A N N U A L R E P O R T 2 0 0 2

spend wisely
helping the nation
spend wisely
helping the nation
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key successes
1.5 billion saved by our work
over the past three years
Exceeded our target of saving
8 for every 1 spent on running the Office
50 major reports to Parliament
covering topics from NHS Direct
to the Collection of Fines
650 billion of government expenditure
and revenue audited in 2001-02
Hosted major good practice conferences
on obesity and construction procurement
Won the competition to audit the
World Food Programme accounts
Two staff won national prizes for their
performance in accountancy exams
Achieved Investors in People post-recognition
review
T
his year has seen an increasing appetite for the work of
the National Audit Office. One clear indication of this
success is that we have seen an increasing demand for
our work from Parliament, from Government, and from
international organisations.
The audit profession is under intense scrutiny itself following
the major accounting scandals in US companies, Enron and
WorldCom. I am pleased to be involved in reviewing what
regulatory lessons there might be for UK auditing and
accounting, through my membership of the co-ordinating
group set up by the Treasury and the DTI.
Of course central government audit and accountability has
recently been the subject of a comprehensive review by Lord
Sharman. We were delighted to receive the Government's
positive response to the recommendations made by Lord
Sharman. Their response represents a significant step forward
and overcomes a number of obstacles to improving public
accountability that have arisen as a consequence of changes in
the way public services are delivered.
Implementing the changes will increase the assurance we are able
to provide to Parliament and they will also allow us to develop
further the work that we do in support of those that we audit. The
largest new areas of work for us will be validation of the data
systems that underpin Public Service Agreements, and taking over
the audit of some thirty non-departmental public bodies.
Turning to Parliament, the Public Accounts Committee (PAC) is
the principal focus of our work. As the Committee is increasing
the number of evidence sessions it holds each year so we will
need to produce more reports for them to consider taking
forward.
As well as the increase in our work for PAC, there have been
calls - from the House of Commons Liaison and Modernisation
Committees, for example - for greater NAO support for the
House more generally in carrying out its financial scrutiny
work. Where we can do so in a way that is consistent with our
remit of not questioning policy, we have been happy to provide
help to other select committees. At the same time the NAO,
from its Cardiff base, is also pleased to be providing
comprehensive audit services to the National Assembly for
Wales, for which full reimbursement is received.
On the international front, we continue to win competitions for
new audits such as that of the World Food Programme and we
continue to be successful at winning EU funded work in
countries seeking to join the Union. This involves vital projects
to build up the capabilities of countries to undertake effective
independent scrutiny of their public finances.
I am sure that the enthusiasm to expand our work flows directly
from the quality of the service we provide. This annual report
includes many examples of our work in scrutinising central
government spending and finding ways in which services can
be improved. For example, implementation of our
recommendations in respect of PFI projects generated
162 million in savings for the taxpayer last year.
We are able to produce such effective reports because we have
excellent staff. Our people come from a wide range of
professional backgrounds and between them have
comprehensive expertise across the central government sector
and the NHS. I am particularly pleased that the efforts we make
to develop and train our staff were recognised earlier this year
when we achieved Investors in People re-accreditation.
Independent external reviews have consistently shown that our
work is highly regarded. As part of our wider initiative to
improve further the level of client care we provide to the bodies
we audit we will now be sharing the results of these, in full,
with the relevant audited body. I hope this will contribute
further to the open dialogue that we aim to establish.
So, the current period can certainly be characterised as one of
growth for the NAO as the services we provide are extended in
a number of important ways. The changes should mean we can
make an even greater contribution to parliamentary
accountability. We will continue to do this while taking a
constructive approach with the bodies that we audit and
ensuring that they receive a first class audit service.
a watchdog in demand
The Comptroller and Auditor General's Overview
The financial statements on pages 35 to 53, together with the Operating and Financial Review
and other statements on pages 28 to 33 and the Certificate and Report of the Auditors on pages
33 to 34, reproduce in full those included in the Accounts for the National Audit Office for
2001-02 laid before the House of Commons under reference HC 1114. Pages 1 to 27 of this
Annual Report provide additional information, for which we are responsible, that is not
included within those accounts. The auditors are required by auditing standards to read other
information in documents containing audited financial statements and to consider the
implications for their audit opinion. A supplementary statement has accordingly been
provided by the Auditors at page 35 in respect of their reading of this information.
Page
How the NAO Operates 6
Provides factual information on the role and work of the NAO
Securing Change 8
Describes how we bring about real improvements in public services
Promoting Good Practice 10
Shows the high priority we give to disseminating the lessons from our work
Assessing the Services Citizens Receive 12
Gives examples of the reviews we have done of services delivered directly to citizens
Enhancing Client Care 14
Highlights changes that we are making following Lord Sharman's review of central government
audit and accountability
Providing an Expert Audit Service 16
Describes how our approach to financial audit continues to evolve to ensure that it remains top class
Working With Other Auditors 18
Shows how we co-operate wherever we can to reduce the demands on audited bodies
NAO in the North 20
Features the work of our Newcastle and Blackpool offices
Our People and Resources 22
Highlights the talents and expertise of our staff
A Global Organisation 24
Shows the high regard in which we are held around the world
List of Major Reports 26
Major reports published last year
Resource Accounts 2001-02 28
Financial Statements 35
NAO Management Board 54
Lists our senior managers and contact points
contents
Our role
! We audit all aspects of central
government spending and provide a
detailed insight into the performance of
public services.
! In doing so we provide assurance to
Parliament and prompt savings for the
taxpayer.
Our independence
! The C&AG is an Officer of the House of
Commons, appointed by the Queen on
an address proposed by the Prime
Minister with the agreement of the
Chairman of the Public Accounts
Commission and approved by the House
of Commons.
! He appoints the 750 professional staff of
the NAO who are not part of the civil
service.
! Our budget (49 million net resource
requirement in 2001-02) is set by
Parliament and the Public Accounts
Commission appoints our auditors and
scrutinises our performance.
!
We have comprehensive, statutory rights
of access to the bodies we audit.
What is value for money work?
! Value for money examinations look in
detail at the implementation of specific
central government activities in order to
assess performance, identify good
practice and suggest ways in which
public services could be improved.
! They involve consideration of economy
(minimising costs), efficiency
(maximising the ratio of outputs to inputs)
and effectiveness (actual outcomes
compared to what was intended).
! Studies assess the way policies are
implemented but cannot question the
policies themselves.
"The NAO has a central place in the British constitution. It is Parliament's
window on the secret processes of government. And because it is
Parliament's window, it is the public's window as well. It is the essential element
in keeping the whole system clean and decent."
Peter Hennessy, Attlee Professor of Contemporary British History,
Queen Mary University of London
how the NAO operates
7
How we decide which topics to examine
! We identify topics for examination by carefully
monitoring and analysing the risks to value for money
across the whole range of central government
spending. A key factor is where most value can be
added by our scrutiny.
! The C&AG decides which studies should go ahead
and, in doing so, he takes into account the views of
the Public Accounts Committee and any broader
parlimentary interest.
! Our study programme is continually evolving and
flexible - subjects can be added at short notice to
react to emerging key issues.
Agreeing the factual accuracy of reports
! We seek to ensure that our reports are balanced and
fair. We therefore discuss our emerging findings and
draft reports with the bodies concerned to ensure the
accuracy and completeness of the evidence on which
we base our conclusions and recommendations.
! In this way we make sure that Parliament has the
benefit of a report based on agreed facts.
What is financial audit?
! The C&AG, with the NAO's support, is responsible
for auditing the financial statements of all Central
Government departments, agencies and other public
bodies, reporting the results to Parliament. We also
audit a range of international agencies.
! We form an opinion about whether the financial
statements are true and fair and whether the
transactions within them have appropriate
Parliamentary authority.
! If we identify material mis-statements, the C&AG will
issue a qualified opinion. In 2001-2002 we audited
over 600 accounts, of which we qualified 26.
! We also undertake wider reviews in the field of
corporate governance and financial management.
Reporting the results of financial audit
! When the C&AG's opinion on an account is
qualified, or when there are other significant matters
arising, we prepare a report for Parliament.
! In all cases we write to the audited body at the end of
the audit to outline our findings and where
improvements in their systems could be made. Such
'management letters' often lead to significant changes.
Our reports are
presented to
Parliament and
published
The Public Accounts
Committee (PAC) holds
evidence sessions on
most of our reports at
which they question
the senior official
responsible
The Committee
publishes its detailed
recommendations
which are aimed at
ensuring lessons are
learned and mistakes
not repeated
The Government
publishes its response
to each PAC
recommendation
We monitor the
implementation of
NAO and PAC
recommendations
NAO
report
PAC hearing
PAC
report
Government
Response
NAO/PAC
Follow Up
The accountability process
securing change
8
The bank of good practice that we have built up from our work on
the Private Finance Initiative (PFI) continues to have a major
influence on savings arising in projects. We have now published
27 reports on PFI and other forms of Public/Private Partnership
(PPP). These reports assist the Treasury, OGC and Partnerships UK
in developing new PFI/PPP guidance. Last year implementation
of our recommendations generated agreed savings of 162 million.
Following recommendations from NAO and the Public Accounts
Committee the MOD introduced a new asset tracking system to
provide better information on the equipment it has deployed. As
a result it has recovered 75 million from the United Nations for
the UK contribution to peace-keeping in Bosnia.
In our work on the flotation of the National Grid we encouraged
the DTI to seek additional benefits for consumers if they redeem
special shares in National Power and Powergen. Last
year consumers received benefits worth 5.1 million in this way,
through energy efficiency measures and reduced surcharges for
prepayment meter customers.
Our financial audit of the Highways Agency identified cases where
developers owed the Agency money in connection with road
building schemes which primarily benefit the developer but which
also have some public benefit, such as approach roads to new
supermarkets. So far 10.5 million has been recovered.
Examples of financial savings achieved
A
s well as our role in providing accountability to Parliament, our other key
priority is to bring about improvements in public services. Our work leads
directly to substantial financial savings and hundreds of significant other
improvements every year. Last year audited bodies agreed that our work had
generated financial savings of 491 million.
But our impact goes much wider than this. Bodies aware of our interest in a subject
might initiate improvement regardless of whether we launch an investigation. And
sometimes they might follow good practice recommendations that we have made in
a report on another area. Indeed awareness of the very existence of the effective UK
public audit process can often stimulate beneficial change.
We understand that it is one thing to suggest beneficial changes, another to actually
secure them. The section on Promoting Good Practice shows the efforts we put in to
achieve change, well beyond the inclusion of recommendations in our reports to
Parliament.
Crucial to securing change is our formal relationship with the Committee of Public
Accounts which bases its enquiries on our reports. At its hearings, which are
attended by the C&AG, the Committee takes evidence from senior government
officials and in turn issues its own report with recommendations. The Government
issues a point by point response to these recommendations.
Nearly all of the Committee's recommendations are accepted and implemented by
the audited bodies. In 2001-2002 almost 94 per cent of the Committee's
236 recommendations were accepted in full. We track progress in implementing the
Committee's recommendations and this follow up work shows that accepted
recommendations are implemented in almost every case.
Possible improvements in accounting and financial control systems which we
discover during financial audits are passed on in day to day contact with the
management of the audited bodies. Significant issues, however, are addressed
formally in management letters or reports to audited bodies. In total our financial
audit work led directly to over one thousand improvements to financial accounting
systems last year. And audited bodies made over 220 significant improvements
following recommendations in our value for money reports.
Follow up work: the
Charity Commission
In 1998 the Public Accounts
Committee was highly critical
of the Charity Commission and
made a series of recommend-
ations for improving its
management effectiveness, the
accuracy of the Register of
Charities, the monitoring of
charities including their
submission of accounts, and
its support and investigation of
charities.
Last year we made a detailed
assessment of the Com-
mission's progress and
reported the results to
Parliament. We found it had
made significant progress in
implementing the changes the
Public Accounts Committee
had demanded. For example it
was now meeting more key
business targets and had
improved the accuracy of the
Register. Our report included
further recommendations for
improving investigation work
which the Commission is
following up.
9
Examples of significant non-financial changes
Our work helped the Community Fund to make
significant changes to its grant application and
management arrangements. These include improving the
distribution of Lottery funds to deprived areas,
simplifying application procedures and compiling a
register of assets purchased with Lottery funds so that it
can monitor their use beyond the grant period.
Our report on non-competitive defence procurement
made a range of recommendations to improve the
process. The MoD Accounting Officer, Sir Kevin Tebbit,
said it was 'a helpful report. We found it very positive for
us and where the recommendations suggested we should
take action we are doing so.'
NATIONAL SAVINGS TEAM
(l to r) Ken Chan, chartered accountant; William Bessell, barrister and certified accountant; Charles Hastie, chartered accountant
trainee; Mark Turley, debt management expert and chartered public finance accountant; Roy Eke, chartered accountant trainee;
Linda Webb, chartered accountant and John Thorpe, expert in Central Finance issues and chartered public finance accountant.
P
ublishing our value for money studies is the beginning,
not the end of the story. We continuously look for ways
to share our findings and recommendations. We aim to
promote the good practice that we have found in one
organisation to all the others that could benefit. We are
committed to working to ensure that the fullest savings and
improvements possible are achieved throughout Government.
In the process of reporting to Parliament and holding
government to account, we examine aspects of various projects
and programmes in depth. It would be a waste if we did not
make the most of this knowledge, understanding and broader
perspective. This is why we put considerable effort into
following up our reports and ensuring that we have a key role
in bringing about beneficial change.
Major Conferences
We have hosted four major good practice conferences on
widely differing subjects this year. They have allowed us to
speak directly with those people who are involved and who
can act on our findings.
Our report, Tackling obesity in England, highlighted the
importance of cross-departmental working in tackling obesity. For
the two-day conference which we held to build on our report, we
brought together over 300 people and contributed to the sharing
of knowledge and joint working that is required. Delegates
included experts from the UK and from the USA, from
government, the private sector and the voluntary sector, who
work in health, education, sport, transport and food standards.
The conference provided delegates with a better understanding of
the obesity problem and promoted awareness of potentially
fruitful solutions in treating and preventing it.
Over recent years we have build up a formidable expertise in
the subject of PFI. A conference enabled us to share that
knowledge with those who were directly involved in managing
or setting up PFI contracts for their organisations. We were able
to bring together the best practice that we had discovered in the
course of producing almost 30 reports on PFI projects, on
topics including refinancing, funding competitions, managing
relationships and Public Sector Comparators.
In Modernising construction, which we published in 2001, we
looked at the 7.5 billion, and rising, of direct expenditure by
government departments and agencies on construction. Jointly
with the Office of Government Commerce (OGC), we held a
conference this year to help disseminate the best practice
which we had found in that report and to promote wider
understanding by senior officials who are responsible for
construction projects.
In November we brought together key players in higher
education and the NHS to examine the implications of our
report, Educating and training the future health professional
workforce for England. This has further enabled work to reduce
student drop-out rates and achieve a more transparent and
consistent approach to pricing courses.
As well as hosting conferences we also regularly provided
speakers for other events where we have experience and
expertise that is relevant. For example last year we made a
presentation at a Treasury Anti-Fraud Seminar where we
outlined the fraud risk model that was developed as part of our
report on The risk of fraud in MoD property management.
Since then the model has attracted considerable interest from
several Government departments.
Bulletins and guides
It is not just through large conferences that we pass on the lessons
contained in our reports. The good practice established in recent
reports, which has wider application across government, is
flagged up in our regular publication, focus, distributed to all
departments and agencies. focus online, our web-based version,
is kept regularly up to date and allows anyone to search our
archives of good practice in a wide range of topics. On average
focus online receives almost 5,000 page impressions a month.
We also produce a bulletin for NHS Chief Executives which draws
together recommendations in recent health reports.
We have produced and distributed useful guides such as
Getting value for money from procurement, published in
conjunction with the OGC, which distilled the lessons learnt in
the context of current developments in procurement and
provided a checklist of issues to explore to ensure that value for
money is achieved. This complements our report,
Purchasing professional services. All major departments are
implementing our recommendations for achieving savings
totalling some 65 million a year.
We also published the book The challenge of hospital acquired
infection. This book highlighted the issues of which all NHS
employees must be aware in the fight to reduce the severity of
this problem and provided an overview of recent developments
and initiatives.
promoting good practice
10
11
"The House [of Commons]
and the country have
benefited enormously
from the work of the
C&AG and the NAO".
Andrew Smith, speaking
as Chief Secretary to the
Treasury earlier this year.
Reports to Parliament
Many of our value for money reviews place a significant
emphasis on identifying widely-applicable good practice and
presenting it in a way that will best encourage its take up.
Our suite of studies examining various aspects of policy making
provide a useful tool for civil servants throughout government.
Checklists in these studies will enable policy makers to manage
the risks of policy making, to prepare robust Regulatory Impact
Assessments, and achieve successful joint working. The reports
use case studies, such as Sure Start to reflect joint working or
the Meningitis C Vaccination Programme to typify a rapidly
implemented policy anticipating a specific social need. Our
report Modern policy-making complemented a study by the
Centre for Management and Policy Studies, published on the
same day. And we were able to give more prominence to our
messages by speaking at a conference organised by the Cabinet
Office on that day. By drawing out what worked and why in
these case studies, we can assist anyone facing similar
challenges in the future.
Our report, Managing risk in Government departments,
included a checklist on which public bodies could base
their approach to risk management. We are pleased that it
has since been used in the OGC's Best Practice Toolkit and
by the Centre for Management Studies' training of senior
managers in government.
TACKLING OBESITY IN ENGLAND Conference team
(l to r)Natasha Walton, health expert and chartered accountant and Carol Lyons, conference administrator.
12
O
ne of the principal concerns of our work is to assess
the quality of public services from the point of view
of those who use them and to make practical
recommendations on how those services can be improved.
Each year, for example, we publish reports which examine
different aspects of the service provided to patients by the
National Health Service. Our report into Inpatient and
outpatient waiting in the NHS highlighted the large variations
across the country in the time that people have to wait for
treatment. We identified innovative practices in five key areas
and proposed that their implementation widely across the NHS
would make a significant contribution to reducing waiting lists
and times. We suggested in particular that the Department of
Health pursue ways of keeping patients better informed about
the length of time they can expect to wait for treatment.
Our report on NHS Direct in England recognised that this
national telephone healthcare service operated by nurses had
achieved a high level of customer satisfaction and was
operating safely. But we made recommendations aimed at
improving the awareness and use of NHS Direct by younger
people, people over 65, ethnic minority groups, more
disadvantaged social groups and people with disabilities. We
were also concerned that many callers were waiting too long
to speak to a nurse, and recommended that NHS Direct takes
action to improve the efficiency with which they are handling
calls, so that more people can be connected promptly.
In the area of higher education, our parallel studies Widening
participation in higher education in England and Improving
student achievement in English higher education examined the
challenge of encouraging participation in higher education by
previously under-represented social groups while maintaining
academic standards. Implementation of our recommendations
should help university applicants to be matched to courses that
are right for them and the institutions to support those students
through to successful qualification.
Our report The new deal for young people highlighted the need
for this employment programme to adapt to a changing economy
which might result in there being fewer unfilled vacancies. We
recommended that more targeted forms of help be given to
young people who had been through the programme before or
who face particularly severe barriers to employment, such as
lack of basic literacy and numeracy skills, homelessness,
criminal records and drug or alcohol dependency.
On occasion we are contacted by individual citizens who feel
they have suffered from the actions of public bodies and, if
appropriate, we will investigate further. During this year we
secured redress for an individual who had not been treated fairly
by the Student Loan Company, a good example of our securing
justice for a citizen which he could not achieve on his own.
Public services in the regions
Value for money reports usually examine issues on a national
basis and very often part of our work will involve examining the
services received by citizens right across the country. Where we
can we include in our published reports a breakdown by region
of the performance of the public services under review. By doing
this we hope that we can provide people with meaningful
information on the services delivered by central government
bodies and the NHS in their area.
For example our report on inpatient and outpatient waiting in the
NHS highlighted the percentage of inpatients in each health
authority who wait for more than six months. We showed the
figure for urology, for example, varied from 37 per cent in one
authority to less than one per cent in another.
To take another example, our report Reducing prisoner
re-offending found that thinking and reasoning skills programmes
could be effective in reducing re-offending. However it
highlighted how in some prisons all inmates had access to these
programmes while in other equivalent prisons only four in
ten did.
assessing public services
from the citizen's perspective
NHS DIRECT IN ENGLAND - Alison Winkley, health expert and chartered public finance accountant.
13
(1) Audit NDPBs
The C&AG will become the auditor of more than 20
executive non-departmental public bodies (NDPBs)
currently audited by private firms. These include the
Housing Corporation and the Environment Agency. In
each case the C&AG will discuss with the sponsoring
department and other stakeholders his proposals for
whether the audit should be undertaken by the NAO or
a commercial auditor. Overall, any NDPB audit work
lost by the private sector will be counterbalanced by
additional audit work contracted out by the NAO.
(2) Access to all bodies delivering public services
The C&AG will be given statutory access to a range of
bodies that spend public money, such as registered social
landlords, train operating companies and PFI contractors.
He will ensure that individual bodies do not face
excessive burdens and a protocol will be agreed under
which the organisation concerned will receive proper
notice and an explanation of why access is being sought.
enhancing
client care
14
Other changes following the Government response to Sharman
As well as the enhancements to client care, other changes to the NAO's work and role will take place following the
Government response to the review of audit and accountability.
DAVID CORNER,
Director of Corporate Policy and the central reference
point for the implementation of the Sharman report.
David is a chartered public finance accountant.
W
hilst Parliament is our primary customer we also
strive to ensure that our work for the bodies we
audit is of the highest standard. We know that we
must communicate closely to help bring about the
improvements that we both want to see so that audited bodies
obtain maximum value from our audits.
We have always placed great emphasis on ensuring that
audited bodies are clear about what they can expect from us.
We have also always tried to make sure that they can comment
on our work, including its quality. Following the positive
Government response to the recommendations made by Lord
Sharman in his review of central government audit and
accountability, we are now launching further initiatives to
obtain comment and views on our work.
The first of these is to develop the role of Client Liaison
Directors within the NAO. They are nominated to have overall
responsibility for liaison with a particular client and will co-
ordinate all approaches from NAO staff. The result should be a
clearer, more seamless interface with audited bodies which
makes sure we use the time of their staff to best effect.
Issues of client care arising with audited bodies would
normally be resolved through contact between audit teams and
audited bodies. Exceptionally, however, issues other than audit
judgement may arise where our clients may wish to express
their views independently of the audit team. These might
include the conduct of our staff (including consultants and
contracted firms); the management of the audit; and the quality
of communications with the audited body.
To meet this need we are introducing a central reference point.
This role will be taken by David Corner, Director of Corporate
Policy, who is a member of the National Audit Office's
Management Board but has no direct oversight of either
financial or value for money audit. He will report on these
matters directly to Tim Burr, the Deputy Comptroller and
Auditor General.
We are extending the use of questionnaires to both our
financial and value for money work to enable clients to provide
feedback on the service we provide. These mechanisms
enables us to assess how we are perceived, what has worked
well and what can be improved, and, where applicable, to
track progress over time.
We also intend to play a constructive role in developing the
role of the Audit Liaison Group to be established by the
Treasury. The Group will consider how to ensure maximum
value is obtained from our audits and provide a forum to
discuss wider issues of accountability in which external audit
plays a role.
The Group will be chaired jointly by the Permanent Secretary
of the Treasury and the Comptroller and Auditor General. Other
members might include two representative departmental
Accounting Officers appointed on a rotating basis and the
Deputy Comptroller and Auditor General. This is an
opportunity to build on the regular contact and discussion
between clients and the National Audit Office.
And as a further part of making our dialogue with audited
bodies fully open and transparent, we will now share with
them the results of the independent external assessments that
are made on the quality of our work. On the financial audit
side these are carried out by the Joint Monitoring Unit of the
Institutes of Chartered Accountants of England and Wales,
Scotland and Ireland, and for our value for money work by the
London School of Economics.
15
(3) Validation of PSA data systems
Following the Sharman report a Treasury-led working
group was established on this issue and has concluded
that the C&AG should validate the data systems
underlying Public Service Agreement (PSA) targets.
Where data is already part of National Statistics or within
the Audit Commission's oversight, the C&AG will not
normally undertake his own detailed assessment of data
systems. The NAO will be trialling this work in a number
of bodies ahead of full implementation from 2003-04.
(4) More contracting out
A proportion of the C&AG's financial audit work has
been contracted out to the private sector for some time.
This has made it possible to compare the NAO's audit
delivery, standards and service with commercial auditors
and enables us to manage peak workloads. This
contracting out will now increase to 25 per cent of the
C&AG's statutory audit of accounts.
16
A
t the National Audit Office, we pride ourselves on
providing our clients with the best possible audit
service. Above all, this means keeping up with new
developments in accounting and making full use of
developments in new technology. As we make judgements on
whether government activities provide value for money, so we
make every effort to ensure that we ourselves provide a service
that is economic, efficient and effective.
Our new audit support software, Team21, is almost at the end
of its first full year of operation. Team21 is having a large and
beneficial impact on our work and our clients will be able to
see the difference. We are achieving a swifter and more
efficient completion of our audits and reporting in a way that is
more straightforward and meaningful to those we audit. The
major investment involved in training and equipping all our
financial audit staff is further proof of our commitment.
We regularly provide a range of expert advice for our clients. As
well as day to day assistance our Technical Bulletins continue to
give a commentary on a range of financial reporting
developments. This means that we and central government can
be at the cutting edge of developments in accounting.
We also contribute to professional development through our
active role on the Financial Reporting Advisory Board whereby
we give advice on accounting standards for central
government. Members of our staff also serve on the Councils of
the Institute of Chartered Accountants in England and Wales
and the Chartered Institute of Public Finance and Accountancy.
This year was the last year for which Resource Accounts were run
in parallel with Appropriation Accounts. Thanks to the work of
departments with our assistance, we have reduced the number of
late accounts from 29 to 18. But, of course, there is still work to
be done for the coming year, when the Resource Accounts will
stand alone. We continue to provide valuable help in the progress
providing an expert audit service
17
towards producing Whole of Government Accounts. We have
prepared our strategy for the audit of Central Government
Accounts in the coming year, a key stage in the process.
The Office's revised approach to financial audit (Audit 21) is
enabling us to deliver a more rounded and more efficient
service which adds value for the client. This allows us to spend
more time on risk audit, and we are thereby able to make better
informed contributions to the work of audit committees. Risk
audit means working with our clients on wider reviews of
corporate governance and financial management. For example
we are currently working on an examination of the financial
management of the 2001 Census.
We have always had rigorous internal quality assurance for our
financial audit work and the Joint Monitoring Unit of the
chartered accountancy institutes also reviews our financial audit
procedures and the quality of our work. This gives us further
independent evidence of the high quality of our audit service.
"He [the NAO auditor] wanted the
audit to work as a partnership
between the audit office and the
clients so he wanted to do away
with the old fashioned adversarial
"let's find out what's wrong with
you" type of approach. I found this
extremely helpful and through his
audit he was as good as his word.
"The workings are very complex.
It has required a great deal of skill
and professionalism on their part
to understand each logical
business which is not core to
their normal way of working."
Philip Mabe,
Financial Director, Met Office
THE FINANCIAL AUDIT SUPPORT TEAM
(l to r) Vikki Morris, chartered accountant; Des
Blake, chartered accountant and Mike Suffield,
Director of Financial Audit Policy and Support
and chartered public finance accountant.
A
udited bodies are naturally concerned about the
demands that are placed on their time by the auditors
and inspectors that operate in their sector. In order to
keep these demands to a minimum we co-ordinate our work
carefully with other audit and inspection bodies. Working
closely in this way also helps us to learn from the approaches
taken by other auditors.
We have a regular dialogue with other bodies that are involved
in monitoring public sector activity. This includes the
Departmental Select Committees of the House of Commons,
the Audit Commission and the various sector Inspectorates. As
part of this dialogue we share information on forward work
programmes to ensure that we will be covering complementary
areas. We also sometimes agree to collaborate on particular
pieces of work.
A good example of this is the work we are currently doing with
the Audit Commission as part of our study on discharging older
people from NHS acute hospitals. The two teams are carrying out
joint visits to local health and social care communities, running
joint focus groups of older people and sharing results of research
as it emerges, as well as having regular progress meetings.
In our financial audit work we have always sought
opportunities to rely on the work of internal audit so that we
can reduce the amount of direct audit we need to do ourselves.
Over the last year there has been a major initiative to extend
this. In conjunction with the Treasury we produced a detailed
guide on co-operating with internal audit. We followed this up
with a seminar for staff from the NAO, audited bodies and firms
supplying internal audit services under contract. This event
brought internal and external auditors together to exchange
experiences of co-operation that had resulted in real benefits.
Key success factors identified included establishing mutual
trust between internal and external audit through openness,
more informal communication and making sure there are 'no
surprises'; treating the Audit Committee as a focal point for co-
operation; thinking ahead and exchanging plans and ideas at
an early stage.
We play a leading role in the Public Audit Forum, which
comprises all United Kingdom national audit agencies. The
Forum has a specific remit to build on the existing co-operation
between the national audit agencies to enhance the efficiency
and effectiveness of public audit. In the last year the Forum has
issued major papers on Freedom of Information, Central
Government Audit in the UK after Devolution and Propriety
and Audit in the Public Sector.
We also co-operate with other auditors in issuing guidance for
audited bodies. For example we issued detailed advice to help
public sector bodies develop good performance measurement
systems in conjunction with the Audit Commission as well as
the Treasury, Cabinet Office and Office for National Statistics.
We also seek opportunities to work with our counterparts
overseas, where this can add value to an investigation.
Our report Dealing with pollution from ships was part of a
co-ordinated audit with our counterparts in the Netherlands,
France, Turkey, Greece, Malta and Cyprus, examining the
counter-pollution activities of our respective maritime authorities.
working with other auditors
18
HIGHWAYS AGENCY TEAM
(l to r) Katy Sargeant, chartered accountant; Breac MacCleod, chartered accountant; Paul Keane, transport expert and chartered public finance
accountant and Tony Oladejo, certified accountant trainee.
In the audit of the National Savings and Investment's
(NS&I's) resource account the NAO team work closely
with the Agency's internal auditors to make full use of
the results of their examination of costs incurred by
Siemens Business Services (SBS) who are NS&I's private
sector partner in the provision of operational and
accounting services.
This involves close co-operation at all stages of the audit
from planning through to completion. In our audit of the
NS&I product accounts particular care is taken to ensure
that NAO work is co-ordinated with that performed by
both NS&I's internal auditors and those employed by
SBS. This has involved external and internal auditors
holding joint planning workshops to review key business
developments, assess risks and co-ordinate audit
strategies. In the course of the audit fieldwork NAO staff
make extensive use of internal audit's work on NS&I/SBS
business transformation projects and their reviews of the
internal controls over customer accounting.
This is not simply a one way process. However, NAO
staff consult regularly with both internal auditor teams
on the findings emerging from their own work. This co-
operation has been achieved as a result of the
commitment shown by all parties to work towards better
co-ordinated and more effective audit activity across
NS&I/SBS. This includes regular and open consultation
between audit teams, and the active involvement of the
NS&I's audit committee, on which all three audit teams
are represented.
Case example of Co-operation with Internal Audit
19
20
T
he NAO does not stop at the M25. In England, we also
have bases in the North East and the North West. For
many years we have had staff based in Blackpool and
Newcastle and both of these offices have expanded as
government extends its own regional base.
The recent White Paper Your region, your choice noted that the
appetite for regional assemblies is greatest in the northern
regions, and particularly in the North East. Our presence in
Newcastle makes us well placed to respond to any
developments in regional government which may impact on
our work.
Central government already has a very significant presence in
the North, including several bodies which have their national
headquarters there, and some major national services, such as
social security benefits, are administered from there. It is for
this reason that we have a long-standing presence in the region.
The White Paper goes on to list 52 national public bodies that
are active in the North East, almost all of which are audited by
the NAO.
By locating staff close to our audited bodies we are also
recognising the value of proximity in building constructive and
continuous relationships with them, and in responding quickly
to their needs. In addition our staff aim to be active within the
regional accounting profession.
Newcastle
Our strong links with the North East for many years were
centred on our base at the Department for Work and Pensions'
Longbenton site, just outside Newcastle. Audit work was
historically focused on activity at this site but this is now
changing rapidly as we develop our organisational structure to
reflect the regional base of many audited bodies.
We have made significant investment in Newcastle, part of
which has involved moving to a new location in the city centre.
Our offices are beside the 'blue carpet' - a major art installation
and focal point. The value of our audit field in Newcastle is
now 120 billion and in the last year our team has doubled in
size to 16. Their new challenges include the audit of locally
based clients such as Child Support Agency and National Care
Standards Commission and taking a lead role in the audit of 73
Education Action Zones. They are also acting as a provider to
other parts of the NAO, for example in the audit of Special
Health Authorities and the Regional Development Agency, One
North East.
Our teams in the North of England draw on a wide range of
experience gained in the NAO, in local government and in the
private sector, in both the UK and abroad. The Newcastle office
is headed up by Newcastle-born chartered public finance
accountant, Kevin Suttie.
Blackpool
Our North West office, based outside Blackpool, has
responsibility for the audit of the large and complex
Department for Work and Pensions including the new
Jobcentre Plus Agency. The team of 15 also audits a number of
the Education Action Zones based in the region as well as
managing contracted out audits such as the War Pensions
Agency and the NHS Pensions Scheme. In total they cover an
audit field worth 61 billion.
Our office there is headed by chartered public finance
accountant, Jacqui Smillie and contributes to the work of other
parts of the NAO through its audit of the Disability Rights
Commission and the Equal Opportunities Commission, which
are based in Manchester, and various health accounts.
21
NAO in the north
THE NEWCASTLE TEAM
(l to r)Nathan Gulliver, certified accountant trainee; Mousa John, certified accountant trainee; Joan Richards, administrative support; Daniel
Houghton, certified accountant trainee; Paul Hewitson, chartered accountant and Kevin Suttie, work and pensions expert and chartered public
finance accountant.
22
"Our deliberations are informed by the detailed work and expert analysis provided by the NAO".
Edward Leigh, Chairman of the Public Accounts Committee.
MEMBERS OF THE NAO DIVERSITY GROUP
(l to r) Manjeet Manku, Alan Hartnell, Martin Pfleger,
Sheena MacDougall and Linda Asamoah.
T
o carry out our audit right across central government and to meet Parliament's expectations, we need to ensure that our
staff are of the highest quality, with the skills and experience needed to carry out their roles to the full. To this end, we
remain heavily committed to training and development within the NAO as well as recruiting high calibre staff. We also
strive to make the most efficient use of all our other resources.
Accountancy Expertise
Our financial audit staff are either qualified professional accountants or are studying with one of the accountancy bodies. Entrants
to our graduate training scheme study for the Institute of Chartered Accountants in England and Wales (ICAEW) qualification.
Other staff are training with institutes such as the Chartered Institute of Public Finance and Accountancy (CIPFA), the Association
of Chartered Certified Accountants (ACCA) or the Association of Accounting Technicians.
our people and resources
23
We were delighted that two NAO employees - Stuart Smith and
Fiona Anderson - were among the ICAEW national prize
winners for their performance in particular papers. Also, Jo
Peddle in our Cardiff office (where we have 40 staff who
provide audit services to the Auditor General for Wales)
achieved a commendation from the University of Wales
College, Newport, for her performance in her ACCA papers. In
recognition of the exceptional support that the NAO provides
for the training and development of ACCA students, the office
has been awarded the status of 'platinum approved' employer.
We continue to place great importance on our contribution to
the accountancy profession more generally, with our staff
holding places on the committees and councils of national and
international bodies. As an office, we are now a corporate
member of the ICAEW's Audit and Assurance Faculty and
contribute to its work on public sector auditing issues. Also this
year, Caroline Mawhood, one of our Assistant Auditors
General, was appointed the CIPFA representative on the
Federation of European Experts Public Sector Committee. The
aim of this committee is to promote co-operation among the
professional accountancy bodies in Europe in relation to issues
of common interest in the public and private sectors.
People Initiatives
A major project this year has been the implementation of our
career development plan, "Aiming High". This is designed to
provide the framework for trainees to get the best possible start
to their careers within the NAO. The project ensures that they
receive consistent, high quality and varied work experience.
The NAO has increased the variety and challenges of the work
of new staff, created dedicated training managers and raising
awareness of the range of opportunities available in the NAO.
We also contribute to the wider world by our secondment
schemes. We have over 80 staff on secondment to UK and
international bodies, bringing a wide range of hands-on
experience back into the NAO. And the host organisations
value our expert assistance. Among those to which we have
currently seconded staff are the Cabinet Office, House of
Commons, DEFRA, ACAS and the DTI.
This year we held the inaugural NAO Awards. These are
designed to recognise NAO teams or individual members of
staff who have exemplified the values of the office. The winners
included Tim Fry for the integrity he showed in our report on
the sensitive subject Inappropriate adjustments to NHS waiting
lists and Brian Grubb for his professional excellence in guiding
our work on resource accounting.
We also successfully maintained our status as an Investor in
People employer following a Post-Recognition Review. We
were assessed against the new standard based on actual
outputs rather than paper-based evidence. We demonstrated
continuous improvement. In particular, we are still working
hard on management development to produce effective people
managers for now and in the future.
The NAO's Diversity Steering Group continues to take forward
our commitment to ensuring that our staff are representative of
the community we serve and bring to our work the different
perspectives of our diverse nation. Their work has involved a
diversity fair and website, regular seminars and training for staff.
Increasingly, organisations in both the public and private sector
are recognising the mutual benefits of keeping in touch with
their former employees. The NAO is no exception and we have
set up an alumni group to facilitate ongoing relationships with
former staff. It is working to establish a contacts network of
former employees and open up opportunities for secondments
and joint working.
Efficiency and Expertise
We continue to meet the challenge of a workload that increases
much faster than our costs. Over the last 10 years the public
expenditure that we audit has risen by 15 per cent in real terms
while our net costs have gone up by only four per cent. We
must always be on the lookout for further efficiency gains.
Following a comprehensive review of our human resource
services, a restructuring is bringing about improvements in the
delivery of our services and in the use of resources. Our new
structure makes full use of the talents of our HR staff and
ensures that there is no overlap in the delivery of services.
Another way of ensuring efficiency is through outsourcing some
of our central services. These include management training,
catering, building security, IT support and facilities maintenance.
We also contract out some value for money and financial audit
work. For example our report Government on the web II was
prepared on our behalf by the London School of Economics.
We make use of external expertise in virtually all of our studies.
This is done mainly through our expert panels. These panels
enable us to consult with representatives of key stakeholders
and independent experts. For example, in our report Pipes and
wires, our panel brought together representatives from
regulators, consumer groups and private companies such as BT
and Centrica, as well as academics. We have experts in a wide
range of fields within the NAO who can bring their specialist
knowledge to bear on particular pieces of work. These studies
also incorporate the skills of staff who are statisticians,
economists, social scientists and accountants.
We adopt the principle that in the conduct of public business
in Wales we will treat the English and Welsh languages on the
basis of equality. In this context we have prepared a Welsh
Language Scheme under the provisions of the Welsh Language
Act 1993. We are very pleased that this scheme was approved
by the Welsh Language Board in July 2002.
24
O
pportunities for international co-operation and work
arise from our reputation as one of the leading state
audit institutions. We are happy to play such a role on
the international field on behalf of the United Kingdom. This is
at no cost to the British taxpayer because we are paid in full for
our work overseas by the organisations that commission it.
Bodies audited
The C&AG is the appointed auditor of many major
international bodies, for example the Pan American Health
Organization and the International Atomic Energy Agency. This
year, after a competition among international auditing bodies,
he was appointed as auditor of the World Food Programme,
the UN frontline agency in the battle against global hunger.
This appointment lasts for four years, starting in 2002. And
after an open competition against several private sector firms
we also won, for the third time, the UK audit of expenditure
from the European Agricultural Guidance and Guarantee Fund
- the body that finances the Common Agricultural Policy funds.
These appointments are a gratifying recognition of the NAO's
excellence in audit no matter where in the world. The C&AG
is also a member of the UN Panel of External Auditors which
sets the standards for the audits of UN organisations.
Technical Co-operation
We are heavily involved in the EU's programme to provide
long-term, in-depth expertise to the 13 Candidate Countries to
improve their capacity to scrutinise public finances ahead of
their gaining accession to full membership of the Union. Our
work with Hungary, Slovenia and Estonia continues apace and
this year we have started our work with Romania and Latvia.
In the coming year, we will begin our involvement with
projects in Lithuania and Bulgaria.
While most of this work is funded by the EU, the Foreign and
Commonwealth Office has also contributed to the assistance
we are providing to our Polish counterparts in auditing
counter-smuggling activities.
Separately, in a project with Sweden, we have seconded two
staff to the Ghanaian Audit Office and we have also had input
to projects in Serbia, Montenegro, Georgia and Ethiopia. In
total 24 of our people were on secondment overseas in March
this year and many others are involved in providing short-term
training and advice.
a global
organisation
"It was very fruitful and useful for us to have the
benefit of the British auditing experience".
Dr rpd Kovcs,
President of State Audit Office, Hungary
25
Europe
This year, for the first time, we hosted the Contact Committee,
which is the annual meeting of the heads of the national audit
bodies of EU members and the European Court of Auditors. It
allows those bodies to come together to agree a programme of
joint working amongst themselves and with the European
Court of Auditors.
Each year we produce a report for Parliament on the European
Court of Auditors' annual report. This summarises the Court's
findings and highlights those of relevance to the UK.
To assist our European partners, we have published an update of
our State audit in the European Union book which describes the
audit and accountability arrangements in place in each member
state. It provides a clear understanding of the role of each
institution and should help to stimulate debate and discussion
about how these roles might develop further in the future.
As part of an exchange programme with our French counterparts,
the Cour des comptes, one of our Directors, David Woodward,
is currently working in the Cour, undertaking a number of
comparative studies and also working on a study of the European
Social Fund in France. At the same time, a Conseiller Matre from
the Cour, Jean-Louis Beaud de Brive, is working with us on social
security and health value for money issues.
Congress in South Korea
The triennial congress of the International Organisation of
Supreme Audit Institutions (INTOSAI) was held in South Korea
in 2001. It was here that the C&AG was elected to INTOSAI's
Governing Board as one of the two representatives of
EUROSAI, INTOSAI's European counterpart. The appointment
is for six years.
At the congress, the C&AG also accepted the invitation to
become a member of INTOSAI's Strategic Planning Task Force.
He will thereby play a key role in guiding INTOSAI's future in
the 21st Century. The NAO made a further contribution to the
Congress when it presented two new publications on the audit
of privatisation. By chairing the Working Group on the Audit of
Privatisation, the NAO has been able to help develop guidance
and share information on this important topic.
Environmental audit
We have built up a considerable expertise in environmental
audit over the years. We have produced 20 value for money
reports which have examined environmental issues. We are
active members of working groups on environmental audit
formed by INTOSAI and EUROSAI. This allows us to share our
expertise with countries throughout the world. We have
contributed to papers by the INTOSAI working group on
several subjects, including the conduct of environmental audits
and the contribution that national audit offices can make to
sustainable development. We hosted the inaugural meeting of
the Steering Committee of the INTOSAI working group. And
we have given presentations on our work to seminars held by
the EUROSAI working group.
Other contact
The past year has seen 570 representatives from 62 countries
visit our office and we have also fielded numerous other
enquiries from across the globe. This enables us to make our
own contribution to the international reputation of the
United Kingdom.
THE LATVIA TWINNING TEAM
(l to r) Miles Gray, secondee from HM Treasury; Peter Carlill, chartered
public finance accountant and Andy Hamer, chartered accountant.
26
List of major reports produced
April 2001 - March 2002
Title HoC No. Session
Agriculture
Agricultural fraud: The case of Joseph Bowden 615 2001-2002
Cross Government Reports
Modern Policy-Making: Ensuring Policies Deliver Value for Money 289 2001-2002
Joining Up to Improve Public Services 383 2001-2002
Purchasing Professional Services 400 2000-2001
Better Public Services through e-government 704 2001-2002
Better Regulation: Making Good Use of Regulatory Impact Assessments 329 2001-2002
Resource accounting 349 2001-2002
Culture, Media & Sport
Winding-up The New Millennium Experience Company Limited 749 2001-2002
Awarding the new licence to run the National Lottery 803 2001-2002
The BBC: Collecting the television licence fee 821 2001-2002
Defence
Non-Competitive Procurement in the Ministry of Defence 290 2001-2002
Ministry of Defence: Major Projects Report 2001 330 2001-2002
The Joint Services Command and Staff College 537 2001-2002
Combat Identification 661 2001-2002
Implementation of Integrated Project Teams 671 2001-2002
Major Repair and Overhaul of Land Equipment 757 2001-2002
Education
Widening participation in higher education in England 485 2001-2002
Improving student achievement in English higher education 486 2001-2002
Employment
The New Deal for Young People 639 2001-2002
Environment
Policy Development: Improving Air Quality 232 2001-2002
The operation and wind up of Teesside Development Corporation 640 2001-2002
Regulating Housing Associations' Management of Financial Risk 399 2000-2001
HM Customs & Excise
Losses to the Revenue from Frauds on Alcohol Duty 178 2001-2002
The Misuse and Smuggling of Hydrocarbon Oils 614 2001-2002
Customs & Excise Accounts 2000-01 335-XVI 2001-2002
27
Title HoC No. Session
Inland Revenue
Income Tax Self Assessment 56 2001-2002
NIRS 2: Contract Extension 355 2001-2002
e-Revenue 492 2001-2002
Inland Revenue Accounts 2000-01 335-XVI 2001-2002
Law, Order & General
Reducing Prisoner Reoffending 548 2001-2002
Collection of fines and other financial penalties in the criminal justice system 672 2001-2002
The Implementation of the National Probation Service Information Systems Strategy 401 2001-2002
Financial Management of the European Union 402 2000-2001
National Health Service
Inpatient and Outpatient Waiting in the NHS 221 2001-2002
Inappropriate adjustments to NHS waiting lists 452 2001-2002
NHS Direct in England 505 2001-2002
The Management of Surplus Property by Trusts in the NHS in England 687 2001-2002
Handling Clinical Negligence Claims in England 403 2000-2001
Overseas Affairs
Performance Measurement - Helping to Reduce World Poverty 739 2001-2002
Privatisation/ Asset Sales/ Commercialisation
The Auction of Radio Spectrum for the Third Generation of Mobile Telephones 233 2001-2002
Delivering the Commercialisation of Public Sector Science 580 2001-2002
Public Private Partnership - PPP
Innovation in PFI Financing: The Treasury Building Project 328 2001-2002
Managing the relationship to secure a successful partnership in PFI projects 375 2001-2002
Redevelopment of MOD Main Building 748 2001-2002
Regulation
Giving Confidently: The role of the Charity Commission in regulating charities 234 2001-2002
Opening the Post: Postcomm and postal services - the risks and opportunities 521 2001-2002
Pipes and Wires 723 2001-2002
Transport
Royal Travel by Air and Rail 25 2001-2002
Ship Surveys and Inspection 338 2000-2001
Work and Pensions
Fraud and Error in Income Support 491 2001-2002
28
Introduction
The Comptroller and Auditor General is an Officer of the House
of Commons appointed by Parliament to carry out the external
audit of central Government departments, executive agencies
and many other public bodies. The Comptroller and Auditor
General is wholly independent of Government.
Since 1983, the Comptroller and Auditor General has been
supported by the National Audit Office, the successor body to
the Exchequer and Audit Department. The senior executive
management team comprises the Heads of the six operational
units, reporting to the Comptroller and Auditor General through
the Deputy Comptroller and Auditor General. As at
31 March 2002, the National Audit Office employed some 749
staff based mainly in offices in London, Blackpool, Cardiff and
Newcastle.
In addition to its National Audit Office work, the Cardiff Office
also provides a comprehensive service of financial and value
for money audit and administrative support to the Auditor
General for Wales, who reimburses the costs incurred.
The financial statements on pages 35 to 53 are the first that the
National Audit Office has been required by statute to prepare
on a resource basis. They reflect the changes made from
2001-02 in the way that Parliament approves the annual grant
of supply, and in the accountability for that grant.
Aim and Objectives
The goal of the National Audit Office is to help the nation spend
wisely and its primary role is to provide independent information,
assurance and advice to Parliament on the way government
departments, executive agencies and other public bodies account
for and use taxpayers' money. The National Audit Office also aims
to encourage sound financial management and help these bodies
provide better value for money.
In order to meet its goal of helping the nation spend wisely, the
National Audit Office has five objectives:
! to carry out financial audits of central government
departments and bodies, to certify their accounts and, where
appropriate, report the results to Parliament;
! to examine the economy, efficiency and effectiveness with
which audited bodies have used their resources and to
report the results to Parliament;
! to examine and report on risks to financial systems,
regularity and propriety;
! to support the Committee of Public Accounts in its scrutiny
of Government departments and other bodies, and to
provide independent assurance, information and advice
to a wide range of other public, international and
overseas bodies; and
! carrying out the Comptroller function, which involves
controlling the release of money from the Exchequer to
Government departments.
The cost, and any associated revenues, of the National Audit
Office's work in meeting each of these objectives is shown in
the Statement of Resources by Objective on page 40.
Main Activities
The principal activities of the Comptroller and Auditor General
and the National Audit Office are:
! providing independent assurance and advice to Parliament
on regularity, propriety and the proper accounting for
central government expenditure, revenue and assets
through auditing the annual accounts of public bodies; and
! providing independent advice to Parliament on whether
public bodies spend taxpayers' money economically,
efficiently and effectively.
Most of these activities flow from the statutory functions and
obligations of the Comptroller and Auditor General and are
funded by parliamentary grant. However, income is generated
from certain audits which the Comptroller and Auditor General
provides by agreement and from the provision of other services
such as advice and training.
Operating and Financial Review
Performance for the year
In 2001-02 the National Audit Office:
! completed the audit of 523 accounts, plus 85 departmental
Appropriation Accounts for which 2001-02 was the last year;
! delivered 50 value for money and other major reports
to Parliament;
Resource Accounts 2001-02
29
! played a key role in assisting departments with the
implementation of resource accounting and budgeting, along
with providing regular feedback on work underpinning the
introduction of whole of government accounting;
! reported on a range of issues arising from the Government's
public service improvement programme;
! handled a complex and wide range of inquiries from
Members of Parliament and members of the public, some of
which came through on a designated whistleblower hotline;
! provided a comprehensive service of financial and value for
money audit and administrative support to the Auditor
General for Wales, who reimburses the costs incurred; and
! continued to audit functions in Scotland and Wales reserved
to Westminster, such as defence, social security and revenue
assessment and collection, which account for over a third of
general government spending in Scotland and Wales.
In achieving this performance, the Office used 59.420 million
resources. After taking account of 10.900 million income
appropriated in aid, the Office's net resource requirement in
2001-02 was 48.520 million, 0.230 million less than the
sum approved by Parliament in the Office's Supply Estimate.
The Office generated income of 12.242 million, 1.342 million
more than the sum authorised by Parliament to be appropriated in
aid. The surplus was due to a combination of factors including an
increase in work on fee paying activities at the year-end
compared with the previous year, and an increase in income in
respect of staff seconded to Parliament, government departments
- such as the Treasury - and other organisations.
Capital investment exceeded the 1 million budget by
0.174 million. This reflected an increased level of spending on
the assets, particularly information and communications
technology, needed to support the Office's operations.
Going forward
The National Audit Office's Supply Estimate for 2002-03
provides for a gross resource requirement of 64.329 million,
which after taking account of 12.700 million income, leads to
a net resource requirement of 51.629 million, some
5.8 per cent more than in 2001-02. The key factors influencing
the resources required by the National Audit Office during
2002-03 are:
! the Government's increased expenditure programme;
! developments in financial audit;
! correspondence with Members of Parliament and members
of the public; and
! staffing in a competitive employment market.
Investing for the future
The National Audit Office's fixed asset base comprises its
headquarters building, with associated fixtures and fittings, and
information and communications technology equipment. The
National Audit Office is currently reviewing its
accommodation requirements to identify options that will meet
its needs now and into the future. The Office continues to
expand its asset base to support the increasing use of
information technology in its work, for example mobile
computing and electronic records management, and to refresh
its information technology hardware and software.
Comptroller and Auditor General
Under the provisions of the Exchequer and Audit Departments
Act 1866 and the National Audit Act 1983, the Office of
Comptroller and Auditor General is a Crown appointment
following the agreement of the Prime Minister and the
Chairman of the Committee of Public Accounts. The
Comptroller and Auditor General retains office unless removed
by a resolution of both Houses of Parliament. Under the
provisions of the National Audit Act 1983, the Comptroller and
Auditor General is a corporation sole. The current Comptroller
and Auditor General is Sir John Bourn.
Management Board
Senior executives of the National Audit Office are members of
the Management Board by virtue of their executive positions,
and remain on the Board during their term of appointment in
the Office. The Board is chaired by the Comptroller and
Auditor General and comprises the Deputy Comptroller and
Auditor General, Deputy Auditor General, five Assistant
Auditors General and the Director of Corporate Policy. The role
of the Board is to advise the Comptroller and Auditor General
on the discharge of his statutory duties. The Deputy
Comptroller and Auditor General has corporate management
responsibilities and deputises in the absence of the Comptroller
30
and Auditor General. One Assistant Auditor General has been
appointed by the Comptroller and Auditor General as the
Principal Finance Officer whose responsibilities are the same
as those set out in Government Accounting for the Principal
Finance Officers of Government departments.
Board Members
The Board members during 2001-02 were:
Comptroller and Auditor General
Sir John Bourn KCB
Deputy Comptroller and Auditor General
Tim Burr
Deputy Auditor General
Martin Pfleger
Assistant Auditors General
Jeremy Colman
Wendy Kenway-Smith
James Marshall (retired 31 March 2002)
Caroline Mawhood (Principal Finance Officer)
Martin Sinclair
Director of Corporate Policy (Secretary)
David Corner
Michael Whitehouse replaced James Marshall from
1 April 2002, and was appointed Principal Finance Officer in
succession to Caroline Mawhood.
Audit Committee
The Audit Committee, which comprises a non-executive
member (John Scotford - ex President of CIPFA), the Deputy
Comptroller and Auditor General, and two Directors, meets
three times each year and addresses issues raised by the
National Audit Office's internal and external auditors. The
Audit Committee is tasked with providing the Comptroller and
Auditor General with advice and assurance on the adequacy of
internal control and risk management within the National Audit
Office, including the framework of financial, operational and
compliance controls and risk management processes and the
quality and reliability of financial reporting.
Remuneration
Comptroller and Auditor General
The Exchequer and Audit Departments Act 1957 and the
Superannuation Act 1972 provide for the remuneration of the
Comptroller and Auditor General to be met from the
Consolidated Fund.
Board members
Under the provisions of the National Audit Act 1983, the
Comptroller and Auditor General determines the level of
remuneration for all employees within the National Audit
Office, including senior executives on the Management Board.
The Act requires the Comptroller and Auditor General to have
regard to the desirability of keeping the remuneration and other
terms and conditions of employment broadly in line with those
applying to persons employed in the civil service of the State.
Further details about remuneration are disclosed in Notes 2
and 3 to the accounts.
Pensions Liabilities
The pension scheme for the Comptroller and Auditor General
is covered by the Superannuation Act 1972 and is analogous to
that of a member of the Principal Civil Service Pension Scheme
(PCSPS) which is unfunded. The Act provides for defined
pension benefits to be met from the Consolidated Fund and no
liability rests with the National Audit Office.
Past and present employees of the National Audit Office are
covered by the provisions of the Principal Civil Service Pension
Scheme. The scheme is a defined benefit scheme and liability
rests with the Scheme, and not the National Audit Office.
Benefits are paid from the Civil Superannuation Vote to which
the Office makes contributions calculated to cover accruing
pension entitlement for staff employed. Statements of account
for the Scheme are provided by the Cabinet Office Civil
Superannuation Resource Account, 2001-02.
Early Departure Costs
The National Audit Office meets the additional pension costs of
any employees who retire before they reach normal pensionable
age. The total pensions liability up to the normal retiring age in
respect of each employee is charged to the account in the year in
which the employee takes early retirement and a provision for
future pension payments is created.
Further details about pensions are disclosed within Notes 1.10,
3 and 13 of the accounts.
31
Public Accounts Commission
The National Audit Act 1983, which established the National
Audit Office, also established the Public Accounts Commission
consisting of the Leader of the House of Commons and eight
other Members of the House. Under the Act, and in respect of the
National Audit Office, the Commission are responsible for the:
! examination of the annual Estimate;
! appointment of the Accounting Officer; and
! appointment of the auditor of the annual accounts.
Accounting Officer
The Public Accounts Commission has appointed the
Comptroller and Auditor General as the Accounting Officer for
the National Audit Office. His responsibilities as the Accounting
Officer and for the National Audit Office's system of internal
control are set out separately on pages 32 to 33.
Codes of Conduct
Consistent with his responsibilities as Accounting Officer, the
Comptroller and Auditor General has issued to all National
Audit Office employees:
! a Vision, Mission and Values Statement - the purpose of the
Statement is to ensure that each employee undertakes the
work of the Office by reference to a clear set of core values
which include integrity and professional excellence; and
! a Code of Conduct - the purpose of the Code is to provide
all staff with clear guidance on the standards of corporate
and personal conduct expected of them. The Code includes
statements on the conduct of National Audit Office work,
confidentiality, conflicts of interests and personal conduct.
Copies of both statements are available from the National Audit
Office upon request.
Auditors of the National Audit Office
The Public Accounts Commission appointed BKR Haines Watts
(Chartered Accountants and Registered Auditors) as the
auditors of the National Audit Office for the three years ending
31 March 2004. In addition, the Comptroller and Auditor
General appointed Bentley Jennison (Chartered Accountants
and Registered Auditors) to undertake the internal audit
function of the National Audit Office for the five years ending
31 March 2003.
Payment of Suppliers
The National Audit Office has adopted the Confederation of
British Industry prompt payment code. The policy is that all bills
should be paid in accordance with contractual conditions, or
where no such conditions exist, within 30 days of the receipt of
goods or services, or the presentation of a valid invoice,
whichever is the later. The calculation of payment performance
for the year ended 31 March 2002 has been based on continuous
monitoring of payments since the start of the year. On this basis,
approximately 90% of payments met the policy criteria.
Post Balance Sheet Events
There have been no events since the Balance Sheet date that
would impact upon the financial statements for the year ended
31 March 2002.
Staff Issues
The National Audit Office has a policy of close co-operation
and consultation with the National Audit Office branch of the
Public and Commercial Services Union over matters affecting
staff. To ensure effective operation of this policy, a Joint
Negotiating and Consultative Committee has been established.
Staff involvement is also actively encouraged as part of the day-
to-day process of line management and information on financial
results and current and prospective developments is widely
disseminated.
Equal Opportunities and Diversity
The National Audit Office is committed to the principle of
equality of opportunity and values the diversity of its staff. It
has established procedures to ensure that all staff and job
applicants are entitled to fair and equal treatment free from
unfair and unlawful discrimination. The Deputy Auditor
General has assumed specific responsibility for the promotion
of diversity throughout the Office.
Disabled Persons
The National Audit Office is fully committed to providing equal
opportunity for all staff, and disability itself is not a bar to
recruitment or to advancement in the National Audit Office. To
further this policy the Office promotes the observance of good
practice in the areas of employment particularly relevant to
disabled people.
John Bourn, Comptroller and Auditor General
2 July 2002
32
Statement of the Accounting Officer's
Responsibilities
Under the National Audit Act 1983, as amended by the
Government Resources and Accounts Act 2000, the National
Audit Office is required to prepare resource accounts for each
financial year, detailing the resources acquired, held, or
disposed of during the year and the use of resources by the
Office during the year.
The resource accounts are prepared on an accruals basis and
must give a true and fair view of the state of affairs of the
National Audit Office, the net resource outturn, resources
applied to objectives, recognised gains and losses and cash
flows for the financial year.
Under the National Audit Act 1983, the Public Accounts
Commission have appointed the Comptroller and Auditor
General as Accounting Officer for the National Audit Office
with responsibility for preparing the Office's accounts and for
transmitting them to the auditor.
In preparing these accounts, the Comptroller and Auditor
General has adopted the Resource Accounting Manual
prepared by the Treasury, and in particular:
! observed the relevant accounting and disclosure
requirements, and applied suitable accounting policies on
a consistent basis;
! made judgements and estimates on a reasonable basis;
! stated whether applicable accounting standards, as set out
in the Resource Accounting Manual, have been followed
and disclosed any material departures in the accounts; and
! prepared the accounts on a going concern basis.
The Comptroller and Auditor General's relevant
responsibilities as Accounting Officer, including responsibility
for the propriety and regularity of the National Audit Office's
finances, for keeping of proper records and for safeguarding
the National Audit Office's assets, are set out in the
Accounting Officer's Memorandum issued by the Public
Accounts Commission.
Statement on Internal Control
As Accounting Officer, I have responsibility for maintaining a
sound system of internal control that supports the
achievement of the aims and objectives of the National Audit
Office as endorsed by the Public Accounts Commission,
while safeguarding the public funds and assets for which I am
personally responsible.
The system of internal control is designed to manage rather
than eliminate the risk of failure to achieve the National Audit
Office's aims and objectives. It can therefore only provide
reasonable and not absolute assurance of effectiveness.
The system of internal control is a continuous process based
on the identification of the principal risks to the achievement
of the National Audit Office's aims and objectives. It includes
evaluations of the nature and extent of those risks and their
management in an efficient, effective, and economic way.
As Accounting Officer, I also have responsibility for reviewing
the effectiveness of the system of internal control. The
National Audit Office has established the following main
processes:
! a Management Board which meets to consider the strategic
direction of the Office and performance against objectives.
The Board comprises myself, the senior members of the
Office and the Director of Corporate Policy;
! corporate planning arrangements that identify the Office's
strategic objectives, which, after approval by the Public
Accounts Commission, are then translated into annual
operational plans;
! business management arrangements, in which risks which
could affect the achievement of the Office's objectives as
set out in annual operational plans are identified,
monitored on a monthly basis and reported to the
Management Board;
! internal and external validation of the quality of the
National Audit Office's certification and value for
money work;
! regular reports by internal audit to standards defined in the
Government internal audit manual, which include their
independent opinion on the adequacy and effectiveness
of the Office's internal controls, together with
recommendations for improvement, where necessary; and
33
! an Audit Committee, comprising a non-executive member,
the Deputy Comptroller and Auditor General and senior
National Audit Office staff, which meets three times a year
to monitor the operation of internal controls. The
Chairman reports to me on the work of the Audit
Committee.
These processes were in place for the year ended
31 March 2002 and up to the date of approval of the
accounts.
My review of the effectiveness of the system of internal
control is informed by the Office's business management
arrangements, the work of the internal auditors, and
comments made by the external auditors in their management
letters and reports.
The Office continued to review its risk management
arrangements during the year in response to developments,
including changes in the business environment and the
Turnbull Report. From April 2002, key risks to the
achievement of the Office's aims and objectives have been
allocated to individual members of the Management Board
and new arrangements for reporting the status of risks are
being introduced. As these arrangements were being
developed during 2001-02, the first financial year when they
will be operational throughout the reporting period will be
2002-03.
John Bourn
Comptroller and Auditor General
2 July 2002
Audit Certificate and Report to the
House of Commons
We certify that we have audited the financial statements on
pages 35 to 53 under the National Audit Act 1983, as
amended by the Government Resources and Accounts Act
2000. These financial statements have been prepared under
the historical cost convention as modified by the revaluation
of certain fixed assets and the accounting policies set out on
pages 41 to 42.
Respective responsibilities of the Accounting
Officer and the Auditors
As described on page 32, the Accounting Officer is
responsible for the preparation of financial statements and for
ensuring the regularity of financial transactions. The
Accounting Officer is also responsible for the preparation of
the other contents of the Annual Report. Our responsibilities,
as independent auditor, are established by statute and guided
by the Auditing Practices Board and the auditing profession's
ethical guidance.
We report our opinion as to whether the financial statements
give a true and fair view and are properly prepared in
accordance with the National Audit Act 1983, as amended by
the Government Resources and Accounts Act 2000, and
whether in all material respects the expenditure and income
have been applied to the purposes intended by Parliament
and the financial transactions conform to the authorities
which govern them. We also report if, in our opinion, the
Annual Report is not consistent with the financial statements,
if the National Audit Office has not kept proper accounting
records or if we have not received all the information and
explanations we require for our audit.
We read the other information contained in the Annual
Report and consider whether it is consistent with the audited
financial statements. We consider the implications for our
certificate if we become aware of any apparent mis-
statements or material inconsistencies with the financial
statements.
We review whether the statement on pages 32 and 33 reflects
the Treasury's guidance entitled Corporate governance:
statement on internal control. We report if it does not reflect
the Treasury's guidance, or if the statement is misleading or
inconsistent with other information we are aware of from our
audit of the financial statements.
34
Basis of opinion
We conducted our audit in accordance with auditing standards
issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the
amounts, disclosures and regularity of financial transactions
included in the financial statements. It also includes an
assessment of the significant estimates and judgements made by
the National Audit Office in the preparation of the financial
statements, and of whether the accounting policies are
appropriate to the National Audit Office's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
to provide us with sufficient evidence to give reasonable
assurance that the financial statements are free from material
mis-statement, whether caused by error, or by fraud or other
irregularity and that, in all material respects, the expenditure
and income have been applied to the purposes intended by
Parliament and the financial transactions conform to the
authorities which govern them. In forming our opinion we
also evaluated the overall adequacy of the presentation of
information in the financial statements.
Opinion
In our opinion:
! the financial statements give a true and fair view of the
state of affairs of the National Audit Office as at
31 March 2002 and of the net resource outturn, resources
applied to objectives, recognised gains and losses and
cash flows for the year then ended, and the statements
have been properly prepared in accordance with the
National Audit Act 1983, as amended by the Government
Resources and Accounts Act 2000;
! in all material respects the expenditure and income have
been applied to the purposes intended by Parliament and the
financial transactions conform to the authorities which
govern them.
We have no observations to make on these financial
statements.
Supplementary statement by the Auditors in respect of material
included at pages 1 to 27 of this Annual Report, not included
with the financial statements to which the audit opinion above
relates.
In respect alone of our responsibility under United Kingdom
auditing standards to read the other information included with
financial statements on which we express an audit opinion.
We have read the additional information on pages 1 to 27
which was not included with the financial statements on
which we reached the audit opinion set out in our Certificate
above and considered whether it is consistent with the
audited financial statements. We have considered the
implications for our audit opinion if we have thereby become
aware of any apparent mis-statement or material
inconsistencies with the financial statements. We have not
considered the effects of any events since the date of our
Certificate.
In this regard, our audit opinion on the financial statements is
unchanged.
30 Camp Road
Farnborough
Hampshire GU14 6EW
July 2002
BKR Haines Watts
Chartered Accountants
and Registered Auditors
35
Schedule 1: Summary of Resource Outturn
2001-02 2000-01
ESTIMATE OUTTURN
Net Total
Outturn
compared
to Estimate:
saving
Gross AinA Net Gross AinA Net or Prior Year
Expenditure Total Expenditure Total (excess) Outturn
Notes 000 000 000 000 000 000 000 000
Request for Resource 1* 6 59,650 10,900 48,750 59,420 10,900 48,520 230 45,256
Total Resources 59,650 10,900 48,750 59,420 10,900 48,520 230 45,256
Non Operating Cost A in A - - -
Net Cash Requirement 47,600 47,274 44,102
Reconciliation of resources to cash requirement
000 000 000
Net Total Resources 48,750 48,520 230 45,256
Capital:
Purchase of fixed assets 7&8 1,000 1,174 (174) 1,314
Non operating cost - - -
A in A
Accruals adjustments:
Non-cash items 4 (3,411) (4,024) 613 (2,412)
Changes in working capital
other than cash 12 328 453 (125) (780)
Use of provision 13 933 1,151 (218) 724
Net Cash Requirement 47,600 47,274 326 44,102
* Request for Resource 1: Providing Independent Assurance to Parliament on Central Government Expenditure.
Providing independent assurance, information and advice to Parliament on the proper accounting for central government
expenditure revenue and assets, including compliance with laws and regulations, and in the economy, efficiency and effectiveness
with which central government resources have been used. The National Audit Office also audits a wide range of other public and
international accounts: the cost of these audits is recovered through audit fees.
The notes on pages 41 to 53 form part of these accounts
36
Analysis of Income Payable to the Consolidated Fund
In addition to appropriations in aid, the following income relates to the Office and is payable to the Consolidated Fund:
(cash receipts are shown in italics)
Estimate Outturn
Income Receipts Income Receipts
000 000 000 000
Operating income and receipts -
excess A in A - - 1,342 286
Other operating income and receipts
not classified as A in A - - 43 43
Other non-operating income and
receipts not classified as A in A - - - -
Other amounts collectable on behalf
of the Consolidated Fund - - - -
Excess cash surrenderable to the
Consolidated Fund - - - -
- - 1,385 329
1 Actual outturn - resources:
Request for resource 1: Net total outturn 48,519,763.72. Actual amount of saving compared with Estimate 230,236.28.
Actual outturn - cash:
Net cash requirement: Outturn net cash requirement 47,273,575.35, which is 326,424.65 less than the Estimate.
2 The actual receipts surrenderable to the Consolidated Fund are 328,722.89.
The notes on pages 41 to 53 form part of these accounts
37
Schedule 2: Operating Cost Statement
for the year ended 31 March 2002
2001-02 2000-01
Note 000 000
Administration costs
Staff costs 3 36,321 34,014
Other administration costs 4 23,247 20,914
Gross administration costs 59,568 54,928
Operating income 5 (12,242) (9,529)
Net operating cost 6 47,326 45,399
Net resource outturn 6 48,520 45,256
All income and expenditure are derived from continuing operations.
Statement of Recognised Gains and Losses
for the period ended 31 March 2002
2001-02 2000-01
Note 000 000
Unrealised gain on revaluation
of tangible fixed assets 15 1,348 4,347
The notes on pages 41 to 53 form part of these accounts
38
Schedule 3: Balance Sheet
as at 31 March 2002
31 March 2002 31 March 2001
Note 000 000 000 000
Fixed assets
Tangible fixed assets 7 22,016 20,628
Intangible fixed assets 8 942 705
22,958 21,333
Debtors falling due after more than
one year 9 326 396
Current assets
Debtors 9 4,500 2,667
Cash at bank and in hand 10 655 512
5,155 3,179
Creditors (amounts falling due
within one year) 11 (3,532) (1,746)
Net current assets 1,623 1,433
Total assets less current liabilities 24,907 23,162
Creditors (amounts falling due after
more than one year)
Provisions for liabilities and charges 13 (1,963) (1,526)
22,944 21,636
Taxpayers' equity
General fund 14 16,249 16,195
Revaluation reserve 15 6,695 5,441
22,944 21,636
John Bourn
Comptroller and Auditor General
2 July 2002
The notes on pages 41 to 53 form part of these accounts
39
Schedule 4: Cash Flow Statement
for the year ended 31 March 2002
2001-02 2000-01
Note 000 000
Net cash outflow from operating
activities (Note i) (45,866) (42,931)
Other amounts received 43 -
Capital expenditure (Note ii) (1,174) (1,314)
Payments of amounts due to the
Consolidated Fund (334) -
Financing (Note iii) 47,474 44,564
Increase/(decrease) in cash in the period 143 319
Notes to the Cash Flow Statement
Note 000 000
Note i: Reconciliation of operating cost to operating cash flows
Net operating cost 47,326 45,399
Adjust for:
Non-cash transactions 4 (4,024) (2,412)
Movements in working capital other than cash 12 1,413 (780)
Use of provisions 13 1,151 724
Net cash outflow from operating activities 45,866 42,931
Note ii: Analysis of capital expenditure
Fixed asset additions 7&8 1,174 1,314
Net cash outflow for capital expenditure 1,174 1,314
Note iii: Analysis of financing and reconciliation to the net
cash requirement
Parliamentary Supply From Consolidated Fund 47,326 44,421
Consolidated Fund Standing Services 4 148 143
Net financing 47,474 44,564
(Increase)/decrease in cash 10 (143) (319)
Net cash flows other than financing 47,331 44,245
Adjustment for payments and receipts not related to Supply
and transitional adjustment:
Consolidated Fund Extra Receipts received in prior year paid over (334) -
Consolidated Fund Extra Receipts received in current year and
not paid over 329 -
Consolidated Fund Standing Services (148) (143)
Transitional adjustment for working capital 12 96 -
Net cash requirement (Schedule 1) 47,274 44,102
The notes on pages 41 to 53 form part of these accounts
40
Schedule 5: Statement of Resources by Objective
for the year ended 31 March 2002
2001-02 2000-01
Gross Income Net Gross Income Net
000 000 000 000 000 000
Objective 1
Certifying and reporting on accounts 31,542 8,487 23,055 30,763 8,012 22,751
Objective 2
Value for money work 15,834 757 15,077 13,806 830 12,976
Objective 3
Examining and reporting on risks to
financial systems, regularity and propriety 3,646 218 3,428 2,568 145 2,423
Objective 4
Other work for Parliament and the Public 8,401 2,780 5,621 7,654 542 7,112
Objective 5
Comptroller function 145 - 145 137 - 137
TOTAL 59,568 12,242 47,326 54,928 9,529 45,399
The notes on pages 41 to 53 form part of these accounts
41
Notes to the Resource Accounts
1 Statement of Accounting Policies
The financial statements have been prepared in accordance with section 4 of the National Audit Act 1983, as amended by the
Government Resources and Accounts Act 2000. The Act requires the National Audit Office to prepare resource accounts and, in
meeting this requirement, the Office has followed the Resource Accounting Manual (RAM) issued by HM Treasury. The accounting
policies contained in the RAM follow UK generally accepted accounting practice for companies (UK GAAP) to the extent that it is
meaningful and appropriate to the public sector. Where RAM permits a choice of accounting policy, the accounting policy which
has been judged to be the most appropriate to the particular circumstances of the National Audit Office for the purpose of giving a
true and fair view has been selected. The National Audit Office's accounting policies have been applied consistently in dealing with
items considered material in relation to the accounts.
Accounting convention
1.1 These accounts have been prepared under the historical cost convention modified to account for the revaluation of fixed assets
at their value to the business by reference to their current costs.
Tangible fixed assets
1.2 Tangible fixed assets are stated at the lower of replacement cost and recoverable amount. Expenditure on tangible fixed assets
of 1,500 or more is capitalised. On initial recognition, they are measured at cost including any costs such as installation
directly attributable to bringing them into working condition. Tangible fixed assets are restated to current value each year.
Land and buildings are restated to current value using professional valuations each year. Non-property operational assets are
revalued to open market value where obtainable, or on the basis of depreciated replacement cost where market value is not
obtainable. Published indices appropriate to the category of asset are normally used to estimate value.
Intangible fixed assets
1.3 Purchased computer software licences and the associated costs of implementation are capitalised as intangible fixed assets
where expenditure of 1,500 or more is incurred. Except where reliable evidence of current value cannot be readily
ascertained, these are restated to current value each year. Software licences are amortised over the shorter of the term of the
licence and the useful economic life.
Depreciation
1.4 Tangible fixed assets are depreciated at rates calculated to write them down to estimated residual value on a straight-line basis
over their estimated useful lives.
Asset lives are normally in the following ranges:
! Leasehold land & buildings remaining life of lease
! Computers and other equipment 3 to 10 years
! Furniture, fixtures and fittings 10 years
To comply with FRS15 tangible fixed assets, material non-structural elements of the Headquarters building have been separately
identified and depreciated over periods up to 25 years.
The term of the lease for long leasehold land and buildings (the Office headquarters) is 130 years. Revaluation was undertaken at
30 September 2001, at which time the lease had 109 years remaining. Depreciation is charged on the revalued amount over the
remaining term of the lease.
42
Stocks and long term contract balances
1.5 Consumable stocks are charged to the account in the year of purchase. Long term contract balances, mainly related to fee
based audit assignments, represent costs incurred on specific contracts, less foreseeable losses and payments on account not
matched with operating income. Operating income is determined by reference to the value of work carried out to the balance
sheet date. Provision is made for the full amount of foreseeable losses on contracts. Cost comprises staff salary costs and direct
expenses together with an appropriate proportion of overheads.
Operating income
1.6 Operating income is income which relates directly to the operating activities of the National Audit Office. It principally
comprises fees and charges for services provided by statute or by agreement with client organisations. Income represents the
amounts derived from the provision of completed work for clients during the year and includes an appropriate allowance for
work in progress on assignments which will be completed in the following year. It includes not only income appropriated in
aid of the Estimate but also income to the Consolidated Fund, which in accordance with the RAM is treated as operating
income. Operating income is stated net of VAT (see Note 5).
Capital charge
1.7 A non-cash capital charge, reflecting the cost of capital utilised by the National Audit Office, is included in operating costs.
The charge is calculated at the government's standard rate of 6 per cent in real terms on the average carrying value of all
assets less liabilities, except for cash balances with the Office of the Paymaster General and amounts to be surrendered to
the Consolidated Fund.
Operating leases
1.8 The total cost of operating leases is expensed in equal instalments over the life of the lease.
Foreign exchange
1.9 Transactions denominated in foreign currencies are translated into sterling at the rates ruling at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates ruling at
that date. Translation differences are dealt with in the Operating Cost Statement.
Pensions
1.10 Present and past employees of the National Audit Office are covered by the provisions of the Principal Civil Service Pension Scheme
(PCSPS) which is a defined benefit scheme and is unfunded. The National Audit Office recognises the expected cost of providing
pensions on a systematic and rational basis over the period during which it benefits from employees' services by payment to the
PCSPS of amounts calculated on an accruing basis. Liability for payment of future benefits is a charge on the PCSPS.
Provisions
1.11 The National Audit Office provides for legal or constructive obligations which are of uncertain timing or amount at the balance sheet
date on the basis of the best estimate of the expenditure required to settle the obligation. Where the effect of the time value of money
is significant, the estimated risk-adjusted cash flows are discounted using the Treasury discount rate of 6 per cent in real terms.
Value Added Tax
1.12 Most of the activities of the National Audit Office are outside the scope of VAT. Output tax is however charged on certain
services. Where output tax is charged or input VAT is recoverable, the amounts are stated net of VAT. Irrecoverable VAT is
charged to the relevant expenditure category or included in the capitalised purchase cost of fixed assets.
43
2 Remuneration of the Comptroller and Auditor General
By statute the remuneration and associated employers earnings-related National Insurance contributions of the Comptroller and
Auditor General is met directly from the Consolidated Fund, rather than Parliamentary Supply. For the year ended 31 March 2002
the amount paid for the Comptroller and Auditor General's remuneration was 132,603 (2000-01 - 127,872) and the employer's
national insurance contributions were 15,240 (2000-01 - 15,066). These costs are included under Other administration costs and
are referred to as Consolidated Fund Standing Services (see Note 4).
3 Staff costs and numbers
3(a) Staff costs consist of:
2001-02 2000-01
000 000
Wages and salaries 29,241 27,403
Social security costs 2,471 2,368
Other pension costs 4,609 4,243
36,321 34,014
The PCSPS is an unfunded multi-employer defined benefit scheme but the National Audit Office is unable to identify its share of the
underlying assets and liabilities. A full actuarial valuation was carried out at 31 March 1999. Details can be found in the resource
accounts of the Cabinet Office: Civil Superannuation (www.civilservice-pensions.gov.uk).
For 2001-02, normal employer contributions of 4,608,980 were payable to the PCSPS (2000-01: 4,243,261) at one of four rates
in the range 12 per cent to 18.5 per cent of pensionable pay based on salary bands. Employees also make contributions at a rate
of 1.5 per cent of pensionable pay in respect of dependents' benefits. Rates will remain the same for the next two years, subject to
revalorisation of the salary bands. Employer contribution rates are to be reviewed every four years following a scheme valuation by
the Government Actuary. The contribution rates reflect past experience of the scheme benefits and liabilities as they accrue, not
when the actual costs are met.
The PCSPS is a statutory scheme which provides benefits on a "final salary" basis at a normal retirement age of 60. Benefits accrue
at the rate of 1/80th of pensionable salary for each year of service. In addition, a lump sum equivalent to three years' pension is
payable on retirement. Pensions are increased in payment in line with the Retail Prices Index. On death, pensions are payable to the
surviving spouse at a rate of half the member's pension. On death in service, the scheme pays a lump-sum benefit of twice
pensionable pay and also provides a service enhancement on computing the spouse's pension. The enhancement depends on length
of service and cannot exceed 10 years. Medical retirement is possible in the event of serious ill health. In this case, pensions are
brought into payment immediately without actuarial reduction and with service enhanced as for widow(er) pensions.
3(b) The average number of whole-time equivalent persons employed (including senior management) during the year was as follows:
2001-02 2000-01
Number Number
Objective 1: Certifying and reporting on accounts 397 425
Objective 2: Value for money work 199 190
Objective 3: Examining and reporting on risks to financial systems,
regularity and propriety 46 35
Objective 4: Other work for Parliament and the Public 105 105
Objective 5: Comptroller function 2 2
TOTAL 749 757
44
3(c) The salary and pension entitlements of the senior managers were as follows:
Total accrued
(2000-01 figures are in brackets) Real increase in annual pension
Salary annual pension at age 60 at
Name and title (as defined below) at age 60 31 March 2002
Age 000 000 000
Tim Burr 52 120-125 7.5-10.0 55-60
Deputy Comptroller & Auditor General (115-120) (10.0-12.5) (45-50)
Martin Pfleger 52 110-115 5.0-7.5 50-55
Deputy Auditor General (105-110) (5.0-7.5) (45-50)
Jeremy Colman 53 95-100 0-2.5 10-15
Assistant Auditor General (90-95) (0-2.5) (5-10)
Wendy Kenway-Smith 43 95-100 0-2.5 5-10
Assistant Auditor General (85-90) (0-2.5) (5-10)
James Marshall 58 90-95 7.5-10.0 45-50
Assistant Auditor General (85-90) (0-2.5) (35-40)
Caroline Mawhood 48 100-105 2.5-5.0 30-35
Assistant Auditor General (95-100) (2.5-5.0) (25-30)
Martin Sinclair 44 90-95 2.5-5.0 25-30
Assistant Auditor General (85-90) (2.5-5.0) (20-25)
David Corner 45 70-75 2.5-5.0 15-20
Director of Corporate Policy (65-70) (2.5-5.0) (10-15)
Notes:
a "Salary" includes gross salary and performance bonuses payable
b None of the above received benefits in kind
c For pension benefits, see note 3 (a) above.
45
4 Other administration costs
2001-02 2000-01
000 000 000 000
Professional services bought in 6,426 6,186
Accommodation 3,769 3,544
Travel, subsistence, hospitality 2,432 2,502
Office supplies/equipment 3,214 2,752
Recruitment and training 1,865 2,027
Other indirect costs 1,245 1,233
Operating Lease (buildings) 73 53
Operating Lease (vehicles) 9 9
Consolidated Fund Standing Services 148 143
Remuneration to external auditors for
other work 30 33
External auditors fee 12 20
19,223 18,502
Non cash items:
Cost of capital charge 1,540 1,166
Provision for early departure costs 1,588 749
Depreciation 896 497
4,024 2,412
23,247 20,914
46
5 Income and appropriations in aid
Operating income
Operating income not appropriated in aid (i.e. transferred to the Consolidated Fund) is analysed for resource budget purposes
between that which is included in public expenditure and that which is not (see Note 6). In 2001-02, all operating income not
classified as A in A was within public expenditure.
5(a) Analysis of operating income by classification and activity
2001-02
Resource outturn Operating cost statement
Netted off Payable to Income included
gross expenditure Appropriated Consolidated in Operating
in sub-head in Aid Fund Cost Statement
000 000 000 000
Appropriated in aid:
Audit fees 6,703 918 7,621
Other miscellaneous income 3,783 69 3,852
Secondment income 414 355 769
Total operating income 10,900 1,342 12,242
2001-02
Resource outturn Operating cost statement
Netted off Payable to Income included
gross expenditure Appropriated Consolidated in Operating
in sub-head in Aid Fund Cost Statement
000 000 000 000
Appropriated in aid:
Audit fees 7,336 - 7,336
Other miscellaneous income 2,193 - 2,193
Secondment income - - -
Total operating income 9,529 - 9,529
5(b) Analysis of income from services provided to clients
2001-02 2000-01
Surplus/ Surplus/
Income Full cost (deficit) Income Full cost (deficit)
000 000 000 000 000 000
Audit fees 7,621 7,436 185 8,012 8,059 (47)
Other miscellaneous income 3,852 3,813 39 1,517 1,517 -
Secondment income 769 769 - - - -
______ ______ _____ ______ ______ _____
12,242 12,018 224 9,529 9,576 (47)
______ ______ _____ ______ ______ _____
The National Audit Office has a target of recovering the full cost of undertaking fee paying work.
6 Reconciliation of operating cost to net resource outturn
2001-02 2000-01
000 000
Net operating cost (Note a) 47,326 45,399
Operating income not classified as A in A 1,342 -
Consolidated Fund Standing Services (148) (143)
_______ _______
Net resource outturn 48,520 45,256
_______ _______
Note:
a Net operating cost is the total of expenditure and income appearing in the operating cost statement (Schedule 2). Net resource
outturn is the total of those elements of expenditure and income that are subject to parliamentary approval and included in
the National Audit Office's Supply Estimate. The outturn against the Estimate is shown in the summary of resource outturn
(Schedule 1).
7 Tangible fixed assets
Long Leasehold Computers & Furniture
Land & Building other Equipment Fixtures & Fittings Total
000 000 000 000
Cost or valuation:
At 1 April 2001 19,844 2,270 389 22,503
Additions 108 618 20 746
Disposals - (834) - (834)
Revaluation 1,053 - - 1,053
________ ________ ________ ________
At 31 March 2002 21,005 2,054 409 23,468
________ ________ ________ ________
Depreciation & amortisation:
At 1 April 2001 326 1,378 171 1,875
Charged in year 317 350 39 706
Disposals - (834) - (834)
Revaluations (295) - - (295)
________ ________ ________ ________
At 31 March 2002 348 894 210 1,452
________ ________ ________ ________
Net book value:
At 31 March 2002 20,657 1,160 199 22,016
________ ________ ________ ________
At 31 March 2001 19,518 892 218 20,628
Note:
Land and buildings (the Office headquarters) were revalued at 20,500,000 as at 30 September 2001 in accordance with the
Guidance Notes of the RICS by Drivers Jonas, independent property consultants and surveyors, on the basis of value for existing
use. The market value of the building on an open market basis is valued at 28,000,000 by Drivers Jonas. The difference reflects
the potential value attributable to redevelopment or major refurbishment of the existing building.
47
48
8 Intangible fixed assets
Software Licences and Implementation costs
000
Cost or valuation:
At 1 April 2001 1,966
Additions 428
Disposals -
Revaluation -
________
At 31 March 2002 2,394
________
Depreciation & amortisation:
At 1 April 2001 1,261
Charged in year 191
Disposals -
Revaluations -
________
At 31 March 2002 1,452
________
Net book value:
At 31 March 2002 942
________
At 31 March 2001 705
9 Debtors
2001-02 2000-01
000 000
Amounts falling due within one year:
Work in progress 2,593 1,565
Deposits and advances 390 368
Trade debtors 758 220
Prepayments and accrued income 649 291
Other debtors 110 165
VAT debtor - 58
________ ________
4,500 2,667
________ ________
Amounts falling due after more than one year:
Deposits and advances 326 396
________ ________
Total 4,826 3,063
________ ________
Included within work in progress is 1,056,000 (2000-01-nil) that will be due to the Consolidated Fund once the debts are
collected (see note 12).
49
10 Cash at bank and in hand
2001-02 2000-01
000 000
Balance at 1 April 2001 512 193
Net cash inflow 143 319
________ ________
Balance at 31 March 2002 655 512
________ ________
The following balances at 31 March are held at:
Office of HM Paymaster General 532 320
Commercial banks and cash in hand 123 192
________ ________
655 512
________ ________
The balance at 31 March comprises:
Cash due to be paid to the Consolidated Fund:
Consolidated Fund extra receipts received and due
to be paid to the Consolidated Fund 329 334
Amounts issued from the Consolidated Fund for supply but not
spent at year end 326 274
Suspense account balances - (96)
________ ________
655 512
________ ________
11 Creditors
2001-02 2000-01
000 000
Amounts falling due within one year:
VAT 274 -
Trade creditors 67 406
Other creditors 52 650
Accruals and deferred income 860 65
Payments received on account 568 351
________ ________
Total excluding amounts due to the Consolidated Fund 1,821 1,472
________ ________
Amounts issued from the Consolidated Fund but not spent at year end 326 274
Consolidated Fund extra receipts received and receivable and other
income due to be paid to the Consolidated Fund 1,385 -
________ ________
Total 3,532 1,746
________ ________
50
12 Movements in operating working capital other than cash
2001-02 2000-01
000 000
Total movements:
Increase in debtors 1,762 492
Decrease/(increase) in creditors (excluding amounts due to the
Consolidated Fund) (349) 288
________ ________
1,413 780
________ ________
Less movements not relating to Supply:
Increase in A in A debtor (Note 9) (1,056) -
Transitional adjustment 96 -
________ ________
Increase in Supply working capital 453 780
________ ________
The transitional adjustment of 96,000 (net) is for advances brought forward on 1 April 2001 that need to be financed from the
Net Cash Requirement for 2001-02.
13 Provisions for liabilities and charges
Early departure costs
000
Balance at 1 April 1,526
Provided in the year 1,588
Provisions utilised in the year (1,151)
________
Balance at 31 March 1,963
________
Some 40% of the provision will be used during the next financial year and approximately 58% will be used during the next two
to five years.
Early departure costs
The National Audit Office meets the additional costs of benefits beyond the normal PCSPS over the period between early
departure and normal retirement date. The National Audit Office provides for this in full when the early retirement programme
becomes binding by establishing a provision for the estimated payments discounted by the Treasury discount rate of 6 per cent in
real terms. In past years the National Audit Office paid in advance some of its liability for early retirement by making a payment
to the Paymaster General's Account at the Bank of England for the credit of the Civil Service Superannuation Vote. The balance
remaining is treated as a prepayment.
51
14 Reconciliation of net operating cost to changes in general fund
2001-02 2000-01
000 000
Net operating cost for the year (Schedule 2) (47,326) (45,399)
Income for 2001-02 not appropriated in aid payable to Consolidated Fund (1,342) -
Receipts for 2000-01 not appropriated in aid paid to Consolidated Fund (334) -
Net Parliamentary funding 47,326 44,426
Prior year surplus 274 -
Realised element of revaluation reserve transferred to general fund (note 15) 94 13
Transferred from Consolidated Fund for standing services 148 143
Consolidated Fund creditor for cash unspent (326) -
Non-cash charges:
Cost of capital 1,540 1,166
________ ________
Net increase in General Fund 54 349
General Fund at 1 April 16,195 15,846
________ ________
General Fund at 31 March 16,249 16,195
15 Revaluation reserve
2001-02 2000-01
000 000
Balance at 1 April 5,441 1,107
Unrealised gain on tangible fixed
assets during the year (see Note 7) 1,348 4,347
Transferred to General Fund (94) (13)
________ ________
Balance at 31 March 6,695 5,441
The revaluation reserve reflects the unrealised element of the cumulative balance of indexation and revaluation adjustments.
52
16 Commitments under leases
Commitments under operating leases to pay rentals during the year following the year of these accounts are given in the table
below, analysed according to the period in which the lease expires.
2001-02 2000-01
000 000
Obligations under operating leases comprise:
Land and buildings:
Expiry within 1 year 70 -
Expiry within 2 to 5 years 88 50
Expiry thereafter - -
Other:
Expiry within 1 year 10 9
Expiry within 2 to 5 years - 10
Expiry thereafter - -
17 Capital commitments
The National Audit Office had no capital commitments as at 31 March 2002.
18 Other financial commitments
The National Audit Office has entered into a non-cancellable contract for administration software. The payments which the Office
is committed to during 2002-03 analysed by the period during which the commitment expires are as follows:
2001-02 2000-01
000 000
Expiry within 1 year - -
Expiry within 2 to 5 years 357 536
Expiry thereafter - -
19 Contingent liabilities
The National Audit Office had no contingent liabilities at 31 March 2002.
53
20 Related party transactions
The National Audit Office is headed by the Comptroller and Auditor General and was established by the National Audit Act 1983.
The National Audit Office has had transactions with Government Departments and central Government bodies for the provision of
training courses and the hosting of seminars. Some of these transactions have been with various trading funds who are fee paying
clients.
None of the Board members or key managerial staff has undertaken any material transactions with the National Audit Office
during the year.
21 Notes to Statement of Resources by Objective
Staff and other direct costs are allocated to objectives on the basis of costs recorded in the National Audit Office's resource
management system. Indirect costs are allocated to objectives by apportioning them pro-rata to staff costs.
The National Audit Office's capital is employed exclusively for administration purposes. Its distribution between objectives is
therefore not markedly different from the proportion of the related gross administration cost.
22 Financial instruments
FRS 13, derivatives and other financial instruments, requires disclosure of the role which financial instruments have had during the
period in creating or changing the risks an entity faces in undertaking its activities. Because of the largely non-trading nature of its
activities and the way in which it is financed, the National Audit Office is not exposed to the degree of financial risk faced by
business entities. Moreover, financial instruments play a much more limited role in creating or changing risk than would be typical of
the listed companies to which FRS 13 mainly applies. The National Audit Office has very limited powers to borrow or invest surplus
funds and except for relatively insignificant forward purchases of foreign currency, financial assets and liabilities are generated by
day-to-day operational activities and are not held to change the risks facing the office in undertaking its activities.
As permitted by FRS 13, debtors and creditors which mature or become payable within 12 months from the balance sheet date
have been omitted from the currency profile.
Liquidity risk
The National Audit Office's net revenue resource requirements are financed by resources voted annually by Parliament, as is its
capital expenditure. The National Audit Office is not therefore exposed to significant liquidity risks.
Interest rate risk
The National Audit Office is not exposed to any interest rate risk.
Foreign currency risk
The National Audit Office's exposure to foreign currency risk is not currently significant. Foreign currency gain for 2001-02, for
instance, was some 3,000. The office has recently reviewed its management of foreign currency risk, due to an increase in the
volume and value of transactions denominated in euros. The result of this has been the opening of a euro bank account. The
Office now meets euro denominated expenditure from euro receipts received into this account. This helps manage the potential
exposure to exchange rate fluctuations.
23 Accountability
No exceptional kinds of expenditure such as losses and special payments that required separate disclosure because of their nature
or amount were incurred.
Management Board
Comptroller and Auditor General
Sir John Bourn KCB
Deputy Comptroller and Auditor General
Tim Burr
Deputy Auditor General
Martin Pfleger
Assistant Auditors General
Jeremy Colman
Wendy Kenway-Smith
Caroline Mawhood
Martin Sinclair
Michael Whitehouse
Director of Corporate Policy
David Corner
For further information about the National Audit Office please contact:
National Audit Office, London
157-197 Buckingham Palace Road
Victoria, London
SW1W 9SP
Tel: 020 7798 7400
Fax. 020 7798 7710
E-mail: pressoffice@nao.gsi.gov.uk
Website: www.nao.gov.uk
Regional Offices
National Audit Office, Blackpool
c/o Department of Social Security
Flyde Benefits and War Pensions Directorate
Norcross
Blackpool
FY5 3TA
Tel: 01253 333432
Fax: 01253 333771
National Audit Office, Newcastle
3rd Floor
Higham House
New Bridge Street West
Newcastle Upon Tyne
NE1 8AU
Tel: 0191 269 1826
Fax: 0191 269 1850
National Audit Office, Wales
23/24 Park Place
Cardiff
CF10 3BA
Tel: 02920 678500
Fax: 02920 678501
Layout and Production by NAO Information Centre
Photography by Jon Barlow
Printed by Heronsgate
DG ref: 2031RA
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spend wisely
helping the nation
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