcastle headquarters; will the ever-changing feast of the audits you do and the challenges that come with them lead to any change in staffing numbers?
Gareth Davies: We are trying to concentrate as much of our increased recruitment as possible in Newcastle. It is obviously a different recruitment market, which gives us really good access to high-quality auditors from that part of the world, and we have a little more capacity in our Newcastle office than in our London office to increase headcount. For those two reasons, we think more of the increase will be there than in London.
Q14 John Glen: Can we consider your personnel in more granularity? Staff is 70% of your costs, and this coming year the amount you will spend on staff will go up by 11.6%. That will increase the average staffing level by 58 full-time equivalents. Yet when we look at your plans for graduate recruitment, we see they are up by nearly 43%, from a typical 70 to 100. Given that there is an opportunity for some degree of automation in a lot of work at the lower level, how would you justify that rather abnormal increase in your graduate intake this coming year?
Gareth Davies: We did take in 100 in the most recent intake last September but, as it happens, we are forecasting quite a significant reduction on that for this September. Again, things have moved on since the estimate was produced, so it is worth explaining.
First, our retention of newly qualified auditors has improved. We have been working very hard on that for some years because, having worked hard to train people and see them become expert in this type of auditing, it is in our interest to retain as many as we can. We budget for around about 20% of those people leaving each year. At the moment we are on about 11% or 12%, so there is a material improvement in the number of people we have remaining with us. That has allowed us to bring down the graduate intake for this year to reflect that. Of course, it is not just numbers: those are now trained auditors ready to go, rather than new graduates who arrive not knowing what to do, so a quality improvement is implied in that as well.
Secondly, you mentioned the impact of new technology on productivity. We are starting to see, for the first time, that the implementation of new tools is reducing the volume of work required from the most junior part of our skill mix. It is early days, but we have implemented a tool across our audit practice called DataSnipper, which the firms are using as well.
Q15 John Glen: Does that mean graduates can do more themselves?
Gareth Davies: It means they are not doing the drudgery bit of the job as much as they were. For instance, taking a big audit sample, and then matching an invoice to a supporting record and to what is in the trial balance, was a very manual process in the past. This tool makes that three times faster, automated and, to be honest, more interesting as well.
There are lots of positives about this. There is this idea that you have to go through a tedious spell of training to become a qualified auditor, but that is changing visibly now, and we think this is just the start. I am not claiming that this will affect large volumes of staff in one go, but we estimate that, just on the first few experiences, we were able to trim our recruitment by five graduates just through that one tool.
It is the beginning of what is clearly going to be a big development in auditing. Rather than just automating bits of the process, as that tool does, once we get to the point where we have downloaded the ledger from the Government Department, through a portal, and been able to apply AI tools to spot anomalies in the data, and to look at the whole population of transactions, not just the sample test, this is going to be a radically different audit in a few years’ time. The profession is grappling with the implications for its training model. Where are the qualified auditors of the future coming from if we need fewer? I think it does not go to zero, but instead of this pyramid we have had for decades, people are expecting it to be a much more gentle gradient in future.
Q16 John Glen: That is really helpful, and it gives us a good understanding of the evolution in the work profile for your graduates, but given the presumably significant costs of putting people through formal professional qualifications, and the attrition that you will have—many of your staff start there, go off and work in a professional services firm and come back again—have you given any thought to what sort of mechanisms you put in place to ensure that we get value for money for that investment in the training, and that even if people leave for a season there is an incentive to anchor them back in?
Gareth Davies: Our retention rate at qualification is a lot better than the average of the firms. That is partly because we are a unique organisation.
John Glen: You attract a different crowd of people.
Gareth Davies: We do, and if we do our job well, we get people addicted to the interest of the work. If that is your area of interest, the range of organisations that we have access to is very difficult to replicate elsewhere. Even at 80% retention—and we are doing a bit better than that now—it is a lot better than the firms see at qualification. We start from a good place on this. One of the reasons that we have got better retention now is that we changed our grading structure because it was obvious to us that it was taking too long after qualification to obtain the audit manager grade. We have restructured so that we now have audit managers and senior audit managers, which has given us faster career progression, greater exposure to management responsibility earlier, and has really helped to retain very well qualified people once they qualify. I think that has also helped.
Beyond that, at the moment we are very pleased with where we are on retention, so we are not planning any big changes in the short term. We will just have to keep an eye on this.
Q17 John Glen: Do you compel people to lock in for a certain number of years after qualifications?
Gareth Davies: No, we don’t. On the main audit qualification, people are free to resign when they qualify. That is quite standard in the industry now. Where we pay for a postgraduate-type qualification—for example, an MSc—which is quite unusual, we have lock-in around that. Those are bespoke arrangements, so we require people to work for us or pay some of it back if they leave within a certain time.
Q18 Chair: You have said the retention of staff has improved. I have been here many times when you have spoken about the difficulties of recruitment and retention, so that is good to hear. Do you think that the pay award of 3.5% was pitched about right—that you came to the right conclusion?
Gareth Davies: We have looked at this several times as things change around us. In answer to your question, we think that is about right for maintaining the continuity of staff that we have managed to achieve. As I explained, given what is coming our way in the train operating companies, we absolutely cannot afford to see our turnover increase beyond where it is now. That remains business-critical for us as an organisation.
To put that in context, last year our pay award was 3%; the civil service pay award was 5% for the same year, and I think that was noticed by our staff. In the private firms, the benchmarking data we have shows that it was between 4% and 5%. Coming forward to this year, although we don’t know where the civil service will settle, we think we have benchmarked well with the private sector. If at 3.5% we are slightly above the civil service outcome for this year, taking the two years together we will still be below where they have been. I will bring Fiona in, because the board is challenged on this as well, but for those reasons we think we are at about the right spot.
Q19 Chair: Dame Fiona, the staff and the unions reacted positively to it.
Dame Fiona Reynolds: Yes, indeed. I think that is also because we have spent a lot of time ensuring that our relationship with the union is constructive and requires us to work with them over the whole year on issues other than pay alone. We have seen a bit of a step change in the quality of that relationship overall. We are obviously pleased that they are supporting the 3.5%, but it is due to other, longer-term factors than pay alone.
The board spent a lot of time discussing this issue. As you can imagine, it is a very important one both for staff retention and for the wider sense of what we are offering our people, who often see the private sector as their main comparator, not the civil service, in order for them to stay with us and give us that long-term investment of time and commitment. We would not be putting this forward if we did not feel that it was absolutely at the right level. We feel very strongly that this is part of our more strategic relationship with the staff, building their loyalty and commitment and ensuring that we are well equipped to do the work—which is growing, as you have heard—that we are required to do. It is not a matter taken at all lightly.
Q20 Chair: So you are confident that you will not be coming back for another estimate for a further pay award?
Dame Fiona Reynolds: Our intention, certainly, is not to come back to you on pay; but we need to leave that option open—as Gareth said, there is a possibility that we might get a very significant amount of new work. But we are expecting this pay award to be one that will sit right for the entire year.
Q21 Chair: What has been the financial impact of previously outsourced audits being brought in-house?
Gareth Davies: I covered a bit of this earlier on. In this year, as I mentioned, we have brought nine of the audits we used to outsource in-house, and we have been able to budget for £0.5 million less cost than if we had not done that. That is pretty significant, on just nine audits. It illustrates that the private sector market has changed fundamentally in recent years: the firms that we use are much more selective about the audits they take on, and their fees have risen significantly to meet regulatory standards. So now we, in turn, have to be much more discerning in the audits we ask them to do for us.
We have got a new procurement coming up—a new framework contract, where we will be reflecting this insourcing plan and moving from about 20% a couple of years ago to 15% within the next two or three years, just gradually managing that additional workload for ourselves. Our estimate is that that will mean that that is costing about £1.5 million less than if we had continued to outsource.
Q22 Chair: What proportion of the audits do you anticipate outsourcing as we go forward?
Gareth Davies: Getting to 15% by 2027 is our plan—still a significant number of audits. For the reasons I gave earlier, that is not just the fact that we are getting specialist expertise where we need it, but also that we are working with several of the large firms, and we get to see the developments in their methodology and their approach to new technology, which has definitely been some of the inspiration behind our own developments. There are strategic benefits of continuing to have some level of outsourcing, to ensure that we are in touch with developments in the profession.
Q23 Chair: How do you come to a conclusion in assessing whether it is better to outsource an audit or to conduct it yourself? Is there a trade-off in terms of the standard of the auditing?
Gareth Davies: There is no quality difference. As I mentioned, we have seen a big increase in our own quality ratings; I must mention that they will be the best of any of the firms this year, because that has not been the position in the last two or three years. We are very pleased with that. But obviously you have to maintain that for it to be credible. So it is not a quality issue. The way we decide which audits to insource is essentially to ask how much specialist expertise we require from the firm. If it is well within our wheelhouse as an organisation, we should be doing those audits; that is our stance. Now, accepting that does mean that we have to take more of the resourcing risk. That is why the competitiveness of our offer to staff must be sufficient, because we are essentially transferring the resourcing risk from the private sector to ourselves, so we have to be able to staff up with the right quality of staff to do the work. But we are absolutely confident that the audits that we will be taking on are well within our sphere of capability.
Chair: Great.
Q24 John Glen: May I turn to the issue of laptops? Your capital budget will be 7% less, at £4 million, this year. How can you reassure us that you are deploying that at the most efficient level? Do you look at leasing? Can you reassure us that you are in line with best practice in terms of cyber risk and all those other things?
Rebecca Sheeran: Our total laptop estate is about 1,400, which allows for us to have some spares, and enough for temporary staff who join us during our busiest season. We manage our laptop estate through a rolling programme of investment; about £600,000 of the capital in the estimate is for replacement of laptops. We do use quite high-end laptops because of the volume of data that our teams have to wrangle with, and because we do need them to be of the highest information security standards. The reason why we replace them on a rolling basis is that that works best for our productivity and our resilience, so we are making sure that we are replacing them frequently enough that they are performing well and our people are not losing precious time due to underperformance of kit. That also spreads the cost across the four years that we expect them to last. The price we pay comes including a four-year warranty.
John Glen: Very comprehensive. Thank you.
Dame Fiona Reynolds: I wonder whether this is a good moment to talk about our capital budget. Our capital budgets are not predictable, apart from the laptops. We have spent money, as you know, on the new lease on the Newcastle office. We have also been improving the Buckingham Palace Road office, which has been incredibly successful and welcomed by staff. We also do have quite lumpy items coming occasionally, and I just feel it would be wise to—
John Glen: You are warning us that—
Dame Fiona Reynolds: I am warning you, indeed, that there is likely to be a bid—I cannot say when—for the decarbonisation of Buckingham Palace Road. It is likely to be a reasonably significant bid, and we need to do a lot of work to prepare for that, but our boilers are reaching the end of their useful life, and we obviously must consider both best practice in their replacement and the potential for being a model of good practice that others might find helpful. We have a wonderful heritage building which requires special treatment, so I am just flagging that this is something we are working on and we will at some point be coming to you.
Chair: We’ll take that.
Q25 Tom Hayes: This is a question to Gareth. It feels to me from listening to you that it is really important to the National Audit Office to remain responsive and adaptable within evolving policy landscapes, and that those landscapes can particularly be shifted when there is a change of political parties in Government or a change of Prime Minister. I was really struck by the report that the NAO put out in January looking at the Government’s mission around halving the incidence of violence against women and girls and supporting the Government to try to meet that. It felt like that report came through quite quickly after the election of the Government. Are there things that the NAO does when there is a new Government to be as quickly responsive as possible, so that it can start to bring to bear its analytical insights as quickly as possible?
Gareth Davies: Clearly, we keep our programme under constant review to make sure that it is relevant to what is going on. In that example, we had decided to do that work well before the election because it was explicitly an audit of the previous Government’s strategy for reducing violence against women and girls. Of course, there was assumed new topicality with the safer streets mission and so on. That is an example in which something we had already planned turned out to be particularly relevant.
We also look at our whole programme through the lens of the Government’s mission approach, to make sure that we are not the only ones left looking at silos when others are trying to look across systems. We have a good track record of doing that anyway. We have looked at, for example, clean energy as a whole system for some time. It is also important that we are not entirely driven by the way the Government are choosing to tackle those areas, because sometimes some of the value we add is by reporting on an unfashionable area that has been neglected. There are some very strong examples of that.
For example, nobody could understand why we wanted to look at how child trust funds were being taken up by the people who had received all that public money 12 years ago, because it was not part of the then Government’s agenda. However, our raising it and getting attention focused on the fact that there was a lot of public money in them that was about to miss its target—because people have lost contact with the money that was due to their 18-year-old—turned out to be really prescient and a useful piece of work that nobody was talking about.
Of course, for most of our programmes, we focus on the big risks to value for money in a way that is relevant to how Government are tackling it. That is why our strategy focus on productivity and resilience speaks very loudly to all those missions because it is a response to the value-for-money agenda that we can see the Government are having to grapple with in both those thematic areas. We are responsive all the time.
We are obviously responsive to PAC’s requirements as well. At any one time, if you take a snapshot of our programme, you will see long-planned work, work in response to PAC’s interest, something that is become much more topical because of the Government’s priorities, and the work in the dusty corners, as we call it, where nobody’s talking about it but we think it is important to examine.
Q26 Tom Hayes: You were saying earlier that you think it is possible, if not likely, that you will need to bring a supplementary estimate. On that topic, I appreciate that the NAO will be working on and responding to information that you hope will be as accurate, timely and complete as possible, but that is not always the case. When you have a change of Government, either because a new political party is elected or because you have a new Prime Minister, do you ever build contingency into the estimates that you make—realising, of course, that you cannot always predict what new bodies get created and what bodies get abolished?
Gareth Davies: No, we don’t. Our principle on budgeting is to have no contingency, but to have an understanding with the Commission that if it is absolutely unavoidable in order to do our job properly, we will come for a supplementary estimate. But obviously, it is a matter of pride for us as accountants that that is only when we have exhausted all the possibilities of internal efficiencies, reprioritisation and so on. You have an absolute assurance from me that when and if we do that, it is because we absolutely have to, not because we are saving ourselves a difficult challenge. That is important to say. That is a consistent approach across Government as well—not to build in contingencies just in case.
I will give you an example of how we have a responsive programme, because I think that is at the heart of your question. We pre-allocate about 75% or 80% of our resources on value-for-money work to a programme that is planned about 18 months into the future. We reserve about 20% or 25% of our value-for-money resource for responsive work. That team is always busy—they are never sitting around waiting for a commission—but it means that, at short notice, we can allocate work and resource to deliver something that is clearly required in the public interest or that PAC has a strong interest in. That mechanism has worked really well. Obviously we needed it in spades during the pandemic, but since then too, there has been a constant demand for responsive work.
Dame Fiona Reynolds: Sometimes, if I may say, that is in response to MPs’ concerns. We get a lot of requests to do work. We cannot always fulfil them, but occasionally there is a volume of asks for a particular piece of work and it is good to be in a position to be able to respond positively.
Q27 Tom Hayes: My constituents in Bournemouth East are always eager to achieve better outcomes for less money. That obviously links to the question of some of the changes made by the Government, whether that is about upping defence spending or bringing the NHS back under direct ministerial control. Of the changes that have been announced by the Government, are there any that particularly stand out to you as likely to lead you to request a supplementary estimate?
Gareth Davies: Not necessarily a supplementary estimate, but certainly there may be a reprioritising of our work programme. You mentioned defence, which is worth dwelling on briefly. Before the announcement of the increase in the MOD budget, we had already added a second director to our value-for-money team for defence work because we were having to do quite a lot of it.
If we had not already decided to do that, we would now, because it is one thing to take difficult priority decisions in Government to move money to defence—for obvious reasons in the current situation—but it is another thing to deliver real value for that extra spending. As you know from lots of PAC reports on defence procurement, it has not been a happy story in many cases there. I am sure there is a big expectation in Parliament that the NAO will continue to shed light, via the work of PAC, on whether that additional money is delivering the capability that it was expected to deliver. We are geared up to do that, and we have reprioritised our programme to be able to respond to that requirement.
In the opposite direction, a couple of years ago we reported on how the FCDO had managed the reduction in aid spending from 0.7% to 0.5%. There were a lot of lessons in there for how to minimise the negative impact of that on programmes around the world. Those lessons will definitely be applicable if spending is going further down from 0.5% to 0.3%. We look at both senses: whether the additional money is achieving what it was intended to, and how the reductions elsewhere are being managed to minimise the damage of that and to make sure that we are still getting value for money from what is left.
Q28 Tom Hayes: Has your investment in the audit transformation programme paid off?
Gareth Davies: It really has. I have talked a lot about our use of technology and so on, but that is possible only because we have given ourselves this platform through the audit transformation programme. That has lasted for four years. It is coming to an end formally in April. We have delivered what we said we would on budget and on time, which was obviously really important for us, given that we spend a lot of our time looking at whether the Government does that with its major programmes.
But, really, what has that given us? It has given us a new audit methodology, which is now compliant with the latest auditing standards. We have a new audit software platform called Apex, which is cloud-based, very resilient and allows us to plug in new analytic tools as they become available. After we have tested them and found them to be useful, we can plug them in and make them available to the whole staff.
It has also transformed our ability to understand where the quality risks and delivery risks are in our work, because it is essentially one big database now. The team that is responsible for our audit practice can instantly run a report that tells us things like, “How many audits have this as a significant risk? Have we applied the relevant expertise to those risks properly? Is the progress of our audit on track to deliver our pre-recess targets? And, if not, why not?”
With all of that, this is now a very powerful management information source, as well as a better audit tool, so we are very pleased with the outcome of all of that. And we have a functioning software platform that, first of all, has proven its effectiveness in use across all our audits, but has also received a vote of confidence from Audit Scotland, our sister organisation responsible for auditing the Scottish Government.
Audit Scotland are also adopting the Apex tool that we have developed, saving all the development costs they would otherwise have had to incur. They still obviously have to negotiate their own arrangement with the third-party technology partner that we worked with, but it is a massive saving to the UK taxpayer.
It is still well before people are ready to talk about this, but the new local audit agency will also have to develop an in-house audit capability. This tool is already there for it to consider—and, again, save the time and cost of development—if necessary. So in terms of taxpayer benefit, I am very proud of the result of that programme.
Q29 Tom Hayes: A final question from me: it sounds like, with that having been so successful, any further changes will be not transformative but iterative. Is that right?
Gareth Davies: Yes. The last big transformative one—the last piece of that jigsaw—is a high-security portal between us and every Government Department and arm’s length body, allowing us to import their data directly into our system to carry out the data analytics I was talking about earlier on. All of the big firms do that with their large company audits. That will be limited only, really, by the ability of each Government Department and public body to provide high-quality data and so on. A lot of testing has gone into the security of that.
That is the next big productivity gain—for everybody, actually. Once you can automate that process, it takes out a lot of the time and hassle, and the cost of providing data for the auditor and answering their queries—because the portal controls the raising and clearance of queries as well. That is the last big transformative bit to come in. After that, it really is about then deploying new tools as they become available from the market.
Q30 Sir Geoffrey Clifton-Brown: C&AG, figure 10 on page 34 of your estimates tells us where you get your income from. For the purposes of this question, I would like to just concentrate on your overseas work. The memorandum that we have on scheme of fees—with this Committee and yourselves—does not cover overseas work. The question that then arises is: what profit margin can you make on that overseas work? How do you set what profit you are going to make?
Gareth Davies: Well, at the moment we aim to cover our costs, including overheads. In other words, we make a contribution to the overheads that are relevant to that work, rather than seeking to make a margin on top of that. That is largely because, first of all, it is not high volume, as you can see; this is marginal activity in the scheme of the NAO’s overall operations.
Typically, that work is two main types. The first is doing international audits, so the auditing of international organisations. We audit the International Telecommunication Union, based in Geneva, which is a UN body; we have always audited a number of UN bodies over the years. They are competitive processes; they will invite bids from national audit offices of member countries, and we are typically always at the expensive end of those because, obviously, we have higher labour costs than many audit offices.
Some see their audits of such bodies as a matter of national prestige and they are prepared to make a loss on them. Our policy is not to do that, so if we cannot win the work with a proper fee, we will not do it. That is an important ethical as well as financial stance that we take. It means that we do not have too many of these things as well—but we do a good job when we get the opportunity, and it is very good development for our staff to work on them.
The second category of work is capacity building, which is more project based. That is sometimes FCDO-funded. Essentially, we have just done work with the audit offices of Tanzania and The Gambia, sharing some of our methodologies, approaches and training in a way that they find useful for building their own capacity. The FCDO will fund us for our costs plus overheads, rather than a profit margin. That is why the work is done on that basis at the moment.
Q31 Sir Geoffrey Clifton-Brown: Do any of your audits build in a profit element, or are they all done on costs and overheads?
Gareth Davies: Our UK work is clearly designed just to recover our costs, so there is no profit line in the NAO’s accounts—we are a public body. We have our costs and the fees we charge for some of our company audits, and the difference between those two numbers and the other income that we generate from our building and so on is the estimate that we ask the Commission to approve.
There would not be much sense in us building a profit margin for our UK work, because we would just have to ask you for a bigger estimate. It is the discretionary international work where we have to take a judgment about fees. The judgment we take at the moment, I think, protects our financial position and means that we are not making a loss on that work, which I think is important, but any more, I think we would struggle to win.
Q32 Phil Brickell: This is a question for Rebecca Sheeran. One of your income sources is renting out a proportion of your London offices. Can you tell the Commission what your current rental plans are, please?
Rebecca Sheeran: Our plan for the estimate next year is that we will let out eight of our floors that year, which, we hope, will bring in about £2.3 million of income. Our current position is that we expect to start the year with seven of those floors let out, so we will be working hard to attract a further tenant. We are of course a little dependent on London property markets and we contend with things like quite high business rates in Westminster, but we have recently put a lot of effort into updating our offer and our marketing information, appointing some new property agents to help us draw in that new tenant, and doing some small works like rebranding our main reception area so that it feels like an inclusive space. By the end of the five-year strategy period, we hope we will be able to let out 11 floors, which would represent about £3 million of income, and would mean that we were letting out some 58% of our floor space by that point.
Chair: That concludes today’s evidence session. I thank you very much for coming along this morning. The Commission will now deliberate in private.