Felly, hi! Felly, rydw i'r gwaith gyd i'r gwaith y Deyrnasol 2 yn 2022 o'r Flemysgol Gwladysgol Gwladysgol 1 yn y gallu gwybodaeth o'r gwaith ym Mhwngorffod. Felly, rydw i'n edrych i gael eu bod ar y cyflosio i'r gwaith ym Mhwngorffod, rydw i'n edrych i'r gwaith ym Mhwngorffod. Rydw i'n edrych i'r gwaith ym Mhwngorffod a ddych i'r gwaith ym Mhwngorffod o'r gwaith ym Mhwngorffod, 1. Audit Scotland's spring budget revision 2022-23 budget adjustment. Felly, mae'r cwpio o'r spring budget revision, budget adjustment i'r gweithio, ac rwy'n gweithio i'r gweithio, Professor Alan Alexander, chair of the board of Audit Scotland, Stephen Boyle, auditor general for Scotland, Vicky Bibby, chief operating officer of Audit Scotland, William Moyes, chair of the Accounts Commission, Martin Walker, director corporate support audit Scotland and Stuart Dennis, corporate finance manager audit Scotland. I'd like to welcome Vicky Bibby for our first appearance in front of the commission in our role as chief operating officer. I'll invite Alan Alexander and then the auditor general to make any short introductory remarks. I want to, in the case of the first agenda item, chair, if that's okay, and we'll do what we've done in the past and do an introduction to the major budget item. Okay. That's acceptable. Fine. Stephen, do you have anything that you want to? Very little, chair. Most of my remarks, like Alan, are in respect of our 2023-24 budget proposal to the commission this morning. However, both Stuart Dennis and myself are ready to answer any questions that you or commission members have on our spring budget revision requests. Thank you. Excellent. Well, let me ask a first question on the budget revision. The commission is aware that non-cash pension accounting arrangements have arisen in previous years. With regard to the Lodium Pension Fund, what discussions have you had with the Scottish Government to confirm that previously agreed arrangements with HM Treasury are still in place and we'll meet this pension adjustment? Thank you, chair. I'm happy to start that and I'll bring Stuart in a second just to update the commission on the specifics of the discussions that we've had. Maybe, as you'll probably see in our paper, chair, that the on-going volatility of pension adjustments requires the commission's support to ensure that we remain within our financial requirements to break even each year. The volatility of very small changes to pension assumptions, discount rates and so forth have a very significant effect on overall valuation. Therefore, we, as an admitted body to the Lodium Pension Fund and all the other members where they're in the circumstances that they can't carry reserves, have to look for support. In terms of HMRC and AMA position or the annually managed expenditure budget, Stuart can update the commission on our engagement and I'm happy to broaden that out, as you wish. The engagement with the Scottish Government happens in November each year. It requires us to let them know what our spring budget revision is going to be. We let them know that so that they can then commence discussions for the whole of the Scottish Consolidated Fund in respect of AME funding with HM Treasury. They've got the information that today this is what our revision is required and this is what we'll be looking for, so they have that information. In paragraph 16 on page 3, Audit Scotland states that the expectation of continuing low interest rates in the next few years will lead to larger accounting adjustments in 2023, 2024 and beyond. In such circumstances, further requests for budget revisions to meet additional pension charge adjustments will be required in the future. Given recent interest rate increases, what impact do you think, or do you anticipate in future pension charge adjustments? There are changes in interest rates from the historic low levels that we have seen in recent years. Although the interest rates are increasing, they remain at historically low levels. Neither myself nor Stuart are actual experts and we continue to rely on the advice and the assumption expectations that the loading pension provides us. The indications remain that there will be volatility in pension valuations and assumptions that flow. In terms of the overall arrangements, as we alluded to in the paper, it remains our preference to engage with the SCPA at spring budget revision times when we have more certainty of what the likely valuation results will be rather than to include it in our annual budget proposal. There is something of an element of crystal ball as to what the changes might mean, whether it is about interest rates or other assumptions that are used to arrive at the overall pension valuation. Based on our submission today, we are giving as clear a picture as we have at our disposal that there is likely to be remaining volatility both in interest rates and the other assumptions that are used to produce the overall valuation. As ever, we will engage with the commission as early as we possibly can once we have that information. Do any other members wish to ask any questions on this? Will the minister want to add anything to what you have already said? I hope that our proposal chair was clear that, and I keep on to make it, this is a non-cash adjustment. It is really on the basis of valuations and then accounting valuations for what our pension requirements are based on accounting standards. We think that that broadly represents the best and most transparent way with which to set out what that means rather than including the non-cash pension adjustment requirements in our budget proposal, but I am keen to continue to engage with the commission through and to keep you updated as to how that progresses. Thank you. In that case, I will move on to agenda item 3, which is the budget proposal for 2023-24. This is a consideration of the budget proposal for 2023-24. Members have got a copy of the budget proposal in their papers. It is the same witnesses for this agenda item. Again, I invite Alan Alexander, followed by the Auditor General, to make any introductory remarks. Thank you, chair, and good morning to you and the members of the commission. We are very happy to talk through the proposals and answer any questions that you have on them. I think that it is fair to say that over the past two years we have discussed with you on several occasions the intense pressures on public services and public finances. As you know, the pandemic exacerbated many of the existing stresses on public bodies, on political leaders and on public managers. In this past year, we have seen and we are now experiencing the impacts of a land war in Europe, and an economic crisis added to this most acutely on the cost of living and pressures on household budgets. This volatility and uncertainty and the unfolding impacts of the turbulence of the past two and a half years are going to last for several more years. All of this has created significant additional pressures on Scotland's public bodies, on top of the major stresses and systemic and strategic challenges that they already faced. The response to this has led to increases in public spending and the overhaul and redesign of public services at previously unimaginable scale and pace. In this context, the delivery and development of high-quality independent public audit on behalf of the Auditor General and the Accounts Commission is crucial. As you know, Audit Scotland has to change and grow in the past few years in order to be able to respond to these issues, in order to do the bigger and more complex job that is required of us. Audit Scotland is not immune to the pressures that I mentioned earlier on, however, we have, in the construction of our proposed budget, been continuously aware of the need to be prudent while ensuring the integrity of the audit process. Our proposal is based on a series of assumptions that we will discuss today, but the external environment is more volatile than at any time in recent years. The Board of Audit Scotland has given continuous oversight and governance to the process of constructing the budget proposal, with particular emphasis on some of the risks that are affecting financial planning. This has included a board seminar in the summer in which we looked without the pressures of having to make a decision at the budgetary position. Two formal considerations of the document that you have seen before you today of the draft budget at board meetings. We also touched upon the broader questions of financial and budgetary position at our regular business planning session with you in August. This budget proposal sets out how we need to ensure that we have the capacity, the skills, the resources to deliver public audit that is robust, relevant and flexible. It will also enable us to further develop and deliver public audit that meets the needs of our wide and diverse groups of stakeholders, and ultimately to deliver public audit that drives and supports better public services. It has a positive and meaningful impact on the outcomes that people and communities experience and achieve. If you asked anybody in Audit Scotland what gets it up in the morning, it is that drive for improvement in what we do in the public sector. With your permission, I will hand over to Stephen to speak in his capacity as an accountable officer of Audit Scotland. Thank you. Good morning, chair. Good morning, members. I am very grateful for your time this morning and look forward to the conversation. As Alan has outlined in our proposal, over the past two years, the scope and scale of our responsibilities have grown at a rate not seen since we were established back in 2000. Public spending in Scotland has increased by about a fifth, and public bodies are and remain stretched to an extent similarly not seen. Although the pandemic has ebbed, public bodies have not had the time nor space they need before further challenges have unfolded. Alan mentioned the cost of living crisis and the very real human impacts that that is having on people, businesses and, most importantly, of myr context, public services. Scotland faces financial risks and issues that are bigger and more complex than they have ever been and, with the commission's support, our audit work has responded. Over recent years and in the years ahead, we will focus on ensuring that we have the resources, skills and capacity to fulfil the role that Scotland needs of us now and in the future. Our budget proposal reflects those ambitions. At the heart of this is our focus on innovation and quality of our audit work. Audit quality is the bedrock of the assurance that we look to provide the Parliament and public about how public spending is being used. Over the past two years, we have made progress in addressing previously reported issues affecting audit quality, and we will continue to do so while facing increasing complexity of public spending alongside new requirements for the auditing profession. We are innovating with new approaches to delivering and developing our audit, including digital audits and ensuring flexibility and responsiveness in our audit programmes. That budget proposal supports the further steps that we need to take in innovating and in audit quality. Through all of our audit developments in recent years, both planned and reactive, we have continued to deliver annual audits of almost 300 public sector entities, as well as performance audit on matters of significant public interest. As I have a chair, this has not been easy and it is important for me to pay thanks and tribute to the work of Audit Scotland staff as well as those in the audit firms that we work alongside. Our resource requirement today for 2023-24 is £11.6 million, an increase of £573,000. That is a rise of 4.8 per cent in cash terms but a decrease of 9.1 per cent in real terms. From our previous discussions, our budget has decreased in real terms by around a fifth over the past decade. While the volume of work that we do has increased, our total proposed budget of £30.6 million equates to 0.05 per cent of Scotland's public sector budget. Our work will focus on key issues such as inequalities and the experience of our most vulnerable citizens, climate change as well as how communities can shape the services that they receive. The largest proportion of our resource requirement from the Parliament is the fees for those bodies that we cannot directly charge. I am happy to say a bit more about that over the course of our discussion. While in part this reflects the creation of new bodies, for the most part this is to cover the increasing costs and resources required to deliver the audit. The scope of the work, the ways of working and the regulatory requirements on auditors led in some part by the reviews in recent years of the wide profession have all expanded. Chair, we are clear that the Scottish public audit model provides the Parliament with an independent and robustness service. The five-year change in appointments following a competitive procurement of audit services for external firms have both been completed in the past year. All auditors will be meeting those new requirements. That has meant that the cost of audit is rising for public bodies. As our budget indicates, some of that is reflected in the fee increases for those bodies where we are able to directly charge. We are, as with all public bodies, trying to manage the difficult job of agreeing pay awards that are equitable and reflect pressure on household budgets and the cost of living, while also being responsible and fair to public finances. As with others, we will remain subject to an inflationary environment in the short term that carries both risk on both pay and non-pay costs. That is an issue that we will continue to liaise with the commission as we navigate over the next year and beyond. Chair, as I was very grateful for the commission's time this morning, we are very much looking forward to engaging with you and answering your questions. I will go straight into questions. The first question is fairly obvious. There are significant cost pressures identified in the 23-24 budget proposal, particularly in the way of cost of living pay increases for in-house staff. You are looking to uplift to the April 2022 pay award, an amount of £658,000 and a further provision of £615,000 for the April 2023 pay awards. The first obvious question of that is, why are there two years of pay awards required in the 23-24 budget proposals? We assume that there was a provision in last year's budget proposals in the 2022-23 budget proposal, and you have not sought further cash for that year. How does that work? I am happy to start now and maybe bring Vicky in a moment, Chair, just to say a bit further, as she wishes. You are right. Effectively, this is one of the biggest risks that we are carrying in some of the uncertainty around what pay awards for public sector workers, including our own, reference very briefly to my opening remarks. That is both fair and equitable so that we are able to reflect cost of living pressures that our colleagues are experiencing while also making sure that we can continue to retain and attract high-quality auditors to deliver public audit services. Our budget proposal that the commission considered in January of this year for 2022-23 had budget assumptions of around 2 per cent for pay uplift. Following negotiations with our trade union partners, we have settled on a pay award of 5 per cent in the current financial year. It is our expectation that that will flow through into next year's budget, and we have a further assumption in the 23-24 proposals that you have before you of a further cost of living increase. However, there is undoubted risk, Chair, that the assumptions that we have in the proposal may or may not be sufficient to reflect the market conditions at the time. We have dealt with risk up until now and including last year's budget through management contingency arrangements, but I should say, Chair, that there is real volatility in the proposal that we present to the commission today. We have set out the level of relief that we felt, and I have been able to agree a pay award in recognising that that is not the case in many other public sector industries at the moment, that we are carrying uncertainty into next year's budget proposal. Chair, I'll pause and Vicky might want to come in a bit more detail on where we are at currently. Thank you. Just without the risk of repeating what Stephen said, for the 22-23 budget, as Stephen said, we had 2 per cent in it. We settled on 5 per cent with staff, which was really good that we've settled both for staff, having the money in their pockets, but also for us having greater clarity on where our budget is. That extra 3 per cent equated to the £658,000 in our budget for 22-23. We were able to fund that in-year, this year through savings on slippage of recruitment and savings elsewhere, so we didn't need to come back to the committee and ask for that additional funding. However, the way that we funded that is by one-off savings, not recurring savings, because it is slippage largely on recruitment and one-off other savings. The flow-through of that will hit the 23-24 budget. On top of that, we have the proposed uplift for 23-24, where we have not started negotiations on yet. I think that we consider that being a big risk in our budget. We have pitched it probably. We reckon too low, so we want to be quite explicit with that. We don't know where things will settle. We haven't started negotiations, but I think that that's one of the biggest vulnerabilities in our budget. The budget proposal has a contingency in it. I think that what we would propose to do if there was more would be to fund that from contingency going forward for the 23-24 pay award, but we want to highlight that that is a risk. I hope that that explains why we have the two-year pay awards coming through, because the first one was funded from non-recurring savings. Normally, Audit Scotland sticks approximately to guidelines from the Scottish Government in terms of pay rises and so on. You have adhered to that over the years. Presumably, you have now departed from that to negotiate pay rises based on an industry norm. I can say a wee bit further about that. We referenced in our budget proposal chair that, largely as you described, Audit Scotland takes very clear reference from the Scottish Government public sector pay policy, as to expected pay awards. Although, as an independent body, we are not bound by those arrangements, as many civil servants are. We also received a pay claim from our trade union of 10 per cent. Largely, as you described, we entered into negotiations with them to arrive at what was a fair and, hopefully, affordable pay settlement given the differential that we experienced and the current cost of living arrangements. We took reference from the negotiations and government pay policy, as well as the pay settlements that were in other parts of the public sector, notably local government bodies settled with their workers shortly before Audit Scotland did. It is perhaps of interest to the commission that Audit Scotland members were balloted by their union as alongside other PCS areas across the whole of the UK. Audit Scotland staff were the only part of the PCS network that voted to accept the pay award. We are very relieved that we are in the circumstances and are not facing the prospect of industrial action and disruption to our service. How much is the contingency that you are retaining that you hope to dip into if you have to go a bit higher on pay next time? I want to say a bit more about how that is operating. For the overall budget, the proposition is a £500,000 contingency on the basis that Audit Scotland cannot hold reserves, which I understand has been raised with the committee before. We think that that is a prudent contingency on the basis of the 2324 pay award, looking at where we have pitched our budget. It is quite low from where we know other organisations that are pitching their 2324 budget. Other areas for the contingency will be other non-pay inflation. For an example, we have just received an alert that our rates revaluation will cost an additional £75,000 for the organisation. What we want to do with the budget is to manage those inflationary pressures within what we are asking from the committee. We will look to do that through the contingency and other efficiencies within the budget going forward, but we want to be transparent around the risks but also our appetite to manage those risks within the budget. It is not a huge contingency given all the risks out there. I am going to bring Mark Ruskell in at this point. I think that he has got a supplementary here. I wanted to ask you about the difference in pay. Is there a difference in pay between what you are paying your staff and the private sector bodies that are delivering similar work? How are you managing that? You have spoken about the negotiation with union colleagues, and 10 per cent was put on the table. I am interested in what other ways you are supporting retention, making employment with yourselves and attractive proposition compared to working with a private body. We have really productive relationships with the PS, and we have quite open discussions around those. The pay award was not just to talk about the financial side of it. We agreed a 5 per cent uplift for the lower-end pay of £2,000. We are looking at where the local government settled. There is a cap on that. In discussions with the union, we agreed that it would not be appropriate to have a cap because of the competitive environment with the external firms. We know that some of the other firms have reached 10 per cent pay awards in some ways, and we are also looking at working four-day weeks over the summer. As part of our negotiations, we agreed to look at the four-day working week. We have not committed to doing it, but we will certainly look at the benefits and the studies that have been done on those areas. We offer flexible working packages to our staff, which are well received. We have regular staff consultation and a number of surveys with staff. We have really good working relationships. We are part of the local government and we are an admitted body into the local government pension scheme. We believe that we offer a competitive proposition to staff. However, given the recruitment market at the moment, and we are seeing a number of the clients struggling for financial expertise in their areas, we certainly cannot be complacent, so I think that the on-going discussions with the PCS and our staff on the whole are really important. That is why we have highlighted the risk in the budget around where we have pitched next year's pay award, because it probably is on the low side. I am just thinking that if I was working for your organisation and I saw a private sector body that was paying more, what would encourage me to continue to work for yourselves? I think that Vickie is right, Mr Ruskell, that our offer is not just salary-based. People join odd at Scotland and we have many colleagues who have worked their entire career with us and others who devote decades of service because of the ethos that they share about delivering good value for public spending and supporting improvement in how public services are operating. We cannot take that for granted, because we really need to carefully manage that there does not become a chasm between what our offer is relative to those of other public bodies. Vickie is quite rightly described, so our pension arrangements are flexible working arrangements. The relationships that we have with our trade unions and the overall environment that we want to give colleagues in odd at Scotland is all part of our retention strategy. We are also looking at the metrics about turnover rates and the level of applicants that we are getting. It is fair to say that the volume of applications is dropping slightly, and our turnover, as we discussed in one of the recent sessions with the commission, is also increasing marginally, too. We need to continue to keep a close eye on that. Inevitably, there will be increased risk when some of the private sector firms are offering pay settlements of 10 per cent when we are settling at 5 per cent. If that differential continues into the longer term, that becomes a much more difficult proposition for us to manage. We are also being very clear with our staff that we have a different proposition from the private firms. Our unique selling point is that we are here to make a difference, and we can make a difference for the communities of Scotland and that public. We want our recruitment fairs that we do with graduates. We are highlighting that that is a real selling point. We are also looking at our role in being an anchor institution for the public sector and expanding our modern apprentices, our school leavers programmes and looking at different pathways into the work. We are not just relying on the traditional graduate routine, but on looking at other opportunities for tackling inequalities. That sounds attractive. For anybody wanting a career where they can really make a difference on those key issues—inequality, climate, improving society—that is great. Is there not a challenge inherent there with the blended model that you have with delivery in-house and private sector delivery? You could be doing that work in the private sector and be getting potentially better pay for that. I am being devil's advocate here. That is a perfectly valid challenge. It has been a long time since I worked in an audit firm, Mr Ruskell, but there are quite different environments. We are looking to offer our colleagues particularly the overall volume of benefits. The work that you might be doing is the same, but, similarly, you are very unlikely to have a defined benefit pension scheme, the extent of flexible working, and probably some of the certainty that we can offer our colleagues too. While encouraging people to work across Audit Scotland in both financial audit and performance audit, people are able to specialise work in dedicated teams. They broadly have certainty that can support both their career development and responsibilities that they have outside of work. We are looking to manage all those competing requirements. I guess that the key issue that we want to give the commission today is that we are not complacent about those risks. We understand that we remain in a competitive environment for skills. I endorse the point that Vicki makes. There is a real onus in that case to making sure that we broaden out our entry points into the organisation. We are not just saying that you have to have a 2-1 degree to come and join Audit Scotland, but that we broaden out our modern apprenticeship and various entry points and routes into a career in audit. That is a focus for us in the year ahead. Daniel Johnson, at this point. Thank you very much, convener. I will dig into this point a little bit further, both in terms of salary increases and the contingency, since it has been brought up. I have been talking very much in response to Mr Ruskell's questions about the qualitative aspects. Given that you are accountants, I wonder if I can just ask you about the numbers. In particular, this is an industry that is widely understood, clear transferable skills. How have you compared your salary uplifts to industry norms? What is the industry running at in terms of salary increases? It is not as transparent as would we compare ourselves with some of the big four, in which, quite publicly, PWC has said that there has been a 10 per cent increase. That is not right across the board. As I said earlier, they are looking at different some of the medium-sized firms that we are quite similar to. At the moment for this year, they have not published it so to make a direct in-year comparison. We have, as part of the procurement exercise, quite close working relationships with the firms.  We have to be very careful because of their commercial basis. The real metrics are what we would want to look at, our people leaving us. The attraction, we still have 48 graduates coming in. We are not losing many people to industry at the moment, but we want to be careful and keep a close eye on this. We speak with other agencies across the UK and they are particularly experiencing a lot of loss to the firms, particularly at the graduate recruitment stage and senior manager level. We are not experiencing that, but we are not being complacent about that. We know that that is a risk. What is our offering compared to exactly what the firms are? I do not have that information at the moment. That is not being shared with us. My question is not about individual firms and their comparison to them, but the profession is a whole. Given that it is a regulated profession and that there are industry bodies, I am assuming that there are industry-wide salary surveys that are carried out. Do you use those? Do you undertake a formal benchmarking process? If so, could you just set out how that operates? I am happy to say a bit further about that. Yes, we do use salary skills, so they are published by Hayes and other regularly published salary skills that are set out. We reference those as do our trade union partners, Mr Johnson, when they submit pay claims. That is part of the overall consideration. Vicky has covered the firms, but it is as relevant to say that people will join and leave Audit Scotland to other parts of the public sector, which is potentially as much a valid comparison. Whether it is a finance role in the NHS, the central Government or the local government, will be as likely to see that as a career path, as they will be to go and join an accountancy fund, or perhaps even more so. Part of our elder conversation with the chair, I think that the fact that we have settled a pay claim this year that is consistent with local government and is also likely to be higher than some of the pay settlements, particularly that it is the Scottish Government public sector pay policy affords flexibility to public bodies to settle their pay, but it really is down to individual public bodies. The reliability of some of the salary skills and numbers reduces to an extent as a result of that. I believe not that I could not find the most recent figures, but the previous year that Hayes produced was 3 per cent. It should be useful to understand where Audit Scotland stands in relation to that and, indeed, your rationale for when you step away, which is ultimately the purpose of a benchmarking exercise. There are more options for us to do. At the moment, in terms of our overall pay and reward package, you can very clearly tell from our proposals and our responses this morning that we are relieved that we have been able to resolve our pay arrangements this year. What we do not yet have a plan to do is whether that leads us to a place in which we need to do a whole-scale review of grade rates within the organisation. I do not think that we are in that place at the moment, based on the metrics in terms of our recruitment and retention arrangements. I think that our offer, being wider than just the salary, is giving us some comfort, not complacency, but that, in particular, pension arrangements and the flexible working offer that we make to our employees, as well as prospective hires, is giving us some security, but only some, and I think that it is something that, to reassure the commission, we are keeping it under close review. Following on, the other things that obviously impact on that salary line are the overall numbers and, indeed, your turnover. Can I just clarify what the numbers are in terms of turnover? I mean, I see in Appendix 4 that there is a 2 per cent vacancy turnover assumption. Is that the assumption? How has that borne out compared to the actual turnover rate of the last period? I think that, as I mentioned, our turnover is increasing. It takes time to recruit people but it takes longer, typically, for us to bring somebody into the organisation than the notice period that the person who is leaving the organisation works with us. Largely, we want to be casting our net as widely as possible. That is pluses and minuses, I should say, as a consequence to that. In having fair, transparent, open competition, we want to bring a diverse group of people into Audit Scotland and that is taking longer than it is for people to work their notice and leave. That has led us to the point that 2 per cent is about right efficiency savings and it can vary in terms of what that means for overall turnover, but our turnover is higher than the 2 per cent, and colleagues may wish to elaborate. In 2021-22, a voluntary turnover was just over 6 per cent? Of course, the turnover and the vacancy rate assumptions that we make are not exactly the same thing because we are talking about two slightly different things, of course. However, I would say that that particular year was probably higher than we have been used to in the past. The thing with the pending change to the audit appointments and, as people were, changes that have been at the senior level in Audit Scotland might mean that that is not a truly representative figure. However, as Stephen has said, we keep a close eye on that. We are doing okay at the moment, but there are certainly risks. If, as Stephen and Vicky have both said, the rates change, the demand for certain expertise in the market really starts to widen that gap, then there is no doubt that that would be a bit of a challenge for us. If you have been running at 6 per cent, is 2 per cent a safe assumption? It is safe to say that we would be reluctant to go as high as that for a financial assumption that we are going to continue operating at 6 per cent in terms of turnover. That is Martin's right. It is not exactly the same in terms of what that might mean for a— They should meet—I mean, 4 per cent delta is quite large if your actuals are at 6 per cent, but your plan in front of us is two. There is an element of the nature of how our budget is constructed and how we operate. That we cannot break even each year means that we have to look to have some certainty. In terms of managing some of that risk as going as high, even 4 per cent or 6 per cent would be an extent an additional risk that I would feel uncomfortable in recommending through our budget proposal, through our board and to the commission. However, if we are operating at higher than 4 per cent or 6 per cent where we get to in turnover rates, I think that probably there are a couple of things that we want to do well. That means for our financial assumptions, but perhaps also how we are bringing people into the organisation as well. That is alluded to early, Mr Johnson, but some employment markets are moving incredibly quickly. For example, our digital services, our IT department, the pace with which those services for recruitment are moving was faster than we were able to keep up with. We have had to look closely at how we are engaging in that market and recruitment so that we are able to access the skills. We have applied some modification to our recruitment arrangements to allow us to bring people in. Just by way of anecdote, some of those services jobs are being advertised, recruited for and people starting within a week. Public bodies historically have not operated as quickly as that to sustain access to those services. I could ask more questions about the assumptions in your people line, but I think in the interest time I will move on. Given that the point around contingency has been raised, can I just ask some further details about how the £500,000 figure has been arrived at? Is that derived from your risk register or what is the methodology that has arrived at it? Indeed, what proportion of the contingency is ascribed to your potential risks around salary costs and increases? Have we just started on that? I think that Vicki and maybe Stuart might also want to say a bit more about how precise that figure is and what supports it. The answer is largely that it is not a precise science figure that we have arrived at a figure of £500,000 of contingency. In terms of fundamentals, audit Scotland has to break even each year, so we are not able to hold reserves in the way that we are constituted. In its most basic terms, aside from reputational damage, our accounts would be qualified in the event that we failed to break even, any of us would want to find ourselves in. We looked to have a degree of contingency buffer to support volatility in our financial arrangements. Going back to the early stages of the pandemic at that point, it became clear that our £500,000 contingency was going to be insufficient to cope with the change in the progress of audit work, which effectively is our biggest variable. Stuart can happily say more about that. We spend a lot of time focusing on what we call work in progress, which is the main variable for us in terms of expenditure and income and what that really is a measure of, how much work has been completed. Complexity also derives from the fact that we report, as all public bodies do, towards a March year end in terms of financial results, but our audit year does not follow that pattern. The audit year for NHS audits runs to the end of June. Local government audits into September-October time and for some central government bodies right through to the end of December. Managing all of those variables and, as we have seen through the pandemic, it has not been entirely predictable how an audit would progress without the availability of public bodies to support the audit and then our own arrangements. Those are all the real set of variables that we are dealing with. It is not a precise science, but we think that that £0.5 million gives us enough of a buffer to cope with some of the variables. Stuart May might want to come in and say a bit more about some of the precision within that. I would just highlight on the conversation a couple of points. In respect of the 2 per cent vacancy factor, and I know that this was probably highlighted in some of the answers, is that that 2 per cent represents the whole year. We will get times where it does rise up to maybe 6 per cent or whatever, but we have applied the 2 per cent over the whole year and the timing of when vacancies occur might mean that the actual percentage in turnover is higher, but within the overall span of things, that 2 per cent of the whole year will be within a financial envelope. The actual contingency, the risks, and I think that it is included in the report, is that for every 1 per cent it represents about £220,000 to our pay bill, so obviously that is quite a big risk that we are trying to manage there. We look at the contingency previously. It was at £300,000, and during Covid we increased it to £500, especially with all the risks around that, and those risks are continuing, and more so, and I think that, as Vicki mentioned earlier, there are things that cost the living pressures and things that we are having to try and absorb as well, so we are taking on board within the risk register all the various things of what we would need to do to be able to manage within the budget that we have put before you today, so absolutely there are risks within this budget, I think that is to emphasise that, but we feel that the £500,000 is a reasonable, it represents just under one and a half per cent of our total budget, so we feel that it is a fair representation of what we would need without having to come back for any additional funding. I have probably used up more of my time, but can I ask one very blunt bottom line question? Looking at the overall budget request of £346.9 million, that represents a 4.8 per cent increase on your previous year's budget, I would just note that 4.8 per cent seems incredibly close to the GDP deflator for the coming financial year of 4.8 per cent. I just want to understand, was that your starting point, or is it a bottom up? I hope that you do not mind me asking this question, because I am sure that auditors would agree with me that you should always take a closer look at coincidences when they occur and when numbers seem to match one another. I am happy to assure you that Mr Johnson is entirely coincidental that that is the two-figures match. Mr Johnson talked about the fact that risk is really important. Let me just assure the commission that a very large percentage of what I would call the governance time of the board is spent on risk through the audit committee and the board itself. I think that we are really quite seized about what the risks are and how they need to be managed. We try to manage them in a way that is the most economical way of managing them. There is nothing in here that we could not justify in terms of the risks that we have assessed. Just to give you an example, one of the continuing red risks that we have is how we deal with cyber security. That is something that we talk about very regularly, because if you are looking for a hot employment market, that is where you find it. It is very hot among auditors as well, but it is really hot in cyber security. We are all over that. I think that the numbers that we have got here, given the assumptions that we have had to make, are as good as they can be at this stage. Audit Scotland is required to directly charge certain audited bodies and relies in Parliament to fund audit work for those bodies that it cannot build directly. In paragraph 70, Audit Scotland states that it requires to increase fees by 19.4 per cent in order to break even. Could you explain the difference between the increase in fees to be billed for chargeable audits versus the resource sought from Parliament, which is used to meet the cost of non-chargeable audits, which is only 4.8 per cent? That is quite a significant difference. I suspect that a number of colleagues will want to contribute to answering your question, Deputy Chair. At its most fundamental level, we can charge some bodies and not others, depending on the legislation that accompanies the creation of public bodies. For example, one of the key contributors to our additional request to the commission today from the consolidated fund is, as a consequence of the creation of ScotRail Holdings as a public body and the associated audit requirements from that, we are not able to charge a fee to ScotRail. In terms of the wider aspects—I am sure that Alan might want to say a bit more about some of the fee arrangements as a result of the procurement, given the very important role that he has played in chairing some of our procurement arrangements—we market-tested every five years the cost of audit through public tender arrangements for audit firms. We do that so that we are able to have a comparison in terms of our own cost space, but we are also able to continue accessing expertise from audit firms, again subject to our overall quality environment. That is after a long, thorough process where we ended up at, with the appointment of five audit firms to deliver audit services for the next five years. A number of real considerations that we gave to the prices that we received, as well as the quality of the bids. We interviewed all of the submissions and lots for us to follow through, not just the audits that they will provide on an annual basis, but the sharing of skills and intelligence that we require to support both the accounts commission's requirements and those of my own over the next five years. We think that it gives us price certainty and predictability in an audit market that elsewhere in the UK has been incredibly volatile. We do not have to look too hard to see what happens when there is not that certainty. The local government audit environment in England, for example, has been an incredibly challenging set of circumstances where they, by coincidence, have also gone to the market for audit services from firms and have seen that their prices have increased by 150 per cent for those audit services. Yes, our prices are increasing, but there is variation. I will stop for it in a second. The last context is that Audit Scotland by legislation has to charge on a sectoral basis where we can charge a fee. We by and large have to break even on a sectoral basis, and that reflects the variation by sector that we have as a result of market testing. We do not want to cross-subsidise by sector, and that is what has got us to, based on the submissions that we receive from the firms, reflects both the variation and difference. The non-chargeable element that you refer to is as a consequence of the nature of the bids that we receive by sector. I am sure that others will want to come in and say a bit more about this point, but I will maybe start with you, Ellen. I think that I have mentioned to commission before the value that we place on the intelligence that we get from having a mixed market approach to how we do the audits of the public sector. That said, when we started the process of seeking to engage auditors for a further five years back in 2019, the board then asked me to chair the steering group. It was very clear at the beginning of that process that we had no certainty that the market would come out for the work that we were offering. There was always the possibility that they would decide that what we could pay was something that they couldn't live with. In fact, one of the big four pulled out at a very early stage. All of that market intelligence feeds in to how we price things and how we construct a budget. We get a lot of information in terms of comparability through the way in which we manage the external contracts. As it happened, as Stephen mentioned earlier, five firms came out, we assessed their bids, and each of them now has a portfolio of audits that they will be beginning on about now. There is one other aspect of this that feeds in to budget going forward. That is that the way in which we have structured the contracts that we have is that it is a five-year appointment for each of the firms, and the uplift that they can expect year on year is pegged to the uplift in Audit Scotland's staff costs. That seems to me to be a really effective way of maintaining discipline and also maintaining the value of comparability and market intelligence. Is there any risk that non-chargeable audited bodies are being cross-subsidised by the bodies that are built for their audit work? I think that we are managing that risk really carefully so that that is not the case. You might want to say a bit more about just precisely how we do that, but we are absolutely clear that we are not cross-subsidising between different sectors of public bodies. Do you manage that very carefully? No, absolutely. The sector analysis is robust to make sure that there is no cross-subsidisation. What I would say is that what Steve Allan and I have said is that this gave us very useful market information in respect to the cost of audit and the way that we did the procurement. You will see different percentage increases across different sectors. It is low in the non-chargeable, but we collected that information as well as part of our exercise to see that the cost of audit is a fair representation of the market at the moment. That is the approach that we have taken, so there is no cross-subsidy at all. Further analysis of the increase in fees is provided in Appendix 3, page 23. Audit fees to be charged to further education colleges are expected to increase by 57.5 per cent in 2023-24 from 2022-23. Can you explain why there is such a significant increase in the fees to be paid by this sector in particular? I am happy to start on that and Stuart may want to come in as well. Fundamentally, there is no cross-subsidisation. I hope that we are not laboured at that point, Deputy Chair, but ultimately this is about the market cost to deliver services to different sectors of the public sector. For the delivery of further education colleges, audit funds have historically not broken even for what it actually costs to deliver an auditing standards compliant audit alongside the meeting and the requirements of the code of audit practice that is set by the Auditor General and the Accounts Commission. Coupled with in the previous procurement round, audit firms gave significant discounts in the cost of delivering audit. For all the reasons that we spoke about, the increase in costs in terms of pay and other services has led to the point that the costs for some sectors are significantly higher than the prevailing rate of inflation. A variety of factors, in overall terms, whilst the percentage increase is much higher than other sectors, the comparable cost of the audit fee remains a lot lower than in other settings. We can support the committee with further information on that, as you wish. If you allow me, I will check in with Stuart and other colleagues if there is anything that I have not addressed properly in that. That covers every point on that. That is the reason why it is around the code of audit practice international auditing standards. That is the information that we have in the market that that is how much it costs to do audit for that sector. I am not sure that I entirely follow what you have just set out there. When you are saying market costs, are you saying that the cost in terms of the next best alternative foregone, i.e., if you went to the market, that is what they would charge? Or are you saying that it is just 57.5 per cent more expensive to do an audit on a college because of the nature of the work and the things that you are having to verify? If so, could you explain that? Or are you saying that there has been a change in circumstances in that sector compared to others compared to previous years? That is ultimately what we are saying, is that it is going up. Is there been a change in what you are requiring to do an audit? What is it that is making doing an audit in a college more than half more expensive again than it was previously as compared to local governing the NHS? If you were going to ask me to guess, I would have said that what they do is more complicated than what a college does. Therefore, they would be the ones that were more complicated to audit. Where is the cost actually coming from? I am very happy to elaborate and clarify as best I can. All of the factors that you have mentioned are relevant to why the cost is increasing. Auditors, both those who work in the house throughout Scotland and the firms, have told us and, through our monitoring, have said that it is costing more to deliver ISA compliant international standards in auditing, meeting the requirements of the core of audit practice, the increasing quality requirements that are applied to the auditing profession than the fees that were available to deliver those audits. For the previous five-year appointment round, auditors on some audits in the college sector, notably, have not been able to break even for what it costs to deliver the audit. I have mentioned the fact that in the previous procurement round, which would be six years ago now, audit firms offered discounts to secure work from Audit Scotland. When we structured the tender exercise this year—for all the reasons that we have spoken about with the Deputy Chair—we were not able to cross-subsidise by sector. The bids that we receive reflect what auditors say will take to deliver those services, not just this year, but just to finish, for the next five years. There is price certainty. I know that that is a hard sell, Mr Johnson, that there is an increase in costs this year. If public bodies were to go to the market for audit services, it would be unlikely to secure a contract for five years. They are carrying a degree of risk. For all those factors, it has led to a point that the audit fees for that sector in particular are increasing. However, it is also the case that they are considerably lower than they would be for NHS local government bodies, given their scale. However, there is a cut-off point as to what it can take to deliver a quality audit, and the prices that were being charged previously were below that line. Revised standards are taking more effort to get to that point with colleges than other bodies. Is that fundamentally what you are saying? That is reflected in what bids you are guessing in from the private sector. Is that the fundamental driver? It is not that more effort is taking effort across every sector, but to get to that minimum line, there was a bigger gap than was the case in the colleges. What is that about the colleges sector that is requiring that much? It is such a substantial amount more. I am absolutely clear that it is not specific to the college sector, but it is because of the fees that we are charging to the college sector. I should also say the case to some central government bodies as well. Some of them are very small bodies, but they still require by legislation a quality audit. To deliver that quality audit, the rates that were being charged were not sufficient to adequately break even. Yes, there is increasing complexity in some parts of the college sector that has gone through regionalisation and so forth, but it is not the case that it is directly attributable, but it is a case of the bids that we receive that require us to break even. That is what is reflecting on the rates. Do you check those bids against what you think it would cost you to do that at work yourself? We do, and I can bring Vicky in in a moment. Our analysis is that Audit Scotland has not done as many college audits as the firms for many years. We have only done a handful of those in-house. Even looking at our own analysis, we were similarly struggling to break even on particular audit jobs on colleges by virtue of what it was required in terms of quality standards. Vicky, you might say a bit more about that, but part of it is catch-up, but it is also reflecting the fact that this is a five-year tender. Audit firms and ourselves need to have captured some price certainty over the course of the next five years. I will pause the way, Mr Smith. I am sure that Vicky wants to elaborate. I absolutely agree with that. It is just a point to emphasise that the relationship between the cost and the size of the organisation is not completely linear, and some of the FEs compared to local government are much smaller organisations. Steven Smith says that there is a minimum cost with all the new standards that are compliant. Some of the smaller bodies proportionately have to pay more, and it is getting up to that standard. After that, it is a bit more linear the relationship between the size of the body and the FEs, but what you are seeing explicitly in the colleges of where they have been, of where we are now, is the cost of a minimum audit to make sure that they are compliant with all the new standards. That relationship is not linear, so a lot of them are having to move up to that baseline if that helps. That means that price is right. Will you be able to share with the commission and write saying what the standards are that have driven that? I will not ask you to enumerate them. Can I bring Richard Leonard in? I think that he has got a supplementary in this one. I will go on to my next question. The reason why we are interested in that is just because from one year to the next, there is a massive increase of 57.5 per cent. It sounds massive, so does that tell us that there has been a failure in the preceding period? It sounds a lot more than an adjustment. It sounds like quite a substantial leap in the fees that have been charged to FE colleges. I will pass to Stuart Leonard. If we have information at disposal, what is likely to mean for an individual college given that the scale of audit fee charged to some bodies is much less in a college setting than it is in some of our other public bodies? Percentage-wise, it is significant, but in terms of actual public spending, it is not quite as acute as it looks. To address your wider point, first of all, the requirements upon auditors are changing in terms of quality standards and senior input into audits. The commission will be very familiar with some of the failures that there has been in the audit profession, largely in a commercial setting. The regulatory environment that we operate in has led to increasing focus on quality, more time spent on file review, more after-the-fact quality reviews and more senior input into audits. All of that is driving cost higher in the auditing profession. I do not wish to labour the point, but when we have referenced the price that we have received against some of the factors that are applying in other parts of the UK, we are still seeing a differential in terms of the market that we have here, alongside the fact that we are pleased and somewhat relieved that we have a market for audit services in Scotland that there is some degree of doubt, given that, as the chair has mentioned, one of the big four declined to engage in the market. We think that there are a variety of factors, but quality standards are the most significant. Do you have any information to support some of the example of the change in price? I do not have the exact figures. I would say that all of them are of a similar size, as has been mentioned. The 57 per cent is a lot in percentage terms. When it comes to the actual financials, we can provide that information and have a look at that. The reason, as Stephen says, is that that is what we require to break even. As part of the procurement exercise in the previous conversation, we actually did do in-house costing. All the bodies that were responsible for auditing, we said that we had a comparison and a benchmark to measure what we were getting in from the firm. That came out at reasonable figures that we could award the contracts to. I am quite happy to provide more details on the actual pounds in relation to the increases. I think that that would be useful. Can I move on to another area that we wanted to challenge you a little bit on? If I look at page 6, the paragraph 10 summarises the net increase that you are looking for. Roughly £563,000 is the net additional figure that you are looking for and uplift from the Parliament. By my calculations, around about half of that is as a result of an increase in funding support to the Accounts Commission. Can you maybe elaborate why that significant increase is there? I hope that, with your consent, Mr Lennon, I will pass to Bill, who has the best place to take the commission through that. I was appointed to give a wee bit of context. When I was appointed, the minister made clear to me that he was happy with the audit of the local government, but he was not happy with the commission's impact, and he wanted us to make much more impact than we were making. He wanted to be confident that he was getting independent and objective assessments of financial stability and service quality and that, where there were problems, we were fixing them. That is the objective that has been set for the commission, to go and make more impact and make sure that there are no serious problems in local authorities that we are not hitting. That meant that, in our view, we had to increase our profile with the Parliament and demonstrate that our work is having a lasting impact on service quality. To do that, we needed more dedicated resource. The commission at that stage had two or maybe three members of staff of Audit Scotland who were dedicated to supporting the commission. We have decided, first of all, to have a change programme in the commission that will tackle some of the deficiencies that I felt and the commission felt in our organisation and in our running. We particularly wished to appoint a controller of audit. Previously, certainly for some years, the role of controller of audit was undertaken by one person who was also the director of performance and best value. Having a split like that, as far as the commission is concerned, is no longer viable because of just the workload for the start and the planned workload. We are planning to do quite a lot more to challenge local authorities where we see problems and to make sure that they are getting on with sorting out the problems that they have. That is a big part of the increase to the Accounts Commission, which is the cost of a controller of audit. How much of that quarter of a million pounds is going into the salary of the new controller of audit and how much is going into other areas of expenditure? The controller of audit is costing £155,000, so roughly half the increase goes there. Currently, presumably, there is a resource in Audit Scotland that has resided. I do not know what the current configuration is. In the past, the post that I said was covered by someone who also had another job to do, which was performance and best value. The commission is quite clear that that was not delivering the service that we needed to meet the minister's challenge to make sure that we were tackling issues in local authorities. That is a proposal that has come to the commission from the board of Audit Scotland? Yes, because the commission is dependent entirely on Audit Scotland for services and resourcing. We do not carry a budget of our own. We are dependent on Audit Scotland funding what we need. You have described that this will meet the salary of a controller of audit. The rest of the additional expenditure, Bill, what is that for? We want to create a small secretariat for the commission, which we do not have at present. We have two or possibly three people. We want to add a couple of more posts to do analytical work mainly on the performance of local authorities and to help us with stakeholder relations and finding out what is going on. That is about £65,000 from memory. We need to improve our website because our website is very tangled up with Audit Scotland's website. We need to build our presence a bit better, but those are relatively small sums of money. You say that it is tangled up, but a lot of the work that you do is either work that you commission Audit Scotland to do or else it is batched as a joint report, is it not? Yes, and there are strengths and weaknesses in that. If we want to, as we think we have to, increase our public profile and increase our profile with the Parliament and with the Government and so on, we need to have a much more easily accessible website and documentation and so on than we have. When I first started, I found it quite difficult to find out information about the commission and what it was doing and what it was achieving, so we want to just pull that apart a little bit and make sure that our website is a lot clearer than it is at present. Obviously, as a commission, we have a strategic interest in the relationship between the Accounts Commission and Audit Scotland, so you talk about pulling apart. This is not a separation that we are talking about, is it? No, by no means. It is a clarification, really, but it is important that we think and the Government thinks that our work is understood and acknowledged and open to challenge as well. At the moment, there are times when it is very hard to understand where Audit Scotland stops when the commission begins, and that is the kind of thing that we want to clarify a bit. Sorry, I mean just one final, almost processed question. This is the will of the Government, Minister, responsible for local government, I presume. How does that work in the environment of the Audit Scotland board, for example? Does the minister sit on the board, or is there a directive issue to the board, or? Are you the missionary for the minister on that board, Mr Boyd? Well, no, not quite. It is a very complex role being a board member of the organisation whose job is to provide services to the commission. I think if we were drafting the legislation now, one might draft it slightly differently. If the minister does not sit on the board, the minister comes along more or less once a year to the commission and did that just the other week. Talk to us, to steer us, we in the end report to the minister, but he is very clear that he does not wish himself to be involved in detail in our analysis of a particular local authority or the conclusions we reach or the work that we are expecting the local authority to do to remedy deficiencies in its performance. All of that, he is very clear we should do independently. But his steer remains, you need to be more impactful than you've been, and that's what we take seriously. I'm going to ask the Auditor General if Oral and Alexander, if they want to come in, but again, just for completeness, is that discussion that you've had with the minister, is that a matter of public record, is that minuteed, for example? I don't think so, no. He spoke to me one-on-one when I was appointed, he's been along to the commission a couple of times in the last year. No, I don't think it's minuteed as such, but I think he would acknowledge fairly openly that this is what he's telling us he would like to see. The statutory responsibility of Oral at Scotland through its board is to provide services to the Auditor General and to the Accounts Commission. The line that you're discussing, Mr Leonard, has been part of the consideration that the board has given, and particularly the independent members of the board have given to the construction of the budget. I think that some of that is, as it were, one-off to fund the changes to which Bill has referred, but in the construction of the budget, the amount of due diligence that's been given to it by the Audit Committee and by the board is the same as it is across the entire budget. I think that, as long as what the Accounts Commission wishes to do is within its statutory responsibilities, our responsibility is to exercise due diligence at a board level on that and that we've done, and that's the number that we've come up with in this particular budget proposal. Just going back to my original question about the Comptroller of Audit Post, so that was in the House inside Audit Scotland's budget. It's now going to be transferred to the Accounts Commission, so you're asking us for a net increase here, which has been part, constituted by the additional cost of that salary. Is that not simply an internal transfer from a salary ascribed to Audit Scotland, which it will now, in future, if this is passed, be ascribed to the Accounts Commission? I think that, as Bill says, the role of Comptroller of Audit has fluctuated as to where it's existed within Audit Scotland for the past 20 years. Prior to Audit Scotland's creation, the Comptroller of Audit of the Accounts Commission, as it was, was a standalone post, and then it's varied in times as to where it sat. In recent years, Bill quite rightly mentioned that it's been alongside the responsibilities of the director of performance audit and best value. However, as Bill set out today, and also since he took up post, for the Commission's ambition, the Accounts Commission's ambition to be more visible, more impactful, it's been their position that they've settled on that the Comptroller of Audit becomes a standalone role to deliver their requirements. Audit Scotland exists at its most basic function to provide services to the Accounts Commission and the Auditor General, parking for a moment the complexity of our governance arrangements with both Bill and I as board members of Audit Scotland. That has led us to the point today that there's no separate budget per se for the Accounts Commission, the fact that it's an Audit Scotland budget that is providing those services. However, what we look today in the budget proposal is to be transparent, because that represents quite a material change in how Audit Scotland will function and how it will provide those services to the Accounts Commission. Can I just move on to one other area that we wanted to ask about? That's the reference that's made in the proposal to efficiency improvements. Paragraph 19 on page 8, the proposal talks about action has already been implemented to secure efficiency improvements in the delivery of audit work, particularly in relation to financial statements audits. Can you describe some of the features of those efficiency improvements and how they relate to the fees that are charged to the bodies that are being audited? Yes, I'm happy to start. I'll bring in Vicky and others in a moment. That was fundamental. We want to be efficient for all the work that we do. We're continually looking for ways that we can improve both the quality and the timeliness of our work. The timeliness of it is still impacted by the pandemic. Even today, approaching the end of December, we are still working on the completion of 2021-22 audits in advance of some of the statutory deadlines, particularly for central government bodies. There's an element of catch-up that we're still playing as an organisation, but we're also looking for analysis through our audit methodology that that is efficient, but it's also meeting the increasing bar of quality standards. There are many changes. I'm happy to come back to Mr Johnson's question about the changes in standards. I'm not going into too much detail, but one of the most significant that's coming at the moment is a new auditing standard on the use of IT audit. That's having a really material impact on how we go about our audit work and our methodology. We're applying that, we're absorbing it, but we're also saying, what does that mean for how we're going to be more efficient? We've spoken to the commission in recent discussions with you about digital auditing as well, about how we are making better use of digital tools and techniques. It is that twintrack thing that also supports the quality of our work. We're getting to the heart of some of the material transactions that public bodies are doing that will have an audit interest, but we're also saying, can we do that more quickly, more efficiently, that results in faster audit reporting and potentially audit costs? I think that the moment that we're not quite in the position that we are saying that we complete this methodology analysis, that's going to lead to an x% reduction in audit costs, but we're really careful. I think that we do make reference in the budget proposal today that we want to make sure that, if that is having a material change, that we will reflect that in the audit feeds that we charge, and similarly through a future budget proposals. If I may pause there, I'm sure that Vicky wants to come in too. Yes, hopefully what we're doing will reassure you. What we don't want to do is just keep saying to clients or ourselves with the new standards, the new innovations that are coming on within the industry that we're just adding on, adding on. We are constantly reviewing our audit approach to make sure that we are auditing on the right areas, having our appropriate risk base to our audit work, and you will know that we've developed our innovation and quality team to be looking at that. That particularly, I think, we're quite clear that the auditor of today is different from the auditor of five years ago, but I think that the auditor of five years to come will be very different from the auditor today with all the innovations. We're wanting to work closely with the firms that we've procured services around to speak to them about the R&D and the investment that they have available to them to be building on, to look at the way that we do our audit. With our Executive Director for Innovation and Qualities working right across the organisation to make sure that we are not only just keeping up to date, but we are the forefront of how we're auditing. Otherwise, we could just come under pressure of just adding on, adding on, and that's not what innovation, particularly around the digital, is trying to do for us. So we're very active in the space, which I hope reassures you that when we're coming to you, we're looking at how we're being as efficient as possible in delivering our budget. And another example of that would be how we're auditing climate change for the bodies as well, and looking at how we weave that into the work that we're doing. I'm again, from a risk basis, from what scrutiny requirements are, to be as efficient as possible. So that work will always be on-going, but I think that with the new director of innovation and quality, we're putting quite a clear focus on that work. Okay, thanks. Just one final question has followed up to that. I mean, do you do anything to incentivise the audited bodies to help you to carry out a more efficient audit of their work? So, when we engage with audited bodies, we've spoken about audit fees and we communicate on an annual basis through an annual audit plan that goes to every audited body that's set. So here's how the audit's going to work, the responsibilities of the auditor, the expectations of the auditor, along with the anticipated timescales and so forth, on how they'll address the risk. Within the plan, it states that there's a requirement to be prepared to all intents and purposes. That's not always the case, and in those circumstances, something of a punitive measure is that, because otherwise audit Scotland, in effect of the public purse, will be absorbing that inefficiency, there's a provision for the auditor to charge some additional fees where there have been those circumstances. What we don't offer is to say, and if you are very well prepared, that will result in an X per cent reduction in your audit fee, largely because of the fixed nature of our costs. We don't operate with those variables, however. If we get to a more stable environment after the effects of the pandemic have washed through, applying some of the innovations and digital approaches, we'd be very happy to look at that to think that there is some incentive model, but I think that we're perhaps a couple of years away from being able to enact such an approach. I want to ask you about the strategic improvement programme and the long-term estate strategy and how that aligns with the future operating model. I think that Vicki alluded earlier on to a rates review of your main premises. We were fortunate enough to visit you in the summer in the very nice offices, but I'm just thinking now about how that aligns now with that future operating strategy in terms of space and location and what you might be planning. It's a very live issue, which, as you know, Audit Scotland is not alone to this. Probably every organisation in the world is looking at what is the impact of the way of working from Covid, how we realise the benefits of that going forward and how we get back to what is an appropriate balance for us in office space and for the client-facing space and what that balance is. We are very much active in looking at how individuals can do the work, but we are also conscious about how you collectively, as an organisation, as a team, do your work. 100 per cent of home working does not lend itself to that. We are very conscious to talk about different pathways, graduates and modern apprenticeships and school leavers. How do they learn not just the technical learning of being an accountant or an auditor, but to learn the wider skills? Those are really important to us that we are trying to balance at the moment. We are very aware that we have touched on climate change and tackling other inequalities and the benefits of hybrid working around that. Then there is the financial impact of looking at where we can make savings on our estate strategy. We have break-even points for our offices—2020-25 for Edinburgh and 27 for our Glasgow office. We are actively looking at options. We have been working with organisations to look at if coming into the office is more that collaborative space. What does that mean? We maximise the benefits of people coming together. We have been actively discussing that with the board and looking at our metrics that we have around staff coming in and staff going to the office. We do think that it is a wee bit early to rely on those metrics to completely think about what our future working model is, but that is going to be a key priority for us in 2023, thinking about what is the right balance of the gains that we can have from hybrid working, which will be a balance of people working home. However, hybrid is also people working together. Hybrid is not people working exclusively from home. We are also aware of the client-facing about being audit, being out at clients, picking up those more nuanced parts of that engagement with the client. However, it requires the clients to be working out what their position is. There is no point in auditors all going out to the organisation actually if the client is mainly home-based as well. We have got to work that through. I understand how the ways of working might change, but to put it bluntly, is there a case to look at smaller, cheaper, different locations outside Edinburgh? I think that we are very much looking at that. As I said, we have got our lease break in 2025, and there are options that we are actively speaking with landlords about. We have to do that with staff. It would be absolutely right that we do that with staff. The work that we are doing, we have very much got union representatives as part of that on-going discussion. It is balancing that, but we are very clear that there is clear financial savings to be made, climate change, net zero positive impacts that we can make around reducing our office capacity. However, it has to be done not at the expense of how we deliver a high-quality audit, and that is the balance that we are looking at. I have said to the board on a number of occasions that this is one of the issues that it is more important to get it right than to get it soon. I think that there is quite a lot of easy assumption about how the world of work has been changed by the pandemic. It sure as hell was, but we are in no position yet to see how permanent that is, and we have to make a very well-informed judgment on that before we can, as it were, harvest any efficiencies. We are certainly very clear that there is the strong possibility, over the medium term, the short-term medium term, that we can reduce our costs in terms of the estate that we occupy. It is, of course, made slightly more difficult by the fact that we do not only own any of it, but that there will be negotiations and discussions, both to wind down and to wind up if that is the position that we get to. I agree with everything that Vicky and Allan have said. One of the features that we will see over the next few years across all public sector bodies is a really close examination of their estate. As one of the Scottish Government's public sector reform efficiency proposals in their resource spending review, we will perhaps see more over the course of the next couple of days, more detail on that through the budget. That affords us perhaps some opportunities about where we are using our estate, where we are based. We have got three or four sites across Scotland at the moment. We can fully expect to have a presence across the country, but as we are tracking how really people's working practices evolve about whether that means that we have smaller microsites in different parts of Scotland engaging with other public bodies to have that presence. For everything that Allan and Vicky have said is right, is that we are tracking it, but we are not going to leap into any decision just given the amount of variables at the moment. Can I move on neatly on to the impact of Covid then? It has obviously been a delay in terms of auditing work. Can you give an assessment of where you are as an organisation in terms of catching up from that? If I could also ask just about clarity in terms of Covid funding as well, that would be useful. I am going to bring colleagues in, actually, to start with Martin in terms of our delivery arrangements in terms of both the financial audit and the delivery of our audit programme, and Vicky can touch on Covid funding. Before that, I think that there is a headline that we are still feeling the effects of the pandemic in terms of delivery, and I think that it is absolutely the case that public bodies are too. As I mentioned in my introductory remarks, although the virus impact in terms of public health has ebbed, it is still lingering really strongly in what it is meaning for public service delivery. In terms of our audit work, we are still in that place too, but I will pass to Martin first. In terms of Covid, we have always looked at it from two dimensions. The first is what our audit response to the pandemic has been, and then what our own organisational response has been. In terms of the audit response, very early on in the pandemic, we set out our approach to what we were going to cover and what areas of focus might be around that. We set up a Covid-19 hub and, since the pandemic hit, we have put out 20 specific publications on Covid. As you would expect, the impact of Covid on individual audit organisations features were appropriate in those audit reports, as well as things like the NHS Overview report and so on. We have had a clear focus on that in terms of the audit perspective. In terms of the organisational impact, as with other organisations, it has been an evolving situation. Clearly, there were the early stages of lockdown, the shock and awe that hit everybody in society around that. We were able to transition very quickly because of the business continuity arrangements that we had in place. That meant that the impact on us as an organisation was far less than it could have been had those arrangements not been in place and, indeed, on many other organisations that we audit. There is no doubt that the pandemic continues to have an impact on the delivery of audit. This year, our objective was to return back to something much closer to pre-pandemic deadlines in terms of delivering the audits. We are doing okay on that, but we are not quite back to where we would like to be. For example, this morning, all of the health audits were completed to schedule. Local government audits were at 81 per cent completion, 84 per cent completion in terms of central government audits and, of course, the deadline for those who have not arrived yet, that is the end of this month. We are seeing some return, if you like, but probably not as much as we would like. What we are finding is that there are still lingering effects both on us as an organisation but, indeed, on the bodies that we audit as well. Earlier on, Stephen was talking about the readiness of organisations, the readiness of the accounts and so on, and, of course, we cannot do the audit until those are in there. The last thing that I would say in terms of our organisational response is that we did very much throughout the pandemic prioritise the health, safety and well-being of our colleagues. I think that that has borne fruit in terms of the amount of time lost and the amount of sickness that has been recorded to Covid because we very deliberately took a very kind of people focused approach to that. We have invested very much in terms of communicating with colleagues right across the course of the pandemic and so on, and the different engagements that we have had with people and some of the surveys that we have run tell us that people are really quite appreciated with that. However, I think that we are not out of the woods yet. I think that one of the things that has impacted on the delivery deadlines for the audit was what we in-house referred to as the snow play effect in that the initial effect of the pandemic has rolled through into subsequent years. It takes longer to get the first year done, and that means a slightly lighter start to the second year, so you are playing catch-up in that year as well. That is probably where we are at at the moment. We have not been able to fully catch-up, but certainly there is no doubt that people are working very hard to do so. I know the Covid funding side, if I may follow up. The budget that is presented to you and the last year's budget, our position is that it does not have any Covid funding in it, and I may take a moment to explain that. In 2021, we asked for an additional £1.5 million of funding to cover the loss of income because of the timing of the audits due to Covid, which we have received. We have paid that back up to the tune of £1.4 million of underspends in each year of £0.7 million in 2021 and 2021-22. Our budget last year was called for contingency of £2.4 million, which was £0.4 million for the pay award, and £1.5 million for contingency. That left a £1.5 million amount of contingency. Picking up on Mr Johnson's point earlier, having numbers being the same can confuse what that £1.5 million was around building our capacity as an organisation. That £1.2 million was for additional auditors. We have recruited 24 additional auditors as a result of that. They are on permanent contracts, so it is a recurring cost, but it is not one-off cost. 300,000 of that was around the new financial powers and the increased quality, and we have recruited a number of staff in relation to that. I would be very happy to follow up with that of the breakdown of what that £1.5 million is, but it is recurring costs. I would like to clarify that we are not seeing that as one-off £1.5 million funding. We paid that back. The additional funding was around on-going building the capacity of what we feel the budget is needed to deliver on the capacity, financial powers and quality that future audit requires. That was what was in last year's budget, which we are rolling forward. That is baselined. We are not calling that contingency anymore. The only contingency that we have in the budget is the £500,000 that we have spoken about. However, if it helps to clarify, I am very happy to make that more explicit and a breakdown of what has been spent on that recurring basis. Do any other members have any questions that they would like to ask? I have one or two just to clear up at the end, but, otherwise, if there is time. Just briefly, one of the issues that flagged reading through this was your plans on innovation and that the budget proposal outlines a reduction in capital requirement from £253,000 to £150,000 to £23,000 to £24,000. I am just wondering, given the increasing burdens and complexity and the need additional people that you need, I might have expected you to be having an associated increase in capital, systems, IT, automation to deal with that. Is it just wondering what the explanation is for the reducing capital requirement? It is very important that you quite rightly say that we are predominantly a people business, but, nonetheless, we still require capital to support the delivery of our services. I do not think that that reflects a pattern of what we think it is going to be in future years. In previous years, we have invested both in digital hardware, as Martin rightly mentioned. We did a lot of that at the early stages of the pandemic, so that colleagues could work remotely. Not for this year's budget, but for the following year likely and the year after that, one of our next investments is going to be not so much our offices, but our electronic working papers. We are going through scoping that programme at the moment, so I think that it is going to be a feature of next year's budget. I suspect that that reflects something of a lull in that investment. I have just got one final question. I am afraid that it is a bit of a cheeky question, if I am being honest with you. I could not help but note on page 22 what looks awfully like a rate card to me. Just looking at those and looking at your people that you are charging out, can I just ask what is your target number of chargeable hours per year for a chargeable person for a whole-time equivalent? I know when you are constructing this, if it is not expressed like that, it will be at the forefront of your mind when you are constructing a rate card. The terminology that we would use is utilisation rates within the organisation, and that varies by grade. Trainees have a lower utilisation rate because we are investing in their learning and development through their professional qualifications. They tend to go on a bit with bell-shaped curves, so for our newly qualified rows, senior auditors tend to have the highest utilisation, and that falls as colleagues become more involved in engagement and co-operativities as they progress to more senior grades in the organisation. What I do not have on my fingertips is the precision around that as to what that means, but largely we use that information carefully and we track it carefully about the productivity of colleagues as well in individual grades. All of that informs our management information about how we are supporting colleagues and the delivery of audits, and it is useful information about our cost base as well. Again, I am happy to come back to the commission in more detail on writing just to set that out for you. I found that very helpful. Certainly from a previous life, 80 per cent utilisation rate or between 60 and 80 per cent would be useful to know whether or not that is what parameters you are using, but it would be interesting to know that. I have just got a couple of questions to wind up a bit. On page 9, paragraph 31, you talk about specific areas of our administrative budget that have no inflation applied. Which areas are those? I am going to turn to Stuart Chair if he will have that detail because I understand the nature of the question given the cost of living and the challenges that it would experience. If we have that information, we can share it with you. If not, we will come back. Looking at Appendix 1, there are summarised into that. We will have areas such as staff recruitment, things such as internal audit and external audit. You will see that there remains static things on IT as well. It is not a huge increase in that area. There are numerous areas where we have not applied any inflation at all, and we are just looking at that as a savings. On our attention to Appendix 1, I am looking at legal and professional fees. They seem to have gone up substantially from £840,000 to £75,000. Yes, but they went up to £840,000 from £600,000. That is for the national fraud initiative. We have to contribute £220,000. That is every two years. Next year, we do not have that, but it will be in a requirement in £24,000 to £25,000. You have touched on hybrid models and so on of working, and I know that from past discussions that this is very active. However, the overall delivery model is under consideration at all. What cost and benefits are there for providing the audit work, for example, by in-house teams versus outside? Are you looking at the whole possibilities here in terms of how to deliver the services? We have given that. It really is on the back of a two-year project that led to the culmination of the development of both the code of audit practice and the procurement of audit services. It was central to that thinking about the delivery model that exists for the delivery of public audit services in the provision of in-house teams and those of firms. The Count's Commission, the Auditor General, myself and the predecessor and the Audit Scotland Board weighed up the cost benefit of that and came to the position that operating a mixed market in Scotland gave us the best balance of efficiency, access to expertise and predictability in the delivery of services. There are other models that exist. I think that we are unique in having an Auditor General, an Accounts Commission and a public audit agency, but the extent to which private firms are used varies elsewhere in the UK. Also, as does the certification model that exists in the national audit office, for example, it is still largely the case that the control and auditor general certifies all of the audits that they undertake. In Scotland, we appoint auditors in their own name to certify the delivery of public audits. We are keeping under closer view, but where we are at now is that we have a code of audit practice plus a procurement arrangement in place for the next five years. It does not allow for the fact that, if there is a market shock, as we experienced in the best part of 20 years ago, one of the providers decided to pull out of the market, but I do not think that we are in those circumstances. Although it feels like a number of years away, we are already beginning to think about how we will undertake the next delivery of the code and procurement, and that is closely monitoring both the quality and value for money that remains central to our thinking. Do any members have any other question that I would like to ask at this point? In that case, since no other members indicated that they have got any more questions, I will conclude the evidence-taking session by thanking everybody for the witnesses in particular for attending today. That concludes the public part of the meeting. I do not know if members want a couple of minutes' comfort break before we crack on with the private session. I do not forget that I wish all the witnesses a very happy Christmas and a great new year. All the best.


Okay. Let's try this one. This one is actually just figuring out Planck's constant from this equation. E equals the constant times the frequency. So E here is the energy of the photon. Okay. So what is it asking? Another way of writing the relationship between energy and frequency is the energy of the photon equals some constant times the frequency of that photon. So what's the value of this constant? Again, like I said, you know Planck's constant, but that's what we're actually figuring out here. So what you need to do is rearrange this equation so we're solving for constant. Okay. So I'm just going to say constant equals k whole word. Or in this case, I guess I should just say it equals h. Okay. So when I rearrange this equation, I have each photon. So let's just rearrange this for, let's solve for h. So we got h equals divided by the frequency of that. And we got both of those numbers listed over here. So E of the photon is going to be 2.9 times 10 to the negative, and the V of the photon is, or the nu of the photon, I guess I should say, 4.46 times 10 to the 14 hertz. So if we divide this number into this other number, 2.95 times 10 to the negative 19 divided by 4.46 times 10 to the 14th, what do we get? Well, I got with 1, 2, 3 significant digits, 6.601 is 34. The thing you want to remember is that 1 hertz, 1 per second, like that. So if we cancel out there and there. And since this is second to the minus 1, it actually moves up to the numerator. So our final answer is going to be 6.61 times 10 to the negative 34th joules per second, or a time second. And hopefully you guys notice that that's really, really close to Planck's constant. And that's what you'll get when you take the energy of any photon and divide its frequency. You're always going to get Planck's constant. In fact, that's where Planck's constant came from.