 Welcome to the second meeting in 2016 of the Scottish Commission for Public Audit. We are very tight for time today. We need to be finished before 2 o'clock, so can I ask all members and witnesses at the outset to keep the questions and the answers concise and to the point, and as usual, if you could make sure that your mobile phones and other electronic devices are turned to silent. I'll move straight to agenda 1, which is Audit Scotland's spring budget revision. Agenda item 1 is evidence on Audit Scotland's spring budget revision for 2016-17. Members have a copy of the proposed revision in their meeting papers, and I'd welcome Ian Leitch, chair of the board of Audit Scotland, and Caroline Gardner, auditor general, Diane McGiffin, chief operating officer and Russell Prith assistant auditor general. I think that the auditor general might want to make a brief introductory statement. As in previous years, our spring budget revision request relates to pension adjustments. We've requested budget cover of 1,041 million to meet a non-cash pension charge that will arise as a result of accounting adjustments in 2016-17. The charge is driven by the continuing impact of low discount rates used to value pension liabilities. Those low rates increase the future pension liability forecasts and, in turn, the estimates for the in-year pension service costs that we're required to account for. It's worth emphasising that these movements are notional and don't lead to cash movements at all. As we've explained to the commission before, we're not able to plan for these changes in advance due to the timing of the information that we receive from our actuaries. We get the information once a year. We received this information in April 2016, so well after our last budget proposal was received by the commission. And as you can see from the information in our submission, the amounts involved are very variable and unpredictable. The Scottish Government have therefore asked us to deal with them through the spring budget Amy process, which is why it's here today. I'm sorry that this is a complicated adjustment, but Russell and I will do our best to answer any questions commission members may have. Well, the first and obvious question is, can you confirm that you've held preliminary discussions with the Scottish Government to confirm that the previously agreed arrangements with the CHM Treasury remain in place and have you advised them of the amount of audit Scotland's requirements? The answer is yes to both, convener. Thank you. Can I throw that open to any members if they have any question about this spring revision? Well, it's not specifically on the spring revision, but the Lothian pension fund in general, you'll be aware that pension divestment from fossil fuels and so on is occurring and that there are global efforts to decarbonise. And I believe there's about 5% of the Lothian pension fund invested in fossil fuels. Would you are audit Scotland open to reform to better inform pension members of where their pensions are being invested? More transparency around that I think would be helpful. In broad terms, I'm absolutely in favour of more transparency around public finances, including pension arrangements. I think there has been a gradual movement towards greater transparency about the investments of the local government schemes, which are the only ones that are funded and therefore invested. And I think we'd be happy to give you more information outside the meeting on the way that's developing if that would be useful. That'd be very helpful. Thank you. Thank you, convener. Any other members have a question at this point? Is there anything you would like to add to that audit general? I think that we're content if the commission members have got no further questions. Thank you, convener. Are the members content to agree by correspondence a letter to the finance committee, summing up our views on the spring budget revision? I think that members have obviously got a copy of the budget proposal and the fee strategy in their meeting papers. We have the same witnesses in this agenda as previously, so I'd like to invite firstly the chair of the body in Leech to make a short introductory statement, followed by the auditor general. Ian. Thank you, convener. Good morning, members. We are pleased to present to you this morning our planned budget for next year and our revised fee strategy. You'll be aware that we've been reviewing our funding for fee and fee arrangements in order to ensure that they are fit for purpose. This has been through a thorough process that I've described to this committee and previous members, consultation with all our bodies in which we audit. The fee strategy you have today is the outcome of all of that. We are implementing this strategy for the 16-17 audits. The timing is important because this fits with the new round of audit appointments. The procurement exercise for this was carried out earlier this year and will bring considerable savings. The review reaffirms and builds on the principles that we've previously guided our fee strategy, including the need to ensure fairness and transparency. The revised strategy aims not only to recover fees for our work across the piece but to better balance those fees within each sector and who are possible within individual bodies. One of the key changes that we are proposing relates to the funding of NHS performance audit work. In order to bring this into line with the other areas of the auditor general's remit, we propose that funding for this work should come from the Scottish Consolidated Fund. Details of other proposed adjustments are explained in the fee strategy paper before you. High-quality audit work remains a priority for Audit Scotland. Our budget proposal supports this goal by identifying resources to implement new quality arrangements. That will help us to enhance our assurance on the quality of audit work, promote continuous improvement in audit quality and support professional and technical leadership in public audit. At the same time, we are committed to quality, we strive for value for money. Our main expenditure is on our workforce, which we continue to actively manage. Staff numbers are smaller than in 2010. Despite that, we are confident that our on-going investment in staff development and training of professional trainees and the way we are changing how we work together will continue to deliver cost-effect of efficient world-class audit. I will hand over to Caroline Gardner to give you some introduction on the detail of the budget proposal. As you will know, the budget proposal has been prepared in the context of some uncertainty at the moment. In particular, the amount of work required as a result of the full implementation of the Scotland Act 2016 and, of course, any further devolution of powers as a result of the EU referendum. The proposal in front of you today is based on our known workload as it currently stands, and, as our audit responsibilities change in the light of those developments, we will obviously discuss the resource requirements with the commission further. In summary, the proposal that you have got will deliver an average real-terms reduction in audit fees of 8.6 per cent for the 2016-17 audit year, which has just started. A reduction in the revenue resource requirements sought from the Scottish Consolidated Fund of 2.6 per cent in real terms, simplified funding arrangements for the NHS performance audit, as Ian referred to, a reduction in our gross administrative costs of just over £1 million or 6 per cent of our expenditure budget for the year, and greater transparency in funding arrangements. Overall, I am confident that it strikes the right balance between value for money and ensuring the quality and support to Parliament that we provide, and we are happy to do our best to answer the commission's questions. In that case, perhaps I can start off. On page 4 of your budget proposal, you note that additional work will arise from the 30 integrated joint boards, and those will be audited by auditors appointed within the local authority. That is a considerable increase in work. Can you confirm the oversight arrangements for integrated joint boards and, in particular, what oversight role the public audit and post-legislative scrutiny committee will have in regard to those? Certainly, convener. The audit arrangements for the new integrated joint boards were included in the legislation that established them, so they were set up as local authority bodies, and the audit appointments are made under that regime. All the funds that the joint boards spend will come from either local authorities or from the NHS. At the moment, we think that that is about £8 billion a year, so very significant amounts of public money and providing services that are key to communities right across Scotland. It is one of those areas where the strengths of the public audit model are apparent, in that the accounts commission appoints the auditors to them and can report on problems that occur in the individual bodies. However, because of the significant amount of NHS funding that is coming through, I will also have oversight of that and can report back to the Public Audit and Post-legislative Scrutiny Committee. The committee in the last session of Parliament received the first of the reports that were producing on progress with setting up the bodies, which noted that some progress had been made but also that some risks remained around governance, budget setting and oversight. We are expecting to produce the second report in that series during 2017, and that will be reported to the Public Audit Committee in the normal way to give you that line of sight for the way the money is being spent and what is being achieved with it. Given the hybrid nature of the funding, will the Public Audit Committee have full oversight into the IJB through your reporting? Full oversight to the extent that the overall process is being developed and implemented as planned and for what is being achieved by it. There are accountability arrangements back from the joint board to both the local authority and the NHS, so that line of sight through the NHS gives you in the committee a scrutiny through the work that I do. I think that we will have to see how it develops in practice over the next few years as they take on the new responsibilities in full, but for now it certainly does give the Public Audit Committee the proper degree of oversight. My question relates to page 4 of your proposal in respect of the assumption that you make regarding the extent of timing of the work that is required as a result of the Scotland Act 2016. You also make reference for further allowance for planning for the implications of the EU referendum result, and you estimate that around £100,000 has been set aside for those purposes. I wonder if you could explain what those cash payments account for in terms of the additional resource that you think you will need to deal with those uncertainties. As commission members will know, the Scotland Act 2016 is being implemented over quite a long period of time. We already have Revenue Scotland set up, which will administer the new devolved taxes. We already carry out the order of Revenue Scotland, and there is no new additional work there. We have arrangements for collecting the Scottish rate of income tax in place now, and the second report that was published this week by the Comptroller in Auditor General for the UK spending HMSEs and my additional insurance. Those arrangements are already up and running. What we are still investing in is making sure that we understand the implications of the new full devolution of income tax on non-dividend, non-savings income, the assignment of VAT revenues to Scotland, and in particular the new social security powers, where we know that there will be a social security agency that is not yet up and running. There will need to be a good deal of interaction between that social security agency and the Department of Work and Pensions, and there will be about £2.7 billion of payments coming through those arrangements annually, so a very significant sum and a very high volume of transactions. We are investing in making sure that we understand the Government's plans for delivering that, but we understand the audit work that is needed and can come back to you with a clearer picture of what that audit work will require. The £100,000 that you referred to was paying for an assistant director who we have tasked with leading our thinking in this area. It is the full cost of that post plus development for him and the team that is working with him to really make sure that we are thinking through the audit implications, managing them well, building up our expertise and coming forward to you with a credible plan for the resources that we need for the longer term, as that thinking is developed. Since June, we have also asked him to take on responsibility for the implications of the EU referendum. Obviously, again, we do not know what that will mean for Scottish public finances in terms of what funding is devolved to Scotland and what audit arrangements are needed, but we will do that in a joined up way, and that is what the £100,000 that you referred to is funding. I appreciate that. Just so that I am clear, the £100,000 is the cost of the salary of this new appointment, but you made reference to investing in further research or investigations. Do you anticipate an additional cost beyond the £100,000 to invest in this additional research and understanding of what that is actually going to mean? We think at this point that the £100,000 covers our costs of doing the developing and planning for it. It is the full cost of an assisted director post, plus the associated costs in terms of training and development and travel that is associated with that. We know that there will be an additional cost of audit once it is clearer how the new social security powers will be used and, for example, some smaller things like the Crown Estate, but we want to come to you with a credible, properly worked up plan rather than guesstimates about what it might involve, and that is why we are investing for now. So that will come later? Absolutely, in future budgets. In future budgets, right? Yes, indeed. If I may jump back to a supplementary to your question 1, if that is okay, Auditor General, you state in your paper, page 4, about the IJBs. They will be audited by the auditors of the relevant councils. I am assuming that they will be auditors of local authorities who are used to auditing councils. What experience will they have of auditing NHS? From where I sit, the budgeting arrangements and then expenditure are quite complex for the IJB and a number of councils are still trying to get, and health boards are still trying to get to grips with that. So in terms of audit, it is going to be really important. Are there people who have joint experience or how can Audit Scotland and how can we be confident of their skills to do this properly? You are right, they are complex new bodies and they have got very significant responsibilities. The legislation that established the integration authorities also set them up as local authorities and therefore within the local authority audit regime. The auditors who the Accounts Commission appoint to carry out local authority audits, most of them also do NHS work and Russell can keep me straight on the number of those. But in any case, one of the central costs of Audit Scotland is in providing guidance and support to all of our audit teams to make sure they have got access to the expertise they need, to the information they need and providing opportunities for them to share their experience and insights and really make sure we get that consistency of audit work carried out across the sector. It is something we are monitoring closely and you will see elsewhere in the submission a reference to our investment in the quality of audit. But the starting point is that they should all be capable of doing this and Audit Scotland provides extra support where that is needed. Russell, do you want to add to that? Just to say that of the five firms that we use in local authority work on top of our own staff, three of those are also auditing the NHS in the new round of appointments and of the other two one firm was and as it happens the staff from the other one also have previous NHS audit experience. And the other point I would make is that in wherever possible we have appointed the auditor of the main council in an area and the health board to the same auditor. That is not possible across Scotland but, for example, to take Dumfries and Galloway as the example, the auditor of Dumfries and Galloway council is also the auditor of Dumfries and Galloway health board and is therefore doing the IJB as well. So the external auditor has complete oversight across the IJB arrangements. Okay. I just think that this is going to be fundamental to Parliament's ability to scrutinise effectiveness of the IJBs so watch that with interest. Can I continue to my next question chair? Page 5. You note that other administrative costs has decreased from 9,558,000 in the current year to 8376 in 1718 and throughout the document it is confirmed that the bulk of these estimated savings will arise from savings in fees paid to appointed auditors, which are private sector firms that Russell referred to, following our recent procurement project. Now, while the commission welcomes such significant savings, is it possible that audit firms will perform audits with less qualified staff in time to accommodate these reductions in their fee income and could this lead to an increased risk of poor audit quality for the bodies audited by the firms? I note that you have set side 100,000 to support and enhance quality regime, but with the adjustment to fees can you explore that a little? The board probed this question because it is a matter of concern and we are satisfied and Russell will give you the detail that by enhancing our quality input and additional resources we can check to make sure that the competitive fees that we got in the procurement round are not going to result in a poorer audit service. That is why we are both doing that so that we can do more checks on this. The firms were made quite clear to them what our quality expectations are before the tender round and, as Ian said, we are investing in enhanced audit quality arrangements to ensure that we are able to continue to give assurance to the Auditor General, the Accounts Commission and indeed yourselves about maintaining the quality and indeed improving the quality of audit. Absolutely right, we see the discounts that were offered this time as potentially posing a risk toward equality, so we are aware of that and we are planning to make sure that that does not happen. It does also strike me that Audit Scotland has to set side 100,000 pounds to check on quality regimes in which firms such as KPMG, Ernest Young, are taking handsome fees for the audit of our public sector. Should it not be incumbent on them to internally ensure that quality and because they are earning that fee and that not come at the expense of the public purse? You are absolutely right to ask the question. I think that the starting point is that all of the auditors we appoint, whether from the firms or from our in-house teams, are required to meet the international standards on auditing, the ethical standards which apply and the code of audit practice, which is the commission and I agree for the widest scope of the audit work we do here. We are always seeking to get the balance right between the quality that we cannot compromise but also getting best value for the public purse out of this. At the moment we do have robust arrangements for quality in place, but they provide us with different information about the in-house teams and the firms. For the in-house teams, we commission ICAS, the Institute of Chartered Accountants in Scotland, to carry out an independent review every two years of a sample of audit work and we get that information back directly. For the firms, either ICAS or the Financial Reporting Council on a UK base is to carry out a review of their work but not the work that is done specifically for us. We have less information about the firms, although we have the assurance that they are meeting the professional standards that are required. My view and that of the commission after discussion with the board is that because we are seeing continuing reductions in the tenders that are made by the firms in the competitive market and we welcome the cost savings that come from that, we should be recycling some of those savings into making sure we have truly comparable information across all of the people carrying out audit work for us so that we have the assurance that we are fulfilling our responsibilities and the commission does. It is a fine balance and I think it is worth noting that the £100,000 that we have put into the submission this year to ask for your support is about reviewing the arrangements. We do not expect that to be the cost going forward necessarily, but it is the cost of a project to review that and make sure we have consistent information across the piece and are getting that balance between cost and quality right. You would hope that £100,000 might reduce in time? I do not want to prejudge the results of the review, but it certainly is the one-off cost of reviewing how we do that and putting in place arrangements for the future. You are saying that the £100,000 is recycled money from cost savings on the firms that have been commissioned? As Ian said in his opening statement, we went through a very significant tend around that we do once every five years at the beginning of 2016. The results of that were competitive and gave us a reduction in the costs that we will be paying to firms overall over the next five years. We think that it is appropriate to look at recycling some of that into the arrangements that we have for assuring quality and driving up quality over the piece during the five-year period. Is the quality regime going to extend to in-house teams as well? That is one of the things that I am keen that we do. At the moment, we have different information about the in-house teams and the firms. I think that it should be a level playing field. We are also looking at the way in which we assure the quality of the performance audit work, which is what the Public Audit and Post Legislative Scrutiny Committee sees most directly every time. All of that will be on a common basis. Just coming in the back of Jenny Marra's comments, there must be a concern with fees and everything going down that the quality of service is maintained. Just sharing my experience in public audit, there was certainly a perception that in the case of Coatbridge College, probably again in Edinburgh College, and certainly it would appear last week in the case of NHS Tayside, that internal and external auditors were not exactly on the ball in some respects. That is a worry. It would be a significant worry to me as well, convener, obviously. We do, as I say, have quality arrangements in place at the moment. I am satisfied that the auditors that we appoint are all meeting the requirements that we place on them. That clearly is not quite the same thing as the impression that the committee is able to take from them as they are here before you as witnesses. I think that there may be more we can do to support them to perform as well as they can do in that setting. There is also something, as you will be aware from your formal life, about the gap between expectations of what auditors might be doing and what they are actually appointed to do. I think that we need to do what we can both to close that gap, but also to explain it that auditors are not there to seek out fraud or poor behaviour that they are there to provide assurance on the way public money is being spent, and I think that we need to keep an eye on that. All of that range of issues is behind the investment that we want to make in quality assurance. John, I am conscious that you have to go. Do you have any question that you would like to throw in? I am fine. Page 8 notes a new approach to best value across all 32 local councils in Scotland. I would be grateful if you could explain the new approach to assessing best value in our local authorities and what has changed from the previous approach. I need to start with the caveat that best value in local authorities is the responsibility of the Accounts Commission, not as me, as the Auditor General. Although, obviously, as an accountable officer for Audit Scotland, I have got a responsibility. Diane, do you want to talk about that from your perspective as a steering group? The new approach looks at the best value auditing of local authorities and maps that out over a five-year period, the lifetime of the audit appointments. The previous approach and the one that the Accounts Commission wished to move away from meant that, on a risk-assessed basis, local authorities would receive a best value audit once every three years, once every five years. Some authorities had not had a full best value audit for quite some time. What the Accounts Commission is seeking is a regime that helps to provide an ongoing assurance about the achievement and delivery of best value from authorities through the audit process on an annual basis. In some years, during the five-year appointment, there will be an added element to the best value reporting. We have remodelled a whole range of the work that we do in local government auditing. The Accounts Commission recently ran three roadshow events with local authorities to set out the new approach to chief executives and council leaders, and we will be rolling out the first year of that starting now. The first reporting from the first authorities, who are having the deeper best value audit in year 1, will be later in 2017. Over the course of the five-year appointment, the coverage of best value issues through local authority audits will be clearer and more comprehensive. There is an ongoing dialogue between the Accounts Commission and the Scottish Government over the framework for best value principles and the guidance that the Scottish Government issue, against which we audit. Our audit teams and the firms who are appointed to deliver best value audits have been working together to roll the new programme out. We could certainly provide you with further supplementary information, if you wish, and we could share with you the presentations that were given to council leaders and chief executives just recently. If you could do that. It seems like a more efficient process that will give greater clarity. That is what we are hoping for. I would like to focus on your business restructuring proposals that you outlined on page 8, where you say that the plan is to reduce the headcount of administrative support staff and realign skills and resources, and you are looking for a budget of £100,000 to fund the transition. Can you explain to me how £100,000 will be paid, given that it is an additional resource and it has not been met from existing resources? The background to this is the move that we made in 2015 from two officers in Edinburgh to a single office. We previously had two officers each on five floors with lots of different rooms within them to one office, all on a single footprint and with much more efficient ways of working better use of technology because we were able to do that. That, together with the ways that we are changing our staffing and the ways that people work more widely in Audit Scotland, means that the sorts of admin support we needed quite different from what we needed previously. Against the backdrop of a no-compulsory redundancies policy, what we have done is to design the structure that we think we need to support our business going forward, to go through a process of supporting our existing staff to apply for the roles in that new structure. Then we are looking for the provision that you mentioned in the 2017-18 budget to enable us to redeploy the staff who were not matched into the jobs in the new structure. We expect that redeployment to take place over a period as other staff move on as vacancies arise and so on, but it is really to capture that bridging point between where we are now and where we hope to end up. Diane, do you want to add anything to that as the person who has led the work? No, I think that that is pretty comprehensive. We are pretty far down the road. So, we are just going to ask, can you give me an idea of timescale for these changes? So, we have completed the transferring and matching and interviewing of colleagues and people now have their new roles and there is a supplementary team of four people who are in the team that we are looking to redeploy. Thank you. Can you just confirm or reassure us that the work previously undertaken by staff at these certain levels will not now be done by more senior staff, which would create an inefficiency for the jobs that they are supposed to be doing? Absolutely. One of the biggest drivers here, as the auditor general mentioned, has been the relocation on to a single floor and a single site of teams that were previously dispersed and that generates lots of efficiencies itself. In addition to that, the use of technology in the business, both by audit teams and support services, has made many tasks that were previously delivered by business support services redundant and so on. So, we are continually looking to maximise efficiencies. It would not be efficient for us to be displacing work to our audit teams, and our audit teams would be the first people to tell us that. In fact, what we are seeking is the opportunity to look for projects and support that add greater value to audit teams in the delivery of work, but what that looks like has changed significantly since the teams were first established and it is time for us to resolve that. Just another point. You are not making compulsory redundancies. Does that mean that you have offered a voluntary redundancy? We have offered voluntary redundancy through this process, and we will also be offering a voluntary early release scheme later on, but we expect that to be pretty modest. Do you have figures that you can give us guidelines for that? We will be launching the voluntary early release scheme in the new year, and we can certainly report back to you on that. The restructuring process is very recent, so we are still in dialogue with colleagues, but when we get to the conclusion of that, we can certainly share that with you. Just a reminder to keep questions and answers fairly tight. Jenny? Before he comes to me. Yes, page 13, Auditor General, you talk about the 196,000 of efficiency savings, so you are going to put more work in house teams rather than appointed auditors. Why is that decision arisen? Does it suggest that in-house teams are less expensive than the firms, or does Audit Scotland feel that you are not getting as much value from money from the firms as you used to? Neither of those in relation to that figure. We described earlier that we have been through the large procurement exercise to make audit appointments for the next five years, and as part of that we sought tenders from the firms in each of the sectors that we audit. That process starts off with an indication of the audits that will go to firms in each of the sectors, but once we know which firms have been successful, which have bid the right balance of price and quality to come into it, we invariably find that there are some conflicts of interest. So, for example, a firm might be the internal auditor for a council and can't also be the external auditor for a council. At that stage, Russell and his team enter into a tortuous process of discussion to make sure that we know about all the conflicts of interest and that we are avoiding them. We are making audit appointments that don't generate those conflicts. At the end of that process this time, an additional £196,000 worth of work that we had expected to go to the firms was actually appointed to the in-house teams without any increase in the in-house team's resources to take it on. We are confident that they can cover it by smarter working, the use of technology that we have been talking about, the investments that we are making in one organisation working, but we are generating an extra £196,000 worth of efficiencies as a result of the fine-tuning of the audit appointments at the end of the process compared to what we expected at the start of it. Are conflicts that you mentioned that you can't have the same internal and external auditor? Are conflicts like that more common now than they used to be? Russell, have you got a view? Yes, I think they are slightly more common as in particular in relation to internal audit there are probably more public bodies now that have firms as their internal auditors than was the case maybe a decade ago. They were doing it in house a decade ago. More were doing it in house I think. Does it also suggest that perhaps to follow on from Rona Mackay's question that the kind of staff count or audit Scotland actually you found yourself with surplus capacity and that's why you're pooling some work in back in house for auditors? No, I'd say not. Again Russell might want to comment. You asked as part of your lead into the question whether our in-house teams were cheaper than the firms. In practice actually they're not, they're slightly more expensive and that's something the commission has explored in the past partly because we know that we ask more often that they are more closely involved for example in providing support to Parliament, they provide intelligence to us about what's happening across public services and what we try to do over the life of the audit appointment is to make sure that the in-house teams can demonstrate either that their costs are coming down to the average of the firms or that we can quantify the added value that we're getting from having an in-house team. So it's about that balance of gradually increasing the efficiency and quality of the in-house team against the benchmark we have for the firms. Thank you. On page 17, Appendix 1, the budget for audit support external fees is forecast to fall by 27% from £586,000 in 2016-17 to £425,000 the following year. The actual expenditure in this area was 273,000 in 2015-16 and 311 in 2014-15 so given the historical levels of expenditure in this area are you content that the budget proposed in this area is actually realistic? Yes and I'll ask Russell to talk you through why that's the case, that'd be helpful. One of the biggest significant component in the variation of these figures across the piece is the cost of the national fraud initiative. That's an exercise that costs us approximately £200,000 and takes place every second year so the reason for the £586,000 for the current year is because that's a year in which we will make that payment and it then drops back again for the next year and we'll come back up in 2019. On page 17, Appendix 1, the budget for IT is forecast to increase by 18%. In fact, the entire capital budget £200,000 is in relation to IT. Maybe you can give us a little bit more information about that. I seem to remember about three years ago or so, we also had a fairly stiff charge for IT. Resilience and reliability of our IT is absolutely critical to the business and the more that our colleagues out-auditing in public bodies are travelling around and working across Scotland, the resilience that we need in the IT service is critical to keep them being able to work and access secure networks and so on. A lot of the additional costs that you see here is about the ongoing improvements to the resilience and security that we have. This year we invested a lot in achieving our ISO accreditation and we're very pleased to get that to ensure that the way that we hold data is very secure and we are continuing to invest in equipment that enables our teams to be able to work really from anywhere and at any time and the investment is the ongoing investment in IT resilience and security. Do members have any other questions that they would like to ask on the budget? On page 5, can you remind me what the corporation tax is for? Yes, we receive a small amount of interest income on money that's in a commercial bank account and that is taxable. On the same page and over, the proposed change to the funding of the NHS performance audit, clearly that's quite a significant change. On the face of it, if it brings it into line with what's happening elsewhere, it seems reasonable. However, I just ask you, does this constitute a technical increase in the NHS budget? I don't think so and in any case it's a very small amount, £475,000 a year. As you say, convener, the background is that for historical reasons performance audit in the NHS is the only part of our performance audit work where the audited body makes a contribution, currently the boards are paying 40% and the Scottish Consolidated Fund is paying the other 60%. As part of the review of the transparency and consistency with which we do this, we identified it as an area where we have the chance to improve both and to simplify the process for you, but it's clearly right at the margins and it's cost-neutral for us. It's cost-neutral for audit Scotland. My only concern is that if we're moving a cost away from the NHS and it's going to be met now by the Consolidated Fund, does that constitute technically an increase in budget in the NHS? I think it would actually mark a very small and a miniscule in the scale of things saving to NHS budgets. I don't imagine that the Scottish Government would want to reallocate the funding away from the NHS, but it's one of the things that contributes to the reduction in the audit fees, which you will see in the audit proposal for that sector. I suppose that the concern from the point of view of the commission is if it does constitute an increase in the budget to the NHS, however technical, possibly we can recommend it if it's appropriate, but we were in a position that maybe we'd have to get more advice on that and maybe ask the clerks to clarify that and come back to members of the commission so that we're clear in making our decisions as to where the powers in that lie. I think that that would be useful, but just for clarity it would be a reduction to the budget for the NHS and absolutely other margins. Would reduce their audit fees by more than would otherwise be the case? I'm just checking to see if there's anything that actually hasn't come out already. The current VAT arrangements, are they secure with HMRC? I remember two or three years ago there was a bit of correspondence and now she had some difficulties over VAT. Sorry, I'm on page 10. Is that now absolutely 100 per cent? The agreement that we reached with HMRC two or three years ago remains in place and we have no reason to think that it won't remain in place. How does it affect IGBs given the hybrid funding? They're local government bodies and therefore they fall within the local government regime. Even if funding comes from NHS the VAT is still secure. Because they're local government bodies, yes. The bodies themselves are local government bodies. They're not under control of the Scottish Parliament. Okay, unless the members have any other questions, I'm going to propose that we move on. Are members content to agree by correspondence a letter to the Finance Committee reporting our views on this budget proposal? Subject, of course, to the clerks coming back on that technical question on the NHS. Next thing is the fee strategy. Maybe I can start off with the key messages on page 4. The fee strategy proposes a fundamental change in how performance audits are funded and the NHS is funded. Can you explain in terms of the funding for NHS performance unit audits, how did the 6040 split originally get arrived at and how the funding was worked out to reflect the work and the requirements of the stakeholders? In other words, why was it put that way in the first place? I think that it goes back to the establishment of Audit Scotland in 1999-2000 when Audit Scotland was bringing together the work that had previously been done for the national audit office in Scotland and the work that had previously been done for the accounts commission in Scotland, at which point the accounts commission covered both local government and the NHS. At that point, all of the performance audit for local government and the NHS had been funded through audit fees within the accounts commission's regime. When Audit Scotland was formed, it became clear that the local government regime continued, if you like, at arm's length, but that the performance audit in the NHS would have a benefit to the Parliament as well as to NHS boards themselves. Therefore, the decision was taken at that point that it made sense to share the cost between them. I think that the 6040 was an estimate of where the benefits might lie. As always with these things, there's nothing terribly scientific behind it. Our experience of carrying out the fee review over the last year also has been that it is now an outlier. It's the only area where the costs are split between the Scottish consolidated funding funds and audit fees and that it's an inconsistency with the way all of the other performance audit work that's carried out for the Parliament is done. It's difficult to explain to people. It means that the fees in different sectors move at different rates for reasons that have very little to do with the work that's done for individual bodies. It just seems to us that if the commission is happy to support it, it's quite a straightforward way of simplifying the funding and fees arrangements, making them more transparent and making it clear that performance audit is one of the key parts of the support that we provide to the Parliament in overseeing the use of public money. However, it's a long way back in the midst of time, I think, as a short answer to that. On page 7 of the fee strategy, we're told that revised and enhanced auditing standards have increased the minimum amount of work required to conduct a fully standard compliant audit. Further notes go on to say that developments in technology in both accounting and auditing have streamlined audits of the largest bodies. On the face of it, those statements may appear contradictory and I would be grateful if you could explain how that increased amount of work is matching up with streamlined audits. How are you doing it? I'll ask Russell to talk you through that. First of all, the international standards on auditing a few years ago were completely revised and in doing so, the international audit insurance standards board increased the number of mandatory steps that were required to complete any audit. That has tended to push up the costs of smaller audits, but equally some of those changes to the standards meant that slightly less work was being done on some of the larger audits, whereas previously the amount of work was more proportional to the size of the body that that balance has changed. Bringing in technology has enabled us to carry out audits both more consistently and more efficiently. For example, having the electronic working papers files means that managers can access files from anywhere so they can review at any time. They do not have to go out on site and review paper files in one location. The files are accessible to the entire team. Those are some of the ways in which we are able to do audits more efficiently while still having to meet the highest standards. On page 7, you note that there are increased expectations in auditing or reviewing governance statements, remuneration reports and strategic reports and management commentaries. Can you explain those expectations and how and why they have increased? In the private sector, partly in response to the financial crisis a few years ago and some of the earlier corporate failures, the Venrontite failures, the standards of corporate reporting, corporate governance increased particularly for listed companies. Now successive governments have taken the view that they want to apply the higher standards in the corporate sector into bring those across into the public sector. Over recent years that's meant that, for example, governance statements have come in for all public sector bodies. Separate remuneration reports have been created, they didn't used to exist at all and they are subject to audit. There have been significant developments in management commentaries, strategic reports and the front end of the annual report in other words. Those are now subject to more audit review than they were previously. It all stems from trying to enhance standards in originally the private sector which successive governments have then adopted and brought through into the public sector. On page 8 of the fee strategy, Audit Scotland notes that audit fees should be set within the objective of recovering the full cost of audit in each sector. However, Audit Scotland states that some costs will be pooled within each sector. During the previous SSEPA's December 2015 meeting, Audit Scotland was asked if there will be a move towards fees being set for individual audited bodies within and across sectors. At that meeting, Auditor General advised the commission that this issue was still being considered by the board. Again, on page 8 Audit Scotland notes that it's reviewed and revised the cost of individual audits using information on the actual cost of delivering the audits in recent years. We acknowledge the improvements that arise from a closer balance between fees and related expenditure within each sector, but are there plans to ensure that individual bodies are only billed for the actual audit service that they receive? The statutory requirement that we work under is a requirement to recover our costs each year across all of our work. We have always complied with that. Within the fee review, the board has agreed—we have discussed with the commission here previously—the view that we can increase transparency and accountability by narrowing that to make sure that each sector recovers the costs of audit. The new arrangements will do that year on year. We have looked closely at the question of individual bodies. It is not quite as straightforward as the question suggested. We have rebased the audit fees to make sure that they more closely reflect the cost of doing the audit in each body, depending on their size and complexity and so on. We have reviewed the arrangements by which we apportion the costs that do not apply just to the cost of an individual body—the costs of audit strategy, the sorts of support to auditors that we were talking about earlier, our property costs and our IT costs. We have reviewed how they are apportioned to sectors and to individual audits. We will see some rebasing of audit fees for the audit appointments that have just started. Where we think the cost would outweigh the benefit would be to go through a process at the end of each year to review how much we had spent on each audit and go through a process of refunding and invoicing the amount that is spent for individual bodies. Instead, the audit fee will be kept under review during the life of the appointment. If there are improvements in the audited body or reductions in what they are asked to do that mean that their fee should come down the scope for that to happen, equally the scope for an increase where we feel that is required. However, we are not looking to recover the costs at the level of the individual body each year in that way. We have placed our focus on doing that at sector level, matched with much greater transparency for individual audited bodies about what they are paying for. You can see that breakdown in the fee strategy, where they will now have four lines showing the direct cost of audit, the pulled costs, and the other categories of performance audit and the overhead costs for which they are making a contribution. They get much more transparency, the sector will balance overall, and their fee will move across the life of the audit appointment, depending on our experience of doing their audit. Can I just ask one other question? On page 4, the key messages, we have had very substantial fee reductions over the past four or five years. This year, we are reducing fees again by 6.7 per cent, and you state that you are expecting further real-term reductions in fee levels in 2017-18 and in 2018-19. Isn't this a huge challenge given the expansion of the work that is coming down the line? Are there not lots of dangers in this? Again, I need to be really clear that the proposal relates to the work that is already known to us. As we have clear information about the new responsibilities that we have, we expect there will be new resource requirements, and we will come back with a clear proposal for that to the commission. At the same time, we take seriously our responsibility to make sure that we are providing the best value for money that we can to the public sector in Scotland and to the Scottish Consolidated Fund. We know that we have been able to make savings through the procurement round, through things like the property moves that we have made, and through our continuing efforts to make sure that our workforce is the right shape and size for the work that we do, and we will carry on doing that and passing on the benefits. I need to make clear that that is entirely separate from the resources that we will need to take on new responsibility. I think that it is most appropriate for us to treat those separately rather than to blur them into one for the accountability that we owe to the Parliament. Do members have any other questions that they would like to ask? Order, General. Do you have anything that you would like to add? Thank you, convener. I think that if there are no more questions, we are content to leave it there. In that case, I close this meeting of the Scottish Commission of Republic Audit. Thank you for your attendance.