Public Accounts Commission
Oral evidence: Public Accounts Commission
Tuesday 24 March 2020
Ordered by the House of Commons to be published on 24 March 2020.
Members present: Mr Richard Bacon (Chair); Jack Brereton; Mr Nicholas Brown; Sir Edward Leigh.
Questions 1-68
Witnesses
I: Gareth Davies, Comptroller & Auditor General, National Audit Office.
Witness: Gareth Davies.
Q1 Chair: Welcome. We are joined by Comptroller and Auditor General Mr Gareth Davies to discuss the National Audit Office’s strategy.
Good afternoon, Mr Davies, you are very welcome. We meet in extraordinary times, and it is probably worth saying that this commission, because it is statutory, is meeting in order to be able to lay your strategy before Parliament, as it is legally obliged to do, but this is almost certainly the last time we will meet in person like this. Later in our agenda, we will talk about how to work remotely, including on an even more important subject for you, your estimates—making sure you get your money. We will come on to that.
Can you say—because this is affecting everybody, and I am sure it is affecting your organisation as well already—how is covid-19 affecting your work, the timescales and the costs for the National Audit Office?
Gareth Davies: Yes, of course. On 16 March, we followed the Government’s advice immediately and have been working from home as an organisation since then. That has gone remarkably well.
Clearly, like everyone else, we have been concerned about the health and wellbeing of our staff. As of this morning, 27 staff were reported sick with symptoms of coronavirus, thankfully none of them seriously ill, as far as we are aware. We are keeping close tabs on that number, as you would expect. Another 50 are self-isolating, without symptoms, either for themselves or because of family members. That is significant—approaching 10% of our workforce already affected, and everyone else working from home—
Q2 Chair: And working harder to fill the gaps.
Gareth Davies: Indeed. Our work programme is so far largely intact, but it is only a matter of time before some of the extraordinary pressures on Departments and other public bodies have an impact on our work too. We are in close touch with the accounting officers and their teams in each Department, with Treasury taking an overall view, both on the timetable for the accounting process for this year and the audit timetable that goes with that, as well as the progress of our extensive programme of value for money projects. In one or two cases, we have already been approached by Departments quite reasonably saying that they need to divert staff who were supporting that work onto more urgent priorities and, of course, we understand and agree with that. We are adapting our own programmes accordingly. We will need to free up some resource ourselves to understand Government’s response to this crisis.
Auditors are important, but they are not life-and-death frontline workers, so we know not to get in the way when people are responding in this emergency mode. At some point, however, Parliament is going to need assurance on the huge sums being spent quite rightly to tackle this crisis. There will be a right time for us to engage with those making those decisions, understand the basis for them and report back to you.
Q3 Chair: Thank you. If we leave value for money aside for a moment, do you anticipate that the impact on the bodies you audit and the production of the accounts by you means that the accounts themselves will be significantly late this year?
Gareth Davies: We are getting different messages from different organisations and Departments. Some are very keen to stay with a timetable already set, which they believe they can still hit. Of course, we are co-operating and doing our part in those cases. Others are already saying it is very unlikely that they will be able to hit their original target date for laying their accounts. We are working closely with them to plan an alternative timetable.
It is too early to give you a full picture, but we are working with the Treasury accounts team very closely. At the moment, I think it is fair to say there will be some delays, and that may even mean that for some of the big Departments, which, as you know, all now get their accounts audited before the summer recess, that may not be possible this year. I think that is a realistic position.
Q4 Chair: Is the working assumption for your value for money work that the shape of the programme will stay roughly the same, but it will simply be slowed down?
Gareth Davies: I think there will be some changes to the shape of the programme. Work that is either nearly complete or mostly finished, we will finish off, unless there is a very good reason not to. With other work at much earlier stages, we are already being approached by one or two Departments that realise we are going to have to do some work on their coronavirus response and would prefer that we prioritise that over the things already in our programme. Clearly, my job is to take an overall view on the balance of the programme, to make sure there are no important VFM risks that are not being addressed and reported to Parliament. I will do that on a continuous basis.
Q5 Chair: Are there any functions that you have to carry out face to face still or that involve travel?
Gareth Davies: None at all. We are working completely remotely. I am the only person who has met anybody physically in the organisation this week and last week. We are very pleased with how our remote working plans have worked in practice. It helps that we are designed to be able to work remotely because we go on site to our audit clients. Our infrastructure is designed to accommodate that, but it has never been tested like this before. Including all our back-office functions, those people are all working from home too for the first time and all our systems are working well. That is a real tribute to the planning done by my predecessor and the team to put us in this position.
Q6 Chair: What contingency plans do you have in place if the situation deteriorates further, both for people being off because of illness or isolation or because of caring responsibilities?
Gareth Davies: We have close monitoring of the information on that, so people are letting us know whenever their availability is affected. We have our own list of priorities for both of our main streams of work on value for money and financial audit, so we are making sure the top priority work is resourced.
We have also identified a number of critical functions. The comptroller bit of my title refers to the Exchequer function of the National Audit Office. That is where we sign off transfers from the Consolidated Fund and other payments to Departments out of their parliamentary vote. Our job is to ensure that those can be accommodated within the amounts voted by Parliament, so that is an essential day-to-day function. We have particular resilience plans built into that, with back-up staff available if the current staff fall sick. Where we have critical functions such as that one, we have particular plans in place, and they are working well so far.
Chair: I have one more question and then I want to hand on to Sir Edward Leigh, who wants to ask about your strategic review. This is plainly a big change in the role of the state and its size. This is a hugely increased state intervention and that obviously affects the work you do. Do you think that will change the processes you engage in long term and the volume of work that you do?
Gareth Davies: It will certainly affect the shape of our programme. Whether it affects the volume, we will have to take a view as it becomes clearer where the risks lie on both accountability and value for money. But, for example, there are the huge volumes going through HMRC and DWP in the next few weeks and months, and there are significant transfers from MHCLG to local government—all of that happening as we speak. We will have to check that those big increases are adequately reflected in the focus of our work programme. That is bound to mean some changes in balance across Departments.
Q7 Sir Edward Leigh: Following on from that question, we are now looking at the biggest expansion of the state since the second world war. You may not be on the frontline in terms of saving lives or rolling out help to small businesses, which everyone is concerned about, but you will be on the frontline in finding out what went wrong and what went right. I made this point at the statement this morning on help for the self-employed: I am worried about the instinctive reaction in the DWP and Treasury. It will fine-tune its systems—it has complex systems and tapering systems—and it is obsessed with targeting help, but I feel there will be an enormous amount of waste, fraud and all the rest of it, which the PAC will be picking over for years. What is your initial reaction to what is going on? I seem to remember that over the years the Public Accounts Committee has tried to make the point to Government that simplification is often the key to avoiding duplication and waste.
Gareth Davies: Yes. It is obviously too early for me to comment on how Departments are responding because we are still learning the detail of that day by day. The sheer scale of it is, as you say, unprecedented. That feels appropriate, given the scale of risk to life and to the broader economy. The Government are trying to strike the right balance on those two critical priorities.
The lessons of the past will be of some relevance, although we have to be careful because we are not really comparing like with like in many of these examples. The last time there was such a huge scale of expenditure was the financial crisis in 2008, which was very much focused on the financial sector, obviously, and without any of the far-reaching health impacts that are a central element of the current crisis. We are already dredging our corporate memory for lessons from the large response in 2008. We are even looking at things like the NHS Plan investment in 2000, which is the last time a very large increase went through a single public service in a short space of time. Those are helpful guides, but I do not think they are anything like the scale that we are now dealing with, so we will have to understand very closely how the decisions are being taken. One of the themes of our strategic review—we did not have this in mind when we wrote it—is understanding lessons internationally, too, because this is a crisis that again is, maybe uniquely, worldwide and everybody is trying to solve the same problem. So understanding how well our Government’s response stands up against successful experience in other countries, and perhaps where it compares favourably to unsuccessful experience elsewhere, will be a rich source of evidence for us, too.
Q8 Sir Edward Leigh: You mentioned the strategic review. It just shows how these events pan out—when you started the job, you probably thought you would have months or years to gradually get into it, and here we have this crisis. Tell us a bit about the review. What is your perception of the organisation, as an outsider? Who did you speak to? What are your initial thoughts? What have you found out so far, coming fresh to the job?
Gareth Davies: Sure. What I found was a well-run organisation that had improved both its efficiency and impact over the last few years. A good measure of that is that the real cost of the NAO is 20% lower now than it was in 2010, but, judging by the feedback we have had from Parliament and other stakeholders, its impact is higher than it was in 2010. That is a very significant achievement; one that I inherited. I also inherited a very strong team, and strength and depth throughout the organisation.
I was not surprised, then, that the feedback from the people we audit and the others who rely on our work was largely positive, and in some cases very positive, across both financial audit and our value-for-money work. People appreciated the fact that the NAO had worked hard on its responsiveness and was able to deliver important pieces of work much more quickly than in the past. In some ways, building on that experience, the rest of the feedback was saying, “Therefore, it is now important that you build on that and add more value”. So the second half of our strategy is retaining our strengths but also delivering maximum value for the knowledge in the organisation.
A particular strand of this is making better use of the cumulative knowledge in the NAO. People have said, “Why is it that I have to read six of your Reports on a particular theme across different Departments to really extract the learning? Can’t you do more of that for us?” As you will see, that is an important strand in what we are now setting out to do. As you know, the wider audit industry is under real pressure at the moment, and the succession of reviews of regulation and quality of audit obviously has relevance to the NAO. Thankfully, we do not have examples of audit quality failure in the NAO’s work, but nobody there is complacent about the audit quality agenda. There has been a lot of work already, and more is set out in the strategy, to modernise our methodologies and apply the latest IT technologies that all the firms are now adopting, so there is a significant investment and training job for us to do on audit quality as well.
The final area you will have seen from the strategy is making sure we have the skills in our value-for-money work to tackle the issues that are going to be of most relevance to value for money in Government over the next few years. We have picked out digital services; the significant programme of work on net zero carbon across Government; and the infrastructure programme, which is obviously huge. Of course, just going on our previous conversation, we now also need to understand the response to recovery from the virus. Some of those skills will already be there, but not all of them, I suspect. Those are the main strands, but as you say, all were produced before the current crisis, so no doubt we will go on to talk about that.
Q9 Sir Edward Leigh: To sum up what you are saying, you are taking over a very well run organisation. What is the biggest change we are going to see, do you think? If you had not arrived on the scene—say Amyas had had another year, or something—would the organisation be very different, or will there be some fundamental change in a year or two years that would not have happened if you had not taken over? Do you have any thoughts in your mind? We are not going to hold you to it, but it is interesting to get your thinking.
Gareth Davies: It will be recognisably the same DNA in the organisation. That is a big strength of the NAO, actually: a strong culture of professionalism and quality of work.
I think the biggest impact I have had so far is on what it is like to work in the NAO: the management culture and the focus on people development. In my view, coming from the private sector as I did, that was the area that needed the most attention in my first year, and I think we are already starting to see some of the fruits of that. Quite rightly, there has been a significant focus on the task at the NAO over the past few years, with the need to respond to Brexit pressures and so on. That had been at the expense of training and development, focusing on people management and so on, which has been a big focus of my first year. That is probably the biggest single change.
Sir Edward Leigh: Well, we got through 25 minutes of this hearing without mentioning Brexit, so that is one advantage.
Q10 Chair: Thank you, Sir Edward; let’s hope we don’t mention it again.
The strategy talks about getting deeper insight. You mentioned the question of embedding the learning and making sure you glean more of what you already know, but presumably “deeper insight” means going further than that. Can you give us an example of the sorts of changes you would want to make, and how that might alter what you produce?
Gareth Davies: I am coming up now to 10 months in the job, but I am already slightly tired of reporting the same sort of findings on an issue, particularly for major projects, which have dominated my first year so far. Obviously, we have had major reports on HS2, Crossrail and other significant projects. What I think you will see from us, rather than just the surface analysis of what has gone wrong—clearly we have gone deeper than that in the past as well—is a much more usable set of findings.
For example, we are looking at the very early stages of the restoration and renewal project here in Parliament. Our aim is not to report findings, because obviously we are right at the starting gate of the new bodies that are being set up to deliver and sponsor that project, but to draw on all our learning so far and the experience across other major projects, and help those new organisations to get things right from the start.
That is a different approach. It is not easy for auditors because, instead of drawing on a track record of achievement or failure, you are helping people to focus on the risks right at the outset. For some of our resource, that is a much more productive use of our learning than just coming along afterwards when everything has failed and pointing it out to everyone.
Q11 Chair: Of course, that is something that you did on the Olympics. I think your first report on that came out six years before the Olympics, but you were still able to distil valuable lessons.
Gareth Davies: Yes, the NAO did a good job in reporting at the right time on the development of that huge exercise. We have something similar in mind, I guess, for the restoration and renewal work, but hopefully bringing much more experience of what goes wrong, particularly on the endemic issue of making spuriously accurate estimates far too early, and then spending 10 years explaining why the project appears to have gone over budget as more information becomes available.
Q12 Chair: Are you talking about estimates for major projects?
Gareth Davies: Yes. One of the key areas of learning that we have picked up is the need to reflect reality in estimates at the outset of these complex projects. The reality is that nobody knows the condition of the building or the detailed state of the market for supply that will exist at the time it is needed.
Real businesses that are engaging in very big capital projects, such as oil companies, are adept at using ranges to test the affordability of their plans before they commit to them, and then narrowing down those ranges as they get more and more information about the reality of the situation that they are working on. It is much more difficult for Government to work in that way, but it is really important that those lessons are learned.
Q13 Chair: This is the most interesting question for me. Plainly, you are going to get better at ensuring that you make better use of your own information. The deeper question, surely, is why the Government itself, internally, is so bad at corporate memory, and at keeping and learning lessons. What do you think is the reason for that?
Gareth Davies: Some of the reasons are well documented, such as the turnover of senior people in key roles on projects. The civil service has worked really hard under John Manzoni in the last few years to strengthen the professional functions across Government, rather than rely on generalists in Departments in every case. In several cases, that work has already proved very effective. It offers a more plausible route for learning systematically across Government and ensuring that professional advice is given at the right level to permanent secretaries and Ministers before commitments are made.
We have stressed in our strategy that we want to be able to face on to those Government functions more effectively than we have in the past, because we see them as a very effective way into the bloodstream of the civil service, which we lacked before those functions were strengthened. That offers some hope regarding the perennial problem of lessons bouncing off the civil service and post holders changing too rapidly. These functions are part of the answer to that.
Chair: I will bring in Sir Edward Leigh again, who wanted to ask you about enhancing IT.
Sir Edward Leigh: No—I think you were going to go to Nick, on the BBC.
Chair: I beg your pardon, Nicholas; I was going to come to you earlier. I will come back to the digital audit, and how it is going to be enhanced, but Mr Brown wanted to ask about the BBC and the Bank of England.
Q14 Mr Brown: Thank you so much for what you said about restoration and renewal; I really welcome National Audit Office intervention at this stage to help us to get through this very complex project, and to do it as well as we can.
The National Audit Office has a high reputation, as Sir Edward has said. That is confirmed by the survey work that Ipsos MORI has done for you, which is quoted in the Crowe report that we have been sent about the value for money review impact reporting.
Can I ask you about two relatively new areas of work, which are very different? The first is your work with the BBC. I am sure that the reputation of the National Audit Office will have attracted the BBC to ask it to get involved. The other area I want to ask about is the Bank of England. It is not a fear or a concern but—let me just ask the question—they are keen to have your reputation, and I would like to hear from you how keen they are on having your actual audit services.
Gareth Davies: They are two different cases. We have built up effective working relationships with both. With the BBC, we audit their accounts and we have a programme of value for money reviews. With the Bank of England, our remit is only for value for money. We are not the auditor of their accounts; that is still done by a private firm. We have a role in jointly approving the appointments of that firm, but we do not do the work, so it is a slightly different relationship across the two bodies.
As I have said, in both cases I have inherited strong working relationships. The BBC financial audit is our biggest and most complex, because it is a commercial group of companies. This is not the reason why we were appointed, but it has allowed us to develop our skills in auditing commercial groups, which is proving useful in other settings as well. It is a technically demanding but rewarding set of audits to carry out.
On the value for money work, it is fair to say that, like most Departments and organisations where we carry out value for money work, it is a sensitive topic between us and the leadership of the organisation. Clearly, they come to the Public Accounts Committee on the back of our Reports to account for their performance. We have a really productive set of planning discussions on that, where we set out our risk assessment and get the BBC’s and the Bank of England’s input to that.
We have carried out some productive and useful pieces of work in terms of accountability and improvement, but I think both organisations would also say that they had had direct benefit from that work too. Although there will have definitely been uncomfortable moments for both organisations in the public scrutiny element of our work, the reason Parliament asked us to get involved in both cases was to bring that different approach and that public accountability element, and in both cases there have been significant benefits.
Our work at the BBC has ranged across some of their large IT projects and their pay strategy. We looked at the merger of BBC Studios with their distribution arm most recently. Those are significant pieces of work for the NAO to take on. We do not audit any other major broadcasters at this stage, although we are about to take on S4C in Wales. It has been a big job for the NAO to skill up to do that effectively. The teams have performed well and we have delivered public benefit from that activity.
Q15 Mr Brown: That is pleasing to hear. May I ask a supplementary question? How far do you feel constrained in your relationship with the Bank of England?
Gareth Davies: Not constrained at all in the delivery of my statutory responsibilities for auditing VFM. It is clearly still a newish relationship. We are currently in the process of doing our third piece of value for money work with the Bank of England. The first two were very much on their internal arrangements in support services and other areas. This third one is the first time we have gone into some of their operational outward-facing roles.
We are looking at the role of the Bank and the other public bodies involved in the management of cash in the economy, which is obviously a huge topic, with reductions in the use of cash through the economy and significant challenges on access to cash among sections of the population. That is a big step for us, going into the operational delivery of the Bank, but so far we are pleased with the progress of our work.
Q16 Chair: Good. While we are still on the Bank of England, and before I bring in Sir Edward to talk about enhancing IT, can I ask you one more question about quantitative easing? Some years ago, Sir Nicholas Macpherson, when he was still permanent secretary of the Treasury, said to the Public Accounts Committee that he had not expected QE to be so large, he had not expected it to go on for so long and he could not say whether it was working. Central bank balance sheets are funny things, but what thoughts do you have about all that?
Gareth Davies: We are at the edges of our remit on those questions; clearly financial policy is not in my remit, and the Treasury Committee would be scrutinising those elements of policy.
Q17 Chair: But at the same time, it must be possible at some point to ask the question, “Was quantitative easing value for money?” and get an answer.
Gareth Davies: Yes. We have not tackled that directly yet.
Q18 Chair: Was it effective, efficient and economic? It is not an easy question.
Sir Edward Leigh: Above your pay grade, was it?
Gareth Davies: So far, the view has been that the policy issues are so intertwined that it is hard to separate out a technical value-for-money assessment on a question like that. That is one of the areas we will have to consider when we think about the current response, because the current response will need to be financed.
Debt is cheap at the moment, but it is not free, and the impact on the Government’s balance sheet will clearly be significant. One reason why the whole-of-Government accounts development has been so important, while a bit of a niche interest across Government, is that it sheds light on these balance sheet questions, and I am sure it will be important as the response to the virus plays out.
Q19 Sir Edward Leigh: So you want us to give you another £2 million for enhancing your IT skills. Those of us who have served on the PAC are scarred by I don’t know how many billions wasted on IT projects. This is on a far smaller scale, of course, but can you convince us that you are going to get value for money and a lot of it is not going to go down the pockets of consultants, and all the usual things that go wrong?
Gareth Davies: The reason why we need that investment over the next three years is to replace our audit software platform, which is our main operational IT investment. The one we have is many years old and it will soon be unsupported, so it needs replacing. At the same time, all the firms, including firms of our kind of size, in the rest of the economy are investing heavily in data analytics and IT tools that improve the efficiency of the audit but also improve its quality, because they allow you to look at the whole population of data in the accounts, rather than just picking samples in the traditional audit style. We definitely need to ensure that we are up with the pack in those investments.
That is why we need it. How do I assure you that we will use that money well? We are incredibly focused on applying the lessons that we have learned from auditing so many large IT projects. We never overestimate our own capabilities, but neither do we underestimate them; the digital services team that I have inherited is very strong and has a good track record of moving all our systems to the cloud. That is one reason why the last couple of weeks of homeworking have been so smooth for us. We are keen to ensure that the skills we have in-house are used to full effect and we do not spend money unnecessarily on expensive consultants.
However, we are going to need to buy in the basic platform, because pretending that we could develop our own audit system when all the major firms use third-party developers would just be folly. There will be some spend on the development itself, but we will use our own skills to maximum effect. We will also need our own auditors involved in the project, of course, because this will only work if it dovetails neatly with our audit methodology. So it is a good mix of in-house, but some necessary external investment.
Some of that £2 million, by the way, is for training and development, which we will do ourselves in-house because we have a very good team who are adept at that. The real value of this will be realised when all our teams feel comfortable using it and take full advantage of the efficiency it will give us.
Q20 Jack Brereton: You have already touched on the issues that you are having with the value-for-money work because of the coronavirus. Do you think that you will have to scale back further the work that you are doing because of it?
Gareth Davies: All the work in our programme is still relevant and valid; the question is whether it is still sufficiently high priority for the Departments affected by our work, because clearly we have to have co-operation from Departments and they have huge new calls on their resources, understandably. It is bound to reshape it, and I am sure we will be revising our programme—sometimes delaying things a short while, sometimes replacing them with something we think will be more relevant in the new circumstances.
We are transparent about that nowadays. All our work in progress is set out on our website: whenever we change something it is visible that we have changed priorities, and we keep that up to date. That planning process will carry on, but I will have to reprioritise significantly because Parliament will need our input to help with the scrutiny of what is happening at the moment. We are already receiving the first directions from accounting officers who have received those directions from their Ministers, which you would expect given the situation. There is a significant amount of work both in our accountability role but also in the value-for-money work.
Q21 Jack Brereton: You have put a particular emphasis on value-for-money work, particularly on things like sharing best practice. Will it have an impact on the ideas set out by you? Why was the National Audit Office not already doing some of that work?
Gareth Davies: There have been good examples of that over the years. We are describing a more systematic programme here, which has implications for how we organise ourselves internally as well. Alongside this strategy is an internal plan for ensuring that the organisation can deliver it. That means brigading our resources slightly differently.
At the moment, almost everyone is focused on a group of Departments in our structure, and obviously we need to continue a lot of that, but we also need more of our people to be organised into expertise groupings on major projects or digital projects, for example. Those changes will help us deliver a more systematic programme of the knowledge products that I was describing. The changes are not new but will have more impact, and hopefully these will get into the bloodstream of the civil service more effectively than we have previously managed.
Q22 Jack Brereton: It is always difficult for Government to take a long-term view on these things, and that will be even more challenging now, potentially. What will you be doing to make sure that Government are taking that long-term view?
Gareth Davies: That is a big responsibility of ours, and we are almost uniquely placed to be able to do that. I do not have to stand for election in four years’ time, and I have a single long term that allows me to hold the Government’s feet to the fire on their long-term commitments, essentially.
There is already a big question around the delivery of the net-zero carbon agenda, for example. Without the virus, that would be preoccupying the minds of accounting officers across Government given the scale of investments needed in replacing heating, in domestic housing, in the transport infrastructure, and so on. That does not go away because we are dealing with a pandemic; that challenge is still there.
There is an external timetable, too, that does not just lend itself to being delayed and put on the backburner. A good example of the useful role to be played by the NAO is in reminding the Government and Parliament of the uncomfortable fact that some of these long-term value-for-money challenges cannot be ignored. That does not mean that prioritisation is suddenly easy, because clearly it will not be, but we have a really important role in making sure that focus is not lost on some of those other long-term issues.
Q23 Jack Brereton: How will you ensure that Government Departments take notice of recommendations and implement changes where necessary?
Gareth Davies: We have a really good relationship with every Department’s audit committee and the body that we audit. In terms of the non-executives of those departmental boards holding the management teams to account, there is a mechanism that is proving increasingly useful and effective.
The real amplifier of our message is the PAC and the other Select Committees. The real power of the NAO’s role is the fact that the PAC is able to publicly scrutinise the officials responsible in each case, make its own reports with recommendations that politicians can make that we cannot, adding substantial impact and value to our reporting.
The PAC would agree with this at the moment: there is scope for improvement in the way Departments respond to those PAC Reports. They are not consistently strong responses, and there are times when the PAC has to go back and say, “Well that isn’t quite good enough” and demand a more robust account of the changes that the Department will push through. We can do more to help the PAC with the follow-up of recommendations from its Reports, to strengthen that important lever of public accountability.
Q24 Jack Brereton: It is interesting that you mention that. Do you think that the system as a whole, and the scrutiny system that we have here, is working effectively in making sure that the Government actually take account of things such as value for money?
Gareth Davies: I do not think I’ll ever be satisfied on that—it is probably part of my job description not to be. There are plenty of good examples of the process working effectively and delivering longer-term improvements, but there are also, as I said much earlier, too many examples of our having to repeat ourselves, sometimes in the same Department and quite often across different Departments. Until repeated lessons do not have to be learned, it is hard to be too complacent about the effectiveness of those mechanisms.
Q25 Chair: I will return to follow up in a moment, because this is an important subject. First, in your estimates, you ask for an extra £500,000 for knowledge management, and you are planning to do 6 to 10 “lessons learned” reports, as we alluded to earlier. Aren’t National Audit Office Reports all about lessons learned already? What will be different?
Gareth Davies: They are, but they are written about individual projects and Departments in nearly every case, with the odd, honourable exception, whereas this series of reports will be thematic, rather than about a single Department. They will draw on our experience across several organisations and will be written so as to be more of a manual for those who have to get this right with new projects or whatever the issue is.
We have had a lot of good feedback when we have done this thing on a smaller scale. For example, we shared a list of good practice tips for moving IT systems to the cloud with audit committees across Government, and we had a very good response. People found that genuinely useful in asking the right questions of the management teams of the Departments and getting action. There is a good model there that we need to build on and deliver much more systematically.
Q26 Chair: You did it some years ago with the private finance initiative. I remember—I counted them and kept them in a spreadsheet—that you did something like 64 different studies on different private finance initiative projects, and you then came up with a landscape review on PFI as a whole, in which you synthesised the results. It was a revelation, actually. Is that basically going to be the approach in every area?
Gareth Davies: That is what we are talking about. The fact that you can remember that one so vividly, but not many others, is what we are trying to tackle.
Q27 Chair: How does this relate to the functional standards—the new Manzoni functions, if you like? How will it tie in with that?
Gareth Davies: As I said earlier, we already have effective relationships with many of those. Obviously, the finance function is one of our key relationships in Government, because that function produces the accounts and manages the budgets. We want to establish that quality of relationship with all the Government functions, including around data, people management, technology and so on.
We see those networks as some of the prime users of these synthesised reports that we have been describing. We actually want their input into whether we have picked the right topics in the first place, so that dialogue is getting under way. They are really important in our thinking on this. There are lots of other parts of Government too, including the audit committee network, which is increasingly strong and useful.
Q28 Chair: You refer in the strategy to improving follow-up of the NAO’s recommendations. Some years ago, I visited the Government Accountability Office in Washington. When they presented to us, the fourth of their five stages was the production of their report, and the fifth stage, embedded as part of the DNA, as it were, was what happens next—what they called the follow-up. As far as I am aware, you do not quite do that yet. Is the proposal that you should?
Gareth Davies: We do follow-up at the departmental level.
Chair: I mean with the published product.
Gareth Davies: Not in the published product in the same way. When we come back to that topic, we tend to report on how our previous recommendations in the previous Report were dealt with. However, you are right. Other approaches can be more systematic around that. What happens in practice is that more urgent priorities drive out some of that work. I think that that is what has happened.
Q29 Chair: But that, surely, is why it has to be part of the architecture.
Gareth Davies: Yes.
Q30 Chair: When I was first elected to Parliament and to the Public Accounts Committee in 2001, almost the first NAO Report that we took evidence on was about the Charity Commission. About 15 years later, one Stephen Barclay, now Chief Secretary, happened to be a relatively new member of the Public Accounts Committee. Because he was diligent, he looked back to see what the NAO had done previously. I remember it because I happened to have been there. Mr Barclay read out the recommendations from 2001 and almost nothing had changed. It should not take 15 years to discover publicly that things are just as bad as they ever were, should it?
Gareth Davies: No. I think the answer is partly, as you say, in the design of each of our pieces of VFM work. The difficulty is that we have to be selective with our VFM work, so we only put the spotlight on parts of Government once every so often, otherwise we would need even more resource than I set out in this strategy. The answer, I think, is something else that we talk about in this strategic plan, which is better integrating our financial audit relationship with each Department with our value for money work. There are clearly connections between the two because we are one organisation, but they have increasingly specialised and I think it felt like separate steams of work to many Departments. Better using our financial audit relationship with the audit committee and ensuring that the follow-up of our VFM recommendations is overseen by that audit committee is a more efficient way of doing it. That is why we set it out in that way in the strategy.
Q31 Chair: How do you see your Reports and other projects evolving in the age of social media?
Gareth Davies: The NAO has been cautious on social media so far. We have a presence. We tweet the launch of our Reports each time, but I would not claim that we are a leader in that field. Maybe it is right that we are not. We are not about headline grabbing and so on. We are about serious evidence-based reporting. But, increasingly, people get their information this way. Also, LinkedIn and Twitter are heavily used by professional networks nowadays. Again, coming from the world, as I did, of the professional services private sector, those tools are now an essential part of any professional who wants to keep up to date and engage with potential new business and so on. It is a slightly different dynamic for the NAO, but we do need to be in the same networks as the professionals who deliver Government financial services.
Q32 Chair: So what is the next step, if there is one, for the NAO?
Gareth Davies: We have already strengthened our training in the use of these tools. We have got more of that to do before everybody is genuinely comfortable. Part of the culture in the NAO is that people are very cautious about what they say publicly—quite rightly. Sometimes that means that we are not as engaged as we need to be in some of these networks. Perhaps we need to build confidence there so that people engage productively without causing difficulties by overstepping all of that. I think that within a couple of years you will see more NAO activity there, but still professional, still evidence-based, and not getting caught up in some of the Twitterstorms and the like that you see other people falling into.
Chair: Very wise.
Q33 Sir Edward Leigh: You want to boost your staff numbers by 35 and you want to increase your specialisms, so convince us that we really will employ specialists and not have more chiefs and fewer Indians and all the usual problems.
Gareth Davies: On the first stage in convincing you of that, part of the reorganisation of the management team that goes along with the strategy that I have already implemented is to reduce the size of our management team by one person, because we have our roles constructed differently now and I have taken advantage of retirements to make that reduction. So that is a step in the right direction, to answer your question.
The skills gap that we have identified is not at the senior level. It is at the practitioner level where we need up-to-date skills coming in from the outside world as well as Government. A successful audit operation develops a lot of its own skills, but brings in up-to-date skills from the market and blends those two together appropriately. For example, we need to bring people in who have been implementing some of the latest digital systems to really understand how we should audit those developments in Government. We are actually surprisingly under strength on our expertise in managing people, which I don’t think has been seen as a core NAO specialism; but actually a lot of the value for money you get from an organisation is how well you manage the people in it, particularly in public services. It is an area we do need to strengthen by bringing in some up-to-date expertise, as well as training our own. So those are the kind of areas where we need to focus.
Q34 Mr Brown: Can I ask about the peaks and troughs in work, and how you manage them? We have been given figures that show that the budget for temporary staff has gone from about £500,000 to £2 million in a single year. Why is that necessary, and is it possible to manage the work in such a way that the peaks are smoothed out and permanent staff can do it?
Gareth Davies: It is one of the areas I was least comfortable with when I came in—that level of spend on temporary staff. Actually, we have managed to secure some very good people, so it is not a reflection on those people, but it is not the way that you really want to deliver a quality audit service.
Now, of course, the structural problem for the NAO is that all of our audit clients have the same year end. That is not the case in a professional firm where you can spread your work out over the year. Even in a firm there are peaks, so you have to get good at managing those. The answer for us is not temporary staff, actually. The answer is better management of the audit project itself, in each case, so that we get more of the work done before the year end: big strides already, in that direction, but more to do.
I thought about data analytics. That is a big part of it, actually. It does allow you to bring work forward and reduce the size of that peak in the summer months. I think, in conversations with the staff—that level of pressure in the summer is a big internal issue at the NAO as well—I have been honest and said it will always be very busy here at that part of the year, in the NAO. That is a feature of an organisation like this; but it does not have to be quite as bad as it is now, and we certainly do not want to recruit that volume of temporary staff. It is not right for audit quality, and it is not right for retaining the knowledge and skills inside the organisation for the future.
Q1 Mr Brown: Can I ask about pay gaps? It has been put to us that people who do very similar work in similar circumstances are paid substantially different sums of money. Is that so, and, if it is, is it something you think you should address?
Gareth Davies: Are you talking specifically about the gender pay gap?
Q2 Mr Brown: No, in general.
Gareth Davies: I do not think that is a significant challenge. Clearly, it would be a serious problem—indeed, a kind of legal compliance problem—if that was a systematic problem across the organisation. We have had pretty strong pay restraint in the last few years, like the rest of the public sector, so the limited budgets that have been available have been directed primarily at the lower end of each pay scale, to tackle that challenge. I think that has been the right approach, actually, so I have continued that this year. I think we still have a way to go before we can be confident that the issue you are describing is managed wholly.
I mentioned the gender bit of the pay gap. We do have a gender pay gap, like most parts of the economy. We are working hard to address it. That does take some time to tackle, because it is essentially about bringing women through into senior posts in greater numbers. In my short time we have already made a good start on that, but that will take a number of years to show through, until we have a genuinely equal distribution across the genders. It is a fair challenge. There is an issue there for us, as there is for lots of organisations, but I think we are on the case.
Q3 Mr Brown: You offer a very good training, which is of professional value, not just in public service but in the private sector as well. Do you have concerns about retention and about the private sector’s ability to pay more and take staff from the public service after you have trained them and brought them up to a particular level?
Gareth Davies: It is a feature of not just us but the firms. Every firm expects a proportion of their newly qualified staff to go off to other things. A certain level of that is healthy, of course, because that turnover allows us to bring in the next wave of trainees. One of the financial risks that we are slightly concerned about in the light of the pandemic is that turnover will drop substantially, not just to a healthy low level but to a very low level, potentially leaving our staff planning slightly over-cooked. So it is quite a sensitive number, this, in our business model—the turnover post-qualification. At the moment, it is around 15%, so about 85% of our staff stay with us on qualification. That is a pretty healthy level. I would like it to be even higher, but it is a pretty healthy level.
One of the things that we have realised we have let drift in the organisation is our alumni network. All the successful professional firms put quite a lot of energy into staying in touch with their alumni who have gone on to other jobs. That is particularly relevant for the NAO, because a lot of our staff are in Government roles, or in other bits of the public and private sectors. That is a really powerful knowledge base for us to tap into on a regular basis. So, even though people leave the NAO, we should not treat them as a completely lost resource, and I think that is another useful element of this review.
Q4 Chair: I want to bring in Mr Brereton on devolution. First, however, you mentioned data analytics. Very briefly, I have mentioned the Chief Secretary before, but I happen to remember that when he was on the Public Accounts Committee he used to rail against the lack of widespread use of data analytics, and spoke about the power that it could reveal and the ways in which it could be deployed.
If one were to look, as it were, at the top 3,000 of the senior Civil Service, how wide an understanding do you think there is about the nature of data analytics—what it is, how powerful it could be and how it could be deployed? And do you think there is potentially room for a public piece of work by the NAO to get the message out there, so that it gets understood at the lay professional level, and not just by accountants, as to just how powerful it could be?
Gareth Davies: We have started, actually. One of the Reports that we published in the late summer was on Government’s use of data. It is pretty much the only thematic Report published since I have joined; that work had started well before I did, so I am not claiming the credit for it. But it was a really useful piece of work. Actually, it was very encouraging to see the Cabinet Office citing it in a lot of its recent advertising for data scientists to support the effort that is going on across data in Government at the moment.
One of the points we made in that Report is that it has taken the Government a long time to appoint its Chief Data Officer, a long-mooted post for somebody to lead this effort across Government and provide the professional leadership for it. That person still is not in post, and I think that remains a big priority, which hopefully the current crisis will not totally distract everybody from, because if this crisis has showed us anything, it is about the modelling and about the data. That goes for every other every challenge that the Government are facing, too.
So, I think you are right—it is a critical area. Hopefully we can follow up our Report of last summer with something a bit more focused on the data analytics themselves, rather than the management arrangements.
Q5 Chair: Because I do not think it is publicly understood in the way that it needs to be.
Gareth Davies: No, so we are very keen to keep working on that.
Q6 Jack Brereton: You now have a framework in place between the UK Government and the Scottish Government around audit and accountability. Is that working well or are there some outstanding issues still to be resolved?
Gareth Davies: I think it is working well, actually. We have a really good relationship with Audit Scotland and my counterpart in Scotland, Caroline Gardner, and we are working together on several projects at the moment.
I think the principles are sound in that framework. It is obviously designed to respect the devolution arrangements and the powers that are now vested in the Scottish Parliament and the Welsh Assembly, but it is also designed to manage the audit efficiency of the process. So, we are working very co-operatively, for example, with Audit Scotland to avoid two sets of auditors turning up at HMRC to look at how they calculate the Scottish share of income tax.
In that case, we have done the work, Audit Scotland has tested a sample of the work that we have done, and it has satisfied itself that it can rely on our work. That makes good sense as far as HMRC is concerned, because it does not have to deal with repeated visits from auditors. So that kind of principle of giving the devolved Administrations the assurance they require on matters that are devolved to them but not imposing unreasonable audit burdens on UK-wide public bodies is working well, I think.
Q7 Jack Brereton: Would you like to see that progressed with the other devolved Administrations, so that there is a similar sort of arrangement for them?
Q8 Gareth Davies: It is already happening in Wales because—a few years later than Scotland—Wales is taking responsibility for income tax and the ability to vary its rates, so the same issues are working their way through there. We are using the lessons from the work with Audit Scotland to do the same with the Wales Audit Office, and the early stages of that have gone well.
Q9 Jack Brereton: Have there been any problems with dealing with devolved Administrations and making sure that the audit process is being carried out effectively?
Gareth Davies: I can honestly say no, because we are not competing with each other. We just have good professional relationships with the other audit agencies. We collaborate on a few technical topics as well as doing these work programmes together. Those well-established working relationships have helped keep things smooth, so I do not think there have been any serious problems.
Q10 Jack Brereton: So what do the new agreements that are going to be put in place help to address, or are things already happening in an informal way?
Gareth Davies: They are. What these frameworks do is formalise sensible working arrangements that we have developed between us. They obviously need to satisfy the devolved Administrations. The equivalent of the Public Accounts Committee in the Scottish Parliament invites me to give evidence once a year on our work—for example, on the HMRC exercise—alongside the Auditor General for Scotland, who gives her own assurance to them. Actually, that hearing was due to happen last week. One of the victims of the current crisis was that that was postponed, but the arrangement is already working well. As you say, it formalises the common-sense principles that we have been building up informally.
Q11 Chair: The Redmond review was launched last year to look at the purpose, scope and quality of statutory audit of local government. Has the Office had any input into that review?
Gareth Davies: Very much so, yes. We have submitted a formal response. I have also had several one-to-one meetings with Sir Tony as he has been going through the stages of his review. It helps that my previous background was in local government and NHS audit; I have some personal experience of that world that is not too out of date. I am really pleased that the review is happening. There is a genuine issue to address in the robustness of the audit regime in local government now, and the arrangements that are currently in place are too fragmented and lacking system leadership. I am very hopeful that the review tackles that head-on.
Q12 Chair: What messages came out of your consultation? You are the holders of the code of practice for local government audit; that was part of the reforms in 2011. What messages came out of that consultation?
Gareth Davies: The big message was: how can we make audit reporting at the local level more useful? People could see that, in doing their work, auditors had learned a lot about the arrangements in place at each local authority, but that was not always in the public domain in a clear way. We focused on the review of the code, and the changes in there now will require auditors of every council to produce a pithy summary of their findings across three areas—including financial sustainability, as the key risk area at the moment—rather than report by exception, which is how the current practice had been developing. For any interested member of the public, including every councillor, it will be much easier to see what the auditor really thinks about those important areas based on their work, and there will be a much clearer system of flagging up concerns than is currently the case. Those are the key changes to the code.
Q13 Chair: Is the central problem that the auditing system is not robust enough? After all, when we, slightly surprised, learned that the Audit Commission was to be abolished in August 2010—it was done very carefully in August, I seem to remember—we later learned that only a quarter of local authorities were audited directly by the Audit Commission anyway, and most of the work was farmed out to private sector firms.
I have been wondering about this for a long time. Is the auditing system basically robust, but when the Report comes in to the centre—now the Ministry of Housing, Communities and Local Government—there is nobody there who is sufficiently senior to take notice and make things happen, or is it fundamentally flawed? I caricature it, you understand, but which is it?
Gareth Davies: I think there is a lack of oversight; that is the big gap that has been left. There isn’t the same level of interested, well informed parties there as in the previous case—
Q14 Chair: When the Audit Commission still existed?
Gareth Davies: Yes. The way I would put it is that at the moment it really isn’t anybody’s No. 1 task to—
Q15 Chair: But isn’t it the No. 1 task of the accounting officer of the Ministry of Housing, Communities and Local Government?
Gareth Davies: They have a lot of other, competing priorities; they have the housing agenda—
Q16 Chair: Yes, they have, but they are responsible for all that public money. Yes, it’s a block grant and there are many other people responsible for it, but you are saying that they are not as interested as they should be.
Gareth Davies: I am not saying that. With the head of the Audit Commission in the past, it was very clearly their No. 1 job and they were across all those risky areas in local government. I don’t think it is easy to replicate that in the current set-up.
Q17 Chair: So it’s sort of unfinished business, really.
Gareth Davies: It needs addressing.
Q18 Chair: Thank you very much. While we are on the subject of reviews, you will know that the Kingman review, the review by Sir John Kingman of the role of the Financial Reporting Council, came out with its conclusions in December 2018—over a year ago—and recommended that the FRC be replaced by what it called a new audit, reporting and governance authority, with expanded powers.
From this Commission’s point of view, of course, what we are most concerned about is the statutory independence of the Comptroller and Auditor General. How do you see the Kingman review recommendations meshing with the importance of maintaining your statutory independence?
Gareth Davies: The first thing to say is that we completely support the Kingman review’s focus on improving regulation of audit and improving audit quality and confidence in audit quality in the whole economy. I think that is critical and those are exactly the right messages.
We disagreed with the specific recommendations included in the Report that were aimed at the NAO, because they would have brought us to be directly accountable to a body that is part of Government, a ministerial body—the new regulator. That is just in principle not right for an organisation like mine, which has to be independent of the organisations that it audits.
We have had a very constructive dialogue with BEIS, as the lead Department implementing the Kingman recommendations, but also with the Treasury and with yourselves, as the Public Accounts Commission.
Q19 Chair: Would you say that the Treasury is fully alive to your concern?
Gareth Davies: Yes, very much so. I think everybody is on the same page, actually. And we think the solution is that I, as the CAG, and the NAO, as a corporate body, are accountable to you, to Parliament—through you to Parliament—for our audit quality.
Clearly, the Commission is going to need expert assessments of our quality to be able to hold us to account properly, and if the new audit regulator is prepared to continue to inspect our work in the way it does now, it might be a very good body for you to commission to carry out those reviews.
I think that would incorporate the rigour that Kingman is looking for—the rigour of proper regulation of auditors—but would observe the independence of the NAO from any Government body, and our proper accountability, which is to you in Parliament. I think that that is quite a neat solution—
Chair: Yes, you took the words right out of my mouth.
Gareth Davies: And a different way of working for all of us, but potentially a really powerful one.
Q20 Chair: That brings me on neatly to almost the last question, which is about your own value for money auditors, Crowe. It looks at the impact reporting that you do, the way in which you measure the impact as a metric—as a multiple of your total cost. You tend to express it by saying that you save seven, eight or nine times the cost of running the NAO. Crowe has done this study. How do you intend to respond to its recommendations?
Gareth Davies: We have found it very useful and timely, actually. If I had to sum up the aim of our strategic review in one word, it would be “impact”. That is what we are here for: not just to report on things and document them, but to have a positive impact on value for money and accountability. We found those recommendations helpful in rethinking, “Are we measuring the right things? Are we asking the right questions of the people we work with, and are we being tough enough on ourselves?” For example, on the area of follow-up that you mentioned earlier, are we being tough enough on ourselves when it comes to the rigour of that process and whether we are devoting the right level of priority to it?
We have accepted the recommendations in that Report. We are now working through the new set of impact measures that we should be reporting to you and to the PAC, and publicly in our annual report and accounts, so you will see the fruits of that exercise when we publish.
Q21 Chair: Do you expect to involve the Public Accounts Committee and, indeed, this Commission during that process?
Gareth Davies: Yes, because we want to share with you the measures we think are an important assessment of our impact, in case you have a different view or you would like us to put a different emphasis on them. You and the PAC are our key parliamentary stakeholders and represent MPs generally in our dialogue, so your views on that are going to be important.
Q22 Chair: Thank you. Finally, you mentioned that you inherited from your predecessor Sir Amyas Morse an organisation in good condition, and that the cost of the National Audit Office was 20% lower in real terms over the past 10 years compared with 2010, while it was significantly more economic and effective. Can you think of any Government Department that demonstrates that track record?
Gareth Davies: Not that I can quote off the top of my head now, which is not to cast aspersions on colleagues in Government. Clearly, we have a more contained role than many Government Departments. We are not in the front line on crises of the sort we are addressing, but even so, it is really important that the NAO is an exemplar organisation. We would lack the authority to do our job well if we did not run ourselves properly, so the attention paid to that over the past few years has clearly been vital. My intention is to continue to do that.
Chair: Mr Davies, thank you very much indeed for your evidence. We will now go into private session in order to consider our conclusions and whether we are happy to lay your strategy before Parliament.