 Felly, byddai cwestiynau mynd yn mynd yn gweithio felly ti'n gwneud ar y bydd ar gyfer o'r ystyried i gyntaf i fodr â lawer o gweithio i hynny. G fryds yr Ebikeau Llewyddiadau yn ddodd hi i'w amser. Felly, gweld ddigonio gyda hwn i gydugodau gennymau. Wrtheg,rwyntio cynghwilio gyda'r gwaith y byddai gydugodau, ac i gydrwyntio'r erioedau gyda'r gwirloedau cyntaf, ac ac i gydrwntio gyda'r gwirloedau gyda'r gwirloedau gyda'r gwirloedau. Mae ganddau i ddod yn gendigol, mewn cyfnod. Gŵr i i'r ddod i ddod i heldiau cymryd yn y prif. Y ganddau i iddo hefyd yn ôl ar gyfer Ysbyty Llywodraeth announcedjol ar gyfer yr urnod 31 march 2018, yn gynllen o gweld y cwp iawn i ysbyty Llywodraeth. Rhe sydd i'n fwrdd i gyd, i'n cefnolír boileddau Iann Leitch, Llullau Fyrgodig, Karline Gardner, derbyn am ysbyty Llywodraeth, Diane McIffan, and Stuart Dennis, corporate finance manager of Scotland. I would like to invite Iain Leitch and the Auditor General to make short introductory statements, no more than a couple of minutes, please. Thank you, convener. Good morning, members. As you know, our role as a board is to oversee the exercise of all the functions of Audit Scotland. Audit Scotland supports the Accounts Commission and the Auditor General in their roles of providing independent assurance to the people of Scotland at public money is spent properly and provides value for money. That means, of course, that Audit Scotland has also got to demonstrate the same things in managing its financials prudently. As you will see from this year's annual report, we managed to deliver £2.4 million in efficiencies, cost reductions and additional income against a target of £1.8 million. That was 9.6 per cent of our total expenditure budget. Most savings came from revised external firms audit contracts, staffing costs following organisational changes and reduced consultancy expenditure and training costs. In 1718, Audit Scotland spent £25.6 million on services for the Auditor General and the Accounts Commission. Of those costs, £18 million was recovered through charges to audited bodies and from other income. The balance of £7.6 million net operating expenditure and net finance costs of £0.9 million was met from direct funding provided by the Scottish Parliament on the recommendation of the commission. That sum, £8.5 million, was £0.6 million less than the estimate that is the budget for the year. The board has met eight times during the year, and its committees, the Audit Committee and the Rural Nations Union-Roses Committee, met nine times in all. I am very grateful for the support of fellow board members. During this year, we welcomed Dr Graham Sharpe as the new chair of the Accounts Commission appointed by ministers. I would like to thank Ronnie Hines, who is the vice chair of the Accounts Commission, for carrying out their sole unacting basis. I believe that the Auditor General would like to make a few opening remarks. Thank you, chair. This is a time of significant change for public bodies with new challenges and new demands on public audit. We are responding by investing in our people and strengthening our audit quality regime. The focus on audit quality reflects both the risks associated with increasing pressures on audited bodies and the cost reductions that we achieved through the most recent round of audit appointments. We set up two new teams, the Appointments and Assurance Team and the Professional Support Team. One of the first tasks of the new Appointments and Assurance Team was to develop a new audit quality framework that combines the highest professional and ethical standards with strengthened arrangements for internal quality reviews, external quality reviews commissioned from the Institute of Chartered Accountants of Scotland and enhanced reporting on audit quality to me, the Accounts Commission, the Audit Scotland Audit Committee and the public. We believe that this is now the most rigorous approach of any public order agency in the UK. The new professional support team works closely with the Appointments and Assurance Team to provide guidance, advice and support to auditors. We are represented on and engage with a wide range of UK and international professional bodies and audit agencies, allowing us to influence professional standards and share good practice. Finally, we have maintained our focus on the implementation and impact of Scotland's new financial powers. This is a critical area where Scotland's overall budget will be far more closely tied to the performance of the Scottish economy in future, with much more volatility and uncertainty than in the past, and therefore a greater need to ensure financial sustainability. As always, we will do our best to answer the commission's questions. We will open it up to questioning and perhaps I can ask the first question. Staff costs are about 67 per cent of the budget, so anything that affects staff terms and conditions can have a fairly profound effect on the budget. On page 10 of the annual report, Audit Scotland states that it has implemented a new strategic approach to managing and developing people. It is a recurring theme through the report, and specifically on page 56, Audit Scotland reports that it has developed a new, simpler and more flexible approach to pay, reward, career progression and how we resource the audit work. Can you give some background and explanation to the new strategic approach and identify the anticipated outcomes and improvements that are envisaged? I will then ask Diane to pick up how we are doing that. This is a really important issue for us, Chair. As the commission knows, we can only carry out our work by having the appropriately skilled and qualified staff to do that, and we work within the constraints quite rightly of the Scottish Government's pay policy, which means that we have to work hard to make sure that we can recruit and retain staff who are also in demand by the professional accountancy firms and public bodies more widely. That means that we have to think about the way that we overall reward package, the way that we develop people and the way that we shape jobs to make them attractive to people now and for the longer term. Diane has been leading this work, and I will ask her to talk you through how we do it. We have been working with colleagues in Audit Scotland for about three years to build and redesign how we organise work and how we create career progression, how we handle promotion development, and therefore the way in which we can recruit in the external market, but also internally when we come to do that. We have organised our job roles into three job families, and there are proposals for colleagues to progress within those job families and to use a process that we are calling career development gates in order to make a case that they are able to take on additional work, or for the business to decide that we have opportunities, and we would like to invite people forward to gain new experiences and to broaden their opportunities. For the first time, we have a single structure of job families for the whole organisation, including people who work on financial audit, best value audits, performance audits, and our corporate support services team. Everyone can see clearly how they work together in the different parts of the business. The key for us was taking quite a hard look at how the previous systems we were using were working or not for us, and we found that internal recruitment and external recruitment and promotion opportunities were causing quite a lot of dissatisfaction for colleagues, because there was a time-consuming process. It felt that the feedback process could be improved for candidates. Now, we have turned that around, and we are using internal recruitment and professional development, our annual recording process of conversations to promote professional and technical development, which we call 3D. We are using all of that to enable everyone in the organisation to build a portfolio of their experience and to be able to make a case for moving to do different things and to expand their skills and experience. Underpinning all of that is our investment in professional training and professional development. Our graduate trainee scheme fits into this model, but it also has the goal of delivering professionally qualified auditors at the end of it. We are also looking to enhance the sense of everyone working for one organisation rather than on individual projects or outputs for the business, and that has been going really well for us. What it is enabling us to do in the job market is to offer something attractive and simple and give people a clearer idea of career progression, because all of those changes have been linked to a much simpler pay model, which has simple incremental steps. What we are doing as a business is trying to make sure that we are offering flexible employment opportunities, a rich development and career training environment, and the great experience that comes from working for an organisation that has the ability to look across the whole of the public sector and to produce reports and outputs that can help to make a difference to public services. That approach in the external recruitment market is being very successful for us in attracting applicants to come and work with us. As you will know from our needs to expand to meet the responsibilities of new financial powers, attracting some new people has got to be one of the things that we do well this year. It sounds good. How do you look at your retention levels? It does not seem to have had a huge impact on that yet. The retention levels this year are a combination of a number of things. We have in there some fixed-term contracts that are coming to an end, some retirements, some student placements that are coming to an end. The underlying resignations—I will have to take my specs off to see this—were 18 resignations, which is about 6 per cent of the turnover. We examine all departures within the organisation to understand what is happening there. We need some turnover to help with organisational rejuvenation. We discuss departures with individuals and with managers to make sure that we are picking up on any signals that things are not going well. The turnover rate as published in the annual report is similar to last year. The underlying picture includes a number of people whose departure from the organisation would be known or planned. At the moment, IT skills are quite important, and they are difficult to secure right across the public sector. How are you handling that? We are absolutely right for everybody and for ourselves. We have been building a strong team. We have been focusing on investing and developing in the people who work with us in diversifying the number of posts that we have in IT. We have introduced some new systems in IT to bring greater resilience to the team. We have always been a senior manager on call 24-7, and that rotates across a pool of three people. We have been bringing in external expertise. We have been looking at the benchmarking of pay in IT services, and we have had a discussion with the remuneration committee about the potential, if necessary, at times to be able to recruit in a slightly different market for the skills that we need. So far, we have been able to develop our own people. We have been able to source specific skills for short-term needs when we have them. We have also been using a variety of external benchmarking, a strategic plan around our digital strategy that is consistently focused on improving the security of our own digital services. We have been building the skills of the team behind that, but we are very aware that, should we need to recruit in the external market, that would be quite difficult. Is there a specific audit qualification in IT? It is a very specialised skill being able to carry out an IT audit. A short answer would be yes, there are a variety of things, but I would need to get better equipped people than I to give you the detail of what they are, and some of those skills are in our organisation. Beyond that, it is increasingly the case that all of our auditors need to be skilled in digital. In the past, we had a small number of computer auditors who would go and look at the computer systems and the controls around them. We still have those people, but our digital strategy is recognising that more and more public services are provided digitally and that auditors need to be able to understand what that means for the risks that they are auditing and when they need to bring in specialist expertise. Our digital strategy is very much about how we audit it and the skills that we need to do it. Again, that will be a long-term investment programme, but we do not think that it is going to change, but we need to keep developing those skills for the future. I would like to ask you about areas that have been identified for improvement in risks in an audit and the process for you to follow those up promptly. Can you explain how you do that, how quickly you would follow those up and also why it has been identified as a priority for 2018-19? Can you refer me to the page that you are looking at, Ms Mackay, so that we can focus on it? I do not have the page in front of me at the minute. That operates in two ways. One, all of the audit work that we do is based on a proper understanding of the risks in that specific audited body. There are some risks that the auditor has to assume in planning their audit work and the key one of those is the risk of material misstatements in the financial statements themselves. Beyond that, everybody will have different risks. The new social security agency has very specific risks that we need to be thinking about there because of the scale of payments involved, the number of people affected and their importance to people's lives. The risks associated with something like the cap futures IT system are quite different and closer to the area that Mr Beattie was just asking about. In that context, it is the starting point of the auditor's work every year to make sure that they understand the organisation that they are auditing, what the risks are likely to be and what that means for the audit work that they carry out. Within Audit Scotland, our auditors, both the internal auditors and the external auditors, go through a similar process. It is informed to an extent by our own approach to risk management as a board, which is making sure that we understand it, but it is obviously also designed to test that and to make sure that there are things that we have missed and that our response to risks is the right one. That will then feed very directly into the internal audit programme that is agreed by our audit committee with our internal auditors and the results that are reported back. We have quite a rigorous and transparent system where the internal auditors' recommendations are reported back to the board, to the audit committee on a regular cycle, together with updates from the management team on what progress we have made and what is still outstanding. The internal auditors do an annual report that provides assurance to the Audit Committee and the board that that is working well and that there are recommendations that have been lost as a result of that. There is a parallel between the two, but it operates very rigorously within Audit Scotland itself. The fact that it has been identified as a priority for improvement, does that suggest that there was a weakness there before? No, I think that that is referring to the audit work that we do on audited bodies. What it is recognising is that there are increasing pressures on audited bodies as the financial pressures continue to affect them and demand continues to rise. We are seeing new areas of pressure like the new financial powers and potentially the UK's withdrawal from the European Union. Therefore, that needs to make sure that we are really focusing on the most important risks that are rising in priority each year. I am not sure if Diane Watt wants to add to that. Just to say on the audit work that we do, this is also about how we discuss priorities within teams and how we prioritise resources and enabling us to do that maybe a little bit more quickly than we might have done in the past, which requires us internally to have good information about how we are deploying everyone and so on. It is a continuous improvement process that is on-going. How can we get better at this? I think that we are always asking ourselves how can we get better at doing this? This year we are saying that we really think that there is something in this for us to focus on. On page 19 of the annual report, Audit Scotland states that a priority for 2018-19 is to streamline your audit work. However, on page 36 of the annual report, it further states that the income from audited budgets exceeded budget by 0.7 million due to additional work undertaken by in-house teams and by external audit firms. Can you explain how audit work might be streamlined in 2018-19, given the experience of 17-18, when additional work was undertaken by in-house and external audit firms? I will kick off, if I may, on the reference to streamlining on page 19 and then ask Diana Stewart to pick up from there. In a sense, I think that this follows on directly from the question that Ms Mackay was just asking. The expectations on us, the range of things that we are required to do, is expanding with new financial powers, increasing pressures and EU withdrawal all in the mix. We are very conscious that we need to make sure that we are prioritising what audit work we do in individual audited bodies. One of the benefits of the public audit system in Scotland is that we are able to benchmark the approaches that the Audit Scotland teams take with those taken by the various firms who carry out audit work on behalf of me and the Accounts Commission. There are some differences in the audit methodologies and the audit approaches that are taken. We know that there is some scope for making sure that people are carrying out that risk assessment and planning process and then making sure that that really drives through the audit work that they do, that they are clear why they are carrying out each piece of audit work and they are not carrying out audit work that is not related to the risks and priorities in that body. Now that there is a balance to be struck, we clearly need to make sure that we have got the wider view of the body and our antennae open for other problems to be following up, but we think that in some areas there is scope to streamline the audit approach and more particularly its application in individual bodies. Beyond that, we do carry out the work that is required in an individual body where particular risks arise. I will ask Diane and perhaps Stuart to pick that up. In our model, there is always the scope for appointed auditors and audited bodies to agree additional fees for additional audit work, which is not necessarily the same thing as saying that audit was not streamlined because it may be that in a particular year an audited body is dealing with something that it would like additional audit coverage of and they will agree an additional fee for that. We are trying to do both things at the same time to keep our core audit providing that risk-based coverage but also to be streamlined in terms of what it is costing and how we are delivering it. We are also giving auditors the ability to agree additional fees if necessary for additional work, which is beyond the scope of what we are planning to do. I will hand over to Stuart in a second because in the last year we can tell you more about the additional fees that were generated. It is something that we monitor very closely. We know what additional fees are being agreed between auditors and audited bodies and we follow that closely to make sure that we form a view that that is also appropriate. However, there is scope for the auditor on the ground to agree something locally. I do not understand anything to say. As a commission, we are seeking assurances that Audit Scotland has sufficient resources, reasonable plans and realistic budgets in place to complete the planned audits. I can absolutely give you that assurance. The other thing to add to what Diane has said is that, as well as the ability to agree additional fees, if we think that additional audit work is required, we can effectively impose an additional fee. One of the reasons for income being above budget last year was that additional fees were required for the work carried out at the Scottish Police Authority, for example, where a range of problems emerged during the audit planning process and in the audit of the European Agricultural Fund's audit, where the problems that arose from the limits of the CAP Futures IT system to do what is required meant that additional audit work was required to fulfil the EU's requirements. We have that safeguard that we can impose an additional fee where that is required, but you have my assurance that we have the resources that we need to fulfil our responsibilities with the support of this commission and the additional resources that you have approved for us over the last couple of years. I can add a small amount to that. The Auditor General says that a lot of the income was around the European Agricultural Fund and the additional complexities around that. We have a core indicative fee of what we are expected to audit. What happens is that we get complex issues in certain cases. For example, there was one in Aberdeen Council, which had a corporate bond, which was quite a unique area. We agreed or they agreed the audit firm an additional fee for that, so there are specific areas right across the board where an additional fee will be charged for extra work. On the issue of local government, on page 36 of the annual report, Audit Scotland states that not 0.4 million of additional fee income was raised due to, as you have been speaking about, complexities and additional work within the local government sector. In its budget proposal for 2018-19, which was considered by the commission, in January, Audit Scotland provided for a minimal increase of 18,000 in the fee income. It estimates that it has been receivable from the local government sector. I just want to confirm that you are satisfied that the complexities and matters requiring additional working fees in 2017-18 have been resolved, and the budget proposal for 2018-19 remains realistic, particularly in relation to the local government sector. It certainly does overall. As the commission knows, we have refined the approach that we take to recovering our income through fees. Three quarters of it comes through fees to audited bodies, about a quarter through the funds that are approved by this commission. With the board's support and encouragement, we have moved to a position where each year now we plan the budget on a sector-based basis and then reconcile that at the end of the year. Within local government and the other sectors that pay for their audit, there is always the ability for additional fees to be raised where the work merits that, and that is one of the mechanisms that we use for balancing income and expenditure by sector. The complexities tend to arise at the level of an individual body rather than the sector as a whole, and that body will pay for the work that is required as a result of that. However, we do now monitor and report the sector balance in that way. It is something that the board has been very keen to encourage, and I know that this committee is sharing an interest in it as well. You have repeatedly advised us that audited bodies require certainty in respect of the cost of the audit. The additional work carried out in 1718 appears to have been unplanned and unbudgeted, so, as a commission, we would like to seek assurance that the additional costs in 1718 are not going to keep recurring. It would be helpful for us perhaps to set out for you what is covered in the audit that we set the budget around and the opportunities and the need that we have as we deliver the audit to adjust fees as necessary. We try to keep that to a minimum, but I am afraid that it will always be necessary in some cases, because we have to recover the costs for additional work that is required. In the year that Stewart has outlined, we had particular issues with the EFA audit. We are taking stock on the planning for those audits for next year, so we will take stock as to whether there were any systemic issues in there or whether there were one-off issues. We also take stock every year prior to the start of the audit year, which starts in November. We take stock with the Accounts Commission for Local Government and the Auditor General for Health and Central Government on the fee levels that we are proposing for those audits, and we will use the intelligence that we have from the year in practice to see what we are recommending there. There will always be some departure from the budget that we set. That is unavoidable, and it would not be right for me to assure you otherwise. However, what we could perhaps do is give you after the meeting a greater breakdown of exactly what that was. Please be assured that we will be examining all that as we set fees for the autumn and go forward. There is a very dynamic process of preparing the budget that comes to preparing the audit fees, but discussing it with stakeholders and so on. That is an iterative process that goes on all the time. We want to deliver certainty, but on some individual audits, that is not possible, because the events will have happened that we have to respond to. Are there ever occasions where unexpected increases in costs are a real issue for local governments, for example? No, I think that the point that I would like to add to what Dan has outlined for you is that the audit fees for the body are set on the assumption that they have in place good systems of internal control, that they are able to prepare their financial statements within the agreed timescale, that those financial statements do not undergo significant change between the time that they are provided to the auditor and the end of the audit. In most cases, that assumption is sound, and we are able to deliver the audit for the fee that is set out in the plan. For example, in the case of the SPA over the past three or four years, we have seen real problems with some elements of the financial statements. A lot of additional work is required to get them to the point where they can be audited and to answer the queries of the auditors. Those are the sorts of circumstances where additional work is carried out and therefore an additional fee is required to recover the costs. If the audited bodies have in place robust systems and strong approaches to producing their financial statement, we deliver the audit for the amount of the fee that was originally planned. A lot of that variation is in their control. It is a small number of audits and it is a small proportion of our overall costs. However, we have made that more transparent and we are happy to give you a breakdown of the figures if that would be useful to the commission. Thank you very much. That break would be very useful. Thank you, convener. Can I just mention for the record that I am a member of the Institute of Chartered Accountants in Scotland and used to be a KPMG partner? If I can turn to professional training, if I may, which is a significant investment, not just in money but also in time and time when staff are not available to do their professional work. On page 10, you state that Audit Scotland has worked with graduate trainees to improve the trainee scheme. However, on page 23, you say that there has been a decrease in the number of trainees achieving exam success from a peak of 92.7 per cent in 2015-16 to 88 per cent in 2017-18. Further on, on page 36, you say that the training and recruitment costs were 0.1 million lower than budget. Can you advise what actions are being taken to identify the reasons for the decrease in exam performance by trainees recently and how that will be addressed? Secondly, why were training costs underspent and can that be linked to the reduction in exam success? Our trainee scheme is a very important part of our workforce planning overall. It is a part of the overall approach that Diane was outlining earlier in the meeting. I think that it is worth being clear to start with that our success rate is still very high for professional examinations. ICAS have got no concerns. We discuss it with them regularly. With the number of students that we have going through, quite a small number of students can have a significant looking impact on the past rate. However, I ask Diane to talk you through the approach that we are taking to the trainee scheme and the action that we are taking around that. I am very happy to do so. We began training with ICAS in the ICAS scheme in 2010, and 38 trainees have qualified across the 2010-2014 intake. It probably takes about four years to qualify. Our total intake with SIPFA since we began is 92 trainees, just to give you a sense of the scale of this. The 2016 intake of eight trainees began their exams in January 2018, and 100 per cent of that cohort passed at the first attempt. In any year, we have people at different stages of the training. The 2015 intake of 11 trainees sat various examinations last year, and there were four examination failures. Those are single failures of a part of the exam, all going on to resets. Those are being reset. Two of them have already passed, and two are resitting in the current year, 2018-19. We monitor the exam results very closely. We support the students very closely, and we discuss the results with ICAS and with managers closely. ICAS thinks that we have a good training scheme, and we have, as the Auditor General has said, very strong results. What you are saying is a snapshot each year of people at very different stages, but please be assured that we look very closely at that. We celebrate with our colleagues all the passes, and we provide support to help them to get through to the next stage if, unfortunately, they have been unsuccessful. The overall percentage each year varies, because if there are relatively small numbers, that can adjust the figure overall. Typically, about 30 to 40 exams are set in a year, depending on the numbers and the stages that people are at. As we have said in the annual report over the past year, we have been working with the cohort of trainees who are a key part of our workforce to understand how they would like the scheme and the support that we provide to work for them. We have had some brilliant initiatives this year that have gone very well. One cohort of trainees has been developing their training skills, and they have delivered training to the next cohort of trainees about what it is like as a trainee to do final year accounts, for example. That has been really successful for the people who are delivering the training, who have experience of something that will help them to stand them in good stead when they are in front of audit committees and so on. Also, for the trainees who are facing that part of their experience for the first time, hearing and being coached directly from their peers about how to go about it and what to do. We are continually enriching the scheme. It is very important. We look at the exam results very closely. We understand every single person's experience and we have plans in place for every single person here. It is not a concern in its own right—the position at the end of the year. I know that that is a very detailed answer. I know that it is very important to you, it is very important to us. I want to give you an insight into the level at which we manage the graduate trainee scheme. It is very important to enrich that experience, if that is what it is like. We are frequently bringing in two purples. How do you reward exam success? We have in our scheme cash payment for first-time exam passes. As part of our recent pay and reward negotiations, we increased that. It is slightly sad to say for the first time in 14 years that that is to recognise first-time passes. I know that it is a small token that is valued by trainees. What are the consequences of not passing? Support to try again and discussions about how the course is going and how the work is going. If there was repeated failure to progress, we would be having a conversation about whether this was the right career choice for someone. Do you have people in that circumstance? Occasionally. So that is generally you will get people through? Generally, yes. Generally, I think—I need to go back and check the data. My sense is that generally, if it is not working for someone, we are picking that up within the first year or so. On page 22, you said that you carried out an efficiency review of performance management and how you use your time. Can you tell us, please, what the outcome of the efficiency review of performance management was and what improvement actions have been identified? I know that this is something that we ask you quite routinely, but if you could fill us in on that. The outcome of the reviews that we did this year are the need for us to integrate the time recording systems that we have. We have systems that are fit for purpose but they operate on two different packages, which means that there is a cost to us to process the information and bring it together. The time recording system exists in that form for good historic reasons and it is time to move on. Following the review, we have been working to develop an implementation plan and we will be reporting that back to the Audit Committee and to the board in the course of the year, looking to draw our systems together. There is a whole heap of IT complexity behind this, which I am very happy to talk about. If you wish, and so on. Basically, this has been a tricky issue for us to resolve as we work through how different systems can work together now and what the future proofing of them is and how we manage data. We think that we have a way forward. We know that we have a way forward, and we are working on the implementation of it. We will be discussing that with the Audit Committee, which is similarly very interested in this area. I will give you an indication of how to measure that improvement. We have loads of data. The new approach will make it much easier for individuals to extract the data, for managers to use the data, for everyone to know in real time how we are working and so on. That is more difficult than it should be at the moment, but the systems are fit for purpose. They require a lot of... The systems are giving us good data, but they require more work than we would like to put into it. There are better options available for us now, and we are looking to get that. It is a mix of all things. Part of it is an IT project. Part of it is a culture change project, like all IT projects, in order to simplify time recording codes and so on behind the scenes. We have a good project team working on it. We have had lots of dialogue in the business about it. We have a clear agreement about what the goal is, and we are working on the implementation plan for that. If I could move on a different tack now, on page 34, you report that 273 new issues of concern were raised during 2017-18. 27 of those items arose as prescribed persons under the Public Interest Disclosure Act 1998, referred to as whistleblowers. That is quite an increase on previous years, so I wonder if you could expand a wee bit on that and advise on how new issues of concern are dealt with generally. Those contacts from members of the public and sometimes from MSPs and others very seriously, because they are an important way for us to keep our feelers out there about what is going on in an individual audited body. If we receive a number of complaints about a particular council or a particular health board, it alerts us that there is something that the auditor may want to be having a closer look at. Because of that and because of the whole range of issues that they can cover, we have concentrated quite a lot over the last couple of years in fine-tuning and making sure that the approach that we use to handling those contacts from members of the public is properly resourced and that we are very clear about what we can look at and what we cannot. Some things are not within our area of responsibility, in which case we try to signpost the person who is concerned to somebody who can help them, and if we are able to deal with it, we felt that we could do that more quickly and more satisfactorily than we had done in the past. The procedure and the processes on our website are very closely monitored by the management team and the Audit Committee now. Beyond that, it can cover a whole range of issues of concern about audited bodies from things like the way in which they have made decisions to sell or to buy particular local assets, to the way decisions have been made about continuing public services or reducing them all the way through to the way a particular contract was let and people's concerns about that. They vary a great deal. We have a very detailed annual report on complaints handling that gives more information about it, but I think that the key feature is the variability. Diane, do you want to add to that? Just to say, in terms of operationally how we handle all these inquiries, which can come from a number of sources and so on, we have, as the Auditor General has said, the opportunity through our website for people to raise concerns, also through auditors or through correspondence. We have a small team who handle all correspondence, document it, review it, share every Monday all the leadership team in Audit Scotland, get an email documenting any changes in the correspondence that we can and how that has been handled along with the timescales and the responses that have been issued and whether those have been met or not. Those are discussed actively with teams in relation to the audited bodies concerned and the use of public money, and there are a whole variety of actions that will follow from that, and we track and manage all of that. It is interesting this year that there have been some changes. There have been other years in the past where a particular sector or a particular topic has featured more strongly in correspondence or areas of concern from members of the public and so on. I think that this year, although there are some, there is no particular dominant pattern. It is just a volume increase across a number of fronts. That was actually our next question. Was there a recurring theme in the new ones that have arisen? Not anything particularly distinctive from previous years other than in some isolated cases. We do look at the team producing annual report for the audit committee and the board and we look systemically at what are the issues that come up, why do they come up and so on. This year, primarily, I think that there are volume increases in some points which are not new issues for us to deal with. Has this resulted in additional audit work for you because there has been a significant increase? It has an occasion resulted in additional audit work. Sometimes an issue of concern will be raised and we are already actively auditing in an area, so it folds into work that is already planned. Nothing terribly surprising other than just no issue that stood out this year for you other than just a general upsurge of areas? I think that some of the issues that were raised with us were already issues that were being audited and reported on in public, and some correspondence wished to comment or contribute to our knowledge base. If you look at the new issues of concern, the trend over the last couple of years has been downward. It does vary a lot year from year, and a couple of years ago we received an awful lot of correspondence about one particular issue in the west of Scotland, so that showed up in the numbers but did not require additional audit work. We were already looking at it. On the whole, they tend to be quite small issues in the overall scheme of what we do, although they are clearly important to the people who contact us. The amount of extra work that is needed to resolve them by the audit team does not blow the budget for the work that they are planning to do anyway. We do our best to accommodate it, and it is only if it is very significant that we would need to consider whether there is a requirement to ask the body for an additional fee, if it was due to a failure on their part or, indeed, to reallocate resources within the audit plan to deal with it, but that is unusual. Before I ask my specific question, you may not know the answer just now, but you can tell me later. If you take all the financial audits that you have performed, do you have a total of the revenues that you audit and the assets that you audit, just to get a scale of the… I give you an indication of it, but one of the challenges is, as you will know, there will be lots of related party transactions in there. The overall expenditure is something over £40 billion at the moment. The assets and liabilities, about three years ago, we tried to produce an estimate of what a balance sheet for Scotland would look like, and I think that we came up with a figure of about £120 billion of assets and liabilities, but I would need to come back to you on what is included and excluded from that because of the… I would not ask you to do a lot of work, but just to get a feel for the size of the… I can refer you back to the figure that we produced three or four years ago. If the £40 billion expenditure figure is the more robust one, that is the overall Scottish budget that is spent in Scotland, the devolved budget. That you would, as a firm, actually… That is audited on behalf of me, as auditor general, and the accounts commission for local government. As you know, we appoint firms of auditors to do about a third of that. I will come back to the financial statements. You have a process for dealing with complaints, which I think is on page 34, where you say that one complaint about recruitment campaign was upheld. Can I ask not the details of that, but to ensure that the circumstances that resulted in that upheld complaint have been addressed and will not recur? Absolutely. That is when we got wrong. In a recruitment campaign, we were informed about a candidate's additional support needs in advance, and on the day we failed to take that into account, they complained to us. We investigated what happened and apologised to them, and we tightened our procedures to make sure that it would not happen again. So if somebody complained and weren't happy, what can they do? We respond through our complaints process. We have a complaints procedure for people who wish to complain about our work and the actions that we have taken. That has the levels within it that you would expect, including when necessary, reviewed by a member of the board. If they are not happy, they can complain to the ombudsman that has happened on occasion. There was one referral to the ombudsman during 2017-18, but the ombudsman concluded that we would handle the complaint properly and they were not minded to investigate further. Can I mention another aspect in this general area? We have heard during this past year a member in the chamber remark that they would not know about something because the auditors had not raised it. I read in the newspaper recently about a chief executive at an employment tribunal saying, well, I would not know about that again because the auditors had not raised it. Sitting aside the rights and wrongs of the specific cases, and I am sure that your reports and your engagement contracts all make clear what the responsibilities of the auditors are and the responsibilities of management, do you feel that you need to do more to make boards and chief executives or senior people actually aware of what their responsibilities are and what your responsibilities are? That is an issue that we have been reflecting on over the past few months for reasons that you will understand. In many ways, I think that it is difficult to see what more we can do. As you say, in the letters of appointment to the firms, it is very clear what their responsibilities are. We produce a statement called Public Audit in Scotland produced by me and the Accounts Commission, which is clear about our responsibilities and those of boards and those charged with governance. That runs through the code of audit practice, the annual audit plan and the annual audit report. The annual audit report is a very full-form document, which is, first of all, accompanies the financial statements to the audit committee and the board itself at the end of each year and is then published on our website, as well as being available through the audit committee papers. In the case of NHS bodies and central government bodies, all those documents, the financial statements and the annual audit report are laid in Parliament. They are public documents and we try to be clear about what people's responsibilities are. Most of those documents are laid in Parliament by Government itself. For the NHS, they are sent to the Scottish Government health directorates for laying, and I assume that they have a process for reviewing the reports for any significant items and taking action where they need to. We engage with them on a regular basis about our concerns. As you and Mr Beattie know as members of the Public Audit Committee, we have reported on a number of those issues through the formal statutory section 22 report, as well. I struggle to think what else we can do to make sure that people charged with governance are taking their responsibilities seriously, but it is obviously a concern if that is not happening routinely. Before blaming you becomes a standard response, which is always the risk. What you described is fair enough, but it just sounds a little bit in a passive way, as opposed to when you actually meet them to do your planning or to do your closure, just to record with them face to face. I would give you that assurance that happens routinely. Our auditors will meet very regularly with the director of finance and his or her team, particularly at the planning stage and during the final accounts period. There is a process of reviewing the draft annual audit report because it is a public document to make sure that any comments that they have are taken into account, so there should be no surprise in there. The auditors routinely attend audit committees across the public sector and present their findings to them. There is a concern in some instances that the audit committee is not willing or able to fulfil its responsibilities in the way that you and I would expect them to do, and the auditors will continue to engage with them and to make the point as clearly as they can about the issues that the audit committee needs to be cited on. The most persuasive lever that we have is, first of all, the fact that we report in public, and secondly, the role of the public audit committee as a parliamentary committee, which is very much focused on following up those issues. As I say, we have been reflecting on what it means that some of those statements have been made over the past few months. I pay for senior staff as a matter of public interest, and I note on page 54 of the annual report that Audit Scotland has reported that the highest paid member of Audit Scotland has paid 3.4 times the median remuneration paid to Audit Scotland staff. I wonder if you have any idea how that compares to the wider public sector. We think that it is not atypical for the wider public sector and it is probably quite low, not for reasons that we can take very much credit for to be frank. There are two reasons for that. One is that my salary is not set by Audit Scotland, it is set by the Parliament and an office holder of Parliament, and that sets the context for our pay overall. Secondly, we have fewer low paid staff than many public bodies do. We know that most of our staff are professionally qualified accountants. We do not have many staff who are close to living wage roles, so the ratio tends to be smaller than it would, for example, a council or a health board for those reasons, rather than particularly to do with our pay policy. Anything you want to add to that? No, I think that that is fair. We have stayed in a pretty similar area over time, it has not shifted very much. We are an accredited Scottish living wage employer, and we have extended Scottish living wage provisions to contracts that we let for cleaning services and so on, built into the contract. We are conscious of the low pay agenda. It is something that we discuss with PCS, our trade union, every year and actively. Those figures are pretty stable over time, and the composition of our workforce is dissimilar to large public sector bodies, so that makes it difficult to directly compare. A comparison with Audit Scotland's budget proposal for 2017-18 and actual expenditure on page 80 of the annual report and accounts shows that Audit Scotland significantly underspent on a number of budget lines, with the exception of fees and expenses to appoint audit firms, other accommodation, costs and staff recruitment. Obviously, we welcome any cost savings, but are those underspends recurring, and will they form the basis of future budget proposals? I do not think that we have a significant underspend at all this year, Mr Beattie. I think that our overall underspend was about 0.6 million. Of that, 0.2 million was to do with the pension adjustments that we are required to make at the end of the financial year, and about 0.4 million was due to a limited number of underspends rather than misleading. I will ask Stuart to keep me straight. What was the 0.4 million underspend made up of? Principally, it would have been made up of training, consultancy, which we have a budget for, and where the management contingency is, so we saved there. Looking at on page 80, the actual reduction, there is a big reduction from 2016-17. We did actually have the national fraud initiative in 2016-17, which costs about £190,000, which we did not have in 2017-18, but we have in the budget for 2018-19. That is why every two years we have to have a budget allocation for that. There is a significant drop in things like training and getting down to nitty gritty stationary and printing. What schedule 4 on page 80 is showing is the actuals for 2018 and 2017, and there are some differences between the two years. Part of that is to do with our continuing drive to generate efficiencies where we are able to do that without affecting the quality of the work. As Stuart has said between 2017 and 2018, we have had the taking out of the 200,000 required for the national fraud initiative, which is a biannual exercise that shows up in legal and other professional fees, but the differences are actuals to actuals for 2016-17 to 2017-18. I would like to put through one or two items that stick out for me in the report. On page 12, you talk about a new audit quality framework. Is it possible to get a copy of that? I am not going to interrogate you on it, but could we see a copy just out of interest for the members? Of course. It has been a big area of investment for us this year, so we can happily let you have a copy of the framework and of the annual audit quality report that we published. The other thing is that you say on page 11 that you have implemented a new approach to auditing best value. Would it be possible to get details of that as well? Certainly. Just for interest. I will try to remember what that was. You are talking about, on page 36, reduced consultancy expenditure and training costs. We talked about training costs just now, and there is a significant drop there. Consultancy expenditure, what has driven that particular drop? How have you been able to accommodate that? The consultancy expenditure is a budget that we maintain because of the range of topics that our performance audit programme particularly can cover. We need to make sure that we have the professional expertise to carry out our work. Sometimes that means bringing in specialist support to help us, but we can also bring in that support in other ways through, for example, secondments. We have had a significant number of secondments from other public bodies to help us with that, and you will see a trade-off between agencies and succumbent costs versus consultancy costs, which is part of what is happening there. Page 54, and tell me if I have got this wrong, the CETV at 31 March 2018, does that imply that some of the people mentioned here are reaching their pension cap? Yes, it does. Indeed, one has exceeded it. Are there any implications in terms of employment? The implications are for the individual's personal tax affairs. As you know, over the past few years, the UK Government has introduced both a lifetime allowance limit and an annual allowance limit. A number of people employed across the public sector who are in or reaching their mid-fifties are likely to be breaching those caps. The caps were introduced at a high level, I think, initially £1.8 million and have been gradually reduced to now about £1 million, so people are reaching them. The implications are for the tax liabilities of the individuals themselves and need to be met by the individuals. As we have discussed in the Public Audit Committee, there is at least a risk that it affects the future career decisions that individuals are taking, but I can only speak for myself and say that, in my personal circumstances, my role is a privilege and I fully intend to see at the end of my term of office. We are relieved. I turn to page 56. I am looking at the staff report and gender balance. Overall, the gender balance is slightly in favour of the female side, which is fine, but I am looking at management. There seems to be a huge disparity there. The disparity is that of a management team of four, three of us are women and one is a man. That puts it in perspective that it is a small team. Page 59, early the title on sevens. You have an on-going voluntary early release arrangement. We do not have an on-going voluntary release arrangement. We have a policy for voluntary severance. Each year, the board considers whether there is a business case for making a voluntary severance scheme available within the terms of that policy. As we say here, last year, five members of staff left under that policy, but it is not a standing scheme that is available unless the board agrees that there is a business case for it. As a case that, periodically, the board goes out to the staff and says that, for a limited period, there is voluntary. We expect that the Auditor General and the Chief Operating Office to advise us whether there is a particular issue. For example, when you merge the two offices into the one, the new office location, there obviously arises some duplication of front office staff and other things. If we see a case for it, we will approve for that year a scheme. However, we have to be satisfied if we give the green light to it every year. If there is no case, there will not be one. I was going to say that, when the Auditor General has been looking at other public bodies, it is the business case for early voluntary release. The total cost was £156,000 in this case. The total cost for five departures was £156,000. The scheme that we have, the policy, is that, as well as the savings from the posts that are being released, we have to generate savings of 25 per cent that continue into the future for there to be a business case for that individual to go. So, there is both a scheme overall, which applies, a business case for invoking it in a particular year, and then the individual applications are judged against that criterion to make sure that it is good value for money for the public purse and that the governance stands up. Diane, do you want to add to that? We produce a governance report to the remuneration committee every year to track the delivery of the savings of previous departures on to the early release scheme, and that is an annual feature of the remuneration committee's governance of staffing matters in the business. Turn to page 70, just a couple of quickies. Can you remind me what the intangible assets are? I know that I ask you this every year. You ask every year, convener, and every year I tell you that it is software licenses, which we are required to capture in that work. Of course it is. Just moving down to the current assets, you have got prepayments within that of £508,000. What is that? It is page 70, current assets, and it is note 9. Obviously there has been quite a significant increase in current assets, at least receivables. I think that it is going to be to do with the way in which we bill audited bodies for their audit fees and pay the firms for the work that they have carried out. There is a work-in-progress calculation that is always trying to match the amount of work that we have billed and paid with the point in the financial year at which the accounts are prepared. There is a mix of prepayments and accruals. Just coming down to current liabilities, the next item on that page, deferred income, £585,000. That would be the same. That is where we have been voiced. Is it the other side? Yes, in advance. The last question that I want to ask is about internal audit. Obviously, Audit Scotland has got internal auditors. Are they in-house? Are they bought in? We have just appointed for a three-year term BDO, and I think that Diane can tell you more about that. The chair of the Audit Committee, Heather Logan, leads on this matter with the Audit Committee and supporting the board. We put out to Tender through the procurement register this year for internal audit services, and BDO were appointed for three years. They made a submission to us. We are maintaining our level of investment in internal audit at about the same level as previous years. There is a full programme of work. There is a three-year programme that is broken down into each year. That is fully discussed with the Audit Committee. The terms of reference for each individual piece of work are also discussed with the Audit Committee. The reporting of the work is to the Audit Committee and is also shared as all the Audit Committee papers are with the external auditors. I think that it is about £27,000 a year. Okay. Do any members have any other questions that they would like to ask? Can I ask her? Yeah, of course. I maybe missed it in the papers, but coming back to the ICAS reports, can you tell a bit more about what they do? Yes. In a sense, it comes back to the convener's short question about the quality framework and the annual audit quality reports. We recognised, first of all, that there are increasing risks in audited bodies, given the financial pressures that they are under, and that our recent appointment round had generated price and cost savings again in the firms that we use and the benchmarking that we do with our own teams. At that point, we had appointed ICAS for a period of six years to carry out reviews of the financial statements audits that were carried out by our in-house teams, which had been very helpful for us in providing assurance, but also identifying some areas where we could improve our audit approach. However, I was very conscious that that only gave us a partial view across the work that was carried out on behalf of me and the commission. There was no direct external review of the work carried out, the financial statements audit carried out by the firms that we appoint, the FRC regulates them and the ICA, EW and ICAS regulates them, as you know, in different ways, but it is very unlikely that they would look at any of the audits that they carry out on our behalf. The review of the performance audit and best value audit work was done by means of peer review with the other audit agencies. As part of the new audit quality framework, we have put in place a very clear understanding of the role of hot reviews and cold reviews under the international standard on quality control, but we have also put in place an ICAS contract that covers all of the audit work and will cover all of the audit providers over the five-year term of the appointments. The annual audit quality report pulls all of that together with other sources of assurance around elements of the IWSB quality framework, primarily to provide me, the commission and the board with assurance about the quality of audit work, but also as part of accountability to this commission more widely. So, who selects the files that they review? They do. They select them. So, it is absolutely clear that it is not you deciding that we will not do this one this year. It is their decision. That was very much part of the approach that we put out to tender. They won the tender, but whoever won would have full freedom to choose whichever audit they thought was appropriate. It is a matter of which the board and myself in particular have taken an interest in this whole question of quality. Given the very competitive nature of the quotes we received, the question that we all asked was, is this the detriment of the quality that we are going to get? And so, this is why we spent so much time on this. Some of the information that we have given there is in the audit quality annual report, which you have asked for, and sets it out. We are very conscious against the background of other matters elsewhere in the commercial world about the need to be on top of the issue of quality and to ensure an independent element of it. You can be assured that your board is very much alert on this issue. But it focuses on internal work as well, not just the contracted outwork. It covers all the audit work. 65 per cent of it is in-house, so that is very important, obviously. We have done that for longer. We have done that since about 2010, I think, but the shift now that it is done on a common basis across all of the audit work. And the details are in that, your audit quality. Any other questions? You have previously published information regarding EU withdrawal, and you have mentioned a couple of times this morning potential implications. In one of your reports, you have said that all public bodies are likely to face capacity issues to some extent as they try to manage the implications of EU withdrawal and maintain business as usual. Does that apply to yourselves? It does. We have had to think hard about what EU withdrawal means for our work, for the bodies that we audit and for ourselves. We have built on the approach that we have taken to the new financial powers in developing a small team of people whose job it is themselves to do the thinking and the research and the understanding, but then to work with colleagues across all of the audits to help them think about what it means for their particular audits. We are in, I think, a good place with this year's audit planning guidance that we have been clear with auditors, that the likely effects are going to be on funding, on the workforce and on regulation, and it will apply differently in different audited bodies, but as part of the planning process that we were discussing earlier, the auditor should be thinking about that and discussing it with the bodies that they audit. Internally, we are thinking about what it means for the seven or so staff we have ourselves who are from other EU countries and who will have concerns about their future ability to live and work in Scotland, making sure that we support them, and then doing the best we can with the levels of uncertainty that we are all facing to think about what that may mean in terms of additional audit work for the Scottish Government or for particular bodies that are particularly affected by it. But at the moment, lacking a crystal ball, we are having to just make sure that our plans are resilient and can respond to different scenarios depending on what happens over the next nine months or so. Thank you. Clearly a challenge. Another question. I ask if our general or chair of the board have anything to add before we wind up. In that case, thank you very much for attending and we will move to private sit. No, we do not. We are not going to have a changeover of witnesses. I would like to welcome to the meeting Stephen Cunningham, partner and Gillian Soe, audit manager from Alexander Sloane. Do you have any comments that you would like to make before we open questions? Good morning, convener, and apologies for a late arrival. I would just like to start by confirming that we have received all the information and explanations to allow us to undertake our audit for the year ended 31 March 2018. I can also confirm that there was not any limitations on the scope of our audit work. Just to give you a brief overview of our work, the firm of Alexander Sloane has been appointed to carry out the extern audit of the 2018 financial statements of Audit Scotland. During the year, we attended all audit committee meetings of Audit Scotland. We attended the offices to carry out into the audit work in February, and the fine audit work was carried out in May this year. Our work was carried out in accordance with international standards and auditing. As part of our work, we have reviewed all intern audit reports during the year and held discussions with intern auditor. As I mentioned earlier, we received all the information and explanations that were required to carry out our work, and our audit was carried out without any problems. In accordance with our tender and quality control procedures, the audit file and accounts have also been subject to a second partner audit of the year. Based on our audit work, we form an opinion on whether the accounts given to the unfair year, whether they have been prepared in accordance with international financial reporting standards, are interpreted and adapted by the financial reporting manual, and to confirm that they have been properly prepared in accordance with the public finance and accountability Scotland Act 2000 and directions by Scottish ministers. Being satisfied with audit evidence, we signed our audit report on the 12th of June 2018. Our audit report is unmodified. That is, we are satisfied that the accounts do give it the unfair year an accordance with the legislation and the accounting laws, and there are no significant matters that we wish to bring to the attention of the commission by any other leader of the accounts. Can I ask how Alexander Sloan assures itself that the internal audit process that is being undertaken is robust in accordance with the appropriate standards? As I mentioned, we attend all the audit committee meetings with the internal auditor. We also attend the prior to that meeting private closed session with the internal auditors there as well. We also hold discussions as well as the view on all of their papers, which are presented to the committee. Based on that, from our point of view, we are satisfied in terms of the internal audit work that is carried out, and it is any implications for the external audit. Do you review the internal audit programme? We get to see the internal audit programme and we get the opportunity to make any comments if we felt that there were any areas that we felt should be in that programme. So you are satisfied that it is a robust process? Do you receive internal audit reports? Yes, we receive all of the reports that go in the year and we review them to make sure that there are any audit implications. There is nothing of concern that you are aware of? No, there is nothing of concern. That would cause any concern for the financial statements. That is just to clarify, because you have pretty much covered it in your opening statement. In your report to those charged with governance and in your report to the Audit Commission of Audit Scotland, did you raise any matters that the commission should be aware of? No, there was no matters that we believe that the commission should be aware of from the course of our audit work. Was there anything in your notes at the side that you wanted to keep a record of for maybe if anything was repeated? No, I mean, once we carry out the audit work, we have a clothing meeting, which was attended by the chief operating officer, the director of audit. We would just clarify any matters from that, but there was no matters of any significance, which we needed to bring either to the board of Audit Scotland or to yourselves. Of course, we take great reliance on what you say. There are some particularly highly technical accounting requirements around pension costs and the calculations of liabilities. Can you confirm that you are satisfied with all the disclosures in those accounts? Yes, we spend a lot of time in the audit looking over those, considering the assumptions as well and making sure that they are reasonable before they go into the final accounts. I may be missed it. Do you disclose the materiality level that you use? We don't have that, does no. You don't? No. Can you tell us? I don't have that figure off the top of my head. I can get an order, if you wish. Does it concern you? Were you here earlier to know that Audit Scotland audits something like £120 billion of assets? Were you quite comfortable in auditing the auditor of that huge number? Yes, we are. We believe that we have all the procedures in place to carry out an efficient audit. Well, I am not just an efficient audit. I am sorry, and he fits in an effective audit. Okay, thank you. Audit Scotland has included £1.6 million of income in its accounts, which relates to work completed but not yet charged to audit bodies. Are you satisfied that the calculation of that is robust? I can tell you that a prime focus on audit is the work in progress calculation. We spend a lot of time reviewing the calculation, looking at that for the agreed fees, looking at the proportion of what carried out, how that calculation is done, to make sure that, at the end of the day, we are happy with that calculation. Do members have any other questions? Other than the usual questions. Is there anything else that we should know? No, nothing further. Is there any other comment that you would like to make before I wind up this section? No, no other comment, thank you. In that case, thank you very much for your attendance, and we will move this meeting into private session.