Oral evidence: National Audit Office Annual Report, HC 735
Oral evidence, 20 October 2026.
Witnesses
Gareth Davies, Dame Fiona Reynolds and Rebecca Sheeran.
Chair
Welcome to this meeting of the Public Accounts Commission on the National Audit Office Annual Report and accounts for 2025-26. I ask the witnesses to introduce themselves for the record.
Dame Fiona Reynolds
I am Fiona Reynolds. I am chair of the board of the National Audit Office.
Gareth Davies
I am Gareth Davies. I am the Comptroller and Auditor General.
Rebecca Sheeran
I am Rebecca Sheeran. I am the chief operating officer.
Chair
You are all very welcome. We are informal here, so we will be using first names if that is okay. You came in under budget by around £2 million, split evenly between spending less than forecast and receiving more income than forecast. What were the main drivers of each?
Gareth Davies
It is worth taking expenditure and income separately. We were slightly under on expenditure. It was not staff costs; actually, staff costs came in slightly over budget but very close to budget. We were under in our cash costs, particularly the spending on firms for specialist audit advice. That mainly relates to the train operating companies. As you will remember, that was our big new chunk of audit work in the year. We had estimated a fairly prudent amount for specialist advice on those audits. It was the first year we had undertaken them. We were not quite sure what it would take but we could see that there were areas that required specialist advice, such as leasing the rolling stock, allocation of fare revenue and so on. As it turned out, we needed less of that advice in practice than we had expected. That is the bulk of the difference. There were other, smaller underspends, but that is the most significant one. On income, we underestimated the income at the year end for three main reasons. First, an audit that we had expected to be funded out of the grant that you award the NAO, the parliamentary funding, was actually funded from a fee. That was the Infected Blood Compensation Authority. That came in as income that we had not budgeted for. We also did slightly better than expected renting out the spare space in our building, at about £0.2 million, and the rest was the timing of audit work at the year end. Our accounting policy is that we recognise income from fee-paying audits according to the amount of the audit that is complete at the year end, and slightly more of that was complete than expected. That partly led to the achievement of our target on signing off opinions before the summer recess, which I will come to later. Those are the main reasons for the variances against budget.
Chair
You received the supplementary estimate of £1.2 million last year, but you have come in under budget by £2 million. In hindsight, why did you not manage the extra costs within your existing budget?
Gareth Davies
It is really the same explanation, because at the time we asked for the supplementary, that was when we were taking on the new train operating company audits, if you remember, which had not been in our original budget. We needed the expenditure, so had we not asked for the supplementary, we would have been well over on our expenditure budget. But as you say, as it turned out, the income overshoot would have covered it, but we could not—did not—expect that at the time we asked for the money, and we would have been pretty reckless to assume that that would happen. As you know, the one thing that the NAO cannot do is to overspend in a way that triggers an excess vote. Particularly given that we have a role in policing that system across the rest of Government, it would not be good for our credibility to be the one on the list with an excess vote. We have to be prudent in estimating the cost of the audit work. It was the right thing to do at the time, but as you say, as it turned out, the income actually covered the additional expenditure that we needed.
Chair
You mentioned the rail nationalisation, of Avanti. What impact has that had on your audit resources? Does it give you an insight into what you can expect from other additional burdens that will be placed on the National Audit Office as we go forwards?
Gareth Davies
We certainly learned a lot from the first year of auditing the train operating companies, the first wave that came into public ownership. We audited seven of them in the year we are talking about, in 2025-26. The teams did a great job of preparing for that. We treated it as a major additional chunk of work in a new sector. We spent a lot of time talking to the previous auditors, to make sure that we understood what we were inheriting, and then getting to know the businesses in the way that we have to when planning audit work. All that planning paid off, because it meant that we were not surprised by any of the audit issues that came up in the first year of auditing the train operating companies. All seven were signed off before the planned date, before the summer recess—a great achievement from the team involved. We also have three more: as you mentioned, Avanti is one; and we have Chiltern and Great Western coming in this year. We will build on that experience. We are not expecting major differences, although we can never assume anything as an auditor, but we were pleasantly surprised by the consistency of the accounting treatment and the issues across all the train operating companies. They were not as different as we had been expecting. All that means that we have been able to build that into our budget for the current year.
Chair
Going forward, are you confident—having had a good run at all this—that you have the resources to deal with the additional pressures without having to seek a supplementary estimate this year?
Gareth Davies
This year, we are pretty confident about that. Rebecca might be able to give an update on the figures. All our projections are quite tight this year—we are certainly not going to have plenty of room—but they are within the bounds that we should be able to manage both on income and expenditure for the rest of the year. I don’t know if you want to add to that, Rebecca.
Rebecca Sheeran
Yes, just to say that at this point, we are essentially at the mid-point in the year and have just conducted a detailed mid-year review. Our forecast is that we will be in line with our budget this year. I should say that the contrast with last year, when we sought the supplementary estimate, was because partway through the year, there was a change in the number of those train operating companies that we were expected to audit within the year. We are not in that position this year. We have clarity about the new work, so at this time we are not expecting a supplementary estimate.
Sir Geoffrey Clifton-Brown
Good afternoon, team. Can I start with an issue that is probably one of the most important that the PAC and the NAO have to deal with: devolution in local government? I want to talk about the establishment of the Local Audit Office and its role in all of that. Will it free up your resources as it takes over more of that work?
Gareth Davies
I strongly welcome the creation of the Local Audit Office. There has been an unacceptably poor situation in local government audit, as the Committee knows. It remains urgent to tackle that, so that local taxpayers have properly audited council accounts. It is just a basic requirement, and that is before we talk about devolution. With devolution on top of that, there is a significant issue now about credible audit arrangements to allow proper scrutiny of local spending. If significant amounts of what is currently central spending are going to be devolved, which they are, the system of accountability needs to be able to deal with that. The chair of the new body, the Local Audit Office, has been appointed: Bill Butler. He and I have met several times. He has been a guest at our board meeting, and we have had really constructive discussions about how we advise the Government on policy making on this issue, to make sure that there is a joined-up audit framework that delivers the accountability that Parliament expects but that respects local decision making and local accountability, too. That has to be quite different from anything we have had before, given the scale of devolution that the Government are contemplating. We need something more robust than existed even under the Audit Commission, because Parliament needs to be confident that the framework for devolution and responsibilities are clear, that people are not pointing at each other when something goes wrong, and that the importance of local accountability is properly respected. I think that means quite a big role for the Local Audit Office, auditing not just councils but also the accounts of the mayoral strategic authorities. It also means a significant role for the NAO in helping the Public Accounts Committee understand how well the devolution framework is delivering value for money for taxpayers. That does not mean second-guessing local decisions, but it does mean being able to understand how the money is being spent and what difference that makes to value for money. Crucially, it means understanding the different approaches that are being taken to the same issue around the country. The whole point of devolution is that you are expecting more innovation and better-targeted solutions because of knowledge of local circumstances. Is that how this is playing out? Is the evidence demonstrating that local decision making means better value for money? That is a question in which Parliament has a legitimate interest. Devolution does not cover everything that the Government spend, of course, but it covers significant amounts. In those areas, our work shifts from central Government audit to looking at how the devolution framework is delivering. That means working closely with the Local Audit Office to understand what its audits are showing, and giving the PAC national reports that allow you to understand how well the framework is developing. Overall, I do not think that means a shift of resources from us to the Local Audit Office, but us doing a different programme of work in the future. As you know, our VFM work is very selective, and it will remain so even with devolution.
Sir Geoffrey Clifton-Brown
The critical question in all of that is that the devolution from central Government to local government means that there will be a shift in auditing from you to local government auditors. Given the history of local government audit, do you think there will be sufficient capacity to do all that work?
Gareth Davies
It will take time for that capacity to build. I am very confident that, with the early appointment of Bill Butler, for example—somebody who knows local audit very well—you will have people with a good understanding making the decisions about that future regime. However, realistically, it is going to take years to develop the kind of capacity that we are talking about, because it is not just about making sure that council audits are timelier and more robust; it means an audit regime around the mayoral strategic authorities. As we know, there have been cases where there have been questions about individual mayoral spending decisions and without a satisfactory answer about how they are being held to account. That really does need solving. It is going to take time for that local capability to be built. There is a clear plan to do that, but it will take years. There are two points for Parliament. First, what is the end state that we are aiming at? That is where the early discussions that we are having and we are trying to have with officials are proving helpful. And then, what about the interim between now and three years’ time, which is probably as early as you could expect mature arrangements to be in place? We might need some transitional work and perhaps more work from the NAO in the meantime, because I do not think that we can wait for three years or more for that gap to be filled. We are going to need something in the interim.
Sir Geoffrey Clifton-Brown
The bigger the mayoral combined authority, the bigger the problem, potentially, when something goes wrong—look at Birmingham, for example. I believe you have powers to carry out an investigation when something goes wrong with one of these authorities. Would you like to let us know how you intend to use that power and in what circumstances?
Gareth Davies
Birmingham is a council rather than a strategic authority, and we do not have any powers to audit councils. My point about the robustness of the local audit regime is that it absolutely needs to be able to tackle the issues that a council such as Birmingham has been facing for a long time and, to be honest, give a more satisfactory answer to local taxpayers than we have had so far. On the west midlands mayoral strategic authority, the NAO was given powers when the Audit Commission was abolished, but only as a way of looking at thematic areas of expenditure across the system, not to scrutinise individual authorities. In fact, that is specifically excluded, which is why the NAO could not go into Tees Valley when there was a big clamour for that a few years ago. We could not do that under our existing powers and it would have to be a special measure to make that possible. We have listed what we think the powers will need to be for the NAO and the LAO to put in place that effective joined-up audit framework that I was describing. Part of that is us having clearer access powers to individual strategic authorities. I do not think it needs to be for councils specifically, because the LAO must be the body to do that. However, if we are going to do the comparative analysis for PAC that I was describing on how well a transport service is being delivered through devolved systems and what the value for money evidence is there, we need clear access powers to produce a report like that. Those are not clear enough at the moment, and we have suggested that to the team in MHCLG looking at the requirements of the devolution framework.
Chair
On accountability, you are accountable to Parliament through us for the role that you play. Where will the LAO fit in, and where will be the democratic oversight of the LAO? Do you have an understanding of that?
Gareth Davies
Constitutionally, it is an arm’s length body of MHCLG. It is a ministerial body in that sense, so it is accountable to the Secretary of State for that Department, who also appoints the board, agrees the budget and so on.
Chair
Will there be a mechanism of public accountability such as we have here?
Gareth Davies
Clearly, the Public Accounts Committee will be able to take evidence from the senior people at the Local Audit Office. In fact, I think you have a session on whole of Government accounts in December, and the plan is for Bill Butler to be a witness. There is that route into parliamentary accountability. It illustrates the point that it is a Government body and not independent of Government in the way that the NAO is. That is why Parliament will have to be satisfied that the whole system provides adequate assurance, from central decision to local implementation.
Sir Geoffrey Clifton-Brown
I have a question on financial impact. I am not fussed whether the Comptroller and Auditor General, Rebecca or Fiona answers—I will ask and you decide. Your financial impact has fallen from £53 per pound spent to £24 per pound spent. What caused the lower result this year?
Gareth Davies
Fair question. Those are the two highest figures in the NAO’s history, just to put that in context. Had they been the other way round, of course, that would have been an easier story to tell, but it kind of makes the point that these figures are lumpy almost by design. The way this works is that, where we have evidence that our work has either accelerated a decision or created the drive for a new approach that has saved money, we measure from the first year in which that takes effect. It is therefore quite a lagging indicator, because we need to actually see that happening before we put it in the list of impacts. In the first year, there may be two years from the beginning of that impact to catch up on, so there will be quite a lumpy impact in that first year, and then, in some cases, there is an annual run-on until that finishes. Sometimes, these are genuine one-offs that just feature in one year. My point is that that gives a lumpy profile. We would not expect this to be a smooth measure every year. We increased our target from 10:1 to 15:1 because our new strategy is predicated on making a bigger impact, so we thought that that was putting our money where our mouth is. It has also been helpful in concentrating the minds of our teams doing the planning of the work. That is not the only factor when we plan our work. Clearly, the PAC’s interest is a huge factor, and there are other reasons why we might want to give wide coverage to Government spending. But it is really important that, where our work has genuinely created pressure for improvement—together with the PAC’s impacts, obviously—we try to measure the scale of that, so that Parliament has an accurate picture of what difference all this is making. The NAO costs taxpayers, so it is right that they have a measure of the difference that it makes.
Sir Geoffrey Clifton-Brown
You anticipated my next question, which was about that increase from £10 to £15. The question following on from that is: is £15 still adequate, or could you increase that further?
Gareth Davies
We ask ourselves that frequently, and the board challenges us on the same question. I suppose the care that we are taking here is that, first, that is quite a substantial increase in the target, and we wanted to give it a bit of time to see what difference it made. I do not want to get into the territory of perverse incentives here, because it is obviously great to do work that saves taxpayers money, but Parliament needs assurance on lots of other things as well. Systemic areas of improvement, such as digital transformation and the kind of issues that PAC was discussing yesterday on digital ID, are the levers that will change value for money on a huge scale across every Department, and it can be harder to pin down individual savings when we are doing that thematic work. I do not want to drive out that work because people are chasing a cash figure with every study. It is about getting the balance right. Obviously, the PAC’s view on that is very influential as well.
Dame Fiona Reynolds
I would just add that the board did think about this very carefully. It is important for us to be able to show improved financial impacts, but as you know, we are just as keen to show impacts on other areas of public policy in delivering value for money. Creating a mixed portfolio in which we can track impacts across different kinds of outcomes is therefore really important to us. I am sure that, in future, the board will keep as close an eye on that as we do. In fact, a member of the board sits on a panel that, once a year, looks at overall value for money in terms of financial impact achievements. So we are staying close to it, but it is not the only thing that we are trying to do.
Chris Vince
Speaking as a former maths teacher, have you considered using moving averages, because that would avoid the peaks and troughs? I take what you said, looking at the graph there. If you say that you have gone from £53 to £24, it does not look very good, but you are right in saying that, before that, it was £17. Across the five or six-year period that we are looking at overall, a moving average would give you something that would probably be a bit more reasonable.
Gareth Davies
We have discussed doing exactly that, actually, so I think that we should take that away.
John Glen
Turning now to staff numbers, you have 73 more members of staff this year, and, if we look back over the past five years, you have gone from 882 to 1,101, which is just under a 25% increase. Obviously, the body of work that you have to evaluate has increased—I imagine you would say that—but there are also new trends in terms of tools, AI and so on. Could you explain that figure and when we might see it level off or potentially be reduced?
Gareth Davies
Sure. I will start, and Rebecca will come in. As you say, there were quite a few things going on over that longer period, with an increase in the number and the complexity of audits. The balance sheets of Government Departments are significantly more complex, particularly post-pandemic, but lots of other financial instruments have also been creeping into Government over that time, so that has had an impact. Auditing standards have been driven up across the profession, for the big firms and for us. We are subject to the same inspection regime as the big four, and we have worked really hard to ensure that our quality is at least on a par with theirs. All of that has required that kind of investment in audit resource. On the question of the direction it takes, the Commission approved our estimate for the current financial year back in April. Those of you who were there for that will remember that our bid for the current year was essentially flat—a small real-terms reduction, actually. The recent growth that you have pointed to has already levelled off in this current year. We are forecasting a similar picture for next year, partly because we are now generating some of the investment we need through productivity improvements driven by the investments in our audit technology that you mentioned. We are in the foothills of applying AI tools in our financial audit and value-for-money work. We are already seeing some productivity benefit from that but, as you will remember from when we discussed the estimate, we have a three-year programme for delivering more through that. As I say, we have already levelled off for that reason. Of course, the big firms are investing billions in AI, and—
John Glen
You are probably not able to do that.
Gareth Davies
We will never be able to do that. The investment we have made so far will not cut it on its own; I suppose that is the point. Although we are seeing some early benefits from the investments we have made, there is much more to come on modernising our audit in line with practice in the rest of the private sector. This is an ongoing issue. We are going to come back with our estimate in the early part of 2027 to explain how we are taking that forward.
John Glen
May I pursue that a little further? If you were in an optimal situation where you could bring forward more investment into years one and two, do you think you would do that to secure better outcomes further down the period? Is the accounting profile you have to work with inhibiting optimal investment?
Gareth Davies
That is a great question. To some extent—but only to some extent, because money is only one of the capacities that we are dealing with here. There is the change capacity of the organisation itself. I give credit to our staff; across the board, they have absorbed methodology change, technology change, real performance improvement pressure and quality improvements, and they have done a great job in responding to that. It has involved working differently for all of us, right through the organisation. AI means that there is more of that to come—we have just rolled out Copilot to the entire organisation. Everyone has been trained and we are now implementing that. We have more specific audit tools coming through. In the meantime, we are trying to judge how quickly the organisation can absorb that change and produce high-quality work. I think the answer is to some extent, but I would not like to try to spend a very large amount of money in one year and expect to be able to demonstrate value for money as a result.
Rebecca Sheeran
To reinforce that point, a small amount of the headcount growth that you cited in the last year was actually to build up some of our digital capability to deliver our digital strategy, and also to ensure that we were investing proportionately in cyber-security and information security, which the Commission has asked us about in the past. Earlier this month, our first chief digital and information officer joined us to help augment those skills, so that we can pursue the opportunities that, as Gareth says, are increasingly available to us.
John Glen
This year, you have had 19 members of staff leave, with an average exit package of £57,000. The previous year, it was eight, with an average of £30,000. That might just be because it is more senior people who are being let go. Is that what has happened? How do you look at it from a value-for-money point of view?
Rebecca Sheeran
This year, for the first time in a number of years, we ran a voluntary exit scheme, and 17 exit packages were agreed. This was very much as we were coming to the end of the first year of the delivery of our new strategy, and it was to make sure we have the skills mix that we need to deliver that strategy. It also helped us manage our overall cost base. We had not run a scheme of that nature for some time. The numbers in previous years were more ad hoc agreements relating to unique circumstances.
Gareth Davies
The payback on that is less than a year.
John Glen
On the staff turnover, you were below target this year, as you were last year. Would you like to explain to us what is going on there? You told us last year that too low a staff turnover could create budgetary pressures and blockages and obviously prevent promotion opportunities. Please address that.
Gareth Davies
That is a continuing situation. It is a better problem to have than the opposite. A few years ago, as the private sector was gearing up to come out of the pandemic, we had the opposite, but it is a problem for us if turnover is too far below our assumptions for exactly the reasons that you highlight: opportunities come up too slowly, and that creates a build-up of frustration.
John Glen
It could also paint a picture of an organisation in which people are settled in a role, are going through the motions, are not being challenged and do not aspire to the sort of up-and-out culture that exists elsewhere. How do you ensure that that does not happen and that you maintain high-performance levels?
Gareth Davies
Partly through the scheme that Rebecca described, and partly through performance management. We have a big focus on high-quality performance management. Obviously, a voluntary exit scheme is one thing, and day-to-day good management of performance to make sure we are getting what we need out of our colleagues is another. Learning and development is the third leg.
John Glen
How would you evidence the effectiveness of that to us?
Gareth Davies
We have a caseload of active performance management cases at any one time. It would not be appropriate to talk about that in this setting but, if you are interested in more detail, we can provide that out of the public session. We take that really seriously. We have changed our performance management arrangements so that we have a clearer allocation of management responsibility. That is coming through this year. We also have a lot of training for people to make sure they are good at handling difficult cases. Our HR team has done a great job in modernising our processes around that and making sure that we are not in the position that you describe. The results of our work show that we are not a coasting organisation. We are improving in all our core areas and making a really big impact, and that is down to the performance of all the individuals in the organisation. The evidence suggests we are making a good job of that, but you are right that it is more difficult when we do not have healthy levels of natural turnover. We are always looking at how to manage that.
Dame Fiona Reynolds
The impact of the strategy has been huge, in terms of a culture change in the organisation, because every single member of staff is now really aware that their job is not just to produce a piece of work, to complete an audit, to do a value-for-money study or to play a part in a study; it is actually to promote more impactful outcomes themselves. In the last two or three years, I have seen huge amounts of energy unleashed internally, with staff feeling incredibly motivated by this much stronger focus on impact, which plays into the HR processes, performance management and all the rest of it. People are working really hard and in a really focused way to deliver impacts and outcomes that are more stretching than simply doing a job.
John Glen
Thank you very much.
Sir Geoffrey Clifton-Brown
May I follow up on John’s questions? “AI efficiency” can sometimes be a euphemism for shedding staff, particularly at the lower levels. On the other hand, you might need fewer staff at the lower levels—planning the audit, or whatever it happens to be—but at least as many, or possibly more, at the higher levels. Is that what is happening in your organisation?
Gareth Davies
Not yet. There has been a very slight impact on our entry-level recruitment, but it is not significant. We are in conversation with the big firms in the same sort of business as us, and it is very interesting to hear their reflections on the same question. They are saying, “We are not actually backing away from graduate recruitment and school leaver recruitment. We think those people will be doing different things in the future, and we are emphasising digital skills from the outset, not just accountancy training.” It is changing the way in which people are trained, and their early career experience will be different. In my day, I remember standing by the photocopier, thinking, “Why did I do all of that studying at university to stand by the photocopier?” That kind of work is now disappearing from audits, so junior staff are getting earlier engagement with some of the more judgmental bits of the work. I think all professions are grappling with this question: how do we make sure that people get first-hand experience of the nuts and bolts of this job, so that they can make good judgments when they become managers? That just means a different way of training them and giving them early work experience. In numbers terms, we are actually continuing with 55 graduate recruits this year, which is similar to last year—it has not affected that number yet.
Chris Vince
Despite significant investment in technology and, as we have said, higher staff numbers, you again failed to hit your target of certifying 70% of audits before the summer recess. Do you want to comment on why?
Gareth Davies
In summer 2025, which is the period covered by this Report, we did not. That was a step up from the previous year, but we hit some barriers in that summer to hitting the target. We redoubled our efforts and, since we published this annual report and accounts, we have had the summer recess for 2026, and I am pleased to say that we actually achieved 70% this year. With this long haul back to having a timely set of accounts, from the disruption caused by the pandemic, we are getting close to where we want to be. It is not just 70% by this summer; we are also expecting to have more than 90% finished by the end of this month, which is a big step forward from previous years. Our target next year will be 70% by the summer and 100% by the end of October. To me, that has the accountability framework for accounts into the right position for central Government, and I will be very pleased if we are in that position this time next year. Again, I just want to pay tribute to the staff who delivered that. That is a lot of really complex work all done by the summer recess, less than four months after the year end to which these accounts relate, and that is a real achievement. There were Departments that were pre-recess for the first time in several years, including DEFRA and DESNZ, and the MOD recovered from the severe problems that it had the previous year, which were linked to the Afghan resettlement scheme and missing provisions. The MOD was on time and unqualified this year, which was a significant achievement for that Department. This really matters. We are talking about a lot of public money being properly accounted for, on time. Apart from anything else, it frees up the finance teams in those organisations to do what they should be doing: adding value to the financial planning of that Department, not still completing the accounts months and months after the year ends. All ways around that is real progress.
Chris Vince
You said that you are on target for 90% at the end of October, so not complete. When are you hoping to have all those 2025-26 audits complete?
Gareth Davies
Soon after the end of October. The purpose of setting this firm deadline at the end of October for everything, which will be next year’s target, is that it is a deliberate message to the small number that have drifted on towards the end of the calendar year. In some cases, they will have got used to a particular rhythm, and in a small organisation that takes some resource to shift. We are now working with them to say, “Okay, this is now the expectation, and Treasury is also taking the same line.” What does that mean for every organisation? It means moving its audit committee dates and releasing some resource to get this thing done in a more timely way. I will be very pleased if we hit those deadlines for next summer.
Chris Vince
A positive is that 83% of your value for money reports met internal standards, which is significantly higher than the 70% target, and higher than the corresponding scores for financial audit, as we have discussed. The question on my sheet asks why do MPs and senior officials—though not necessarily this MP, by the way—routinely score the quality of your value for money work lower than financial audit?
Gareth Davies
Obviously, we are asking those questions to MPs as a whole, not just the ones who engage with our work directly through PAC and other Committees. Actually, the numbers are not bad—it is not as if they are poor. Of course, what they mean by “quality” is very different to the technical assessments of quality that we are measuring through the rest of our processes. Those are different angles on the quality question—all of them valid. That is why we have them all in here as performance indicators. We want to drive that up for MPs as a whole. We are trying to increase awareness of our work. We have a fortnightly newsletter to MPs, which is increasingly well used. We are also targeting researchers and MPs offices because we know how busy MPs are and how difficult it is to get through a typical MP’s inbox. We are working hard with the staff side as well to make sure that they pick things out from the rest of the spam that they are otherwise engaging with and say, “Actually, this one is worth highlighting.” We use this to challenge ourselves and ask how we can drive these numbers up and get better results.
Chris Vince
So you do not feel that, as was suggested, value for money and quality standards are lower compared to financial audits, just that it is the perception?
Gareth Davies
No.
Chris Vince
This will be my last question. The proportion of your expenditure on financial audits has increased compared with last year, meaning proportionally less is now spent on value for money work. Is there a risk of financial audit work becoming too much of a focus?
Rebecca Sheeran
It is important to bear in mind some of the things Gareth said earlier about how our financial audit portfolio has grown over a number of years. That is really the driver of the increase in the headcount and expenditure there. To put some numbers around that, back in 2017-18, we certified 370 accounts. In the year that we are looking at now, that number is 413. Within that there is quite a variation and some of those are quite significant endeavours. It is not that the expenditure on value for money has gone down; it is the proportions. However, we are keen to make sure that we continue to invest in our value for money work. In the current year we have particularly put resources aside to modernise our reporting and how it looks on our website as an example of that continued investment.
Sarah Olney
Apologies for my late arrival. On risk reporting, you changed the number of principal risks that you report against this year. It was previously 24 and is now nine. That is to align with the strategy. However, does that mean that there is a lower level of detail in your risk management processes?
Rebecca Sheeran
It certainly does not mean that there is a lower level of detail in our overall risk management processes. What it does mean is that the way we are looking at risk is a bit more focused at the executive team and board level. As well as making sure that our risk framework aligned with our strategy, we also refreshed our framework to make sure we were in line with best practice. We adopted a framework whereby we categorise the principal risks, those that we think have the greatest impact on our strategic performance and reputation. Underneath that there are a series of component risks, broadly the same number that we had before, which feed into that. That is supported by a rigorous bottom-up risk assessment process with business owners throughout the business so that we are looking at a comprehensive picture at the executive team.
Sarah Olney
This year you have rated the risks of poor service delivery and a failure to deliver impact as areas of concern above the target level in your risk rating. Why is that?
Rebecca Sheeran
In terms of impact, this was partly a response to the strategy and the fact that we have upped our ambition in terms of the impact that we are looking to achieve, specifically the ambitions that we have set to positively influence productivity, resilience and financial management in government. We do not want to be complacent. We have been using that to challenge ourselves, and the board have very much been challenging us by asking if we are doing as much of that as the strategy indicates that we should. In response we have a new parliamentary engagement plan and have also refreshed our communications road map. We also think very deeply about the impact that we are looking to achieve at the point at which we are commissioning our VFM programmes. In terms of service delivery, this connects back principally to making sure that we are achieving those ambitions that Gareth has already spoken about in terms of improving the timeliness of our financial audit work. This year, we have met the 70% target pre-recess, but it will be a continued focus in the coming years.
Sarah Olney
So you are expecting to see the risk analysis of your failure to deliver impact improve with your new approach to engaging MPs through our inboxes?
Rebecca Sheeran
It should do. The poor service delivery one has already improved; we should be reporting an improved position in next year’s Annual Report and accounts.
Sarah Olney
Fantastic. In last year’s Report you highlighted sickness absence, mental health and wellbeing as principal risks to the National Audit Office, but they do not feature this year as principal risks of concern. What has changed?
Rebecca Sheeran
Partly, they are risks that would now sit as component risks and would feed into PR2: “Failure to maintain an open and inclusive culture that supports engaged, motivated and high-performing people and teams”.
Sarah Olney
You are doing very well on that this year.
Rebecca Sheeran
It is all the things that Gareth has spoken about, such as the focus on performance management and our wellbeing strategy. Our sickness absence has continued to fall almost month on month. We are now down at, I think, about 5.2 days per FTE, which is a very strong position and an indication of an organisation that is thriving, rather than one that is perhaps stagnant.
Chair
Before we finish, Gareth, several people have approached me about the future accountability of Governments for inquiries and the recommendations of those inquiries. I know that you may have had a number of conversations with people. I declare my interest: I am chair of the all-party parliamentary group on haemophilia and contaminated blood. The duty of candour, accountability, and Sir Brian Langstaff’s report are dear to my heart. The suggestion has been that the National Audit Office is the place where that should sit: it should hold the Government to account for how they respond to inquiry recommendations. Do you have any advice, or a view on that debate?
Gareth Davies
As you say, we have been approached by Government on exactly that point: the strong level of dissatisfaction in Parliament about the rigour with which public inquiry recommendations are followed up, and whether they have been implemented in the way that was intended when the recommendations were made. The most recent example is the Thirlwall inquiry into the Lucy Letby case—that appalling set of circumstances up in Cheshire. The judge in that case made a specific recommendation that the NAO should follow up NHS-related inquiries because they were so concerned that previous recommendations had not been implemented at the trust in question and could have helped to prevent the terrible events there. I therefore completely understand the seriousness of the issue and the public interest in improving the position. The point that I have made to Government is that that needs to be really carefully thought through, because the NAO cannot become part of the Government’s own system for managing those risks. We can stand outside that system and audit it, as we do with other areas of public expenditure. Getting the design of that right is absolutely crucial. I do not think that at the moment Government have a reliable system for monitoring the implementation of public inquiry recommendations. That problem needs to be fixed first, then it would be legitimate to ask if the NAO can provide assurance to Parliament on whether that system is working effectively. I am obviously prepared to engage on that. We have a strong sense that we must not allow our mission to creep, and must absolutely hold on to our mission to support Parliament in scrutinising public expenditure. That is what the NAO is for. You can make a case that this is a legitimate extension of that but it needs to be carefully grounded in the governance structure that I have mentioned so that we are not being drawn into something of which we should be independent. Of course, you can be so pure that you are ineffective—I am aware of that risk as well—but those are the issues that we have suggested that we work through with Government before they are taken any further. It is crucial to be clear where the parliamentary audience for that question is, because otherwise we cannot deliver our mission of supporting Parliament and helping to make Government more accountable.
Chair
It strikes me, when I look at the recommendations of those inquiries, that they are not just about the financial trail or value for money. There are things that go beyond that, which are not the responsibility of the National Audit Office.
Gareth Davies
Particularly if they are issues of clinical practice, for example, which are more for a specialist inspectorate than for the NAO. However, that makes the point that if the question is about whether the Government Department responsible can evidence that these recommendations have been satisfactorily implemented. The evidence base for that would be the reports of inspectorates saying, “Yes, we’re satisfied that clinical practice has changed in the way intended. Here’s the evidence.” We will be reporting one layer up from that: “Does the Government have the evidence to show that these recommendations have been satisfactorily implemented?” At the moment, I have not seen a framework in place to deliver that evidence base. In that case, that would be something the NAO could add value to. What we cannot do is go in and give a properly informed judgment on whether clinical practice has changed in every NHS trust in the country.
John Glen
I declare an interest in the Infected Blood Compensation Authority, because I was the Minister responsible for passing the legislation to set it up. It was set up remotely from any Government Department, at the insistence and request of many victims. However, the point that the Chair makes is a reasonable one. We have legislated with the expectation of certain outcomes and then, because it is so independent of the Department of Health or the Cabinet Office or whatever, we are, two years later, in a situation where, as parliamentarians, we apparently cannot achieve any accountability. I think what you are saying is that it is quite delicate and difficult for you to insert yourself into that audit process if the entity is remote from any one Department and just dependent on legislation. Is that correct?
Gareth Davies
Not quite. First, we are the auditor of the Infected Blood Compensation Authority, and we qualified its accounts in the first year because the estimate of the liability was patchy. That has improved significantly for this summer; it is in a much better position. So the financial audit is clear. We did actually report on its performance in implementing its responsibilities for paying compensation, as part of the report that the Public Accounts Committee took as a basis for two separate evidence sessions earlier this year—a really successful week, I think, for the Committee. One session had witnesses from IBCA itself, the Post Office, the military veterans scheme and the Windrush scheme, so we had four schemes accountable to Parliament for their performance in paying compensation. It was informed by a session with representatives of the victims in each case beforehand. The existing framework can cope with holding public bodies to account, including independent public bodies of that kind. This is more the technical question of the public inquiry that gave rise to that: have its recommendations all been satisfactorily implemented?
John Glen
Is it not a matter for the Government of the day to discern what they think is the appropriate response to an inquiry? How could you possibly be holding them to account for that? It is, in a sense, the Government’s judgment—you might dispute it, whichever Government it is—but you are there to audit what they have said they will do with the report.
Gareth Davies
The proposal would be that we would not get involved in how the Government should respond to an inquiry. It would be to take the agreed action plan once the Government had responded and ask, “Have the Government done what they said they would do?”
Dame Fiona Reynolds
Exactly. We are going to be discussing this later this year, so this is actually a really helpful input. We are talking, as much as anything, I think, about a third line of defence, meaning that we are not actually involved in the mechanics of the rights and wrongs of particular recommendations, but in whether they have been implemented. If we were to consider this the right thing to do, we would be extremely careful about the terms and conditions of any engagement. We do think, however, that it is something important for us to consider.
John Glen
In something like that, there was an iterative process through statutory instruments, after conversations with the victims, on changing the parameters of the scheme to reflect the needs of different cohorts. To have a coherent single point of reference to audit would be quite challenging until the scheme is fully embedded, which has only happened relatively recently.
Gareth Davies
It is. I understand the impetus behind this: it is very frustrating to see public inquiry recommendations that could have headed off subsequent problems and were not implemented. I understand the frustration, but this discussion has illustrated the complexity of it.
Sir Geoffrey Clifton-Brown
The C&AG was kind enough to mention the PAC inquiry into this matter. Among the four groups that we had in front of us and a lot of the other witnesses, the feeling was very much that Government Departments that caused the injury in the first place should not be setting up a scheme to compensate the victims. We have not had a response from the Government yet, but in the hearing we heard that there should be some form of independent standing body so that when the next scandal comes along—you mentioned one that has come along, C&AG—it is there to draw on all the experience from previous schemes that went wrong and to produce some common standards across the new schemes. It would try to resolve the thing as quickly and as litigation-free as possible so that victims can get their compensation quickly and fairly.
Chair
It is not just about compensation; it is about justice, which encompasses a wider range of issues, although compensation is at the heart of it. That is absolutely right. That is my understanding of where we need to get to. What happens is that the Government accept the recommendations of inquiries, but no one holds them to account for doing anything about that and for how they are followed through and implemented. There needs to be an independent body—the equivalent to a body like the NAO—that has the responsibility and can hold the Government to account. It would literally pick up responsibility for the inquiry’s recommendations being taken forward, independently of Government. That is where I think we need to go. I know that others disagree and think it should be the Select Committees, but I am not convinced that they have the resources to do that.
Sir Geoffrey Clifton-Brown
It would be possible, once the standing committee had established the terms of an inquiry and the Government had accepted the terms—the Government always have to accept them, because they have to pay in the end—for you to become the auditor of that scheme, Gareth. I do not want to put work in your way, but these are going to be fairly large matters, because the Government will deal with small matters in another way.
Gareth Davies
We do audit all the compensation schemes, so that is definitely covered. As this discussion shows, this is a question for the Government, really. How does the Government demonstrate that it has a grip on the public inquiry recommendations that it has agreed to implement? How is it accountable to Parliament for doing that? We could help with the debate because we have some practical experience, but in the end it is for Parliament and the Government to come to a view. How do we make sure we have better accountability than we currently do for acting on these recommendations?
John Glen
The issue in this case is: how can you be accountable for the delivery of something that you are asked to hand off to an independent entity?
Chair
Well, as chair of the APPG, I might question just how independent IBCA is, given some of the things that are in the path of dealing with the claims that are currently waiting to be finalised. We will not go down that rabbit hole right now. Thank you very much for your answers. I think this debate is going to be very important, so I appreciate you giving your time to answer our questions. Before we conclude, Dame Fiona, this is your last Annual Report and accounts session with the Commission as chair of the NAO board. Looking back on your six years as chair, how do you think the relationship between the NAO and Parliament has evolved, if at all?
Dame Fiona Reynolds
Thank you for the opportunity to speak briefly. It has been six fascinating and quite tumultuous years. I came in when covid was in full spate. We have had the Brexit settlement since then, and we have seen a huge churn in Prime Ministers and the permanent secretaries with whom we deal quite regularly. There have also been global uncertainties affecting how people feel about public expenditure. Through that period, we have built an ever stronger, ever more purposeful and ever more effective NAO, and I am really proud of that. I am particularly proud of our strategy. When I came in it was very clear that the role of chair of the NAO is unusual: it is very strategic in focus, but fortunately I love strategy so that has suited me well. Actually, the strategy that we are discussing the first year of today is very different. We call it “Trust, Value, Impact”. It is about using every ounce of our energy not only to audit and to do a series of studies on Government expenditure but to help the Government to do a better job. I think we have demonstrated, in many ways, how that has liberated the organisation’s potential and actually has begun to lead—we are being deliberately modest about what we have done so far in setting ambitious objectives—to our two strategic outcomes of greater productivity and resilience in public services, and improved financial management in Government. I think both of those are absolutely critical to our role. Briefly, on audit, I think we have seen real improvements in quality—on which you have challenged and tested us each year—through wise investment in people, in technology and in culture change. We are never going to be complacent about audit quality but we are increasingly confident that we can hold to that level of sustained quality. There has been an interesting—for me—creative shift between audit as a compliance tool, where you simply have to do it, to using audit as a way of improving insight and analysis of where the money goes in order to do a better job. I think that is a really interesting development and there is more to come. Bringing in the train operating companies is a good example of that. We are not just auditing the TOCs; we are drawing insights and learning from across different companies in order to demonstrate how they could collectively be more effective and do a better job. Of course, we have talked today about the Local Audit Office and improving audit at the local level, which has been an absolutely shaming gap in recent years. Now at last, though it will take time, we can see real improvements. On value for money, we have had similar heart-searching discussions about making best use of our capabilities in those areas. There has been an ever more strategic approach to the value for money studies that we do. We are obviously very keen to ensure that the Public Accounts Committee has the reports that it needs and values from us, but it has been exciting to see the development of more cross-Government studies and whole-system approaches. I was particularly taken by the asylum report, which I think is a model for future systems that cross departmental boundaries. They are quite difficult for Government to track but we can really be helpful in that respect. We are just beginning our new studies of particular initiatives of Government Departments, for example the one on the Ministry of Justice’s use of AI to ensure that the records that need to be produced in court are both present and correct. That is a wonderful example of a very helpful tool that I think will really benefit Departments. In all those areas we have made real progress. Of course, there is also now the new approach to the scrutiny of sensitive defence expenditure, which I think is a major step forward. You asked me to speak about challenges for the future and since we have already discussed them today I can be very brief. One is clearly AI. We are determined—internally, and in our audit of Government Departments, as well as in our value for money studies—to watch both the potential of and the need for clear guardrails on AI. I am not saying anything original or new there. It is a vital tool—one that is completely with us and impossible to ignore—but it has to be carefully managed and observed. A second challenge is devolution. We spoke about that at some length this afternoon. It is potentially huge, and we can play a very helpful role in terms of both the devolution framework and our work with the Local Audit Office. Devolution will not work unless we can assess whether it is working. There will be huge questions about postcode lotteries and different outcomes in different parts of the country, but we are well placed to support the Local Audit Office, as well as doing our own work to ensure that the parliamentary accountability is clear and well judged. Finally, a personal plea from me: I hope that we are entering a slightly more stable period, simply because some of the issues that we know are really important long-term issues have been squeezed out by short-term crises. There is an opportunity to use our expertise, and our good and strong strategy to move forward on important issues such as climate change, food security, public health and social care—there are so many areas. Taking a longer-term view is going to be really important. That is my tuppence-worth as I approach the end of a job that I have really enjoyed. I am hugely grateful to my board, to Gareth and the executive team, and in fact to all the staff at the NAO. They are an amazing bunch of very committed, very bright, very dedicated people. We are extremely lucky to have them working so hard to ensure that Parliament has the assurances that it needs. Thank you.
Chair
Thank you. I think you are with us on one more occasion, when we will say a fond farewell and thank you for everything you have done, but certainly, as you have just set out, the NAO has moved forwards considerably under your chairpersonship.
Dame Fiona Reynolds
It is a collective progress but thank you.
Chair
I am sure it is, but thank you for what you have done. It is a pleasure to have worked with you. That concludes today’s evidence session. Thank you all for coming along this afternoon.