National Audit Office (United Kingdom)
The National Audit Office's Head Office in Buckingham Palace Road, London, built originally as the Imperial Airways Empire Terminal
|Independent Parliamentary body overview|
|Preceding independent Parliamentary body|
|Jurisdiction||Government of the United Kingdom|
|Motto||Helping the nation spend wisely|
|Annual budget||£64.5m net budget 16–17|
|Independent Parliamentary body executive|
|Parent department||Public Accounts Commission|
The National Audit Office (NAO) is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies. The NAO also carries out value for money (VFM) audits into the administration of public policy.
The NAO is the auditor of bodies funded directly by the Parliament of the United Kingdom.
The NAO reports to the Comptroller and Auditor General who is an officer of the House of Commons of the Parliament of the United Kingdom and in turn reports to the Public Accounts Commission, a statutory body established under section 2 of the National Audit Act 1983. The reports produced by the NAO are reviewed by the Public Accounts Committee, a select committee of the House of Commons, and in some cases investigated further.
The NAO has two main streams of work: Financial Audits and Value For Money (VFM) audits.
The NAO’s financial audits give assurance over three aspects of government expenditure: the truth and fairness of financial statements; the regularity (or statutory validity) of the expenditure, and; the propriety of the audited body’s conduct in accordance with parliamentary, statutory and public expectations. Financial audits are carried out in much the same way as private auditing bodies and the NAO voluntarily applies the International Standards on Auditing (ISAs). The NAO is subject to inspection by the Audit Quality Review team of the Financial Reporting Council.
Value for Money (VFM) audits are non-financial audits to measure the effectiveness, economy and efficiency of government spending. Roughly sixty of these reports are produced each year, the most notable from recent years being the reports on MRSA, which led to an increase in public interest in the topic, the report on the rescue of British Energy and the report in the Public Private Partnership to maintain the London Underground. The remits of the NAO and the Public Accounts Committee do not allow them to question the policy itself and so VFM reports only examine the implementation of policy. The responsibility for questioning policy is left for other select committees and debating chambers of Parliament, but this has not prevented the PAC being named committee of the year in 2006.
"Good Governance", an output somewhere between financial and VFM audits, was previously a strand of NAO work, but is no longer a focus of activity. The NAO does, however, publish best practice guidance for public sector organisations. An example includes the fact sheet on governance statements. In addition, the NAO undertakes fast-paced and more narrowly focused work called investigations.
The NAO received new powers under the Local Audit and Accountability Act 2014 to provide an end-to-end view of policy implementation, and produce reports aimed at the local government sector.
The Comptroller Function
The Comptroller Function is administered by the small, but important, Exchequer Section within the NAO.
Its work centres on recording all transactions to and from the Consolidated and National Loans funds. Money cannot be paid from either of these without the C&AG's prior approval. This approval is granted every banking day through a mechanism known as 'the credit'. The Exchequer Section is also responsible for agreeing payments from the Consolidated Fund directly to certain bodies, including the Queen (through the civil list), judicial salaries, MEPs salaries and the European Commission.
The NAO produces a number of briefings for select committees, but its key audience is the Public Accounts Committee. It also has a strong relationship with the Public Accounts Commission that oversees the work of the NAO and approves its budgets.
Public Accounts Committee
The NAO and Public Accounts Committee (PAC) form the key links of the Public Audit Circle which has the following sequence:
- The NAO performs financial and VFM audits and makes its reports public
- The PAC has hearings based on NAO reports wherein failures in meeting regularity or propriety requirements are apparent.
- The PAC provides a report with recommendations based on PAC hearings.
- The Government responds to the PAC report in a Treasury Minute.
- The NAO publishes a reply to the minute and there may be an NAO/PAC follow-up study.
Public Accounts Commission
The Public Accounts Commission (TPAC) annually approves the NAO's corporate plans and budgets. It also receives value for money reports on the operation of the NAO. These are written by private sector audit firms in much the same manner as the NAO reports on Central Government.
The National Audit Office is a member of the International Organisation of Supreme Audit Institutions (INTOSAI). The NAO shares knowledge and experience with other Supreme Audit Institutions (SAIs) around the world and undertakes the audit of some international bodies. For example, between 2010–2016 the C&AG was one of three members of the United Nations Board of Auditors, responsible for auditing the United Nations itself, including peacekeeping operations and related organisations such as UNICEF and the UN High Commissioner for Refugees (UNHCR).
History and establishment
The earliest known mention of a public official responsible for auditing government expenditure is a reference made in 1314 to the Auditor of the Exchequer.
Auditors of the Imprest (1559-1785)
Commission for Auditing the Public Accounts (1785-1866)
In 1785 a Commission for Auditing the Public Accounts was established by statute (the former arrangement having fallen into abeyance). Its members, the Commissioners of Audit, were five in number (increased to ten in 1806). The Commissioners worked closely with the Comptroller of the Exchequer (who was charged with controlling the issue of funds to the government) following the establishment of that office in 1834.
Exchequer and Audit Department (1867-1984)
Under the terms of the Exchequer and Audit Departments Act 1866, the offices of the Comptroller of the Exchequer and the Commissioners of Audit were merged and their duties vested in a new official: the Comptroller and Auditor General (formally the Comptroller General of the Receipt and Issue of Her Majesty's Exchequer and Auditor General of Public Accounts).
National Audit Office (1984-present)
The NAO developed from the former Exchequer and Audit Department (founded in 1866) in 1983 as the auditor for central government (including most of the externalised agencies and public bodies) as part of an "appropriate mechanism" to check and reinforce departmental balance and matching of quantitative allocation with qualitative purpose (as set out by public policy). The existence and work of the NAO are underpinned by three fundamental principles of public audit:
- Independence of auditors from the audited (executives and Parliament)
- Auditing for: regularity, propriety and VFM (value for money)
- Public reporting that enables democratic and managerial accountability
The basic need for the NAO arises from these three fundamental principles, in that, as Parliament votes on public expenditure of various activities by public bodies, they need auditors that are independent of the body in question, the government and/or opposing political parties; while auditing for compliance and legal spending by departments on the activities voted for by Parliament, in a transparent and public forum.
The NAO is based in London and Newcastle and has a staff of 800.
The NAO is structured into Directorates, each with a responsibility for a government department (for instance, the Home Office or Department for Culture, Media and Sport). Each Directorate contains 20–30 staff, many of whom are qualified accountants or in training for qualification with the Institute of Chartered Accountants in England and Wales (ICAEW). Within Directorates, staff will be split between Financial Audit and Value for Money work and include staff of the following grades:
- Analyst: Junior researcher on a value for money engagement;
- Assistant Auditors: auditors employed on a three-year training contract, leading to a qualification with the ICAEW;
- Auditors: auditors that have completed their ICAEW exams but have not yet obtained the full qualification;
- Senior analyst: Oversees value for money studies;
- Audit Principals: senior auditors, with responsibility for leading a financial audit engagement;
- Audit Managers (Civil Service equivalent Grade 7): oversee a portfolio of audit engagements or a value for money studies;
- Director: (Civil Service equivalent Grade 5/SCS 1): responsibility for a directorate.
Directorates are arranged into clusters of government departments of similar characteristics. This enables the NAO to undertake comparative work between departments.
Above director grade, Directors General have responsibility for specific cross NAO functions (such as Audit Practice and Quality, and Finance and Commerce) and Executive Leaders (previously Assistant Auditors General) support the Board.
The NAO has finance, human resource and ICT functions to support its operations.
The NAO Offices
Part of the NAO's London Office is a listed building, originally built for Imperial Airways as their "Empire Terminal". The building underwent a £60m restoration and refurbishment, completed in 2009. The NAO rents part of its offices to tenants, generating income of £1.3mn in 2012–13. The building is a modern, open plan office and the refurbishment enabled the NAO to introduce many environmentally friendly features, such as rain-water harvesting. The NAO has a separate office in Newcastle employing about 90 staff.
Following the controversy over a previous C&AG’s expenses —see the criticisms— the governance arrangements of the NAO were overhauled and a Board was put in place to oversee the running of the organisation. The Board is made up of
- Non-executive chairman – Michael Bichard, Baron Bichard
- Comptroller and Auditor General – Gareth Davies
- Chief operating officer responsible for the day-to-day running of the NAO – Michael Whitehouse
- Three other Executive Directors
- Four non-Executive Directors
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Some of the criticisms that have been levelled at the NAO include the following:
- Accountability: although the NAO publicly scrutinises other public bodies, the scrutiny that it is subjected to is not fully transparent. Its reports are subject to external review both before and after publication by teams of academics from Oxford University and the London School of Economics. These reviews consider whether the methods, findings and conclusions of the reports are sound, and have on occasion found the intellectual basis of the reports to be thin. The results of the reviews are not, however, made public.
- Caution and neutrality: this criticism stems from the normal way in which the reports are written. Initial drafts of reports are shared with the department(s) about which they are written. This begins a process of 'clearance', during which all facts are agreed between the NAO and departments. The reason for this is to give the PAC a mutually agreed report on which to base its later hearing; the hearing would be pointless if the departmental witnesses were able to disagree with the findings of the report. In practice, the clearance process is said to lead to a watering down of the initial draft, with the most contentious early findings removed at the behest of the department (and never, therefore, made public).
- Unpublished reports: in extreme cases where information is too politically sensitive, a report is not published. The often quoted case is their 1992 investigation into the Al Yamamah arms deal where due to ongoing legal investigations the report has not been released. It refused to release a copy to investigators during the Serious Fraud Office investigation into the Al Yamamah corruption allegations in 2006 as to do so would have required a special vote by the House of Commons.
- Calculations of its savings: the NAO claims to save the taxpayer £9 for every £1 it costs to run. These savings include reductions in public expenditure and quantifications of non-financial impacts of the NAO's work. The latter includes expenditure being better targeted and, in some cases, increased expenditure. (For example, the NAO published a report on how the Department for Work and Pensions was making the general public aware of state benefits to which they might be entitled. Any increase in the take-up of benefits that could be shown to be directly attributable to the report would be counted as a 'saving' by the NAO.) If the definition of 'savings' were restricted to reductions in public expenditure, the amount of savings that the NAO could claim to have made on behalf of the taxpayer would be significantly reduced. The argument used to support this practice is that the NAO's remit is to examine the effectiveness and efficiency of public spending as well as the economy.
- Strategic nature of reports: the NAO produces a wide range of reports on all aspects of central government expenditure, but many of these deal with marginal topics like government leaflets, countryside rights of way and railway stations. David Walker of The Guardian argues that the NAO does not and cannot examine major strategic issues such as the underlying principles of the Private Finance Initiative and the effect of class sizes on educational attainment.
- Treatment of value for money in reports: the NAO uses a broad brush definition of 'value for money' to plan and carry out its reports. The reports do not, as might be expected, focus purely on detailed financial analysis of whether or not a particular scheme or initiative is value for money. Instead, they include qualitative analysis of costs and benefits to give a more comprehensive assessment. In 2005, an NAO report on NHS Local Investment Finance Trust (LIFT) was criticised by one of the PAC members at the time, Jon Trickett, for its focus on qualitative analysis of the benefits of LIFT schemes and the paucity of its financial analysis. The NAO has recently published a report about the use of consultants in the public sector. Critics identify that this report did not directly answer the question of whether consultants employed by the public sector give good value for money. However, as the report highlights as one of its findings, this was not possible because insufficient information is gathered by departments. Furthermore, the report did not consider the quality of the advice given to departments by consultants.
- Expenses: in May 2007, Private Eye released information obtained under the Freedom of Information Act detailing the travel expenses of the then head of the NAO, Sir John Bourn. These included tickets on Concorde and stops at luxury hotels. In one instance, Bourn and his wife attended a three-day audit conference in The Bahamas. The conference was Wednesday to Friday. Bourn arrived on the Friday and he and his wife stayed on the island Saturday and Sunday.
- The NAO was also accused of hampering a police investigation into the Al Yamamah deal by The Guardian newspaper in July 2006. It would, however, have been a breach of parliamentary privilege and hence illegal for the NAO to have handed over the requested information.
Other public sector auditing bodies
There are several other public sector auditing bodies in the United Kingdom:
- The Wales Audit Office, Audit Scotland and Northern Ireland Audit Office are responsible for auditing their devolved assemblies and associated public bodies.
- Whole of Government Accounts
- A few other "Supreme audit institutions" (for a full list, see International Organization of Supreme Audit Institutions):
- "Exchequer and Audit Department". gov.uk. UK Government. Retrieved 14 November 2016.
- Sainty, J C. "Audit Commissioners 1785-1867". Institute of Historical Research. Retrieved 8 December 2018.
- "Commissioners for Examining Public Accounts". Archive Hub. Retrieved 21 March 2018.
- “The Audit Commission” by Couchman V. in Sherer & Turley: Current Issues in Auditing, Paul Chapman Publishing (1997)
- http://www.nao.org.uk/wp-content/uploads/2013/05/ANNUAL-REPORT-2013_WEB-1.pdf NAO annual report
- Summed up – David Walker – The Guardian, Friday 20 July 2001
- House of Commons Public Accounts Committee – Forty-Seventh Report
- Central Government's use of consultants – NAO
- Auditor General's luxury hotel bills under fire – The Telegraph.
- Parliamentary auditor hampers police inquiry into arms deal – The Guardian.
- Audit, Accountability and Government White & Hollingsworth, Oxford University Press (1999)