The Scottish Parliament - Scottish Commission for Public Audit

1st Report, 2008 (Session 3)

Review of the corporate governance of Audit Scotland

Robert Brown
Derek Brownlee
Angela Constance (Convener)
George Foulkes
Hugh Henry

1. At its meeting on 3 September 2008, the Scottish Commission for Public Audit (‘the SCPA’) decided that it would undertake a short review of the corporate governance of Audit Scotland. This was prompted in part by a request from the board of Audit Scotland to consider the implications of a similar review of the governance of the National Audit Office in England. However, the SCPA also considered that the coincidence of Audit Scotland’s request with the announcement of a Scottish Government bill on reform of public services offered an appropriate opportunity, nine years into the life of the Parliament, to reflect on the operation of the post-devolution public audit arrangements in Scotland.

This report outlines the SCPA’s review, and the recommendations it makes for changes. Before considering the various issues, the report explains the background – outlining the review that has been conducted in England, and giving a brief outline of the current public audit structure in Scotland.

3. In conducting this review, the SCPA has sought to bear in mind two over-riding principles. The integrity of the public audit process is paramount and, in considering the various issues, the SCPA has sought to acknowledge and affirm this and the principle enshrined in the Scotland Act 1998 that the Auditor General for Scotland must have operational independence from the Scottish Government and the Parliament so that audit judgements can be made without fear or favour. This has to be balanced with the need to ensure that an appropriate level of scrutiny and accountability is applied to the public audit arrangements, so that the corporate governance of a structure that ought to be an exemplar to the public sector can be seen to conform to best practice. Holding these two principles in balance is not always straightforward, and the particular circumstances mean that an ‘off the shelf’ set of arrangements is not necessarily applicable.

4. The SCPA values highly the work done by Audit Scotland, and has enjoyed good co-operative relationships with the Auditor General and the office-bearers and staff of Audit Scotland in conducting its public scrutiny role. The review does not arise out of any current difficulty with these relationships, but rather out of a desire to ensure that the appropriate and proportionate checks and balances are in place to deal with all eventualities in a robust, credible and transparent way.

5. In July 2007, the Public Accounts Commission - the Westminster equivalent of the SCPA - commissioned a review of the corporate governance of the National Audit Office in England. The report (‘the Tiner Review’) was published in January 2008, and the Public Accounts Commission published a response to the review in March 2008.¹

6. The review made a number of recommendations, largely about the role and composition of a board for the National Audit Office, and the appointment process and terms and conditions of the Comptroller and Auditor General. It is expected that any recommendations that may require primary legislation to implement will be taken forward in a proposed Constitutional Renewal Bill at Westminster.

7. The Tiner Review made no comment on whether its proposals may have any relevance for arrangements in the devolved administrations, although it did examine devolved arrangements for comparative purposes. In May 2008, John Baillie, the Chair of the Audit Scotland Board, wrote to the SCPA on this issue. He provided a short commentary on corporate governance issues relating to Audit Scotland, based on the Tiner Review.² Although it cannot be translated wholesale to Scotland’s arrangements, on one or two points John Baillie indicated Audit Scotland’s explicit agreement with the proposals of the Tiner Review. On others he simply indicated that further thought was required.

8. The system of public audit has evolved over a number of years. The current framework in Scotland incorporates a combination of modified pre-devolution bodies and new post-devolution bodies. Some of the key features are outlined below.

Accounts Commission
9. The Accounts Commission for Scotland was established in 1974, under section 97 of the Local Government (Scotland) Act 1973 (subsequently amended). The Accounts Commission’s remit is to secure the financial audit of local authorities (and joint boards) and the audit of their performance of their Best Value and community planning duties.

10. It comprises between six and 12 Members including the Chair and Deputy Chair. Members are appointed by Scottish Ministers following an open recruitment process adhering to the public appointments procedures. In its operation, the Accounts Commission is independent of Scottish Ministers and local authorities. It meets monthly, with additional meetings to consider Best Value reports as required. Members serve in their personal capacity, and not as nominees or representatives of any interest group. Members are appointed for a period of three years, normally renewable for a further three-year period. All members are remunerated on a part-time basis.

11. The Controller of Audit (who is also currently the Deputy Auditor General) is an independent officer with the statutory function of reporting issues arising from the audit of local authorities and joint boards to the Accounts Commission.

12. The Controller of Audit can also make reports in the public interest. The Accounts Commission will consider reports of the Controller of Audit, investigate all matters raised and reach findings, and has the power to make recommendations to councils and to Scottish Ministers. The Accounts Commission also has the power to conduct hearings, where appropriate, into the conduct of local authorities, councillors and officers and may impose sanctions on individual officers and members responsible for illegality.

Auditor General for Scotland
13. The post of Auditor General for Scotland was established by section 69 of the Scotland Act 1998.³ It is a Crown appointment, made on the recommendation of the Parliament. It is an independent position and not subject to the direction or control of the Scottish Government or the Parliament. A recommendation can only be made to the Queen by the Parliament for the removal of the Auditor General if a resolution to that effect is passed by at least two-thirds of the members of the Parliament.

14. The Auditor General is responsible for the audit of the Scottish Government and most other public sector bodies (health boards, further education colleges, Scottish Water, agencies and NDPBs), except for local authorities and fire and police boards. He also performs the comptroller function in Scotland, which involves him formally approving the release of funds from Westminster to the Scottish Government.

15. The Auditor General reports to the Parliament under sections 22 and 23 of the Public Finance and Accountability Act (Scotland) 2000 (‘the Act’).⁴ Reports cover the proper, efficient and effective use of public funds, and a programme of performance audits. The Audit Committee of the Parliament can then hold evidence sessions to explore the issues detailed in the Auditor General’s reports, and may issue its own reports based on these evidence sessions.

Audit Scotland
16. Audit Scotland was established as a corporate body in April 2000 under section 10 of the Act. It was formed by the merger of the Scotland division of the National Audit Office and the staff of the Accounts Commission for Scotland. Audit Scotland provides services to both the Accounts Commission and the Auditor General for Scotland, allowing them in turn to provide assurance to the Parliament and ministers that public money is being spent appropriately. Audit Scotland has about 270 staff. On behalf of the Auditor General or the Accounts Commission it either conducts, or commissions a private firm to conduct, the audit of all public bodies in Scotland.

17. Audit Scotland’s work is overseen by a board which meets around six times a year to consider plans and strategic direction. The board is currently chaired by the Chair of the Accounts Commission and also comprises the Auditor General and three other members who are appointed jointly by them. It has become customary that the other three are the Deputy Auditor General, one further member of the Accounts Commission and an independent non-executive member.

18. The board has an audit committee which appoints internal auditors and receives annual accounts and internal audit reports. The board also has a remuneration committee which sets and reviews the salaries of senior staff (excluding the Auditor General) and the main terms and conditions for all staff. The Auditor General is currently designated as the accountable officer for Audit Scotland. Under the Act, he, or another member of Audit Scotland staff, is designated as such by the SCPA.⁵

19. The Act gives the SCPA a number of responsibilities, primarily focused on scrutiny of the budget and expenditure of Audit Scotland. The Audit Scotland governance arrangements are, therefore, of direct interest to the SCPA – at least in so far as they relate to the management of Audit Scotland’s budget setting.

20. As the SCPA’s primary responsibilities relate to providing accountability for Audit Scotland’s expenditure, its focus is, therefore, on Audit Scotland, rather than on the office of Auditor General or the Accounts Commission. However, there is overlap to the extent that the Auditor General is a member of Audit Scotland’s board, has the statutory authority to direct the board and (as accountable officer) has a key role in the management of expenditure by Audit Scotland. Equally, the Accounts Commission provides members of Audit Scotland’s board, is served by Audit Scotland and can direct it.

21. While the Tiner Review is a useful starting point, the SCPA agreed to undertake its own more general review of how Audit Scotland’s current arrangements accord with best practice in public sector corporate governance. In doing so, the SCPA was aware that a number of standards and good practice frameworks have been developed over recent years and could act as a benchmark for any examination.

22. The SCPA took oral evidence over three meetings and, in doing so, sought to take account of the perspectives of the other stakeholders who also have an interest in an examination of Audit Scotland’s governance arrangements. On 17 September, the SCPA heard from Tom McCabe MSP and Paul Grice, Clerk/Chief Executive, representing the Scottish Parliamentary Corporate Body (‘the SPCB’). On 24 September it heard from John Swinney MSP, Cabinet Secretary for Finance and Sustainable Growth. On 1 October it heard from Angela Scott, Head of the Chartered Institute of Public Finance and Accountancy in Scotland (‘CIPFA’) and Gillian Fawcett, Senior Fellow at the Office of Public Management (both of which organisations were involved in the development of the Good Governance Standard for Public Services, which isa tool that outlines six key principles and is widely accepted and applied in the public sector⁶). Later in the same meeting it heard from John Baillie, Chair of the Accounts Commission and of Audit Scotland, Robert Black, Auditor General for Scotland, Caroline Gardner, Deputy Auditor General and Controller of Audit, and Phil Taylor, who was until 30 September 2008 the independent non-executive member of Audit Scotland’s board.

23. The SCPA also received written evidence from the Finance Committee (covering experience from its inquiry into accountability and governance towards the end of Session 2, and its interest in connection with its overall role in budget scrutiny) and from HW Chartered Accountants, the firm it has appointed as external auditor to Audit Scotland.⁷ The SCPA also received written representations from Murdo Fraser MSP⁸ on arrangements for setting the Auditor General’s salary, and supplementary information from the SCPB on arrangements for the selection process for the Auditor General. SPICe also prepared a briefing note comparing some elements of the public audit structure in Scotland with those in England, Wales and Northern Ireland.⁹

24. The SCPA would like to express its thanks to all those who provided written and oral evidence for the review.

25. The SPCB has two main responsibilities in relation to the Auditor General for Scotland: to manage the process by which the Parliament nominates a person for the post of Auditor General, and to determine the salary and conditions for that office. These are areas in which the SCPA has no direct statutory responsibilities. However, correspondence from Audit Scotland indicated that it felt them to be issues that would merit re-examination. As part of its review, the SCPA therefore agreed to seek evidence from the SPCB, which stated that it was content for the SCPA to consider all the evidence and make proposals on these issues in its report to the Parliament.¹⁰

26. The SPCB also has responsibilities in connection with various other office-holders appointed by the Parliament (such as commissioners and the Scottish Public Services Ombudsman). Noting the forthcoming Scottish Government legislation on public services reform, and continuing a process connected to the Session 2 Finance Committee’s Accountability and Governance inquiry¹¹, the SPCB has, separately, been considering whether any modification is required to the set-up for those office-holders. This is not directly related to consideration of the office of Auditor General, but may provide some useful comparisons.

27. Under section 69(1) of the Scotland Act 1998, an Auditor General is to be appointed by the Queen on the nomination of the Parliament. The only Auditor General so far was nominated by the Parliament after a preferred candidate was recommended to it by the SPCB. This followed a selection process led by the Presiding Officer and a committee (selected according to the provisions of Standing Orders Rule 3.11¹²) supported by the Clerk/Chief Executive of the Parliament.

28. The effect of Rule 3.11 is that the Convener of the Audit Committee will be a member of the selection panel for an Auditor General. The SCPA has no role in the process. In England, the proposed appointee is put to the House of Commons on a motion by the Prime Minister, with the agreement of the chair of the Committee on Public Accounts – a system which is not proposed for change as a result of the recent review.

29. In its correspondence to the SCPA, Audit Scotland stated that the process by which the next Auditor General is to be appointed is unclear. However, it gave no further detail on the basis for this view or on how it considered that the process could or should be improved or clarified. The SPCB, however, felt that the present system is suitable and sufficiently prescribed, balancing a structured system with appropriate flexibility in the selection of members of the panel. It commented that the process has been used successfully in relation to a number of parliamentary appointments, and is always overseen by an independent assessor to ensure that the appointment conforms to good practice.¹³

30. The SCPA notes that there is now some considerable experience in applying the procedures currently set out in Standing Orders for nominating postholders, and considers that this provides sufficient guidance and flexibility. The SCPA, therefore, recommends no change to the process for selecting a nomination for Auditor General for Scotland.

The principle of a fixed term
31. Section 13(5)(b) of the Act initially provided that, “A person appointed to be Auditor General vacates office on attaining the age of 65, or on such later date as the Parliament may by resolution determine”. In 2007, this section of the Act was amended to remove the age limit of 65, in response to EU Directive 2000/78 which prohibits discrimination on the grounds of age. There is now no specified retirement age for an Auditor General for Scotland. Section 13(5) of the 2000 Act, as amended, now provides that, “A person appointed to be Auditor General - (a) may be relieved of office by Her Majesty at that person’s request …. (c) holds office on such terms and conditions as the Parliamentary corporation may determine”.

32. The SCPA acknowledges the legal considerations surrounding a fixed retirement age, and also recognises the consensus among witnesses that a fixed term of appointment for a future Auditor General would be an appropriate step, which would also have the benefit of avoiding the issue of a retirement age. It is also a recognised principle in many other countries that a fixed term is appropriate for public auditors to help enshrine their independence to carry out their mandates free from political interference.¹⁴ There is also substantial precedent for public appointments associated with the Parliament being held for fixed terms.

33. It is not clear whether the SPCB has the power to impose a fixed term on a future appointment on the basis of its general power in section 13(5) of the 2000 Act. However, amending the Act to introduce a clear and transparent statutory framework for a fixed-term appointment would be preferable, as it would remove any risk that the SPCB might be perceived as having undue discretion or potential to make appointments on inconsistent terms.

34. The SCPA recommends that, in future, the Auditor General for Scotland should be appointed on a fixed term.

Length of term
35. The SCPA heard different views on the appropriate length of a fixed term. In examining the options, the SCPA has been mindful of the need to balance competing considerations, including that the term is sufficiently long:

while retaining the benefit of providing relatively regular turnover in the post.

36. The SCPA notes that, in regard to the other office-holders sponsored by the SPCB, the various statutes provide for a term not exceeding five years to be determined by the SPCB at the time of appointment and, in most cases, renewable once.

37. As a result of the recent review in England, it is proposed that the Comptroller and Auditor General is in future appointed for a single non-renewable fixed term of ten years – the maximum length of two parliamentary terms. This was regarded by the Public Accounts Commission as an appropriate length to allow a postholder to become established without the risk of public audit becoming too closely associated with the personality of one individual over the longer term.

38. In its original correspondence, Audit Scotland suggested that the single non-renewable ten-year term proposed in England would also be appropriate for Scotland. In evidence, it said that a term of less than eight years would risk compromising the effectiveness of the postholder. It emphasised that an Auditor General needs time to develop a study programme and come to a view as to what should be pursued, with particular studies then potentially taking three years from conception to delivery. Any less than eight years may leave an Auditor General overseeing not much more than one full cycle of work. A period of eight years, provided the term could begin somewhere in the middle of a session of the Parliament, would straddle three parliamentary sessions and allow the Auditor General to develop an appropriate relationship with the Parliament’s Audit Committee. Audit Scotland suggested that there would be a risk of a gradual erosion of independence in the course of a fixed term any longer than 10-12 years.¹⁵

39. The SPCB said that any suitable candidate for the position of Auditor General would almost inevitably be expected already to have substantial public sector experience and be able, particularly with the benefit of inheriting an established organisation, to make a significant impact in early course without a long lead-in time.¹⁶ It recommended a term of around five or six years, although it did not provide any detail on the considerations behind reaching this view other than stating that it crosses over the length of a session of the Parliament and would allow experienced members to be involved in the selection process. There is, however, no length of fixed term that can guarantee at which point of a parliamentary session a vacancy may occur.

40. The Tiner Review noted that the terms for public auditors in various other countries range from five to 15 years and often, but not in all cases, on the basis of a single non-renewable term. It suggested that five years is too short, given the complexity of the role and the reliance a parliament places on the judgements of the postholder.

41. The SPCB acknowledged that a conclusion on the appropriate length of term is a matter of judgement, and stated that it was content for the SCPA to come to its own decision on the issue.

42. The SPCB stated that it is preferable for the Auditor General to be appointed on a non-renewable basis. It said that there is a risk of a re-appointment process becoming largely a formality in many cases.¹⁷ In the case of the Auditor General’s position, it is also particularly important that the postholder is able to operate free of any possible perception that their judgements may be influenced by a desire to secure re-appointment. Audit Scotland agreed that a renewal process would create a perceived, and potentially real, compromise of the Auditor General’s position.¹⁸

43. The SCPA recommends that legislation should be amended to provide that, in future, the Auditor General for Scotland is appointed for a single non-renewable term of eight years. It would be advantageous, but not essential, if the appointment falls to be made a point where the term will span three parliamentary sessions.

Conflicts of interest and future employment
44. The SCPA considered whether any statutory restrictions should be applied to the future employment of an Auditor General after leaving office, or to any other posts an Auditor General can hold while in office. At present, the Act provides no such restrictions, although it is not clear whether the SPCB would have sufficient discretion to include any such restrictions in the terms and conditions it determines under section 13(5)(c).

45. While holding the post of Auditor General may often be expected to come towards the end of a person’s career, it is possible that younger candidates may have the requisite qualifications to be appointed. If the post is to have a fixed term, the likelihood increases of an outgoing Auditor General desiring to continue their career elsewhere afterwards. An outgoing Auditor General will also have extremely valuable experience which would be of benefit to many spheres of the public and private sectors, whether in employment or as a board member, consultant, adviser, etc. Allowing an individual the opportunity to pursue their career and make appropriate use of their experience must be balanced carefully with the importance of avoiding any perception of conflict of interest or possibility of influence on audit decision-making. Audit Scotland agreed that it is essential to avoid any sense of a ‘revolving door’ of Auditors General.¹⁹

46. In England, it is proposed that a former Comptroller and Auditor General should be prohibited for life from accepting a post in a body audited by the National Audit Office or other post in the gift of government, or acting as a consultant for any such body. In addition, a system requiring a former postholder to consult before taking up certain other positions is also proposed.

47. Enactments establishing some other parliamentary offices sponsored by the SPCB do contain such provisions. For example, the Scottish Public Services Ombudsman Act 2002 stipulates certain persons who may not hold that office, posts to which the Ombudsman may not be appointed while holding office, and prohibits a former Ombudsman from certain public offices for a period of three years after leaving post.²⁰

48. The SPCB suggested that the approach proposed in respect of the Controller and Auditor General in England is too draconian, although it is not clear whether it considers that a former Auditor General for Scotland should be treated in a different manner to former holders of other offices it sponsors. The SPCB acknowledged the merit of some process by which a scrutiny body should be consulted and required to approve any subsequent employment, but did not make a specific recommendation. It suggested that there may be some parallels with a requirement on former ministers to consult a particular Cabinet Office committee or a Permanent Secretary on accepting subsequent appointments.²¹ At present, Scottish Ministers are required to give up all other public appointments on taking office and to seek advice from the independent Advisory Committee on Business Appointments about any appointments they wish to take up within two years of leaving office.²²

49. The SPCB agreed in principle with setting some criteria, although it did not specify whether this ought to be a statutory provision. HW Chartered Accountants suggested that one option was for some form of restrictive covenant to be adapted to allow the Audit Scotland board to have a right to approve future employment of the Auditor General.²³

50. Audit Scotland agreed that the proposed approach in England may be too severe. A complete prohibition on taking up any appointment with an audited body may preclude a former Auditor General, for example, from taking up an academic career. However, Audit Scotland acknowledged the primary need to avoid any perception of potential compromise, provided it could be achieved in balance with the need to avoid unnecessarily restricting the pool of potential candidates for the post. It said that attention should be paid both to positions taken up after leaving the post of Auditor General and positions held immediately before taking up the post. There may be a conflict in someone who had immediately previously been responsible for a large area of devolved expenditure then becoming Auditor General and overseeing the audit of that same expenditure.²⁴

51. Audit Scotland suggested that it may be relatively straightforward to agree a list of particularly sensitive posts, with a prohibition on a former Auditor General taking up any of these within a set period of, for example, two years. It agreed with other witnesses that a further safeguard could be a requirement for reference to an official or scrutiny body on other possible positions or beyond the set period.

52. The SCPA considers that, in a country of Scotland’s size, it would be potentially unfair and counter-productive to be unduly restrictive on whether the holders of any particular posts should be ineligible for appointment as Auditor General. To do so would potentially limit the pool of applicants to those from the private sector or internal Audit Scotland candidates. The SCPA does not, therefore, recommend any specific prohibition. The SCPA recommends that, in future, the selection panel considering suitable candidates for nomination should carefully balance the implications of a candidate’s current employment for the independence of the Auditor General’s position.

53. The SCPA also considers that the integrity of the Auditor General’s position could be compromised by the postholder taking on any other role while in post. The SCPA, therefore, recommends that a presumption that the Auditor General will hold no other positions of any kind should be included by the SPCB as a term and condition for any future Auditor General.

54. In considering the future employment of an Auditor General after leaving post, the SCPA is mindful that any undue restrictions would, in effect, dictate that a former Auditor General must retire or work in the private sector. This could significantly reduce the pool of appropriate candidates. However, the SCPA accepts that the future employment of a former Auditor General has the potential to cause public disquiet. The SCPA, therefore, recommends that, while still in post, an Auditor General should not be permitted to apply for a post with any body which is subject to audit by the Auditor General, or which is associated with the Auditor’s General’s role. This restriction may inevitably lead to the situation of an individual being disadvantaged by having a gap between leaving the Auditor General position and taking up any other post. The SCPA recommends, therefore, that the SPCB should consider how the terms and conditions associated with the post can compensate for this.

55. Under section 13(1) of the 2000 Act, the SPCB is responsible for determining the salary and allowances of the Auditor General, which are then to be paid by Audit Scotland. There are two slightly distinct issues in relation to salary: the basic level and the mechanism for deciding on increases. The SCPA considers that the arrangements for setting and increasing the salary must be such as to attract appropriate candidates for the position, to reflect the seniority of the position within the public sector and to maintain the independence of the position.

56. It is not clear whether, when the post of Auditor General for Scotland was established, the salary level was set by reference to any particular benchmark or whether any research or consultation was done on the issue. The Financial Issues Advisory Group originally recommended that the salary set for the Auditor General should be commensurate with similar posts elsewhere, such as the Comptroller and Auditor General for Northern Ireland.²⁵ However, it is not clear if this was done. The SPCB agreed a starting level, and that it should be reviewed annually in April applying the same mechanism used by the Senior Salaries Review Body (SSRB) to determine the annual percentage increase in MSPs’ base salaries (which in turn is linked to that of the senior civil service).

57. Audit Scotland has argued that there are potential weaknesses in the process for deciding on salary increases for the Auditor General, with a potential perceived conflict of interest arising from the terms and conditions being the responsibility of the SPCB - which is also a body audited by the Auditor General. It suggested that an alternative mechanism should be considered in order to ensure that the arrangements are perceived as supporting the independence of the Auditor General, and said that the SCPA should consider taking on more of the SPCB’s role of oversight.²⁶

58. Audit Scotland has also in the past suggested that the SPCB might consider establishing a remuneration committee to advise on such matters. The SPCB said that it is not persuaded of there being a problem, or of the need for it to establish a remuneration committee to advise on such matters. It said that, in 2004, it commissioned the SSRB to undertake an independent review of officeholder’s salaries and invited it to recommend an appropriate annual uprating mechanism for salaries. The SSRB recommended that the annual pay increase for all parliamentary officeholders should be linked to that of the senior civil service revalorisation award and that there should be no change to the salary level of the Auditor General. The SPCB endorsed these recommendations, and said in evidence that it is content with the approach of seeking external advice at times and otherwise sticking to an agreed indexation formula. The SPCB said that it felt the salary had attracted a good number of high quality candidates for the position. It also suggested that, should it need further advice on such matters, it could seek that from its own audit advisory board.²⁷

59. A recent letter from Murdo Fraser MSP to the SCPA expressed concern at the reducing differential between the salary of the Auditor General and those of other senior Audit Scotland staff. Determining the salaries of Audit Scotland’s senior and other staff is a matter for its board, advised by its own remuneration committee, and is not necessarily a factor to be considered (by the SPCB or, indeed, by the SSRB) in examining the appropriate salary for the Auditor General.

60. Audit Scotland said that the identification of a comparable post within the senior ranks of the civil service as a benchmark would help to ensure objectivity, impartiality and transparency in the salary determination. However, it did not suggest a particular post.

61. In both England and Wales, the salary of the Auditor General is currently linked to that of a high court judge. In response to the Tiner Review, the Public Accounts Commission stated that this link does not relate the position of Comptroller and Auditor General to an appropriate peer group. The Commission suggested that the salary should be comparable to that of the Treasury’s Permanent Secretary and be linked to that pay level but adjusted so as not to include a bonus system. Proposed legislation in England is now for the salary package to be decided by the Public Accounts Commission at the start of each new postholder’s 10-year tenure, that it must not exceed the maximum value of a civil service permanent secretary’s package, and must be determined at the outset for the whole 10-year period by making provision for an appropriate index to be used to determine increases.²⁸

62. The SCPA recommends that SPCB should invite the SSRB to undertake a review of the salary benchmark for the Auditor General post prior to advertising the post at the start of each fixed term. The SCPA considers that the Auditor General’s salary and terms and conditions should not be at any risk of arbitrary change during the term of appointment. The SCPA, therefore, also recommends that the SPCB should specify at the start of each fixed term a mechanism that will be used throughout the fixed term to determine routine increases in the salary. The legislation should be amended to specify that the SPCB may not modify that specified mechanism for the duration of the term without the agreement of the postholder and the advice of the SSRB.

Other issues
63. The SCPA also considered whether any other issues in relation to the office of Auditor General require modification. The 2000 Act provides that an Auditor General may request to be relieved of office. The Scotland Act 1998 provides that a recommendation for removal of a person from office may only be made to the Queen on a motion passed by at least two-thirds of the members of the Parliament. The SPCB stated that the principle of the Parliament having such a reserve power is an important safeguard, and suggested that the current two-thirds threshold is appropriate.²⁹ It did not offer any view on whether it would be useful to have a more detailed specification of criteria for removal from office. The SCPA is content with the current provision.

64. One further question is whether the existing provisions in the 2000 Act for delegation and deputation are adequate. Section 13(6) provides that any functions of the Auditor General can be exercised by any person authorised to do so by the Auditor General. Section 13(9) also makes provision for the SCPA to appoint a person to discharge the functions when the office of Auditor General is vacant.

65. However, it is not clear whether there is sufficient provision for delegation in the event of the Auditor General being incapacitated – in a similar style to provision in the current Judiciary and Courts (Scotland) Bill for incapacity of the Lord President.³⁰ Section 13(9) of the 2000 Act does not cover such an event in the case of the Auditor General. It is also not entirely clear how the provisions of section 13(6) and (9) interact with the status of the Deputy Auditor General. There is no statutory provision for such a post, and so it is not clear how the existence of that post interacts with the statutory obligation on the SCPA to appoint someone to act when the post of Auditor General is vacant.

66. The SCPA considers that a potential difficulty may arise in the event of the incapacity of an Auditor General, where temporary provision may need to be made for certain functions of the post to be delegated. The SCPA notes the model used in the Judiciary and Courts (Scotland) Bill in the event of the Lord President being incapacitated but still in post. One option to address this would be to make formal statutory provision for the position of Deputy Auditor General. The SCPA recommends that further consideration should be given to this issue by the SPCB.

67. As part of its review, the SCPA noted that the current tri-partite public audit structure of the Auditor General and the Accounts Commission, with both served by Audit Scotland, was established on the recommendation of the Financial Issues Advisory Group. The SCPA considers that, particularly given the overlap between membership of the Accounts Commission and the Audit Scotland board, the overall public audit structure is closely related to a review of the corporate governance of Audit Scotland. The SCPA also noted the work being led by the Scottish Government on simplification of the scrutiny of public services, and agreed that it was, therefore, appropriate to consider how this tri-partite structure has worked in practice and whether it is still suitable for the future.

68. In evidence, the SPCB said that, while there were good reasons for establishing the current structure when the 2000 Act was being considered, it was now appropriate to consider whether there is still a good case for it going forward. The SPCB stated that the structure is divided in a way that is not particularly helpful or easy to understand, given that the essential function of all the bodies to give assurance about the use of public funds is the same. It suggested that the SCPA should reflect on whether the structure should be simplified.³¹

69. The Cabinet Secretary agreed that the distinctions between the roles of the bodies are not widely understood. He stated that it is not for the Scottish Government to consider the question of whether the structure should be simplified. However, he agreed that, if a simplified organisational and governance model could be achieved in a way that retained the fundamental independence of public audit and assurance for the public, he would be willing to discuss changes.³²

70. Audit Scotland stated that it regards the structure as essentially very simple, with the Audit Committee and the Accounts Commission playing what it described as similar roles. On the one hand is the Auditor General, responsible for the audit of central government and its public bodies, and reporting the conclusions of that work to the Parliament’s Audit Committee to consider the implications. On the other hand is the Controller of Audit, responsible for the audit of local authorities and their joint boards, and reporting the conclusions of that work to the Accounts Commission to consider the implications.³³

71. The Audit Commission for England, which oversees the audit of local authorities, is entirely separate from the National Audit Office. The Chair and members of the Audit Commission are appointed by the UK Government. The Audit Commission has its own directly employed staff and its own governance arrangements. It has not, therefore, been considered in relation to the Tiner Review of the National Audit Office.

72. The SCPA noted with interest the unified public audit structure that exists in Wales. The audits of all public bodies are the responsibility of the Auditor General for Wales, and there is no separate Audit Commission for local authority audits. The Auditor General for Wales is a corporation sole, and is head of the Wales Audit Office (‘the WAO’). The WAO was established in 2005 as a result of the Public Audit (Wales) Act 2004. There has never been a separate Audit Commission for local authority audits in Wales. Prior to the creation of the WAO the Audit Commission in Wales was a semi-independent office of the Audit Commission, with its own Director General.

73. The Welsh Affairs Committee of the House of Commons produced a report on a draft bill prior to the passage of the Public Audit (Wales) Act 2004 at Westminster. It made clear that all of the key parties concerned welcomed the overall aim of the Act to create a more unified public accountability framework. The report notes that Assembly Ministers considered and rejected the option of establishing a separate Welsh Audit Commission. The Audit Commission agreed that "the strength of this solution is integration". This was echoed by other witnesses, including the Welsh Local Government Association.³⁴

74. Audit Scotland highlighted the fundamental issue about the separate Accounts Commission role – that local government has different accountability arrangements to central government and so public audit arrangements should reflect this. Local authorities have a local electorate and should not be subject to parliamentary oversight in the same way as central government and its agencies. Audit Scotland acknowledged that there is, ultimately, oversight of the audit of local authorities by Scottish Ministers. However, it argued that this is a final arbiter, only after independent factual findings have been made by the Controller of Audit and an independent judgement about what to do about them taken by the Accounts Commission.³⁵

75. The Cabinet Secretary indicated that the Accounts Commission plays a very valuable role in providing assurance and highlighting issues in respect of bodies that, while outwith the direct control of ministers, are substantially funded by central government. There is, therefore, a legitimate public interest in ensuring that ministers are able to identify and effectively address any fundamental concerns about their operation. The Scottish Government has found it very useful to be able to direct the Accounts Commission as to certain work that it ought to pursue. The Cabinet Secretary suggested that any simplification of the structure should, therefore, ensure that the Scottish Government can retain this perspective on local authorities, as well as the audit examination of central government and its agencies.³⁶

76. This issue appears to have been addressed in the Welsh arrangements. The UK Government stated that one of the key considerations when drafting the Public Audit (Wales) Act 2004 was that it should not undermine or weaken the system of local democratic accountability. Therefore, alongside implementing the unified structure, legislation makes three specific provisions for the way in which local authority audits are conducted and reported.³⁷

77. Firstly, the Auditor General for Wales appoints the external auditors to local government bodies and regulates their work, but is not able to appoint himself/herself as the auditor for local authorities.³⁸ This contrasts with the audit arrangements for the Assembly and other public sector bodies where the Auditor General is the statutory appointed external auditor and has personal responsibility for the work. This is to maintain a separation so that the same body is not auditing both central and local government accounts.

78. Secondly, appointed auditors and the Auditor General are not required to lay audit reports on local government bodies before the National Assembly for Wales, and so they cannot be considered by the Assembly’s Audit Committee. Local government bodies remain accountable to their own electorates rather than to the Assembly. The Auditor General will be required to lay only an annual report on local government work before the Assembly. A protocol on handling any reports of a cross-cutting nature has been agreed. (This is similar to the situation in Scotland, where Accounts Commission audit reports on local authorities are not laid before the Parliament and so cannot be considered by the Audit Committee – but the Audit Committee does consider an overview report on local government and can consider cross-cutting reports.)

79. Thirdly, the National Assembly's Audit Committee is not able to consider or modify the local government element of the Auditor General's budget. These provisions aim to ensure that it should not be possible for the Assembly to interfere with the audit of local government bodies. Likewise, the Public Audit (Wales) Act 2004 aims to ensure that the Auditor General is, and is seen to be, operationally independent of the Assembly, especially as the unified structure replaced the oversight of local government audit work by a collegiate Commission with oversight by a single individual.

80. Audit Scotland stated that it is not clear how, in Wales, action would be taken if a local authority audit exposed significant concerns. It described the process in Scotland of the Accounts Commission considering findings and, on occasion, holding public hearings - which it described as an important and powerful aspect of the process. It stated that, in England, the Audit Commission does not have the power to hold hearings and so, in extreme examples, has no option but to resort to the courts. Audit Scotland argued that the Scottish model is significantly better, allowing the opportunity to address concern through a tribunal-like process but avoiding taking audit into the realm of the courts or politics. It said that delivering the Accounts Commission role in a different way would simply require some version of reinventing the Accounts Commission. It stated that, if that was to be delivered through Audit Scotland, it would change its nature as an organisation and, rather than leading to simplification, would raise as many difficulties as it resolves.³⁹

81. Audit Scotland also said that the current separation of the Auditor General and the Accounts Commission is an important strength of the system. However, there was some lack of clarity about the extent of that separation in fact. The function of Controller of Audit is a statutory appointment under the Local Government (Scotland) Act 1973. Audit Scotland indicated that this is an independent office, appointed by Scottish Ministers with no reference to the Auditor General, notwithstanding the fact that the postholder is also currently designated as Deputy Auditor General. Audit Scotland later said that the appointment was made by the Accounts Commission, with the approval of the Auditor General.⁴⁰ In fact, the 1973 Act provides for the appointment to be made by the Accounts Commission, after consultation with, and subject to the approval of, the Scottish Ministers. ⁴¹

82. There appears no reason why the Auditor General could not be designated as Controller of Audit. It is not, therefore, entirely clear the extent to which it can be regarded as a strength of the system that the Auditor General and Accounts Commission are separate.

83. With continuing development towards joint working between local authorities and other public bodies (and some development of hybrid part-elected bodies such as national parks authorities), to some extent the processes involved in providing assurance about the use of public funds increasingly cross the previous distinctions. However, in the time available to it, the SCPA has not been able to take evidence from the full range of stakeholders who have an interest in the implications of changing the tri-partite structure.

84. As noted above, oversight of the three public audit elements in Scotland is split between different bodies. Any examination, therefore, involves complex overlapping interests and is not for the SCPA to conclude on its own. In the time available to it, the SCPA has not had the opportunity to examine in full detail the implications for all stakeholders of possible options for simplification of the structure. Nonetheless, the SCPA considers that the current arrangements are not clear or widely understood.

85. The SCPA considers that it is essential to retain the functions and processes of the Accounts Commission, namely considering the output of the audit of local authorities and joint boards and, where necessary, making recommendations to Scottish Ministers. However, the SCPA believes that there may be merit in delivering these functions within a simplified audit structure. It considers that greater transparency and public understanding could be achieved by an option such as the Auditor General being the strategic figurehead responsible and accountable for the audit of all public bodies, served by Audit Scotland, and with reporting lines to the Parliament’s Audit Committee and to Ministers. There appears no logical reason why the Auditor General should not also have the function of Controller of Audit, or why the integrity of the different functions cannot be retained in a simplified structure.

86. The SCPA, therefore, recommends that the Scottish Government and the Parliament should enter into discussions in early course on how a thorough review of the arrangements could be accommodated within legislation such as the Scottish Government’s forthcoming Public Services Reform Bill.

87. Under section 10(2) of the 2000 Act, the Audit Scotland board consists of the Auditor General, the Chair of the Accounts Commission and three others appointed by them. In practice, it has become a convention that the other members are the Deputy Auditor General (who is also currently the Controller of Audit), another member of the Accounts Commission and an independent non-executive member appointed by open competition.

88. The Office of Public Management (‘the OPM’) and CIPFA both emphasised that good governance is essential to developing and retaining an effective organisation and that boards that work well are those that can exercise objectivity and independence.⁴² The SCPA agreed, therefore, that it was important to examine the role, composition and operation of the Audit Scotland board.

89. The SPCB stated that it did not think that the current arrangements are a sustainable model for governance, and that Audit Scotland would not likely approve that model in another public body. While it accepted that the arrangements had been set up in accordance with the will of the Parliament, it suggested that it was now appropriate to review them.⁴³ The Cabinet Secretary stated that the corporate governance of Audit Scotland is of great interest to the Scottish Government, because of the central importance of strong public assurance about the effective role of audit over the conduct of the Government. However, he indicated that, as a body audited by Audit Scotland, the Scottish Government did not feel able to comment in detail on the arrangements.⁴⁴

90. Audit Scotland’s role is to provide such assistance and support as the Auditor General and the Accounts Commission require in the exercise of their respective functions. Audit Scotland has no functions of its own that are not performed under the direction of the Auditor General or the Accounts Commission.

91. In evidence, Audit Scotland said that the composition of the board reflects the shared services role of the organisation, with both the main stakeholders being represented on the board. It said that the current model stands up well and is fit for the purpose of running a shared services organisation.⁴⁵

92. CIPFA also emphasised that Audit Scotland is a somewhat distinctive public body, in that the primacy of the Auditor General’s independence means that the purpose of the board is not to represent the interests of Scottish Ministers, as would be the case with many other public bodies. Throughout its consideration, the SCPA sought to test any discussion to ensure that there is no potential risk to this independence. However, CIPFA emphasised that there is not necessarily a tension or compromise between the independence of an office-holder such as the Auditor General and the obligation on a board to be robust and effective in holding the office-holder and staff to account for their performance against the agreed strategy.⁴⁶

93. The OPM described best practice understanding of the purpose of a board in three main categories: to establish and approve the body’s strategy in conjunction with the executive; to support, challenge and scrutinise the strategy; and to monitor delivery of its outcomes. Further purposes relate to the public role and accountability of the organisation. The OPM highlighted the scrutiny function as being a key component of a board achieving a high level of performance.⁴⁷

94. However, Audit Scotland argued that the board is different due to the organisation’s shared services role. It said this reflected the fact that some levels of accountability lie with the SCPA in the overall governance regime. It said that the board does not, therefore, exist as the principal means of accountability for Audit Scotland, but is more operational in nature, seeking to ensure that the internal processes by which Audit Scotland marshals its resources work in accordance with proper standards. It sought to distinguish between this operational accountability and what it described as the higher level governance and accountability role of the SCPA. However, it also emphasised that the board does, in practice, provide a challenging environment within which the Auditor General (as accountable officer for Audit Scotland) is scrutinised.⁴⁸

95. The SCPA considers that its role is to provide a focus for political accountability for Audit Scotland in a way which minimises any risk of apparent political interference in the independence of public audit. The SCPA does not consider that this means that it should be regarded in any way as having any of the nature or functions of a board for Audit Scotland.

96. The SCPA, therefore, recommends that the Audit Scotland board should review its focus, to ensure that its purpose accords with best practice as far as is possible while respecting the independence of the Auditor General. The board should formulate and publish a statement of its purpose.

Size and composition
97. CIPFA and OPM emphasised that there is no particular board model that would represent best practice for all public bodies. The structure of a board has to reflect its purpose and the nature of the organisation.⁴⁹

98. CIPFA said that the whole focus of a board should be to be independent, which flows in part from the membership of the board. OPM said that, for a board in any sector to gain public trust and confidence, it is important that it can demonstrate objectivity and independence in fulfilling its public value role.⁵⁰ All best practice approaches indicate that a board should include a balance of executive and non-executive directors, such that no individual or group of stakeholders can dominate the decision-making. Audit Scotland favoured an odd number of members on the board. There was no evidence in favour of any change to the current size of the board, although it may be necessary to make such a change to reflect changes in the public audit structure in due course. Audit Scotland suggested that, if there was an increase in membership, consideration would have to be given to the extra value that would be brought in view of the additional cost.⁵¹

99. Audit Scotland also agreed that non-executive members should always have a majority. Its view of the composition of the board appears to be somewhat inconsistent. It described the board as having a narrow non-executive majority on the basis of having two members drawn from the Accounts Commission and a third independent non-executive member. However, when discussing the role of non-executive members and the way they might be selected in future, it appeared to be referring only to one member.⁵² While not having day-to-day operational roles in Audit Scotland, it is not clear the extent to which the Accounts Commission representatives can be regarded as independent non-executives as normally understood.

100. While acknowledging the view of Audit Scotland that it is primarily a shared services organisation, the SCPA is not clear that this necessarily requires the board composition that has become customary. The 2000 Act does not provide for the board to include two representatives each from the Auditor General and Accounts Commission perspectives.

101. The SCPA considers that a board of five members should consist of the Auditor General and the Chair of the Accounts Commission and three other independent non-executive members with no connection to either. However, the SCPA considers that there should be further reflection on whether, as accountable officer, it is appropriate for the Auditor General to be a full member of the board. The composition of the board may need to be considered again if the overall public audit structure is revised in the future.

Method of appointment of board members
102. Members of the board are appointed on such terms and conditions as the Auditor General and the Chair of the Accounts Commission may determine. The SCPA understands that the independent non-executive member, Phil Taylor, stood down from the post at the end of September 2008 after seven years in office. The new member will be appointed by the board with no external approval required.

103. CIPFA stated that the best way to ensure that board members were clearly independent is the process and conditions of appointment. It said that it was usual for appointments to boards of public bodies to be made either by election or by the public appointments process.⁵³ The SPCB suggested that there is some difficulty in perceiving independence in a structure where, for example, the Auditor General is a member of the board to which he is answerable as accountable officer and also directly involved in selecting other board members.⁵⁴ Neither CIPFA nor the OPM were aware of other similar models in other public bodies.

104. Audit Scotland suggested that, while it did not perceive any problems with the current system given the nature of the organisation, it recognised that the perception of transparency could be improved if, for example, the SCPA had a role in approving the appointment of the independent non-executive member. Phil Taylor said that he had never felt inhibited in acting robustly and independently on the board, but recognised that this position would be further bolstered by the approval of a parliamentary body.⁵⁵ The SPCB went further. It said that it would prefer the members of the board to be appointed by a committee of the Parliament, using the selection panel procedures laid down in Standing Orders.⁵⁶

105. The proposal in England is for proposed non-executive members of the board of the National Audit Office to be recommended by the Chair of the board to the Public Accounts Commission, which can then decide whether to appoint or require an alternative recommendation.

106. The SCPA does not consider that non-executive members of the board should be appointed by the board itself. The SCPA recommends that a process similar to that specified in Standing Orders Rule 3.11 should be used by the Parliament to appoint non-executive members of the Audit Scotland board, and recommends that the Standards, Procedures and Public Appointments Committee should consider whether such a change to Standing Orders can be proposed.

107. The OPM and CIPFA said that it is best practice for board members to be appointed for a fixed term, to avoid the risk of members running out of momentum and independence becoming compromised. A normal approach is for a fixed term of three years with the possibility of renewal once, although CIPFA highlighted the possibility of a board member’s independence being questioned with renewal.⁵⁷

108. The SCPA recommends that non-executive board members should be appointed on a fixed term.

Roles of the Auditor General in respect of the board
109. The Auditor General performs several functions in respect of the board. He is an executive member, has the right to give statutory direction to the board, has a role in appointing its members and is accountable officer being scrutinised by the board. The SCPA considered whether this confluence of roles is a necessary consequence of protecting the independence of the Auditor General.

110. Audit Scotland said that at the top of any organisation there is a coming together of different roles and it believed that the current model for Audit Scotland was robust and worked well.⁵⁸

111. The SPCB, however, argued that the multiple roles of the Auditor General were a weakness in the current governance structure. It suggested that there should be more of a separation of the executive offices from the accountability arrangements, with its preference for the Auditor General to take on more of a chief executive/accountable officer role.⁵⁹

112. In considering Audit Scotland’s accounts and budget proposals, it is open to the SCPA to take evidence from the Auditor General and the Chair of the Accounts Commission as the principal stakeholders for whom work is delivered, as well as from the accountable officer. The SCPA suggests that, in future, Audit Scotland should include any member of its board in those it nominates as authorised to give evidence to the SCPA on its accounts and budget proposals.

Selection of board chair
113. The Act states that the Audit Scotland board may determine its own procedures and appoint one of its members to preside at its meetings.⁶⁰ By convention, the Chair of the Accounts Commission is chosen as the Chair of the Audit Scotland board although this is not required by statute. There is no specified procedure for selecting the Chair, and the role of the Chair is not clearly defined.

114. In England the proposal is for the Chair of the NAO to be one of the independent non-executive members and to be a separate public appointment by the Queen on a motion of the House of Commons, proposed by the Prime Minister, with the agreement of the chair of the Committee on Public Accounts.

115. CIPFA said that different rules and approaches for selecting a board chair are adopted depending on the sector. Sometimes boards will select their own chair, others will advertise externally. It emphasised that there should be a partnership between the chief executive and chair of the board, but they should have distinct functions so that there is no misunderstanding of each others responsibilities. It suggested that producing a job description for each role can help to provide that clarity.⁶¹

116. Audit Scotland explained that the reason that the Chair of Audit Scotland goes to the Accounts Commission Chair is to have a countervailing influence on the board to that of the Auditor General who is, in effect, chief executive through being designated as accountable officer. This is to allow the only two principal stakeholders to have an equal and opposite say in the command of the resources that are used to deliver the programmes of both of them.⁶² It should be borne in mind that it is not essential for the Auditor General to be the person designated as accountable officer.

117. The SCPA notes that the current custom of selecting the Chair of the Accounts Commission as the Chair of Audit Scotland board effectively means that Scottish Ministers are indirectly appointing the Chair of Audit Scotland. The SCPA recommends that a review of the method of selecting the Chair of Audit Scotland should result from a fuller review of the public audit structure in due course.

Performance evaluation
118. One principle of the Good Governance Standard for Public services is that good governance means enhancing the ability of the governing body to be effective by developing the capability of people with governance responsibilities and evaluating their performance, as individuals and as a group. Both CIPFA and OPM emphasised the importance of being clear about the roles to be performed by board members, identifying the skill mix required and investing in the training of members, particularly non-executives.

119. CIPFA said that there are several strands to performance evaluation of a board including evaluating individual board members, the board chair and the board collectively. The OPM suggested that some of the best practice in measuring the effectiveness of boards involves not just self-assessment, but asking organisations to assess their performance against the standards. ⁶³

120. The SCPA recommends that Audit Scotland should develop and publish board performance evaluation procedures.

121. Given that the aim of its review was to consider the corporate governance of Audit Scotland eight years on, the SCPA also invited witnesses to comment on any particular strengths and weaknesses in its operation and role in the scrutiny process. Witnesses were also invited to comment on any issues arising in practice in the split of responsibilities between the Scottish Government, the SPCB and the SCPA in regard to their different respective roles in oversight and accountability for the Accounts Commission, the Auditor General and Audit Scotland.

External auditors to Audit Scotland
122. Section 23(1) of the Act provides that, when required by the Auditor General, it is the responsibility of the SCPA to appoint external auditors for Audit Scotland. The competitive tendering process for external auditors is managed by the Parliament’s procurement office in conjunction with the adviser and the secretary to the SCPA. Although the SCPA selects and appoints the auditors without reference to the board of Audit Scotland, the auditors’ fees are paid by Audit Scotland. Although the external auditors provide assurance to Audit Scotland’s board, the principal line of communication is for the auditors to report to the SCPA as part of its scrutiny of the expenditure of Audit Scotland.

123. At Westminster, the Public Accounts Commission currently appoints external auditors for the National Audit Office. However, it is proposed that in future the National Audit Office’s audit committee would recommend a firm to its Board which the Board would then appoint, subject to approval by the Commission.

124. HW Chartered Accountants (the current external auditors appointed by the SCPA) stated that appointment of external auditors by the Audit Scotland board would closely mirror standard practice in corporate governance as detailed in the Combined Code, where the board appoint the auditors, subject to shareholder approval. They said that following this approach would have no impact on the role, independence or accountability of the external auditor. However, they also said that they have no issue with the current arrangement for appointing the external auditor which is performed by the SCPA and, in any event, would recommend the retention of the current procedure whereby the external auditors have the ability to communicate directly with the SCPA.⁶⁴

125. In correspondence, Audit Scotland stated that the Westminster model could also be applied in Scotland, provided that there was a clear understanding between the SCPA and the Chair of the Audit Scotland board about the role of the board. However, in evidence it emphasised that it values the real and perceived independence created by the SCPA appointing the auditors and did not recommend any change.⁶⁵

126. The SCPA recommends that the current system for appointment of external auditors for Audit Scotland should remain unchanged.

Membership of the SCPA
127. At present, the Act provides for the SCPA to consist of, “the member of the Parliament who is for the time being convener of the Audit Committee and four other members of the Parliament appointed in accordance with standing orders”.⁶⁶ Rule 3.13 of Standing Orders provides for four members to be appointed to the SCPA by the SPCB, having regard to party balance and having secured the agreement of the Parliament to a motion proposing the membership.

128. The Session 2 Finance Committee’s inquiry into Accountability and Governance considered, among other things, the scrutiny conducted by the SCPA. The resulting report observed that, given its role scrutinising Audit Scotland, having too much overlap between the memberships of the Audit Committee and the SCPA could result in a perceived conflict of interest. The Finance Committee recommended that, “Unless it can be demonstrated that there is a compelling reason for doing so members of the Audit Committee should not be proposed for membership of the SCPA other than the Convener of the Audit Committee who has an ex-officio position.”⁶⁷

129. In response to this recommendation, the Session 2 SCPA agreed that, while experience on the Audit Committee is valuable, there is an important distinction between its role and that of the Audit Committee and the type of relationship each should have with Audit Scotland. It agreed that there should be a limit on the number of members of the Audit Committee on the SCPA. The SCPA also suggested that, given the need for good lines of communication to be maintained between it and the Finance Committee, at least one SCPA member should also be a member of the Finance Committee.⁶⁸

130. In evidence, the SPCB did not express an opinion on whether Standing Orders should specify the composition of the SCPA on a more formalised basis – for example, by stating possible criteria such as that the four SPCB nominations should include at least one member of the Finance Committee and no more than one member from the Audit Committee. The SPCB suggested that retaining some flexibility to nominate members with the appropriate experience and interest would be appropriate.⁶⁹

131. The SCPA is content with the current process for seeking nominations for its membership.

Privilege for proceedings of the SCPA
132. Section 41 of the Scotland Act 1998 provides that statements (whether by members, witnesses, advisers or parliamentary staff) made in the proceedings of the Parliament and any publications under the authority of the Parliament are absolutely privileged for the purposes of the law on defamation – i.e. in the event of witnesses or other parties taking legal action on the basis of potentially defamatory comments made in committee meetings or contained in committee reports etc. The protection does not prevent an action for defamation being taken, but provides an absolute defence against such an action.

133. Although it comprises five MSPs, the SCPA is not a parliamentary committee, but a public body established under the 2000 Act. Formal SCPA reports are classed as publications which are absolutely privileged in the terms of s41(1)(b) of the Scotland Act, as they fall within the definition of material “published under the authority of the Parliament”. Legal advice has, however, confirmed that statements made during SCPA meetings would not be covered by s41(1)(a) of the Scotland Act as they are not "proceedings of the Parliament". This effectively means that anything said by SCPA members (or witnesses, officials or advisers speaking at the meeting) could be subject to an action for defamation. This leaves the SCPA in what may be regarded as a more ‘exposed’ situation than that of parliamentary committees.

134. The SCPA has previously considered the issue of whether its proceedings should be covered by a form of privilege, and agreed to pursue the issue at an appropriate opportunity. Although such issues may be relatively unlikely to arise in the course of SCPA proceedings, members agreed that it would be desirable to seek to extend that protection to the SCPA at an appropriate legislative opportunity.

135. In considering whether it is appropriate or desirable for proceedings which are not parliamentary proceedings to be exempt from the normal law of defamation, the SCPA noted that there is recent precedent for privilege being granted to non-parliamentary bodies. For example, a form of privilege is granted in the statutory provisions establishing the Scottish Public Services Ombudsman and some other commissioners. Some differentiate between communications by and to the commissioner. Others grant only qualified, as opposed to absolute, privilege in some situations.⁷⁰ For example, communications by the Parliamentary Standards Commissioner have absolute privilege, but communications to the Commissioner have qualified privilege.⁷¹

136. The application of privilege appears to have been considered differently in the individual circumstances, role and context of each body when it was established. The 2000 Act does not provide for either the SCPA or the Auditor General to benefit from privilege and it is not clear from debates during the passage of that Act whether this was deliberate or an oversight. However, the SCPA is a group of parliamentarians, acting in most respects in a manner parallel to that of a committee having decided to apply similar procedures, and reporting to the Parliament. The SPCB suggested that it should, therefore, be afforded the highest level of protection in its work.⁷²

137. Audit Scotland agreed that this would be appropriate.⁷³ It also stated that it had made representations to the Scottish Government regarding the fact that the Auditor General does not have any privilege protection, whereas any statements of the Accounts Commission (and of staff of Audit Scotland when acting on its behalf) do.⁷⁴

138. The SCPA recommends that its proceedings should be treated in a way that is consistent with those of parliamentary committees and, therefore, that the legislation should be amended to provide for absolute privilege to be extended to its proceedings.

139. The SCPA also recommends that legislation should provide for any statements of the Auditor General (and of staff of Audit Scotland when acting on his/her behalf) to have absolute privilege, in the same way as is provided for the Accounts Commission.

The SCPA’s role in budget scrutiny
140. The SCPA has previously noted that the Act does not state that the Parliament should vote on its report on Audit Scotland’s annual budget proposal. The Act is silent on whether the SCPA’s report can recommend that Audit Scotland’s proposals be amended in any way. It simply obliges the SCPA to “examine proposals and report”. The National Audit Act 1983, which established the SCPA’s Westminster equivalent the Public Accounts Commission, provides for the Commission to examine the National Audit Office’s estimate of expenditure and lay it before the House “with such modifications, if any, as the Commission thinks fit”.⁷⁵ It is not clear why the Act (which mirrors the Public Accounts Commission set-up in many other ways) differs on this point.

141. Standing Orders are also silent on whether the SCPA, in publishing its report, could lodge a motion to ask the Parliament to debate and vote on the report. Similarly, it is not clear how, if the SCPA were to suggest amendment of Audit Scotland’s budget bid, this would be reflected in the subsequent Budget Bill introduced by the Scottish Government, given Audit Scotland’s independence of the Government.

142. Nonetheless, despite the absence of specific provision in statute or Standing Orders, the Finance Committee suggested that the Written Agreement between the Finance Committee and the SCPA provides for a suitable process.⁷⁶ In a situation where the SCPA’s report expresses discontent with Audit Scotland’s expenditure proposals and the Finance Committee either has no comment to make or is in agreement, the Written Agreement says that the SCPA could lodge a motion on its report and seek to secure parliamentary time to debate this. Alternatively, the Finance Committee could, with the SCPA’s agreement, express any discontent in its report which would then be debated.

143. The Written Agreement also suggests a course of action in the event of disagreement between the Finance Committee and the SCPA over Audit Scotland’s budget. While the SCPA has to report directly to the Parliament, the Finance Committee’s report on the Draft Budget includes a section on the SCPA’s report and includes the report in an annexe. To attempt to avoid a situation where the Finance Committee and the SCPA make different recommendations, the Written Agreement states that the SCPA will seek to answer any questions from the Finance Committee and make information available to it. If, however, there is still disagreement between the two bodies, the Finance Committee can express its comments on Audit Scotland’s proposals in its report and/or in the motion to debate its report. The SCPA would then be free to lodge an amendment to the Finance Committee’s motion. The Parliament would then vote on both the motion and the amendment.

144. The SPCB did not express any view on this situation. The Cabinet Secretary indicated that any change would not cause any difficulties to the overall budget process, in which the funding of Audit Scotland is top-sliced before the Scottish Government allocates its budget. He suggested that, provided that the SCPA and Audit Scotland are able to engage in reasonable negotiations to reach agreement, the current arrangements are adequate.⁷⁷ Similarly, Audit Scotland stated that the reporting arrangements between the SCPA and the Finance Committee are appropriate and fit for purpose. It did, however, suggest that further discussion may be helpful on clarifying how the role of the Audit Scotland board in relation to its budget proposals interacts with that of the SCPA.⁷⁸

145. Audit Scotland also said that there is no formal arrangement for the Chair of Audit Scotland to have access to the SCPA, and that it was keen to build a relationship between them.⁷⁹ However, there is nothing in theory to stop the Chair appearing to give evidence on budget submissions, accounts, and so on. Indeed, the Financial Issues Advisory Group originally recommended that Commission would take advice from outside professionals as necessary, notably from the Auditor General and the Chair of the Accounts Commission.⁸⁰

146. In the case of the reformed governance of the National Audit Office, it is proposed to draw a formal distinction between the statutory and discretionary work of the Comptroller and Auditor General, so that any proposed modification of the budget does not interfere with the independence of operational audit decision-making.

147. The SCPA is content with the current process as described by the Finance Committee. The SCPA welcomes the offer of Audit Scotland to engage in discussions on how the protocol with the SCPA might be developed.

Many of the proposed changes outlined in this report – both to some of the aspects of Audit Scotland’s governance and to the role of the SCPA - would require amendment to the Public Finance and Accountability (Scotland) Act 2000 by way of new primary legislation. Others which indicate changes to Standing Orders would require consideration by the Standards, Procedures and Public Appointments Committee. The SCPA commends its recommendations, summarised below, to the Parliament and will continue discussions with other interested parties on suitable approaches to taking them forward.

Selection process
The SCPA notes that there is now some considerable experience in applying the procedures currently set out in Standing Orders for nominating postholders, and considers that this provides sufficient guidance and flexibility. The SCPA, therefore, recommends no change to the process for selecting a nomination for Auditor General for Scotland.

Term of appointment
The SCPA recommends that, in future, the Auditor General for Scotland should be appointed on a fixed term. The SCPA recommends that legislation should be amended to provide that, in future, the Auditor General for Scotland is appointed for a single non-renewable term of eight years. It would be advantageous, but not essential, if the appointment falls to be made a point where the term will span three parliamentary sessions.

Conflicts of interest and future employment
The SCPA considers that, in a country of Scotland’s size, it would be potentially unfair and counter-productive to be unduly restrictive on whether the holders of any particular posts should be ineligible for appointment as Auditor General. To do so would potentially limit the pool of applicants to those from the private sector or internal Audit Scotland candidates. The SCPA does not, therefore, recommend any specific prohibition. The SCPA recommends that, in future, the selection panel considering suitable candidates for nomination should carefully balance the implications of a candidate’s current employment for the independence of the Auditor General’s position.

The SCPA also considers that the integrity of the Auditor General’s position could be compromised by the postholder taking on any other role while in post. The SCPA, therefore, recommends that a presumption that the Auditor General will hold no other positions of any kind should be included by the SPCB as a term and condition for any future Auditor General.

In considering the future employment of an Auditor General after leaving post, the SCPA is mindful that any undue restrictions would, in effect, dictate that a former Auditor General must retire or work in the private sector. This could significantly reduce the pool of appropriate candidates. However, the SCPA accepts that the future employment of a former Auditor General has the potential to cause public disquiet. The SCPA, therefore, recommends that, while still in post, an Auditor General should not be permitted to apply for a post with any body which is subject to audit by the Auditor General, or which is associated with the Auditor’s General’s role. This restriction may inevitably lead to the situation of an individual being disadvantaged by having a gap between leaving the Auditor General position and taking up any other post. The SCPA recommends, therefore, that the SPCB should consider how the terms and conditions associated with the post can compensate for this.

Salary and conditions
The SCPA recommends that SPCB should invite the SSRB to undertake a review of the salary benchmark for the Auditor General post prior to advertising the post at the start of each fixed term. The SCPA considers that the Auditor General’s salary and terms and conditions should not be at any risk of arbitrary change during the term of appointment. The SCPA, therefore, also recommends that the SPCB should specify at the start of each fixed term a mechanism that will be used throughout the fixed term to determine routine increases in the salary. The legislation should be amended to specify that the SPCB may not modify that specified mechanism for the duration of the term without the agreement of the postholder and the advice of the SSRB.

Other issues
The SCPA is content with the current provision in the Scotland Act 1998 for removal of the Auditor General.

The SCPA considers that a potential difficulty may arise in the event of the incapacity of an Auditor General, where temporary provision may need to be made for certain functions of the post to be delegated. The SCPA notes the model used in the Judiciary and Courts (Scotland) Bill in the event of the Lord President being incapacitated but still in post. One option to address this would be to make formal statutory provision for the position of Deputy Auditor General. The SCPA recommends that further consideration should be given to this issue by the SPCB.

Oversight of the three public audit elements in Scotland is split between different bodies. Any examination, therefore, involves complex overlapping interests and is not for the SCPA to conclude on its own. In the time available to it, the SCPA has not had the opportunity to examine in full detail the implications for all stakeholders of possible options for simplification of the structure. Nonetheless, the SCPA considers that the current arrangements are not clear or widely understood.

The SCPA considers that it is essential to retain the functions and processes of the Accounts Commission, namely considering the output of the audit of local authorities and joint boards and, where necessary, making recommendations to Scottish Ministers. However, the SCPA believes that there may be merit in delivering these functions within a simplified audit structure. It considers that greater transparency and public understanding could be achieved by an option such as the Auditor General being the strategic figurehead responsible and accountable for the audit of all public bodies, served by Audit Scotland, and with reporting lines to the Parliament’s Audit Committee and to Ministers. There appears no logical reason why the Auditor General should not also have the function of Controller of Audit, or why the integrity of the different functions cannot be retained in a simplified structure.

The SCPA, therefore, recommends that the Scottish Government and the Parliament should enter into discussions in early course on how a thorough review of the arrangements could be accommodated within legislation such as the Scottish Government’s forthcoming Public Services Reform Bill.

The role of the board
The SCPA considers that its role is to provide a focus for political accountability for Audit Scotland in a way which minimises any risk of apparent political interference in the independence of public audit. The SCPA does not consider that this means that it should be regarded in any way as having any of the nature or functions of a board for Audit Scotland.

The SCPA, therefore, recommends that the Audit Scotland board should review its focus, to ensure that its purpose accords with best practice as far as is possible while respecting the independence of the Auditor General. The board should formulate and publish a statement of its purpose.

Size and composition of the board
While acknowledging the view of Audit Scotland that it is primarily a shared services organisation, the SCPA is not clear that this necessarily requires the board composition that has become customary. The 2000 Act does not provide for the board to include two representatives each from the Auditor General and Accounts Commission perspectives.

The SCPA considers that a board of five members should consist of the Auditor General and the Chair of the Accounts Commission and three other independent non-executive members with no connection to either. However, the SCPA considers that there should be further reflection on whether, as accountable officer, it is appropriate for the Auditor General to be a full member of the board. The composition of the board may need to be considered again if the overall public audit structure is revised in the future.

Method of appointment of board members
The SCPA does not consider that non-executive members of the board should be appointed by the board itself. The SCPA recommends that a process similar to that specified in Standing Orders Rule 3.11 should be used by the Parliament to appoint non-executive members of the Audit Scotland board, and recommends that the Standards, Procedures and Public Appointments Committee should consider whether such a change to Standing Orders can be proposed.

The SCPA recommends that non-executive board members should be appointed on a fixed term.

Roles of the Auditor General in respect of the board
In considering Audit Scotland’s accounts and budget proposals, it is open to the SCPA to take evidence from the Auditor General and the Chair of the Accounts Commission as the principal stakeholders for whom work is delivered, as well as from the accountable officer. The SCPA suggests that, in future, Audit Scotland should include any member of its board in those it nominates as authorised to give evidence to the SCPA on its accounts and budget proposals.

Selection of board chair
The SCPA notes that the current custom of selecting the Chair of the Accounts Commission as the Chair of Audit Scotland board effectively means that Scottish Ministers are indirectly appointing the Chair of Audit Scotland. The SCPA recommends that a review of the method of selecting the Chair of Audit Scotland should result from a fuller review of the public audit structure in due course.

Performance evaluation
The SCPA recommends that Audit Scotland should develop and publish board performance evaluation procedures.

External auditors to Audit Scotland
The SCPA recommends that the current system for appointment of external auditors for Audit Scotland should remain unchanged.

Membership of the SCPA
The SCPA is content with the current process for seeking nominations for its membership.

Privilege for proceedings of the SCPA
The SCPA recommends that its proceedings should be treated in a way that is consistent with those of parliamentary committees and, therefore, that the legislation should be amended to provide for absolute privilege to be extended to its proceedings.

The SCPA also recommends that legislation should provide for any statements of the Auditor General (and of staff of Audit Scotland when acting on his/her behalf) to have absolute privilege, in the same way as is provided for the Accounts Commission.

The SCPA’s role in budget scrutiny
The SCPA is content with the current process governing its role in the overall budget scrutiny process, as described by the Finance Committee. The SCPA welcomes the offer of Audit Scotland to engage in discussions on how the protocol with the SCPA might be developed.

1. Decision on taking business in private: The Commission agreed to take agenda item 4 in private.

4. Corporate governance of Audit Scotland: The Commission considered correspondence from Professor John Baillie, Chair of Audit Scotland, regarding the corporate governance of Audit Scotland and the proposals for the National Audit Office and agreed to consider the matter further at a subsequent meeting.

Corporate governance of Audit Scotland (in private): The Commission further considered correspondence from Professor John Baillie, Chair of Audit Scotland, regarding the corporate governance of Audit Scotland and the proposals for the National Audit Office. The Commission agreed its approach and a programme of evidence for a review of the corporate governance of Audit Scotland.

1. Decisions on taking business in private: The Commission decided to take item 3 in private, and agreed to consider the evidence heard and discuss draft reports on its review of the corporate governance of Audit Scotland in private at future meetings.

2. Corporate governance of Audit Scotland: The Commission took evidence on its review of the corporate governance of Audit Scotland from—
Tom McCabe MSP, Member of the Scottish Parliamentary Corporate Body, Paul Grice, Clerk and Chief Executive, Scottish Parliament.

3. Corporate governance of Audit Scotland (in private): The Commission considered the issues arising from the evidence heard to date, in order to inform the next stage of its review.

Corporate governance of Audit Scotland: The Commission took evidence on its
review of the corporate governance of Audit Scotland from—
John Swinney MSP, Cabinet Secretary for Finance and Sustainable Growth and
Lorna Gibbs, Head of the Scrutiny Improvement Team, Scottish Government.

Corporate governance of Audit Scotland (in private): The Commission considered the issues arising from the evidence heard to date, in order to inform the next stage of its review.

Corporate governance of Audit Scotland: The Commission took evidence on its review of the corporate governance of Audit Scotland from—
Gillian Fawcett, Senior Fellow, the Office of Public Management, and Angela Scott, Head of CIPFA in Scotland;
and then from—
John Baillie, Chair of the Accounts Commission and Chair of Audit Scotland, Robert Black, Auditor General for Scotland, Caroline Gardner, Deputy Auditor General and Controller of Audit, and Phil Taylor, non-executive member of Audit Scotland.

Corporate governance of Audit Scotland (in private): The Commission considered the issues arising from the evidence heard to date, in order to inform the next stage of its review.

Corporate governance of Audit Scotland (in private): The Commission considered a draft report on its review of the corporate governance of Audit Scotland. The Commission agreed the report subject to specified changes being made, and agreed arrangements for its publication.

¹ House of Commons Public Accounts Commission, 15th Report, Corporate Governance of the National Audit Office: Response to John Tiner’s Review, (March 2008) HC402 (2007-08). Available at: http://www.publications.parliament.uk/pa/cm200708/cmselect/cmpacomm/402/40202.htm [Accessed 6 October 2008]

² Audit Scotland. (2008) Corporate Governance of Audit Scotland: A commentary based upon the Public Accounts Commission proposals for the National Audit Office at Westminster. Available at: http://www.scottish.parliament.uk/s3/committees/scpa/papers-08/scpap08-02.pdf

³ Scotland Act 1998 (c.46).
Available at: http://www.opsi.gov.uk/Acts/acts1998/ukpga_19980046_en_1

⁴ Public Finance and Accountability (Scotland) Act 2000 (asp 1).
Available at: http://www.opsi.gov.uk/legislation/scotland/acts2000/asp_20000001_en_1

⁵ Public Finance and Accountability (Scotland) Act 2000, section 18(1)

⁶ The Independent Commission on Good Governance in Public Services. (2004) The Good Governance Standard for Public Services, OPM and CIPFA. Available at: http://www.cipfa.org.uk/pt/download/governance_standard.pdf. [Accessed 6 October 2008]

⁷ Written evidence from Finance Committee and HW Chartered Accountants, and supplementary material from the SPCB, available at: http://www.scottish.parliament.uk/s3/committees/scpa/papers-08/scpap08-06.pdf

⁸ Correspondence from Murdo Fraser MSP available at: http://www.scottish.parliament.uk/s3/committees/scpa/papers-08/scpap08-04.pdf

⁹ Scottish Parliament Information Centre. (2008) Public Audit Structures in the UK. SPICe briefing 08/45. Available at: http://www.scottish.parliament.uk/business/research/briefings-08/SB08-45.pdf

¹⁰ Scottish Commission for Public Audit. Official Report, 17 September 2008, Col 84.

¹¹ Scottish Parliament Finance Committee. 7th Report, 2006 (Session 2). Inquiry into Accountability and Governance (SPP 631). Available at: http://www.scottish.parliament.uk/business/committees/finance/reports-06/fir06-07-Vol01-00.htm

¹² Standing Orders of the Scottish Parliament, 3rd Edition, 1st Revision (September 2007). Available at: http://www.scottish.parliament.uk/business/so/sto-c.htm

¹³ Scottish Commission for Public Audit. Official Report, 17 September 2008, Col 82 and SPCB Supplementary correspondence dated 22 September 2008

¹⁴ 19th Congress of the International Organization of Supreme Audit Institutions (INTOSAI), Mexico Declaration on Independence, 2007. Available at: http://www.intosai.org/blueline/upload/issai10mexikodekle.pdf [Accessed 6 October 2008]

¹⁵ Scottish Commission for Public Audit. Official Report, 1 October 2008, Cols 136-7.

¹⁶ Scottish Commission for Public Audit. Official Report, 17 September 2008, Col 84.

¹⁷ Scottish Commission for Public Audit. Official Report, 17 September 2008, Col 85.

¹⁸ Scottish Commission for Public Audit. Official Report, 1 October 2008, Col 136.

¹⁹ Scottish Commission for Public Audit. Official Report, 1 October 2008, Col 138.

²⁰ Scottish Public Services Ombudsman Act 2002 (asp 11), schedule 1, paragraph 1(1)-(3). Available at: http://www.opsi.gov.uk/legislation/scotland/acts2002/asp_20020011_en_1

²¹ Scottish Commission for Public Audit. Official Report, 17 September 2008, Cols 79-80.

²² Scottish Government. (2008). Scottish Ministerial Code, paragraph 11.19. Available at: http://www.scotland.gov.uk/Publications/2008/06/18120242/0/ [Accessed 6 October 2008]

²³ Written submission to the Scottish Commission for Public Audit

²⁴ Scottish Commission for Public Audit. Official Report, 1 October 2008, Cols 137-8.

²⁵ The Scottish Office, Principles of the Scottish Parliament’s Financial Procedures: Final Report of the Financial Issues Advisory Group, 1999, paragraph 6.71. Available at: http://www.scotland.gov.uk/government/devolution/fiag-00.asp [Accessed 6 October 2008]

²⁶ Scottish Commission for Public Audit. Official Report, 1 October 2008, Col 140.

²⁷ Scottish Commission for Public Audit. Official Report, 17 September 2008, Cols 86-87.

²⁸ House of Commons Public Accounts Commission, 16th Report, Draft Clauses on the Corporate Governance of the National Audit Office, (July 2008) HC1027 (2007-08). Available at: http://www.publications.parliament.uk/pa/cm200708/cmselect/cmpacomm/1027/102702.htm [Accessed 6 October 2008]

²⁹ Scottish Commission for Public Audit. Official Report, 17 September 2008, Col 81.

³⁰