 Good morning, and welcome to the first meeting in 2019 of the Scottish Commission for Public Audit. As always, I ask all members and witnesses to just at the outset to keep questions and answers concise and to the point, and also just as a matter of formality if members can put any electronic devices into silent mode. To move to the agenda, agenda item 1 seeks agreement of members to take agenda item 3 in private. Are members agreed? Now we move on to agenda item 2. Agenda item 2 is evidence on Audit Scotland's annual report and accounts for the year-ended 31 March 2019. Members have a copy of the annual report and accounts in their meeting papers. I welcome to the meeting Ian Leitch, chair of the board of Audit Scotland, and Ian is accompanied by Carline Gardner, Auditor General for Scotland, Dan McGiffen, chief operating officer in the Stuart Dennis corporate finance manager all of Audit Scotland. I invite Ian Leitch and the Auditor General to make short introductory statements, hopefully no more than a couple of minutes each. Thank you, convener. Good morning to you and to your colleagues. As you know, our board is charged with the duty to carry out the functions of Audit Scotland, set out and statute. We support the Accounts Commission and the Auditor General in their roles, which is to provide independent assurance to the people of Scotland that public money is spent properly and provides value for money. During 2018-19 audits, Scotland delivered audits of 297 public sector accounts, published 19 national and local performance audit reports and produced briefings on supporting online communication on issues of national public interest. The organisation also continued to support both the Parliament and the Accounts Commission in their scrutiny roles. We had 87 parliamentary engagements, that is to say, the Auditor General and others, during the year, from giving evidence to eight committees to taking part in inquiries and providing a range of informal briefings to committees, committee clerks and clerking teams and the Parliament's information centre, SPICE. All of this is built on a bedrock of quality audit work. During 2018-19, we continued our focus on high quality and robust testing and assurance of that work. Given that Audit Scotland aims to assure the public that its money is being spent properly, we as a board and an organisation have to demonstrate that we are managing our finances prudently. As you will see from this year's annual report, we managed to deliver £1.1 million in efficiencies, cost reductions and additional income. This was 4.9 per cent of our total expenditure budget. Audit Scotland's board met eight times during the year and its committees, that is the Audit Committee and the Remuneration and Human Resources Committee, met nine times in all. I am very grateful for the support of fellow board members and for the hard work that Diane McIvan, our chief operating officer and Caroline Gardner are accountable officers and all the skilled and competent staff in Audit Scotland. Believe me, I am saying this, they are highly skilled and highly competent. With your permission, I hand over to the Auditor General, who is also the accountable officer to make some opening remarks. We have talked in previous years about the rising demands and expectations on public services combined with type budgets. Added to that, there are significant new powers over taxation and social security and the UK's withdrawal from the European Union. Audit Scotland has got a unique overview of Scotland's public sector and, over the past year, we have worked to try to provide clarity about the impact and the implications of those changes, as well as highlight the pressures that public bodies are facing. That has meant ensuring that we have the capacity to meet growing demands and to continue delivering high-quality audit work. Over the past five years, our staffing has risen by 8 per cent. That is a significant increase, but to put it in context, the number of annual audits that we are responsible for has risen by 43 per cent over the same period. We continue to monitor our capacity and our skill mix to make sure we can deliver the work that we are responsible for. We have created new teams dealing specifically with the new powers and EU withdrawal, while undertaking prudent organisational preparations for the various effects that EU withdrawal could have on us as an organisation. The commission will be aware of the scrutiny that Audit itself has received in the past year. We have a unique public audit model in Scotland, and I hope that the commission can take assurance from the safeguards that have built into that model to protect against the problems that we have seen elsewhere. Of course, we are not complacent, but I believe that the strengths of the public audit model, together with our rigorous audit quality framework, should give the commission confidence in the robustness and integrity of public audit in Scotland. As always, chair, we are happy to answer your questions. I would like to start with a point that you raised, Auditor General, in your opening remarks. It is about public confidence in audit. This is something that I have asked you about at the audit committee before. Obviously, we have had high-profile cases such as Carillion, Patisserie Valley and NHS, where audit processes were questioned and the public were left thinking, why did not the auditors get here before the companies collapsed and people lost their jobs? Obviously, that goes to the heart of the process of audit and the reliability of audit. There was a report done in the House of Commons recently that we discussed at the audit committee. To bring it to Scotland, I really want to ask how Audit Scotland has, because you are the embodiment of audit in this country. How have you responded to those wider public concerns about the public trust in audit, and how have you sought to reassure the Scottish public about the quality of your work? I think that the first thing to say is that, obviously, we have watched the developments that you referred to and the inquiries carried out by the Business, Enterprise and Industrial Strategy Committee, the Kingman Review, the Competition and Markets Authority Review very carefully. We want to make sure that we are able to fulfil our ambition to be a world-class audit organisation and to meet the expectations that Parliament and the people of Scotland have got off us. The concerns and the failures that you have described have happened in the corporate world, and it is not a coincidence that there are features of the public audit model here in Scotland that are designed to safeguard our independence and the quality of the work that we carry out that could have had an impact in the corporate world as well. Things like the independent appointment of auditors, the Scottish public bodies have their auditors appointed by either me or the Accounts Commission rather than appointing their own auditors. We set the fees for that work to make sure that they are not too low to give people the resources and the incentives to carry out a thorough audit. We have very strict limits on the non-audit services that can be carried out, which need to be approved by our independent audit quality and appointments team. As the commission knows, over the past couple of years, we have been developing a very rigorous audit quality framework that gives the board, me and the Accounts Commission the assurance that the order is being carried out to the standards that are required by the international standards on auditing and the wider dimensions that are included in our code of audit practice. We are not complacent at all, but we think that there are factors around the model and the way that we have developed it that give us and you assurance that the order is carrying out its role of being independent, rigorous and acting with integrity at all times. The real overlap here is that you are right to point out that a lot of those things have happened in the corporate world and you are responsible for auditing public bodies, but ultimately it is the same audit companies that are doing this work. We see the big four and a few others involved in these scandals, mainly based in England and the rest of the UK, but they are the same companies that are carrying out the audits of our NHS boards, our colleges. Have the companies that you employ to do the audits sought to reassure you about their accounting practices? Yes, two thirds of the audit work that is carried out by Audit Scotland for me and the Accounts Commission is carried out by Audit Scotland staff and about a third, as you say, is carried out by firms that we appoint to do it. The audit quality framework applies to all of them and to all audit work, so the annual audits, performance audits, best value audits—that is unique across the United Kingdom. As part of that and as part of our general contract management, we have had conversations with each of the firms to ask them not only how they are complying with our quality requirements, but also what their response is to the Kingman review and the Business, Enterprise and Industrial Strategy Committee work to make sure that we have that assurance. We do have more stringent quality assurance for our work than any of the other UK Audit agencies, because it is a newly developed framework. We think that that gives us assurance and, as I say, it is something that the board has been very focused on over the last year, and we are not complacent about it. Have you asked them these questions? Are you satisfied with the answers that you are getting? Yes. In general terms, absolutely. That is not to say that we have not identified for all of the audit work that is carried out in some areas where we think improvements can be made. That is the purpose of the audit quality framework, but we have no concerns about the judgments that are being reached and the audit opinions being reached. It is much more a question of encouraging and supporting continuous improvement. Are those concerns limited to any one specific company that is providing audit work, or is it just quality improvement across the board with all the companies? It is across the board. We are now just coming to the end of the second year of the audit quality framework, so we still do not have comprehensive information that is significant enough for me to be able to give you absolute assurance, but all the findings that we have had back from ICAS from their independent reviews have given us assurance about the quality of audit opinions and judgments, and are focused on aspects of the process, such as documentation, where they think that there is room for improvement. That is very much the purpose of the work that we have put in place. I would assume that if you had any specific concerns, Auditor General, about any of the companies, you would probably put the brakes on awarding them for their work. Beyond that, for both me and the Accounts Commission, if we had concerns about any of the audit work carried out by the Auditor's Wear point, we would not award further work. We would want to make sure that any audit that is being signed off had been properly reviewed before signing off, and that, if necessary, work was removed from the providers. We are not close to that situation. That is very clear, and I think that that will give the public the reassurance that they need. I would like to turn to— I have a rigorous procurement programme before we employ them. Auditors will apply to work for us. There is a rigorous procurement programme, and the next round has already commenced to make sure that we are up and to speed. Quality is a big issue when we select those, and they have to answer and show and demonstrate to us quality in a continuous basis. Moreover, as you are probably aware of, it is worth restating that we rotate the auditors. There is no undue familiarity with the bodies that they are auditing, and that rotation also includes to our internal staff to make sure that there is no conflict or lack of questioning and keeping them at that independent. Can I turn to your own complaints process? Page 25, Auditor General. You said that this year you received a low number of complaints 5 compared with what you had for last year. You said that two complaints were investigated and not upheld. The final sentence says that three complaints were about audit quality, and so we are dealt with through a separate process, but there is no further information there. Can you give us a bit more information on why they were dealt with by a separate process and perhaps what the outcome was? Absolutely. I will ask Diane to pick that up, and I think that you will find more information in our annual audit quality report. While she is pulling that together for you, the reason we have two complaints processes is because we take very seriously the need to have a process by which Audit Scotland can review any concerns that are raised about the quality of audits separate from the assurance work that we already have in place. That is done by the Audit Quality and Appointments team, and it is separate from complaints about the ways in which we, for example, handle correspondence or carry out other parts of our business. That is the reason for the two separate strands of work. Diane, can you give us a bit more information about that? Certainly. The three complaints that were related to audit issues were complex and technical accounting issues in nature, so a question about the adoption of particular standards of the application of particular standards. We have a specialist team, our Audit Appointments Quality team, AQUA, for short. They investigate complaints themselves, or they will bring in an external person to investigate complaints for us. All the complaints were handled through the process and we have referred to them in our quality of public audit in Scotland document. Can you give me a summary of the outcomes? Were they upheld or were they not? I think that one is still in process because it is a very complex and technical issue. One was not upheld and another one is a subject of on-going dialogue just to collect more information. Okay, so two are still live and the third one was not upheld? The nature of the complaints is that they are often very detailed matters of judgment, some of them going back quite a long time. We have had to look in quite a lot of detail at the issues that are being raised, but I can assure you that we have dealt with the complaints very thoroughly. Okay, I am satisfied with that answer, chair. Thank you. Can I just bring Bill Bowman in? Thank you, convener. Good morning. Just on the independence and quality issue, in your financial statements in the corporate governance report, which might be page 31, you have a statement that says, management team and board members must complete a declaration of interests. No significant company directorships or other interests were held which may have conflicted with their management responsibilities and no member of the board had any other related party interests which conflicted with their responsibilities. That might just be the English here. Does that mean that nobody had any interests or nobody had any interests that conflicted? Nobody had any interests which conflicted. So who takes that judgment then as to whether they conflicted or not? We have, as an organisation, a very full process for people fulfilling their ethical requirements as members of staff. We apply that to all staff, not just those involved in audit work. It is based on an annual fit and proper declaration that every member of staff is asked to complete. Those declarations are then reviewed by the directors of audit services and the director of performance audit and best value. If they have any queries, they confer with the technical team and Fiona Cordiac as our head of practice in the organisation. That would come up to me if necessary. There have been no instances in which that was the case. Do you are quite happy that the appropriate judgments have been taken? I am very comfortable with that. It is worth noting that, for members of the management team and non-exec directors of the board, the register of interest is publicly available on our website, so it is open to scrutiny by anybody with an interest. Then note 17 to the accounts. You talk about which is related to this related party transactions. You say that, during the period in which none of Audit Scotland's directors and board members has undertaken any material transactions with related parties, related parties being anybody funded by the Scottish Parliament. What would be a material transaction? Most of the things that would normally fall under that definition would not be permitted under our own code of conduct for staff anyway, but an example would be a member of staff carrying out a piece of paid work or consultancy work for one of the bodies that we audit for a body that is funded by the Scottish Parliament, the sorts of related party transactions that we would expect anybody that we audit to be declaring in its accounts and to be subjecting to the proper independence tests that are required for this. Just finally on that, what about somebody going for a job interview with a funded body? Our code of conduct for staff sets out very explicitly the requirements of the ethical standards there. If somebody is in discussion with an audited body about future employment, they are required to tell their line manager straight away. The line manager is required to tell our ethics partner and she will consider whether we need to make any changes to remove them from the audit or to review their work while that process is in train. People are very conscious of those obligations and do comply with them absolutely. So people do report it. They do. We take it very seriously. If I may add, in respect of my non-exec colleagues, I look at, on an annual basis, any adjustments to declarations of interest. If there are any catches my eye, I will speak to them and also speak to the accountable officer about it. It has never arisen directly I have to say. I am not aware of anyone having conflicts. Indeed, people who are appointed by you generally do not apply for other public body appointments because of the potential for conflict and we are not so worried. Key performance indicators on page 8 in respect of delivering a world-class audit year on year show improvements except for one thing. The number of reports published to schedule has decreased by almost 4 per cent from 97.9 to 94 per cent. Obviously, there is always a concern that maybe this is an early indication of a bit of pressure on the teams there. Performance is high overall, but are there any particular reasons why the marginal fall in the number of reports that were published to schedule? That refers to the annual audit reports that our auditors produce each year alongside their audit opinion. Your right performance did slip very slightly in 2018-19 to 94 per cent. We still think that that is still a high performance, but we prefer that it was moving in the other direction. It tends to be either where the audited body has been slow in responding to a draft report. We give them the opportunity to comment for factual accuracy and that sometimes doesn't happen quickly or in a couple of cases where the auditor had provided the annual audit report to the audited body by the deadline, but it didn't reach Audit Scotland by the deadline. The equity team is working with the auditors involved to make sure that we reverse that trend for this year. Is there a specified period in which the Audited Party must respond? You say that some of them are a bit slow coming back, because they exceeded that period. Is there a case for a tougher response on that? For our performance audit work for the clearance process, which I think public audit committee members are familiar with, the protocol that we have with Government is for a three-week period for people to receive a draft report and return their comments to us. For annual audit reports, because the cycle is tighter, it's an annual cycle, and the deadlines for laying and finalising the audit are statutory deadlines. That is sometimes squeezed. For example, at the moment, our audit teams are looking to finalise their health audits by the end of June. The financial year ended at the end of March. That is a very tight period. We therefore don't have a fixed period of time for comments to be received. It will depend on each body on the reporting cycle and the dates of their audit committee in relation to the sign-off deadline. Auditors are very clear with directors of finance, chief execs and audit committee members about their expectations, and they are not always met. As you can see, it is a small number, but it is not happening. I can see that Diane is looking to add to that. In real time, as a business, we are looking at performance indicators on a quarterly basis. That is reported to the management team and to the board who consider them and to the audit committee. Our aqua team reports in detail on all of those things twice a year to the Accounts Commission and to the Auditor General. There is a very dynamic process of looking at both what the performance levels are and what is the underlying cause of any delay. As you can see, they are marginal and we understand the reasons for the shifts. Overall, the performance levels are still high. It is just an obvious concern that the commission might have that there is any sort of trend developing. We are monitoring that. We hope not, but we will know that there is pressure on us and on the audited bodies, so we are monitoring closely ourselves. On page 29 of the annual report, you state that, in 2018-19, you have delivered £1.1 million in savings, 4 per cent of your total £26.7 million expenditure budget. Most savings have come from staff costs, additional income, organisational efficiencies and reduced other operating expenditure. However, people costs reported on page 46 of the annual report increased by £1 million. Can you explain how staff savings have contributed to the overall savings while it appears that, in actual fact, the costs have gone up £1.1 million? I think that the short answer, chair, is that the volume of work that we are responsible for has gone up faster than our costs have gone up, so there is an efficiency in the difference of the ratio between the two. I will ask Diane to tell you a little bit more about that, if I may. People costs have increased as we have increased the capacity of the organisation. There is a numbers dynamic at work. The pay settlement that we agreed with our union meant that the cost also went up. In addition, I will ask Stewart to give a breakdown of some of this. There are pension adjustments and other things that make up the cost, and there is also a further breakdown of the efficiencies. The pension element was nearly £0.5 million under the IAS-19 employee benefit, so that is nearly half of the previous year's 1 million increase. As Diane and the Auditor General have said, the new financial powers, additional resources that we have required and the pay award has made up the difference of that. To what extent are the recurring savings for future years? Our definition of an efficiency saving is a recurring saving rather than just an underspent. You will see that we underspent our budget by a very small margin of about £68,000 this year, but efficiency savings are where we have managed to find ways of carrying out our business for less. Right across the board where you have saved on staffing, saved additional income, organisational efficiencies and reducing other operating expenditure, all those savings are recurring. For the foreseeable future, yes. Clearly, over time, that will change, but they are not just underspins for a single year. On page 10 of the annual report, Audit Scotland tells us that you have issued 11 section 22 and section 102 reports last year. Notably, that is the most that we have ever produced in a single year. Given that increased number of those reports, how has that impacted on the use of resources within your organisation? Those are the reports that I produce as Auditor General and the Controller of Audit produces on local government, where something arises out of the annual audit work that we think merits public scrutiny. I report to the Public Audit Committee, the Controller of Audit reports to the Accounts Commission. You are absolutely right, it is the largest number that we have ever had. I think that that says something about the pressures on audited bodies. We are just in the process now of monitoring and sifting the ones that we will need to produce for the financial year that has just ended and that trend looks set to continue. The only mechanism that we have got for responding to that sort of demand-led work is either to reschedule the work that we already have planned, we keep an element of contingency in the work programme because we know that there will be a number each year. We work on the assumption of about eight. Last year we had 11, so we had to find space to do three more. If we exceed that allowance, we will look at rescheduling other work so that we can free up staff to do what is required. In extreme circumstances, we would have to come back to the SCPA and ask for more resources to make sure that we could fulfil our responsibilities to Parliament and in relation to local government. It is a trend again that we are monitoring closely and we will keep you apprised of as we head into the next budget setting round. Our concern is that there is always an element of variation each year that is to be expected by the nature of the reports, but we are seeing increasing pressures on audited bodies and we think that it is possible that this may be a trend that will continue for the foreseeable future. We are looking at how best we manage it. On the resourcing side, it has been a very busy year for the organisation in terms of what we have delivered. It has also been a busy year for us in developing our capacity. As you will see in the annual report, we have done really well to be at 99.7 per cent of the establishment that we have. We have worked very hard to do that. We have run 23 recruitment campaigns and made 30 appointments in the course of the year, but that takes time. There is a lagging effect there. We are building our capacity and growing, and we are working hard at that at the same time as we are working on the outputs. I think that we are all agreed that ensuring that we sustain that capacity development is critical for us in the next year. The report and your responses this morning suggest that you very much believe that this is a trend that is going to continue, but you are fairly confident that you have the capacity to manage that on an on-going basis. It is something that we will be working very hard at. We have all the right elements in place. We just need to keep working at all of them at the same time. There is a lot of work to do to make sure that we get the right resources and the right teams at the right time, so we are working hard at that. There is work within local government and local government, and you have spoken about the impact of Brexit, increased powers with relation to taxation and social security. I am a member of that particular committee. Your annual report says that Audit Scotland continues to work through the implications for our resources off the devolved financial powers, social security and financial powers in the EU withdrawal. Can you give us a bit more detail about what you are doing to ensure that you are adequately resourced to provide audits off social security? I think that the first thing to say, Ms Johnson, is that we have been talking to the SCPA over the last three years about our best estimate of what additional resource we need to do all of that work. Our budget for 2018-19 had almost half a million of additional resource in. We expect that to arise to about 1.27 million by 2021-22, about 20 extra staff in line with the forecasts that we have given to the commission as part of our budget round. We are keeping a close eye on that to make sure that it remains about right. You say correctly that there is lots of uncertainty in there, so we may need to tweak it in either direction, but we are grateful for that support and we are using it well. In my opening remarks, I talked about the dedicated teams that we have for the new financial powers in general and another for social security. Social security particularly is a new area for us. We have really done very little work in the past, had to do very little work in the past in that area. We have invested in training and building up the capacity of our own staff, recruiting where needed and, crucially, working very closely with our colleagues in the national audit office at UK level who have many years of experience of auditing social security currently through the department for work and pensions. We found that extremely helpful and it has been good not just for building our own capacity and expertise, but also because the way that social security powers are being delivered means that we are both looking at the DWP if you like from either end of the telescope. The national audit office is looking at the UK social security system, we are looking at it through the lens of social security Scotland and Scottish social security policy and we have been able to make sure that our audit work there joins up, is coherent and can really add value. That, as you know from your committee work, is due to ramp up quite significantly over the next couple of years. About 98 per cent of the total expenditure is still to be delivered. We think that we are well placed to do that. The work is embedded in our work programme both for the annual audit for the first time in social security Scotland this year and another performance audit work over the next 18 months. However, we know, as Diane has said, that we need to keep on investing in our staff, making sure that they have got the skills and experience that are required and that we have the ability to test and challenge the work that they are doing to make sure that it stands up to scrutiny from the Public Audit Committee and from the Social Security Committee here in Parliament. You are also saying in your report that you have increased your engagement with the bodies that you audit. Was that a conscious decision? Was that something that you felt should be improved? Yes, it is something that we have always taken seriously. However, I think that the combination of the pressure that we see them being under and the extent to which we are all having to do new work meant that we felt that there was a real premium on it at the moment. Audits are a tricky relationship. People do not like being audited. We understand that. We have to remain independent but we also have to understand what they are trying to achieve, what they feel is going well and what they are struggling with. We have been investing more in that sense of understanding what it is that they are doing, making sure that we really get their business and using that to make sure that our audit work as much value as it can while providing that baseline of assurance that is the starting point for everything that we do. We heard earlier about the expertise of the body more generally and that expertise comes from how effective the professional training is. We are aware that the key performance indicator for the exam pass rate for professional trainees shows that it has fallen. You have previously advised the commission that you have worked with graduate trainees to improve the trainee scheme following a fallen number of trainees. Do you think that there is any evidence that the fallen exam success is linked to the increase in the workload that we have been discussing? I do not think that it is. I stress that our exam pass rate is still very high at nearly 85 per cent but I will ask Diane to give you a bit more colour around that. There are two parts to the question. How is the scheme doing and is the pressure affecting pass rates? Our pass rates are high. I think that the average for ICAS equivalent would be about 73 per cent for the scheme as a whole. We are still talking about a very good level of performance. There was a small drop in the past two years. There was an introduction of a new exam in the syllabus. We are looking at whether that is affected in timing terms and support terms if there is anything that we can do. Our first time pass rates are 88 per cent and we permit resets for that. We are still running a successful scheme, a retention of graduates. Unlike many of the firms, we would plan to retain quite a high level of the graduates that we recruit. We plan to retain about 60 per cent of a cohort. Our retention rate for the most recent cohort is about 66 per cent. There are lots of positive indicators for the scheme. We look at the data very closely and provide lots of tailored and individual support to participants. We want to ensure success. We are not especially concerned about the drop because we understand the context for it. However, we are always looking at all elements of the scheme. Because we have been with the scheme for 10 years, we are able now to take a longer look at how that is working for us and how it is developing. You are fairly content that you understand the reasons for that. You are monitoring it carefully and you are making sure that you are doing what you can to ensure that trainees have all the support that they need. Every trainee has both a line manager and a mentor, as well as their cohort that they are in. We have regular trainee meetings. We have a group of trainees who are taking the lead in refining the scheme for us and working with us on that. There is very good dialogue and the feedback that we have about the scheme is very good from those who are on it. I would like to ask you about diversity and inclusion, which we know is a key priority for all public bodies. Page 16 of your report refers to you having refreshed equality outcomes and further embedded equality in work to highlight where Scottish public bodies can improve the practice and help to produce inequality. Can you expand a wee bit on how you have done that and what outcomes and improvements do you expect from having done that? We take our responsibilities under the legislation for equality outcomes very seriously. We have two broad strands. One is in our audit work, the way that we are looking at equalities in the 200 or so bodies that we audit. The second is in how we promote equality and diversity and human rights among our workforce. Diane Leitch leads on that work for us and, if you are happy, I will ask her to give you a bit more detail. We have published alongside our suite of reports a report on mainstreaming equalities and equality outcomes. It demonstrates some of the very specific ways in which we have taken that mainstreaming diversity and inclusion objective to heart and embedded it in our audit work. It gives examples of reports that we have published over the past couple of years where that has strongly influenced our audit approach. Examples are self-directed support, the progress report, early learning and childcare, managing the implementation of the Scotland Act, where our report provides findings on how the Scottish Government is engaging with its clients for the consultation around all of the changes that will come through those acts and how it is engaging with groups whose voices are heard less often and less frequently. You will find evidence of our commitment in our Scottish Fire and Rescue Services update in Scotland's colleges and children's young people in mental health. The form that mainstreaming takes is very much tailored to the work that we are looking at. We have been working closely with Youth Scotland and have developed a youth panel, and they have helped us to look across specific pieces of work, but also more generally to say what matters to young people who are in the school and education system about how we look at training, how we look at school education and so on. We have a reference panel who help us to act as a critical friend for the work that we do involving lots of representative and third sector groups. Through our programme of work in best value assurance, which we deliver on behalf of the Accounts Commission, we look specifically at diversity and equality there. I can commend the report to you and you will find in there very real examples of how we have taken our commitment very seriously through our audit work. How is this communicated to the auditors that you work with? How does that span out amongst your wider work? Within Audit Scotland we have a diversity and equality group involving colleagues across the business. We have guidance in our performance audit planning guidance and audit planning manuals about what responsibilities we have and how we expect those to be performed. The best value audit guidance is very clear on all of that. Every year we will produce and refresh our annual audit planning guidance for all auditors. We have an on-going dialogue with our internal colleagues and all the auditors who work with us about our commitment to diversity and inclusion. We spend time on it as a leadership group and we have produced lots of information on our website about our engagement and how we have done this. We also engage with the other audit agencies to see how they approach diversity and inclusion in England, Wales and Northern Ireland. We look to learn from them and we have a meeting with them on Friday this week. Diversity and inclusion will be one of the topics that we are talking about. Can I just clarify the report that you are referring to? Is that the first one that you have done? How was the timescale a new initiative or has this been on-going for a number of years? It has been on-going for a number of years. We have produced several reports over the time that we have had our duties on equality and diversity. The report that I am referring to in particular is our progress report for 2017 to 2019, which we have produced. We also have an annual diversity report. We produce a report on the outcomes of our audit work every two years and we produce a report on our staff diversity every one year. There are multiple reports and they are all available on our website. I will move on to another subject. Can I ask you about expenditure on legal and other professional fees? I was quite surprised to see that it seems to have increased from £474,000 in 2017-18 to £750,000 in 2018-19. Can you explain the reasons for this and whether any further increases are expected for this year? The short answer is that that represents the cost of the national fraud initiative, which we carry out every second year. That is a UK-wide initiative that is now co-ordinated by the Cabinet Office. We facilitate it for Scottish audited bodies, and there is a fee involved for doing that, depending on how many bodies are involved. Last year, I think, it was about £205,000, so you will see that bump every two years looking back over the history of all that. It is back down again for a next year. Absolutely, yes. That is fine, thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Do you want to build a woman? Thank you. I have one specific question and maybe just some general ones. In the financial statements, on page 74, we are talking about contingent liabilities. You mentioned one to do with a pension issue, which is going through an appeals process. Can you give some general indication or a ball-pat figure of how much might be involved in that? Also, would it be an immediate cash cost to you or would it be an adjustment? I do not think that we can say very much about the likely cost. The judgment itself is very broad. It is relating to the pension schemes for firefighters and judges, I think, and the protections that were put in place for some members of the pension scheme when changes were introduced. It is a matter that affects most public sector pension schemes across Scotland and is a matter that our auditors are looking at as well, and the likelihood is that it would not be a cash sum. It would be an accounting treatment change that we would need to fund through the balance sheet over a longer period. Stuart, you may want to add to that. I think that you have pretty much covered everything on that. That is exactly the position that we are in at the moment. It is just a note that we have put in the accounts that we are made aware of. It is very specific, so we could not really put a figure to it at this stage. I am not quite sure what term you use for engagement leaders, or the people who sign the reports. How many of those are there? Most people who sign audits within Audit Scotland are our audit directors. I think that we currently have 11 of those. Then I sign off to audits myself on top of that, the Scottish Government and the Scottish Parliamentary Corporate Body. Does that make 12? I think so. I am hesitating because we are recruiting at the moment to replace a member of staff who has been on secondment for a while. We can confirm the figure to you separately, but it is of that order. One of the ratios that some people look at as the partners just with the engagement signers to staff numbers. Do you look at that ratio to see if you think that there are too many, too few staff supporting them? That is an interesting question. I think that we have not looked at it top down in that way. We do like to look at it bottom up in terms of making sure that we have the audit teams in place of the size that is required to staff each of the audits and that the span of control of the senior audit managers who are carrying out the audit supervision and the audit directors is appropriate. As I am talking, you have just reminded me that some of the much smaller audits, like joint valuation boards, there is a delegated authority for senior audit managers to sign some of those, so I think that it would be better for me to write to you after this meeting and give you the figure in detail. We will take away the suggestion that it might be a quality indicator that we want to be monitoring internally within Audit Scotland. You also mentioned in one of two places about staff career progression. How do you see staff from trainee to, let's call them, engagement leader? What sort of time span and how likely is it that you can make it to the top? This is an area that we have been working on quite a lot over the last three or four years, and I know that I am willing to add to that. As you would expect, it does vary, but one of the reasons for the changes that we have been making in shortening our pay spines and reducing the number of grades that we have is to make sure that staff who are properly equipped to progress quickly can do so. We knew that we were running a risk of people who were building a lot of experience, had real potential getting stuck at a level where they simply weren't able to be promoted up to become engagement lead, and we are looking to reduce those journey times for people who can demonstrate that they have the skills and the experience and the ability that is required. Diane, do you want to say a bit more about that? We have a streamlined and simplified pay and grading structure that was part of some changes that we introduced some time ago. One of the innovative elements of that is the process that we call career development gateways. When someone feels that they are ready to make a pitch to take on more responsibility, they can make a business case to us looking at the work that they would offer, the skills that they have to take that forward and where we would find the funding for that, and they can look to accelerate their career progression if they feel that they are ready to do that and if we as a business feel that we have the work that requires all of that. That is something that we have been running in full form now for about 18 months. It is going quite well. I think that about 13 people have gone through career development gateways partly as part of our capacity building and progression, but we have very clear marks where the jump to the next career family, as we call them, is evident and where you have gateways that you can progress through all of those. Each individual role has no more than five years from the entry to the top of the scale and some of the scales are shorter than that, recognising the time that it takes to become proficient. We have some people, one of my management team colleagues joined the Accounts Commission predecessor body as a trainee and is now the ethics partner. We have some success stories and she is not alone. Thank you for that. I am just talking about the number of engagement leaders, 10, 11, 12, however, or a few more. How do you talk about rotating auditors every five years? How do you make sure that your people do not get too comfortable and balanced there, what you might call industry knowledge versus being there for too long? As Ian said earlier, in responding to Ms Marra's question about independence and quality, we apply all of the ethics standards ourselves, the independence standards are part of that. We aim to rotate all of the engagement leads every five years as part of the appointment round that happens. In exceptional circumstances, we have in the past used the provision to extend that to seven years for an individual just to allow some continuity, where there may have been changing staff members during an audit appointment, but our aim is to make sure that every five years we are rotating engagement leads as well as rotating the firms who we appoint to individual audits. Do you have enough people to do this? Yes. The only complication arises where we have had somebody leave towards the end of an audit appointment. They have had to be replaced and we then have to be balancing continuity with rotation, but we have enough flexibility with the number of people exercising sign-off responsibilities to do it. If I could add, the issue of conflicts and the potential for conflicts or the perception of conflicts is something that we take very seriously throughout the year, not simply at the rotation of the audit appointments times. Every year, as has been mentioned earlier, colleagues complete what is called a fit and proper form, documenting any relationships or engagements or contact that they have with anybody who they are auditing. If their assignment changes in the course of the year, they will complete another one for the new organisation that they are going to work with. We will review and look at all those carefully. We have a culture of disclosing relationships and a practice of moving people to remove any potential or perception of conflict. On page 71, in notes 10 and 11, you have cut a lot of cash at the bank this year, it seems. Commercial banks, which banks do you use? We are part of the Government. We have RBS where we get money from through the Government control, but our main bank is Bank of Scotland that we use. It is your bank account in your name? Yes. The next note says, closing cash balance payable to the consolidated fund. Is it your money or is it not your money? We are unable to hold reserves, so the cash that is in our accounts at the end of the period is held as a cash balance, and there is a netting-off process for what we have drawn down from the consolidated fund against what is available for the following year. Will there be a balance due to the Government? If you look at note 12, there is a cruel creditor there for the balance of the cash that is due back to the Scottish consolidated fund, so we put that in there. You still think that it is your cash? You will understand as well as we do, Mr Bowman, the distinction between the outturn on the consolidated fund and the amount of cash that is held in our bank account at the end of the year. We are disclosing both, but the debtor and the creditor related to the consolidated fund are the figures that matter. Cash is a timing indicator. Just as an innocent reader of the accounts thinks that you have a lot of money at the bank? That was a timing issue this year because of the uncertainty about leaving the EU at the end of March. We drew down in advance the balance of what was due to us in case we needed to take emergency action in the event of a no-deal exit. It is not additional cash. We just threw it down more quickly than we otherwise might have done. Your bank interest income was pretty low. Everybody's bank interest income is pretty low at the moment, but you are right. I would say that I am slightly confused by that, but you have explained it. Purely a timing issue. One of the benefits of leaving the EU. Yes. We will not get into that one. Do members have any other questions for the panel? In that case, I have a couple. On page 16, you say that you refreshed your five-year rolling programme of audit work. Would it be possible to see a copy of that? Certainly. I think that we brought it to the Public Audit Committee three or four weeks ago. I am very happy to provide it to the SCPA as well, of course. I think that it would be of interest to members. On page 28, the corporation tax is only £1,000, but where did it come from? It's good. We have to pay corporation tax on any bank interest that we earn, so that's an element that we have to pay across. You earned a lot of interest. Moving on to page 43, I see that one person is still receiving benefit and kind. There is a fairly substantial increase in that over the year. What drove that? The benefit and kind is the car that the post holder is entitled to under our car scheme. It's the car that she's had for a period of time. It's the same car scheme and it's actually the same car that was disclosed last year in the accounts. The difference in the value here is the way in which HMRC requires us to value it for tax purposes and include it in the accounts. That's a fairly big increase. It is indeed. There's no change to the car. It's simply a treatment to HMRC's rules, for how it's disclosed. Just curiosity on a couple of things. On page 67, rent and rates have come down. How, Stuart, do you want to? Yes, the business rates for Westport, the office in Edinburgh and also for our Glasgow office, we had a refund in the year from a prior year and also a reduction for £18.19. Good luck. Also on the same page, communication costs have gone up a fair bit over the year. What was the close draw of that? I think that, and Stuart will keep me right, that's a timing issue as well. I think that in the prior year we received some fairly significant credits from our mobile telephone contract, which had the effect of suppressing the 2017-18 figures and makes the 2018-19 figures look higher by comparison. I think that it should be much smoother next year looking forward. Is that right? That's correct, yes. On page 71, note 12, staff benefits untaken holidays. That's increased fairly substantially. Is that an indication of pressures on staff? There's a number of things I'm playing into that and I'll ask Stuart to come in in a moment. Partly it's because we have more people, as we've discussed earlier. Partly it's to do with when Easter fell in 2019 compared to 2018. That affects when people are likely to take their holiday around school holidays and parliamentary holidays and so on. But we are also working hard to make sure that staff are taking and are able to take their holiday throughout the year as part of our commitment to staff wellbeing. Stuart, is there anything else to add to that? No, that covers everything. Is that where staff—any individual staff, for example—are accruing large amounts of leave? The policy is that nobody should be carrying forward more than nine days of leave from one leave year to the next. That's calendar years. But that must be more than nine days. On occasion, some people carry more forward, sometimes on a planned basis, because they've agreed with their line manager that they want to take a larger holiday for a significant birthday or another milestone. That's agreed. Sometimes it does simply build up and we expect line managers to take action to bring it down. I think that Diane MacDonald is looking to come in here. Another driver is if a colleague has been on long-term sick leave or maternity leave, they will have accrued holidays that they couldn't take while they were absent from the office, so that will also show up in higher balances. Do you have any staff on long-term sick leave? We have had, occasionally, colleagues on long-term sick leave. But it's definitely not related to any work pressure resulting in people deferring leave. That's not the main cause of it, but we are, as we said in the annual report, conscious that people are under pressure and line managers are monitoring that closely and making sure that people are taking regular holiday. It's good for them. It's also good for audit work to make sure that you're not getting people either so overworked that they can't do good work or so close to their audits that they're not able to step back and apply independent judgment. I'd also add just as assurance that this is another indicator that we monitor very regularly in the business and there's active dialogue with managers in the business who are kept up to date with the profile of their team in terms of leave taking and so on. Okay, thank you. If members don't have any other questions, then I'll thank the witnesses for attending today and suspend for a few minutes while we change witnesses. Okay, I'd like to welcome the witnesses from Alexander Sloane, Stephen Cunningham partner and Gillian Soe, the audit manager, both from Alexander Sloane. Perhaps we can start just with a couple of questions. Sorry, do you have anything you'd like, the statement that you'd like to make? I just have a few opening remarks, if that may. I've just to confirm, we've received all the necessary information, explanations to allow us to undertake our audit for the end of 31 March 2019, and I can also confirm there was no limitations in the scope of the audit work. The form of Alexander Sloane was appointed to carry out the external audit of the 2019 financial statements, and my though was the responsible individual in the audit. During the year, we attended all audit committee meetings. We also attended audit Scotland's offices to carry out the interim audit work in February, and the final audit work was carried out in May. Our audit was carried out in accordance with international standards and auditing. As part of our work, we have also reviewed all internal audit reports during the year and heard discussions with Audit Scotland's internal auditor's BDO. As I mentioned earlier, we've received all the information and explanations that we would require to carry out our work, and the audit was completed without any problems. The audit file was also subject to the second partner of the view in accordance with our quality control procedures and that the view was carried out by our senior partner, prior to the signing of the audit report. Based on our audit work, we form an opinion on whether the accounts give a certain fair view, whether they've been prepared in accordance with international financial deporting standards as interpreted and adapted by the financial deporting manual, and to confirm that they've been properly prepared in accordance with the Public Finance and Accountability Scotland Act 2000 in directions by Scottish ministers. Being satisfied with audit evidence, we issued an unmodified audit report. In other words, we've satisfied the accounts to give a certain fair view in accordance with legislation and accounting rules, and the audit report was signed on the elements of June 2019. There were no significant matters that needed to be brought to the attention of the commission or the leaders of the accounts. We also prepare a management letter based on our findings and the purpose of this report is to summarise the key issues arising from our audit and to report any weaknesses in the accounting systems and internal controls that come to our attention during the audit. I'm pleased to report that, in the course of audit work this year, we didn't find any weaknesses in the accounting and internal consoles. Finally, I would just like to record my funds thanks to both the staff at support staff at the SCPA and Audit Scotland for their assistance during the audit this year. Thank you for that. I've got a phrase running around my head and excuse my pronunciation, but Chris Castori at Ipsos Castori's, who guards the guards, will be you. Are you satisfied in the course of your audit that Audit Scotland is managing the increased pressures that it is under with the additional work that it is taking on in terms of the need of all powers and so on? Are you satisfied that they are managing that well? I mean, from an audit perspective, we do attend all of the audit committee meetings, we do get updates in terms of audit quality, and we do make sure that we take that into account for how it impacts our audit report, so we were satisfied with any implications for the audit. I'm not sure that answered it, actually. Certainly, we've not come across anything, any issues or any problems from our observations during the course of the audit. Obvious signs of stress or their coping well. A question on the work in progress, we have on page 70, maybe not 19, about £1.6 million of income that relates to work in progress completed but not yet charged out. Now, if that didn't turn into income, then there could be an overspend in the following year in Audit Scotland. Are you satisfied with the calculation of the income to be received for work yet to be completed as accurate and robust? Yes, it's an area where we spend a lot of time on audit, focusing on work in progress, so yes, we are happy with the figures in the calculation. Would that amount have been recovered by now? The majority, we look at both the calculation of the time spent and the timing of when the fees and we go through that for each of the audits to make sure that it's been properly calculated. Is there a good history of accurate calculation and recording of work in progress? Yes, we've not encountered any problems in that area. Thank you, convener. Audit Scotland has disclosed a contingent liability in relation to potential future pension liabilities, which may arise pending the outcome of the McLeod case. Based on the work that you've performed and the information and explanations received, are you satisfied with the accounting treatment applied for that liability? Yes, we're satisfied with contingent liabilities, the presupposite accounting treatment at this stage. There can't be an arc here that calculation of how much would be paid over if there could, then we'd be looking at whether the vision should be put into the accounts, but at this stage we believe that's the most presupposite treatment. You're reassured that the matter is in hand appropriately. Thank you, convener. Rona Cymru. Just along the same line, I wonder if you can confirm, categorically, that you're satisfied with all the disclosures relating to pension costs and liabilities in this 2018-19 annual report. Yes, again, we look at all of the disclosure and make sure that they've all been done in accordance with the financial report in manual, and we were satisfied that as a case. No questions arise, arose from your scrutiny? No, we were happy. We did a lot of work in terms of the pensions. We looked at the actual reports, we considered the assumptions. The actual reports provided an issue estimate, and then they provided an update when all the figures were available, and we were happy that we had the most up-to-date information, and that was included in the accounts. Thank you. Just a question for myself. When you're doing your audit, do you audit the fee structure and recovery? We don't directly audit the fee covering the structure of the fees. That would be more of an item for an internal audit after the audit. It would be looking at that. We take into account how the fees are done, and we know that there has been a lot of work done in that area, and it's an area in which internal audits have looked out for Audit Scotland. Implementation of policy on fees? We'll look at how it's changing, but there will be a limit. It won't be a direct part of that audit itself. I'm referring back a little bit here to previously when Audit Scotland was working on revising its policies and so on in connection with fees. I was interested in seeing whether it had been effectively implemented. That was related to cross subsidies, which Audit Scotland worked hard to eliminate. Are you satisfied that that has been eliminated? It wouldn't be part of the audit check and give a comprehensive answer. I know that the fee structures have been reviewed in terms of internal audit. There were very few recommendations coming out of that area. With any audits, there will be some that will have over and underspend due to how that show audits progresses. I'm not clear on the response there. Are you saying that you did look at it, or are you saying that internal audit? I'm saying that internal audit is responsible for that. Would you look at the fee section? So you did not look at it from that point of view? No, we don't look at it in-depth in that area. Okay. Do you have any other questions for Alexander Sloan? In that case, thank you very much for attendance and we'll move this meeting into private.