Official Report: Minutes of Evidence

The Deputy Chairperson (Mr Hilditch): From the Northern Ireland Audit Office (NIAO), we welcome Mr Kieran Donnelly, the Comptroller and Auditor General; Ms Janet Sides, assistant auditor general; Mr Brandon McMaster, director of business improvement and communications; Mr Andrew Allen, audit manager; and Mr Richard Emerson, audit manager. I advise the Committee that the evidence will be reported by Hansard. We invite Mr Donnelly to brief the Committee on the 2015-16 Estimate.

Mr Kieran Donnelly (Comptroller and Auditor General): Thank you very much, Chair, for the opportunity to brief you on our proposed Estimate for 2015-16. At the outset, I feel that it is important to state that the office, in carrying out its functions, is totally independent of the Executive. That is enshrined in legislation and includes that the Audit Committee of the Assembly rather than the Executive should agree the office's annual Estimate and lay it before the Assembly. However, the Executive have set a Budget for 2015-16 incorporating the NIAO, and that has been approved by the Assembly. That pre-empted the setting of our 2015-16 Estimate. The Estimate before you is, of course, based, subject to a couple of adjustments, on the Budget approved by the Assembly. I present this Estimate with considerable unease, given the financial pressures that will be placed on the office and the potential repercussions if we do not balance the books in 2015-16.

Before getting into the detail of the Estimate, it would be remiss of me not to highlight a couple of contextual points. The first is the need for a properly resourced professional independent audit service in this period of significant change in the public sector. Those changes involve substantial reductions to departmental budgets, and the impact of that change should not be underestimated. The second point is that, our audit work, particularly the public reporting side, yields significant savings well in excess of the annual costs of running the office. For every £1 that we spend, a saving of between £2 and £5 is generated by the work of the office. It follows that any reduction to our budget is likely to have some impact on the potential of the office to identify efficiencies across the public sector.

I will give a couple of examples of where we have achieved major financial impacts. These impacts are calculated conservatively and are independently validated. In the three national fraud initiative exercises that we have participated in since 2008, £30 million was saved. In a recent report on primary care prescribing, there were very significant potential savings in the order of anywhere between £20 million and £70 million. Another area in which we have made great strides is working in partnership with DARD to improve controls and reduce the level of disallowances. Since 2006, there have been about £70 million of disallowances to DARD. We have worked in partnership with it, and the controls have tightened. The EU is very happy with that work, and the level of disallowance will go down very significantly. There is an enormous saving from that.

Any reduction in our budget has the potential to impact the services that we deliver. Having regard to the Executive's Budget, we have revisited our financial planning and examined all areas of expenditure for additional savings and cost reductions. In doing that, we recognise that we are doing some things as short-term expedients that cut across the medium- and longer-term interests of the office and value for money. We have pared back, for example, expenditure on training, but we do not want to do that in the medium or longer term. Training is essential in a professional office. The provision sought in the 2015-16 Estimate, working to the Executive's Budget, is 5·1% lower than the net provision for 2014-15. If we take our savings plan into account and pare back everything that we can, including training, consultancy and down to some very small things, we still have a funding shortfall of £300,000. We have previously reported that the office has made significant savings over the years, and, of course, we will endeavour to realise further savings going forward. The bottom line is that we have limited ability to do that without reducing our pay bill, because 70% of our office's expenditure is permanent salaries. We can cut, for example, some secondees from the universities in their placement year. That is very easy to turn off, but it is a false economy in the long run. We cannot turn the permanent staff salary bill off so easily. Some reduction has already been made through suppressing unfilled vacancies. We have put our graduate trainee accountancy scheme on hold.

Set against this, we have an extra pressure this year of £150,000 to cover increases to superannuation costs, because employer rates have gone up. DFP announced that in February. We may have access to some central funding to alleviate that, and news on that came out only yesterday, which is one semi-positive. Overall, the office has limited scope to reduce its pay bill without a significant intervention, so we have launched a voluntary exit scheme, aimed at reducing permanent staff numbers by up to 10%. That would result in the first exits taking place at the end of October 2015. Our annual workforce planning has highlighted the fact that our staffing needs would reduce in any event over the next four years. Benchmarking with other Audit Offices has identified that we have some excess staff at management grades, while the restructuring of local government, education and central government Departments will reduce the scale of financial work, but that will not really happen until about 2018-19. Up to then, we expect that, because of challenges that will arise from the merger of public bodies and the transfer of functions, there will be only limited savings.

It is worth noting that there is a one-year time lag between the establishment of any new entity and the audit of its first year accounts, so, for example, the accounts of the new Departments being established in April 2016 will not be audited until the following year, which will be 2017-18. There is a lag before we get any efficiency out of that. While we have some capacity to reduce permanent staff levels, as in any business, we would like to have managed the reduction of staff on a more gradual basis up to 2018-19, in line with the rationalisation of public bodies. However, the extent of savings required of us in 2015-16 means that we have no option but to proceed immediately with reducing our permanent staff numbers to an affordable level. Given that any pay bill savings from that will accrue only at the end of October 2015, which is halfway through this financial year, we will have to realise double the number of staff than if the savings had accrued from April this year. Any savings will kick in only halfway through the financial year.

We have made a bid for £1·2 million from the Executive's transformation fund. However, we have no certainty over the timing or the amount of funding that we will secure from the scheme or, significantly, the uptake by staff. It is very difficult to predict. It will take several months for a clear picture to emerge, and it is only at that point that we will be in a position to assess the full implications for our work. We will know at the end of April whether our bid to the transformation fund has been successful and how much money we are likely to get. By 8 May, we will know how many staff have applied to the scheme, but it will be early July before we know how many have accepted the offer, so there is a lot of uncertainty. Gradually, as the year progresses, that uncertainty will decrease.

We have also introduced internal change to bring about greater flexibility and innovation in the use of resources to meet business needs. That will assist us significantly in reducing our temporary appointments. That is from a budget of £180,000 in 2014-15 right down to £14,000 in 2015-16, so we are really paring that budget way back. What that means is that we expect our staff to work across financial audit and public reporting to a much greater extent than before. If we take the reduction of temporary appointments together with the implementation of the voluntary exit scheme, we have the possibility of releasing up to 14 staff. That is the maximum number in the second half of 2015-16. That will bring with it the loss of skills and knowledge. We will need fairly early prioritisation of what we can deliver.

Our focus will be on sustaining, as far as possible, a similar service to that provided at present through continued efficiencies in our audit methodologies, but, in reality, budget reductions may have a negative impact on our statutory obligations. I will cover two issues. The first statutory obligation is on the accounts. We have a very good track record of delivering financial audits and audits of accounts. For almost all Departments, agencies and health bodies, the accounts have been audited by the summer recess. That means that the accounts are closed and audits are signed off within three months of the financial year end. That conforms to the best commercial practice for listed companies.

In securing that target, we have been assisted by some private sector accountancy firms, which help us over that workload peak. What would happen in a worst-case scenario? We might have to consider terminating some of those contracted-out financial audits. At the moment, it is 12% of our gross expenditure. In that worst-case scenario, we would have to stand down some of those contracts and do the work ourselves, which would have a negative impact on our delivery. We would not have the capacity for our existing staff to absorb the work, so there could be delays in those accounts. That would be a worrying position.

What is a worst-case scenario? A worst-case scenario is if we do not get traction and movement on the voluntary exit scheme and if the fallback position of getting money through a monitoring round did not materialise either. In that scenario, my first priority would be to balance the books, so I would have to do whatever was necessary to do that. The other side of that is what would be the impact on the scope and quality of our public reporting, including the value-for-money studies that we produce and the work that we do for the Public Accounts Committee (PAC). It is likely that we will not be able to do as many complex studies as before, particularly those studies that cut across Departments and require a lot of work across the Civil Service, the health service and quango-land. An example of such a study is one that we did a year or so ago on collaborative procurement, which cut right across the public service, the health service and the Civil Service. It was an enormously beneficial study. All the recommendations were accepted by DFP. All the Public Accounts Committee recommendations were accepted. Everybody agreed that there was potential for tens of millions of pounds of savings if those recommendations were implemented, but we do not do those studies cheaply. In that particular study, we had to do an awful lot of legwork ourselves simply because the basic management information was not there in the Civil Service system. That is an example. We could not afford to do as many complex studies, so we would have to cut our cloth and look at our product range.

What are the implications if we cannot balance the books? First and foremost, we would have to seek bids through the Executive's in-year monitoring exercise, but there is no guarantee of success in that. If funding were unavailable, it would leave us in the position of having an Excess Vote. That means that we would exceed the provision voted by the Assembly. That would be a very unpalatable position because we would be included in the report on Excess Votes that I am responsible for providing to the Public Accounts Committee. We look at everybody else's. We would really want to avoid such a situation. It would be damaging to the Audit Office and would impact our credibility and reputation.

In summary, what are the risks to the office in this Estimate? There are two separate scenarios. The first scenario is if we do not get traction on the voluntary exit scheme, and various things could happen. You will see that there are no guarantees of anything, even in that DFP letter. Unofficially, we are confident that we will get some funding from that, although we may not get all that we ask for. There is then uncertainty about the traction and how many staff will be interested. We cannot call that yet. We will be able to call that later in the year. In the public service as a whole, there are a lot of public reports of significant interest in the scheme in the Civil Service. That may not read across to our office because of our age structure, so there is uncertainty. We will know how that pans out within the next couple of months.

The opposite scenario is if we do get traction on the voluntary exit scheme. That means that we will be taking out between nine and 14 staff at some point. As I said, if we were phasing this over three or four years, we could handle that. However, you cannot take that number of staff out of a small organisation without its having a short-term detrimental impact on the work, particularly as you would be losing the more experienced and skilled staff. There are risks both ways. The bigger risk in terms of balancing the books is if we do not get traction on the voluntary exit scheme. That is a summary of where we are.

In closing, we fully appreciate the need to play our part in these times of financial constraint. However, I felt it appropriate to register fully with you my concerns about the implications of this Budget.

The Deputy Chairperson (Mr Hilditch): Thanks very much for outlining your position, Kieran. We have had some communications with PAC and DFP. Will you elaborate on both those areas and what you make of it?

Mr Donnelly: I can indeed.

The Deputy Chairperson (Mr Hilditch): It has given us a bit of a situation when we are coming at it nearly from two different ways.

Mr Donnelly: First, I had the opportunity to brief PAC on the Estimate just before Easter, and I expressed similar concerns to those I have raised today. The PAC letter of 26 March raises fundamental issues arising from the reduced Budget. I suppose the key point is the sheer challenge we would face in maintaining the current level and quality of service that we provide to the Committee and the wider Assembly. The other point is the risk of compromising our independence. It is very important that the people we audit do not dictate the Budget: that is a simple point. The key point coming out of DFP's letter was DFP's note of caution on the availability of funding for the voluntary exit scheme. Nothing is guaranteed there, so there is uncertainty; but that uncertainty will diminish. There are some other technical points in the DFP letter around fine points of distinction between the Estimate and the Budget, which Janet will say a quick word about.

Ms Janet Sides (Northern Ireland Audit Office): The Estimate aligns with the overall Budget requirements, but we have a lesser need, the depreciation figure, which is ring-fenced resource and is presented in the Budget. Therefore, we propose transferring some of that into the non-ring-fenced DEL. This is quite technical. At the same time, we require an additional £64,000. That is the figure referred to in DFP's letter, and it is to cover the payment of pensions to former NIAO staff who retired early. The NIAO pays these costs until the member of staff reaches 60, which is the normal retirement age. We have also incorporated that into the non-ring-fenced DEL, which is the point that DFP has raised in its letter.

The Deputy Chairperson (Mr Hilditch): You outlined the risk in relation to service delivery and the difficulties you would face with the current Estimate. What would be the difference if the net resource requirement were increased by £300,000?

Mr Donnelly: If it were increased by £300,000, we would avoid the worst case scenario I described there; there is no doubt about that. In other words, it would reduce the uncertainty and risk. It would mean that we would not be subject to the vagaries of the monitoring rounds. It means then that if the voluntary exit scheme did not work, we would have a fallback position. On the other hand, if the scheme did work, we would be in a position to surrender some money back to the system. It would be a much safer option. The pitch may be £300,000 or £200,000. I mentioned earlier that we were going to incur an additional cost of well over £100,000 on our superannuation costs. Until yesterday, we were going to have to pick up the tab for that. However, there may be some comfort on that, which would give us a release of £100,000. Really, what we are saying is that to mitigate the worst, £200,000 would significantly reduce our risk exposure; that is the way that we would put it.

The Deputy Chairperson (Mr Hilditch): OK. You mentioned the figures and the potential for the voluntary exit scheme to work for you. Would you then be committed to handing back savings at the monitoring rounds?

Mr Donnelly: Absolutely. We would be fully committed to handing back any money we did not need at any of the monitoring round stages. The real difficulty in this is that we have to pitch an Estimate at a point in time. There is an enormous amount of uncertainty as to how things are going to pan out at this stage, and that uncertainty will gradually diminish as the year progresses.

Ms Lo: It is worrying. You have your statutory obligation and, in a way, your independence is at stake. However, you then have to think that other Departments are getting big cuts. I have just come from Question Time with the Environment Minister on budgets and the voluntary sector. What about raising income? Can you increase your fees to Departments when you audit them? Is there any way of doing that?

Mr Donnelly: It is an interesting question. There are some things that we charge for. Most of what we do is not chargeable. Maybe the best way to explain this is that the audit is not for the auditee; it is for you, the Assembly. You are the customer, and the Assembly pays me to do the audit. In other words, the DOE does not pay me to audit its books; you pay me to audit DOE's books. That is important for our independence. So, it is back to the constitutional point. For example, we do not charge for our value-for-money reports. That is funded by you. If there were to be a charge, I could imagine that every auditee would be quibbling at the cost.

There are some audits that we do charge for. They are more in quango-land on the financial audit side — in other words, we do not charge for the financial audits of the health service. The issue is whether that could be expanded. In theory, we could charge more, but we expect that, pound for pound, DFP and the system would say that we need a public expenditure system (PES) transfer; so, it would just be a corresponding reduction in the Budget. In Budget terms, it would be quite neutral. It would work if we had no consequential reduction to the Budget. I do not have a figure off the top of my head for the percentage of audits that are charged. It is probably around 20% and it is just an historical thing. The further bodies are from the centre of government the more there has tended to be a charge.

Ms Lo: I cannot find the page now but this year, off the top of my head, your estimated income will drop by about £20,000 compared to last year. Is that correct? Why is that?

Ms Sides: That alludes to the national fraud initiative which is run every other year. Last year, we had about £200,000 of income in respect of the national fraud initiative. Is that the right figure?

Mr Donnelly: Yes.

Ms Sides: So, we will not receive any substantial income from that initiative this year, but we will do so next year. It runs every other year, and that is why the income varies between years.

Ms Lo: For the next three years, beyond this year, you will see an increase in income.

Mr Donnelly: Local government audit is one area that we fully charge for. It is entirely right to make the distinction between central government work and local government work; one is not subsidising the other. With the reform of local government, the type of audit will be expanded when the reforms come through. So, there will be increased income that will flow eventually through next year on that. That work stands on its own and wipes its face.

Ms Lo: OK. Thank you.

Ms Boyle: In this current climate, we all understand that everybody has to tighten the purse strings. That is a given. Every Department is facing budgetary constraints. But it goes back to something you said earlier, Kieran, about a false economy. When you look at this, what has been created is something similar. In an ideal world, as regards public sector reform, I am sure you would like to be left alone for a few years.

Mr Donnelly: Yes.

Ms Boyle: When you are talking about rationalising services, there has to be a cost. We are trying to make savings, but there has to be a cost that comes along with that. I see the cost as being the savings you have to make in order for savings to be made elsewhere. I think that is a false economy, and, in an ideal scenario, you would be left alone.

Mr Donnelly: We recognise that we have to do our bit. As I said in my talk, we are doing things that run against our gut instinct. We are doing things that we have to do to balance the books but that do not make sense in terms of the longer-term development. To be fair, every other Department will be in the same boat. For expediency, they are doing things to balance the books that may not make sense in the longer term. You can sustain that for a while. There are some things that we paring back in our budget, where we stripped out £200,000. We want to reinstate some of those things down the track when things get better.

Ms Boyle: Absolutely.

Mr Donnelly: For example, we have suspended the secondments of placement students. That is excellent value for money, and we have excellent people in there, but it is one of those expedient things that we have to turn off because we can do so just to balance the books.

Ms Boyle: We are coming to the end of this Assembly term, and I am sitting here hoping that whoever is on this Committee or the Public Accounts Committee in a few years' time will not look back and say, "That was a disaster". I believe that that will happen and that it will be considered a disaster, but there you go.

The Deputy Chairperson (Mr Hilditch): Kieran, during your presentation, I thought that you indicated — maybe I got this wrong — that there is a higher level of management staff employed by the Audit Office. Is that right?

Mr Donnelly: We have benchmarked our staffing structure with other public audit bodies, and we think that, if we are going to make reductions anywhere, it would be easier to streamline the management grades. We need the front-line staff to do the audits, but there is some potential to flatten the structures and widen the spans of control of managers to just a bit less management. This is a safer way of doing it than by cutting front-line staff. That is our assessment. It will not be dramatic, but we think we could pare back a bit at each grade. That is why the voluntary exit scheme is essential. We are not going to get that through natural wastage.

Ms Boyle: Kieran, as regards the transformational fund, I know you said that it will be the end of April, but is there any early indication that you might be successful in that?

Mr Donnelly: You see from the DFP letter that there is no answer. We are in detailed discussions with DFP and are hopeful.

Mr Brandon McMaster (Northern Ireland Audit Office): We are hopeful. We do not know how much we are likely to get. Our bid has been put in and has been accepted. There are lots of bids in there and the fund will no doubt be divvied up on a pro rata basis. We will get something, but we do not know how much. The C&AG mentioned that, hopefully, by the end of this month we will know formally that our bid is successful and how much we are likely to get, and that will then give us something to move forward with.

The C&AG highlighted the risks regarding staff interest in the scheme. We may get a significant number of people interested, and Mr Hilditch quite rightly highlighted what we said in the corporate plan in that we have excess capacity at management grades. We have indicated to staff that we will give priority to applications from staff at those levels, but it is one thing for a person to express an interest in the scheme and then say yes to the offer when they have to finally make up their mind. They can reject it. We will not know how many people will accept the offers made to them until early July.

Mr Donnelly: And what the balance of interest will be between the management grades and other staff — there is a lot of uncertainty.

Ms Lo: That is more or less my question. Kieran, you said that you have to reduce by up to 14 staff, which is 10% of your budget. Is it purely about trying to balance the books, or was it decided after an analytical assessment that 14 staff could go?

Mr Donnelly: There are two points in that. As I said earlier, if we were left to our own devices we would need to pare back numbers to prepare for 2018-19 when government is rationalised, when local authority reforms have been fully worked through, when we have downsized the number of Departments and when the education and library authority is up and running. The thing will have stabilised by that stage. We have to do this more quickly to balance the books. We have to take the hit up front.

Mr McMaster: We carry out an annual workforce planning exercise where we go back to basics and work up our staffing needs. We did that for the corporate plan, but when the budget cut came in and we were told we had to project forward to 2018-19 and determine what the changes would mean then, the C&AG said, basically, "We have to take the hit now in terms of reducing staff".

Ms Lo: Quicken the process.

Mr McMaster: Yes. So, if we get all the money we need and the full uptake in terms of staff leaving the organisation, then for the next two-and-a-half years we are basically going to have to work on a staffing complement that is more appropriate to 2018-19. That is basically where we are, and, again, as has been highlighted, this has implications for what we can deliver.

Ms Lo: How many of your staff have expressed an interest in the scheme?

Mr McMaster: The scheme was launched yesterday.

Ms Lo: Oh. [Laughter.]

Some Departments are saying they know already. Is that right?

Mr McMaster: The Civil Service scheme was launched earlier than ours; our scheme was formally launched yesterday. There have been some expressions of interest at this stage; there have also been some expressions of non-interest.

Ms Lo: Staying put.

Mr McMaster: I do not know whether that is the case or not.

Our scheme is open until 8 May. On 8 May, we will know how many people have expressed an interest. Obviously, we will keep a daily tally of where we are, but at this point you are probably talking about 10 staff having expressed an interest or no interest.

The Deputy Chairperson (Mr Hilditch): Any modification to the draft scheme needs to be agreed with you. Can you be clear, Kieran, about the modifications you would be prepared to agree?

Mr Donnelly: Do you mean modifications to the Estimate?

The Deputy Chairperson (Mr Hilditch): Yes.

Mr Donnelly: I would be extremely happy if it were £300,000 more. I said earlier that if it were £200,000 more that would significantly reduce my office's risk exposure. If things went better than expected in that scenario, we would be in a position to give money back.

The Deputy Chairperson (Mr Hilditch): OK. Thank you. That concludes the formal evidence on the NIAO Estimate for 2015-16. If appropriate or required, the Committee will be in touch about potential modifications to the Estimate.