 Welcome to the second meeting in 2018 of the Scottish Commission for Public Audit. I remind everybody to switch electronic devices off. As always, I ask members to keep the questions and answers concise and to the point. Agenda 1 is a decision on taking business in private. That asks the agreement of members to take agenda items 4 and 5 in private. Are members agreed? Agree. I move on to agenda item 2, which is consideration of Audit Scotland's spring budget revision 2018-19. Members have a copy of the spring budget revision in their meeting papers. I will welcome Ian Leitch, chair of the board of Audit Scotland, and Ian is accompanied by Caroline Gardner, Auditor General, Dan McGiffin, chief operating officer of the Institute of Dennis, corporate finance manager of Audit Scotland. I will invite Ian Leitch and the Auditor General to make any short introduction remarks. No introduction from you, Ian. No, not in this subject, chair. You know my views and this is rather mysterious. In that case, Auditor General. Thank you, convener. As in previous years, the spring budget revision requests budget cover for the non-cash pension charge that will arise as a result of accounting adjustments in 2018-19. As you know, these adjustments are notional and they don't generate cash movements. We aren't able to plan for them in advance due to the timing of the information we receive from our actuaries and the Scottish Government has advised us to deal with them through the spring budget revision process. The amount involved this year is £2.918 pounds. We'll do our best to answer any questions that the commission may have. Thank you. The obvious question is what preliminary discussions have you had with the Scottish Government to confirm that the previously agreed arrangements with the gym treasury remain in place in respect to the pension adjustment, and have you advised them of the amount of Audit Scotland's requirement? The answer to both questions is yes, chair. We've had the usual discussions with them. They're aware of the amount involved and they support the submission that we're making to the commission today. Can I open up to any other members who might have questions or comments to make? Dan? In that case, I've only got one small additional question to ask in the paper on page 4, paragraph 19, the expectation of continuing low interest rates in the next few years may require similar large accounting charge adjustments in 2019-20 and beyond. It's a little bit alarming, but it has been the pattern for the past few years. Is there any logical you would think—I know very little about these things—that once you've plugged a gap, it doesn't keep reappearing? You've gone to the heart of why this is a complex matter, chair. The accounting adjustments that we have to make aren't about covering a deficit in a pension fund. They're to do with the accounting adjustments that are needed to cover the accounting entries that relate to the pension scheme. Stuart can talk you through the accounting entries if you'd like to know more about it, but this isn't a funded scheme where we're looking to plug the deficit. That's handled separately in the contributions we make. This is the accounting entries that are required to reflect the movements around the pension scheme as a whole, and I'll hand over to Stuart to explain it to you. Yeah, there's really three elements each year around the figure. It's the projected current service cost, so that's the cost in year of the staff that you have for the benefits that they get by the end of March each year. On top of that, we will then have the interest income on plan assets and the interest cost on defined benefits. There's multiple things that influence this, and that's offset by the contributions that we make as an employer as part of the different valuation that Caroline mentioned in eventually plugging the gap in a future date. This is really the in-year cost that we have on that. Thank you. No one has any other questions. In that case, thank you very much. I guess we move to next agenda item, which is evidence on Audit Scotland's budget proposal for 2019-20. Again, members have a copy of the budget proposal in their meeting papers. It's the same witnesses for this agenda item, so without further ado, I don't know what you and I—perhaps this time you've got an introduction or mark to make followed by the Auditor General. Yes. We'll be happy to answer any questions on the budget that members may have, and thank you for the invitation, chair and members. A very brief statement. All members will be aware that we are in uncertain times at the moment on reflection that it's pretty much an understatement of what's going on in the world. Like the public bodies that we audit, we ourselves are having to navigate a course through this to run our business and to manage risks and uncertainty. We are tempted to do this while recognising limited public resources and keeping audit fees at a reasonable level. At the same time, we are mindful of maintaining and improving the quality of audit, just as further new financial powers and bodies are coming into being in Scotland. As such, we have produced our budget proposal, taking those factors into consideration in as much as we can. Our resource requirement is £7.564 million, an increase of £416,000 from 2018-19. That is 4.2 per cent in real terms and relates largely to people costs. That is in line with the long-term planned investment in the organisation that has set out in previous years to your commission chair. The 2019-20 aspects of that plan are detailed in the proposal. With your permission, convener, after that brief introduction, I will hand you over to Caroline Gardner in her capacity as a countable officer. Thank you, Ian. New financial powers continue to be rolled out to the Scottish Parliament. As the commission knows, those include major new responsibilities such as the transfer of social security powers. Our budget proposal will enable us to continue our statutory audit responsibilities, take on the audit of these significant new expenditure and revenue-raising responsibilities, and support the Scottish Parliament in its important role of holding government to account. As we indicated last year, we have developed a four-year plan that reflects the implementation of the new financial powers, and this proposal represents the second year of that plan. Finally, convener, as the chair of the board has said, we are all working in an environment of great uncertainty at the moment. We have reflected that in our proposal as well as we can at this stage, but we will keep a close eye on events as they unfold and keep in touch with the commission during that process. As ever, we are happy to answer the commission's questions. Thank you. Perhaps I can just ask the first question then. On the table in page 7 and further explained in page 8, Audit Scotland has advised that following the approval of the 2018-19 budget in December 2017, a further £262,000 of cost pressure were identified. Can you provide a bit more information on the sources of that additional cost pressure? Why have the additional cost pressures been met solely by additional charges to audited bodies? I will ask Stewart to pick that up in detail, but the biggest movement involved in there is the increased audit fees for integration joint boards, which were new bodies established in 2016 or 2017, and where they are gradually taking on significant new responsibilities for health and social care. As you are aware, the budget that we prepare is done every July-August time, and we submitted the budget proposal last year prior to the Scottish Government budget being announced. We were basing the pay award policy on the ongoing 1% cost of living. In addition, as Caroline said, we also had an element of, before that time as well, the fees that we cannot analyse until the audits have completed. The 16-17 fees were not completed by the time that we were building our budget, so what then happened is that once that is done and the SCPA approved our budget submission last year, we have revisited and there has been adjustments in respect of the pay policy primarily, and also the base fee increase for the volume that is increased in the integrated joint boards. I will throw it open then to the members. Alison, I think that you want to say something there. Moving on to explore the additional work requirements and the impact that will have, you have highlighted that in 2019-20, because of increased financial and performance audit work on Social Security Scotland and further work with the national audit office in respect of Scotland's VAT share and Scotland's rate of income tax, you are proposing a further £4.5 whole-time equivalence at a cost of £285,000 to deliver that additional workload. I would like to understand that, when you presented your 2018-19 budget in December 2017, you were suggesting that one whole-time equivalent would be required for that year, 2019-20, so I presume that additional information or a greater understanding of what is going to be required has meant that that is increased by £3.5. It is a timing difference rather than an increase. You may recall that our four-year plan suggested that at the end of that period we will have an additional 20 people in place to cover the full range of the new responsibilities of the Scottish Parliament and the Scottish Government. The exact timetable for the roll-out of the new financial powers is not fixed and keeps changing. For example, on Social Security, the Scottish Government has now entered into an agreement with the Department for Work and Pension to take on responsibility for some of the benefits sooner, and that means that the audit work needs to ramp up more quickly. I am just about to appoint in order to the new social security agency to cover that. The timetable for the full devolution of the assignment of the VAT revenues is also, we think about, to be agreed. There are some other changes behind that and I can ask Stuart to talk you through in a bit more detail, but it is timing differences within the overall plan rather than changes to the plan that we are looking at. Can I ask how you estimate the time that will be required to complete financial and performance audit work for an entirely new body? There is an element of judgment involved, as you would expect. We use our own audit experience of bodies of a similar size and look at the particular functions and responsibilities of this body to see what we think is likely to be needed. My team have worked very closely with colleagues in the National Audit Office who have got a good deal of experience of auditing the Department for Work and Pensions to get a better understanding of the systems that will need to be audited and the risks that will need to be taken account of. We are taking a phased approach to implementation so we currently have a small team responsible for all of our work on social security, the audit of the agency and the performance audit work, and we will build that up both as the timetable for taking on the new responsibilities is firmed up and as we build up our own expertise and experience around it. We are clear that 4.5 is the right number for 2019-20 and there are then two years of the plan after that that we can flex as the timetable unfolds. Given that Audit Scotland will work with the National Audit Office in relation to some audit work, how do you avoid duplication of audit effort and how can you demonstrate value for money in these circumstances? It's a really good question, one that we are spending a lot of time working on with our colleagues in the National Audit Office now. I think the first thing to say is that the devolution of these responsibilities to the Scottish Parliament doesn't reduce the size of the National Audit Office's audit of the DWP because of its scale and complexity. We have a memorandum of understanding in place between myself and the Comptroller in order to general at a UK level which sets out what work we will do to satisfy the needs of each of our Parliaments of the UK Parliament and the Scottish Parliament and the legislation includes some requirements for the CNAG to report to this Parliament. The expectation is that I will provide additional assurance letting this Parliament know that its interests are being taken account of during that process and that I've got no concerns about the work being done. We are due to have an update of the Audit Accountability Framework between the two Governments which will set out how this works once all of the new responsibilities have been devolved. That's still subject to discussion between the two Governments, but it's an important area to make sure that both Parliaments are getting the assurance that they require as well as making sure that there is no overlap in terms of the responsibilities that each of us carry. In terms of that duplication and an overlap question, to what extent has Audit Scotland considered or discussed transferring resource between audit agencies where responsibility for audit work changes, for example, from the National Audit Office to Audit Scotland, such as Social Security? We have considered the question with colleagues in the National Audit Office and I think it's fair to say there very strongly of the view that the devolution of the new financial powers to Scotland doesn't reduce their audit requirement at all. The amount of money involved is very significant for Scotland at about £3 billion a year, but it's actually very small in the context of the overall DWP budget and if anything there's more complexity while DWP is continuing to minister some of the benefits on behalf of the Scottish Government, so we'll keep that under consideration, but at the moment it looks as though the overall volume of audit that's required will increase as a result of the devolution of the new powers. On this point, on Social Security Auditor General, I may be straying slightly into the Audit Committee's jurisdiction here, but on Social Security, will the audit include an assessment of the set-up costs of the social security system in Scotland? Yes, it will. The financial framework was clear about who would bear the set-up costs for all of the new financial powers, including social security and the contribution that the UK Government would make towards that. I look at that as part of my performance audit work at the moment and reported on it, I think, back in April this year on an interim basis due to update that next year, and it's something that the Comptroller and Auditor General will be looking at through the lens of the DWP at the same time, so that information will be available to Parliament. On page 9, you set out your work programme for 2019-20, and it's based on the five-year rolling programme of national performance audits. Can I ask what role the availability of resources plays in deciding the priorities for this programme, based on the chair's remarks about uncertain times and financial unpredictability? Is that becoming a difficult task for you? The process is managed by Audit Scotland on behalf of me and the Auditor General. What we aim to do is to have a rolling five-year programme with certainty over the next two years and an indicative programme for years ahead, so that we can make the best use of our staff time and of the general intelligence gathering we're doing to inform the programme, and so that the people we're auditing and Parliament have got a sense of what's coming. You feel it's fairly set, fairly secure, and beyond that, it's just based on events. Is that the idea? It's certainly more strongly committed in the first couple of years, because by this point work that we're publishing next summer will already be well underway, so we know that's happening, but we do aim to keep some flexibility in there so that we can respond to events. The obvious example right now is the impact of EU withdrawal and what happens over the next 12 months, but other things do emerge from time to time. Last one next question, actually, was how do you build in, you know, is there a safety net for events that happen? There's enough there that could cope with anything that would crop up unexpectedly? We manage it within the programme on the basis that it's not appropriate for us to have a large chunk of uncommitted resource. It's money that's coming from other parts of the public sector, so we don't do that, and we can't carry reserves forward, as you know, but within the programme we're very clear how we can flex it to respond to events. That's possible to a limited extent over the next 12 to 18 months, but to a much greater extent for the remaining three years. If you need to move one area. Exactly, right, and for example we have got a category now around EU withdrawal specifically, where we've committed some resources to that as an area, without yet finding down the scope of what that will actually look at. There's too much uncertainty to do that yet. Okay, thank you. Thank you. Thank you. Thank you, chair. Auditor General, your budget proposes to increase management contingency, actually double it from 150 to 300,000. Why is that? It's a direct response to the uncertainty that we're facing now, because we aren't able to carry reserves forward, and obviously I'm not prepared to risk overspending our budget. We have for a long period run a small contingency of £150,000, which has been in the proposal we've brought to the Commission in previous years. Given the extent of uncertainty that we're now facing, not just in terms of the work that we may need to carry out, as Ms Mackay was exploring, but also what the impact may be on our costs in future, given the range of uncertainty that's around, we are proposing increasing that to 300,000. It's still a very small part of our budget. I think it accounts for 1.2% of our expenditure at the increased level, so it's a very small figure, but we think it's an appropriate buffer to have in place to avoid having to come back to the Commission if things turn out to have a big impact on our prices and costs next year. I see Ian Leach nodding. You obviously feel that this is quite important given the current circumstances. Yes, preparedness is a big issue, but I'm prepared for what. There's guidance issued to the auditors who audit all the bodies about the questions that they should be asking and see what the state of preparedness is, but if the organisation is different, it breaks it. What does it mean? I've given the example before of the European Agricultural Fund audit. It's paid for through Europe, through the National Audit Office, to us at the tune of £874,000 a year. Presumably there'll still be an audit, presumably there'll still be grants to farmers that'll need to be audited, but what will the shape of that be? More importantly, who's going to decide it? If it's a UK thing and we do it as a sort of agent of the NAO, then the resource should come from the NAO. If, on the other hand, it was to be devolved to the Scottish Government, arguably it would not be a chargable item to the Scottish Government because we can't charge for that audit, as you know. Therefore, it would have to be met from the Commission approving it as a top slice from the consolidated fund. We don't know all of these things. We don't know the flexing we've got. We don't know how the staff will be, because there's 18 staff members involved in that work. The contingency fund and our staff movement, for example, are 6 per cent turnover of staff, although there's some flexibility. One thing that we try to do is to avoid taking too much from the pot of the consolidated fund, because if we top-slice too much, it's a denial to other parts of the public sector the use of those resources. There's no point at the end of the day having that as a credit balance, because somebody didn't have the opportunity to spend that and worthwhile public projects. All of the factors that are leading on from the answer given by the auditor general there is how we're trying to manage our budget with unreasonable limits but give us a degree of flexibility. That makes sense. Can I ask of the 150,000 available in management contingency last year, or this year, how much of it has been used? I think that Stuart will be able to give you an answer to that. Last year we actually used half of it, so it was around 75,000 in our actual accounts. This year there are elements to be, but decided on that bit, whether it will be used in full is probably not similar to this year, but we don't know what's going to happen in the next three months, so it might well be used in full. Let's hope that next year we're living in more certain times and don't have these. Sorry, Diane. Just to add that obviously we account for what we've spent out of the management contingency to both the board and to yourself at the final accounts stage, so you have that additional assurance. If the unexpected changes don't occur, we will be accounting for why we haven't spent the management contingency, but we will be accounting for what we've spent as well, so you have that assurance at the other end of the process to us, to the board. I want to move on to the cost of audits, because we've picked up that the cost of audit to local authorities has increased by 4.2 per cent, but I think that the cost of audits to other bodies such as NHS and colleges remain broadly the same. Can you explain, Auditor General, why that is? I'll ask a Stuart to talk you through the detail in a moment. It's worth reminding the commission first that the board has encouraged us over the last few years to provide more transparency about the costs of each sector and how the costs are recovered through fees, and also to make sure that we balance each sector as well as the organisation as a whole, taking one year with another. So, there's more transparency about that. Stuart can talk you through the reason for the changes within the local government sector compared to the others. We do a sector analysis, as the Auditor General said. We looked at, we have to break even by a sector, is what we look for. Included in that is a portion of overheads, and it's based on the data of completion of audits from the prior year. What's happened is that when we collect that data and redistribute it, it means that it's moved around in volumes to where the work has been done, and that's where the fees and the apportionment of costs go and that balances that off. I don't follow that very well. I understand perhaps in accounting terms, but that doesn't explain to me how—can you take us through that again? Yes, sure. What we do is we have, broadly, we look to break even by sector. What we do is we take the amount of audit days for each sector, and then that is the key driver to how we then distribute the costs in our budget across the sectors, and then that allocates all the different overheads, so like finance, HR, IT, depends on where the work is. If that moves around, if the volume moves around slightly, what will happen is that more shift of overheads moves around as well? If the volume moves around? If the volume moves around, so that's the audit days effectively. If there are more audit days for councils than there are for colleges, for example, it becomes more expensive. I suppose my question is why are there more audit days for local authorities than there are for the other bodies? I think for a start when we mentioned would have been the integrated joint board, so they are a local government sector. As we highlighted, that's an area where we've had to increase based on the volume or audit days that we needed to do, so that would be one of the key areas. Can I just add to that? I think what you're referring to, Ms Marra, is the income from charges to local government bodies on page 14, which has gone up, as you say, by 4 per cent as a result of the volume changes that Stuart talked about. It might help to refer you to the fees and funding strategy on page 23 of the submission table 1, where you can see that the charges to local government bodies have gone up by 0.5 per cent in real terms, so that's the unit cost that has gone up by 0.5 per cent. The volume overall has gone up by 4 per cent because of the change in the volume of work that's done. Okay, so the cost of doing an audit of a council has gone up by, what did you just see? That's not quite the right conclusion either. The fee has gone up by 0.5 per cent in real terms on a like for like basis. That will vary for individual bodies depending on their circumstances, but across the sector that's the case. The overall cost to local government has gone up by about 4 per cent because of the change in the volume of the number of bodies that we're focusing on and the size of the IJB audits as they've taken on their full responsibility, and that's where the 4 per cent comes in. I apologise that this is complex. We do— Sorry, I apologise. I should be following it better, but is the differential between what you're charging them and the cost, who's picking that up? Local government pays for all of the audit work in local government, so all of the annual audits, the performance audit and the best value audits are paid for by local government itself through the fees. Okay, thank you. Rona. Yes, thank you. Now, following on from that line of questioning on page 24, you set out the early rates used to cost audits, and that includes staff costs. It's notable that increases for certain grades of staff are higher than others. For example, the early rate for audit managers has increased by 8.6 per cent from £70 an hour to £76 an hour, whereas the early rate for trainees has fallen by 8.3 from £48 an hour to £44 an hour. I wonder if you could expand on that and explain why. I'll ask Stuart to talk you through that. The trainees, as an example, the hourly rates are worked out based on the direct cost, so that's the actual pay, national insurance and pension contributions. Then there is an overhead element in direct costs that's included in that, as it says above around the property costs, IT, finance. What's happened is this is based on the budget at a particular time, so we take what mix of staff there are at that time. For example, the trainees has gone down from £48 to £44, is based on the mix of trainees and where they are on the pay scale. When it was done in 2017-18, there would have been more at the higher pay scale element than when we did it for 2018-19. A trainee rate is on a scale? It's not just a flat rate for trainees, it's on a... It depends where they are in their training programme, so the numbers where they are. We have roughly about 34 trainees, so in 2017-18, there would have been more at the higher point than there was in 2018-19, and then what that drives that is a key driver on the allocation of the overhead, so if that is reducing, that will take less of the overhead element, which means audit manager will take more, because it's at a higher level, because it's based on a pro-rata of the level that they are. Is that how it's normally always done? Is this standard practice? I think as we do Benchmark as a finance forum with other audit agencies, and these are very similar levels to, for example, Wales. So comparable with other audit sectors. Okay, thank you. Bill, I think you wanted to come in with a supplementary there. Yes, thank you, if I may. Do you have a budget for the hours? Each audit manager will have a budget for their audit, which is expressed in terms of both the audit fee that's charged to the body and a standard make-up of the audit team. But as you will know, the actual make-up of an audit team will vary depending on the availability of resources and the requirements of a particular audit, and the breakdown of each grade will vary over time, depending on where people are on their pay scales. Do you have a summary then of all the teams to give a total hours budget for the organisation? The audit services team, which is the team responsible for doing the 70 per cent or so of the annual audits that they carry out, absolutely have that budget and manage it very closely for each of the audits that they manage within managing the organisational staffing budget as a whole, which includes audit services, performance audit, and best value, and the corporate services group? In terms of the previous question, I may be connected to this just to perhaps clarify. This isn't a table at paragraph 26 of the rates paid to trainees. It's reflecting the different mix we've got of trainees. There's not been that shift in the salaries of people, but rather what the total cost of the audit is at each grade. I just wanted to make that clear if it wasn't clear there. Effectively, is it not an increase or a decrease? Is that what you're saying? It's not—our trainees are all paid a set scale, and that hasn't changed. The mix of trainees we have at the point in time that this table is produced has changed from the point in time that it was last produced. The last time it was produced, more trainees were at the top end of the grade. Those people have now qualified and have gone on to other roles in the organisation, and this is reflecting that there are more people starting their trainee journey with us, but they're all being paid the same rate that's not shifted. I hope that that's helpful. I just thought there might have been a bit of doubt about what the table was showing, coming back to your point. Yes, we have all of that data for the audit services group who manage the chargeable rates in the early allocations, and that's built up, as you would expect. I'll be then showing the time to say the spent of clients, time on training, time on— Yes, we have all of those profiles, and we work through the time recording system, and that's what helps to build up the picture of what the cost should be. Stuart mentioned earlier the shift that we made in the integrated joint board charging, which was driven from the use of the time recording data that looked at from the planning assumptions made about integrated joint boards to the reality of how auditors actually spent their time. We recognised that we needed to shift there. Do you see that somewhere? You can. Perhaps we could have a discussion afterwards about what form that might look like. I would provide you with assurance that that information is fed into the financial reporting and so on, which the Audit Committee and the Board review on a quarterly basis, and I'm very happy to share all of that. I have a question, and I'm pleased to see that quality has mentioned quite a lot in your budget proposal. You have your quality report, which, within it, has a regular survey of the staff and their views. The 2017 quality report identifies some areas that the performance has fallen compared to 2016-17, for example training and development. What are the reasons for the fall and the positive responses from those recorded in the previous year? Aside from the staff survey, how else does Audit Scotland assure itself that staff are well supported to deliver quality audits? Finally, you have 250,000 to invest in audit quality. How will you do this and how will it address the issues? If I missed the three parts of your question, I'm sure you will prompt me on the results of the survey. The first thing for your assurance is that the survey will be run again and you'll have the results again at the end of the year when we publish the next annual quality report. The survey hasn't been conducted yet, so I don't know the results for this year, but we'll be looking at them very closely. What we know last year is that, in some parts of the organisation, because of the volume of work, there were increased pressure, increased commitments—we've talked about the integrated joint boards, for example—and we have looked very closely at the training and development. We made some changes following this and we have changed how we organise professional support, which is providing the technical and auditing support and training that helps our auditors to be up to speed and up to date on all the technical matters that they deliver in their audits. We have had a real focus in our learning development programme this year to join up professional support and our learning development programme. We've offered more events, we've offered a huge range of different topics, we've had external providers and internal providers coming in. We've had work with the other audit agencies and a whole range of activities. At each of those events, we take feedback from colleagues who are taking part in learning and development and we're also taking stock of how teams feel about their ability to respond to the demands that they have. We're taking short-term feedback all the way through the year. We'll run this survey again and we have another survey that we run with staff, which is anonymous and we'll have the results of that soon. We know that the participation rate in our best company survey is very high. This year it's 84 per cent and it asks a series of questions about learning and development, so we'll await the results of that. We have the results of that going back 10 years and we can track very carefully what people feel. The participation rate for Audit Scotland in this particular survey that's reported in the audit quality report didn't achieve that 84-85 per cent response rate, which is exceptionally high and which is a high response rate that we're used to. We're also working on the timing of this survey and also thinking about how we can make sure that people participate. We're very disappointed with the results and we've been working very hard to improve them. People and their skills are the heart of the organisation and we want to make sure that our people have the time to devote to learning and development, are supported in learning and development and that we're working to make that as effective as possible. We've been doing lots of work in that area and we'll see what the survey results tell us. You asked about the audit quality team and what we were doing for that. We have a team of three people. If you've been reading our audit quality report, you'll see them pictured at the front of the document. They are regularly reviewing and reporting on audit quality to the Auditor General and to the Accounts Commission and to the Audit Committee of the Audit Scotland Board. They produce five reports in a 12-month period and including the annual report. In addition to the work that they do, they also commission work from ICAS, which means that we are independently, externally reviewing the work of all auditors, Audit Scotland and the firms that we appoint. This year, the work has just started. We will be reviewing, along with the quality work that teams will be doing individually. We'll have reviews of about 11 per cent of the audits that we carry out, which is a very significant percentage and increase on last year. In terms of the quality of the work, we're investing through, as Audit Scotland, through our learning and development strategy to improve the quality of the work. We have a comprehensive programme of quality reviews, and we report annually on that. We have independent external review of the work, which we publicly report on. In development, which is unique across the Audit agencies in the UK, we have taken that independent external review and extended it beyond the financial audits to include both the performance audits and our best value audits, where we're treading new ground in figuring out how to apply really good independent external review of two quite unique audit products. I think that this year we have a lot more quality review work on the goal than we did last year, and last year we made significant progress in the work that we reported. You'll see this annual quality report again at the end of the year, and you'll be able to compare another set of results on all of that. I'm a member of ICAS as well, but I'm just an ordinary member. It's one of our key issues as quality. As you know, the profession across the country is somewhat in dubious circumstances with recent happenings with some of the companies. We're particularly keen that the public audit model in Scotland is the best that can possibly be, and that's why we've gone to all this trouble and concern to make sure that we have this team to monitor it and have the independent review, and that's why the Audit Committee and the Board conscious to seek these reports throughout the year to ensure that there's an assurance, because we have to assure you, we have to assure ourselves first, we have to assure the clangarts and have to assure you and the Parliament that audit quality is good. Just as a final question then, have the reports or the reviews that you've done so far come up with anything that's concerning? Last year's report highlighted a thread across all audit providers, which I think is highlighted in all reviews of audit, which is the need for better documentation sometimes, so we've been working on that and as have our partners in the firms, but as of today there hasn't been any significant concerns. Can I ask if any members have any other questions that they'd like to ask at this point? I've got one or two if I may. Please. Just picking up from the submission, I've asked about the chargeable hours budget, which I think we'll get. Speaking about the social security, I don't think that you actually gave a cost or a number of hours to do the audit of a new body like that. That's the commission after today's meeting with that figure, if that would be useful. There's a capital budget of, I think, 150, down from 175. I think that you've got depreciation, maybe of 300 or something in the budget elsewhere. It's a rule of thumb. I always thought that your capital should at least be the depreciation just to make up for the consumption of the assets. Is that not the case? I think that it's changing because of the way our IT is provided now. Most of the capital budget this year is for IT costs, both hardware and software, but the balance of our overall spend on IT is shifting from buying equipment and buying licences to buying subscriptions for cloud storage for cloud services. We've moved to Office 365 for example this year, so there's less capital investment to run the IT service than we would have seen in the past. We are still depreciating past assets and our leases are dilapidated, depreciated on the same basis with provisions for dilapidations. The staff have the correct equipment to do the job. That's absolutely our intention and it's what this year's capital budget is intended to do. I know on other committees that we get reports from you on various things that go wrong at organisations. Do they get charged in some way for—if a good organisation does nothing wrong, is it in a better position than one that has a number of reports? Yes, for the chargeable audits that we carry out. Probably the clearest example of that has been the Scottish Police Authority over recent years where, for a range of reasons, we've had to do a lot of extra work to be able to provide an opinion on the financial statements and they have been charged an additional fee to carry that out. That's at the extreme end of the range of what's been needed, but that's the best example just now. Does that cost appear in those reports somewhere? It's included within the fee income that you see and it's often part of the answer that we give you when you ask why the fees for particular bodies have changed. I think that we wrote to you last year with more information about the fees that had been higher than predicted, the difference between the budget and the actual. It doesn't appear on the face of it because they are generally very small movements. Something of that scale is unusual. Okay. I've got a couple of small questions myself. I noticed that firms employed by Audit Scotland to perform audit functions received a 2 per cent increase in fees. Although it's not a comparison really, the average fee increases were 1.6. Can you confirm that of the chargeable bodies, the fees from them cover the increase in the fees for the external providers? In total, yes. The mechanism for increasing the fees to the firms is set out in the contract that we have with each of them following the procurement two and a half, three years ago, which makes the provision that we will uprate the amount that we pay to them in line with the base increase to our staffing costs, so 2 per cent is the assumption that we have in for both our base increase to staffing costs and for the fees. That has been recovered on the other side? Absolutely, yes. By sector, as well as across the budget as a whole. On page 5, paragraph 9, you're talking about new social security Scotland. You're talking about a new auditor for that. You're talking about a new team. Where is the expertise coming from for that? Is there special expertise needed? There is certainly special expertise needed. We have some expertise ourselves. We have been auditing housing benefits in local authorities for a number of years now, which provides us with a good starting point. Since the Smith commission agreement and the Scotland act was first being developed, we have recognised the need to build our capacity in this area, and we have worked very closely with our colleagues in the national audit office who have many years' experience of auditing the department for work and pensions and its predecessors. We have developed some specialist training for the staff who are involved, building on that to make sure that we have the experience that we need. You're absolutely right, though. It is quite a complex and specialised area, with particular risks, both in terms of the level of fraud that's been experienced in the UK as a whole in the past, but also the importance of getting it right for people who rely on benefit payments for their wellbeing. We absolutely recognise the importance of making sure that our teams are properly skilled to do that. Diane, do you want to add to that? We've been recruiting this year a lot, and I think that in the year to date we've had 19 news starts in the organisation. There's quite a lot of resourcing internally, where we're looking at the mix of experience and skills that we have and the career opportunities that people want. We've also been, as you know, we've got a very strong commitment to our graduate training scheme and a very strong commitment to growing our own expertise. We took on an additional two graduates last year above what we had notionally planned to help to make sure that flowing through into the new social security work there'll also be a range of skill mix, so there'll be graduates, there'll be experienced staff, there'll be new people, so that we can get that diversity in our teams that will really help us to make the most of the opportunity that we have to set up a new team and expand the organisation. There's a mix. It's a challenging environment in which to create new teams, but it's also a real opportunity for us because we've been expanding slightly as an organisation, and that's been a welcome growth with welcome career opportunities in it for existing colleagues and for new members who've joined. I get the impression that there's increasing specialisation within Audit Scotland, within particular areas. For example, we're talking now about the special skills needed for social security. We've talked previously about special skills needed for IT audits and so forth. Are we increasingly having to rely on people who are specialists in their own areas? Is that creating any sort of silo effect within Audit Scotland? I think that you're right that our work is becoming more complex and the range of bodies that we audit is increasing with things like social security and tax raising for the first time. We work quite hard to make sure that we've got the balance right between having as much flexibility as we can in our resourcing and giving people the sorts of career development opportunities that Diane was referring to, while also having the real specialism that we need for areas like social security that are quite particular. Our workforce plan is part of addressing that. It aims to make sure that we're thinking ahead about what skills we need so that we've got the chance to develop them internally and to recruit to them. The core that runs through all of it is audit skills. Ian referred earlier to the staff who are working on the audit of the European Agricultural Fund. We have about 20 staff working on that. If that work finishes because of the way in which we leave the EU, they are all qualified auditors who will be able to work on other parts of our portfolio of work rather than running the risk of them not being able to be redeployed elsewhere. That's an example of the sort of balance we try to maintain. It doesn't mean that it always works smoothly in the short term, but that's our intention for the longer term. On page 7, I was just noticing that you've got people costs going up, numbers of staff going up, but you've got your administrative costs going down. How realistic is that? The reductions in the other administrative costs are all identified reductions, a combination of savings and cost reductions. I think that Stuart can give you a bit more detail about what's included there. We think that it is realistic as the important point. I think that some of them will be in respect of property costs, which will be coming down. Obviously, there was mentioned earlier about depreciation. That cost is coming down, and also our travel and subsistence is coming down. That's a combination of the car scheme that we had for staff seizing on 1 April 2017, and a staff leave that were members of that. That reduces the cost there. Everything that's been identified to reduce is achievable. The real decrease in costs is greater, because those costs are supporting more staff. Yes, the costs are coming down, but even though there's more staff, some of them won't, for example, the car scheme won't get the benefits, so that's a genuine saving. Things like the business rates that we have, that cost has come down. All the savings that we've identified are actually ones that are deliverable, even though the staff numbers are increasing. One last question. On appendix 2, page 19, performance and best value, audit. For some reason, I'd never realised before that local authorities only pay half of that. Performance and best value audit convener are on page 19, are you looking? Page 19, appendix 2. The total cost is £3.9 million broadly, of which local authorities pay £2 million, and the Parliament pays £1.8 million. Local government is paying for all of the performance audit work in best value and all of the best value audit work in local government. The SCPA, the consolidated fund, picks up the cost of all of the performance audit work that's done in the NHS central government and the further education sector on the back of the fees and funding strategy that we agreed with you at the beginning of this process. Okay, thank you. Do any members have any other questions that I want to ask? In that case, thank you very much for attending today, and we now move into private session.