BGW2 EV12

Better Governance For Wales: Scrutiny of White Paper

I am writing in response to your invitation to submit evidence on the Government’s White Paper "Better Governance for Wales". As you will appreciate, I have confined this submission to issues of finance, audit and accountability, as it would be inappropriate for me to comment on the proposals for primary legislative powers and modified electoral arrangements.

Summary

The budget setting, accounting and audit arrangements in the Government of Wales Act 1998 reflect the Assembly’s existing constitution as a single body corporate with responsibility for legislative/scrutiny and executive functions. Chapter 2 of the White Paper outlines a number of difficulties caused by this constitution and proposes the creation of a separate Ministerial executive authority that is legally distinct from, but accountable to, the National Assembly.

As Auditor General for Wales, I welcome this proposal. With the appropriate underpinning primary legislation, it should strengthen considerably the arrangements for financial management and accountability in the devolved Welsh public sector. The remainder of this submission suggests a number of related, more detailed, provisions that could be included in the forthcoming Bill that will be needed to bring about the separation of the legislative and executive arms of the Assembly.

Budget setting process

The existing budget setting arrangements are governed by Section 80 to 86 of the 1998 Act and the Assembly’s Standing Orders. In essence, the annual budget submitted to Assembly Members for approval is a subdivision of the annual Welsh block budgets agreed following the Comprehensive Spending Review. It consists of capital charges (depreciation and interest) as well as the revenue expenditure to be incurred by the Assembly, its sponsored and related public bodies, and local health boards.

It is not possible for Assembly Members to see an audited statement of outturn against the budget that they were asked to approve. This is because the Assembly’s budget contains items (e.g. capital charges) that will (correctly) be brought to account by other public bodies. The Assembly’s own accounts will only contain the annual cash funding provided to those bodies.

The resource budgets submitted to the House of Commons by UK Government departments contain the estimated revenue expenditure and capital charges to be incurred by those departments together with the cash requirement (i.e. the amount needed to meet amounts falling due for payments less expected receipts). Similar arrangements exist for the devolved administrations in Scotland and Northern Ireland.

An important principle of public accountability is that the elected representatives should be able to consider the budgets prepared by Ministers, and that those representatives should be provided by audit assurances on how the approved budget was utilised.

I recommend that the legislation creating a legally separate Ministerial executive authority for Wales should require Ministers to prepare an annual budget on a resource basis for approval by the Assembly Membership. That budget should include details of the expenditure to be incurred by Ministers (including amounts needed to fund other public bodies), the estimated income to be appropriated in aid of that expenditure, and the cash required to meet amounts falling due for payment less expected receipts. The Assembly’s approval of the annual budget should be seen as a statutory authority for the Ministers to incur expenditure.

The budgets should include expenditure and income items that will eventually be included in the accounts prepared on behalf of Ministers but not the items that would fall to be accounted by other public bodies. For example, the budgets will include grants in aid to sponsored public bodies (currently shown as expenditure in the Assembly’s accounts) but exclude notional capital charges such as depreciation and interest (which do not currently form part of the Assembly’s accounts). In this way, the accounts, when audited by the Auditor General and laid before the Assembly, will enable Members to see a statement of outturn which can be directly compared with the approved budget.

I also recommend that a Welsh Consolidated Fund be created using the models in existence in Scotland, Northern Ireland and Westminster. The Secretary of State would transfer the supply provided by Parliament (less the expenses of his own office) into the Fund and amounts would be issued to Ministers based on the cash requirements submitted to and approved by Assembly Members as part of the budget setting process. The Auditor General should be given "comptroller function" requiring him or her to authorise the issue of amounts from the Fund at the request of Ministers. In effect, the Auditor General will be required to act in the interest of Assembly members by ensuring that those requests were supported by legally binding Assembly budget resolutions.

Financial arrangements for the reconstituted Assembly

Paragraphs 2.10 and 2.20 of the White Paper suggest that a new corporate body will need to be established to manage the affairs of the reconstituted Assembly. Like the House of Commons Commission and the Scottish Parliamentary Corporate Body, it will not be subject to Ministerial control. It will, however, need to prepare its own annual budgets for approval by Assembly Members and be able to draw supply direct from the Welsh Consolidated Fund. The legislation establishing the body will therefore need to provide for a budget setting and approval process similar to that for Ministers, for the appointment of an Accounting Officer, and for appropriate audit arrangements.

Audit Committee

We welcome the proposal in 2.16 of the White Paper to retain the existing statutory requirement for an Assembly Audit Committee. It performs an essential non-party political role in holding the public sector to account and helping to improve the delivery of public services. Key to its success is a close working relationship with the Auditor General for Wales and the Wales Audit Office.

Standing Order 12 currently requires the Welsh Assembly Government to respond to recommendations made by the Audit Committee within 30 days. We recommend that this requirement be carried over into the new arrangements and that, if it is not possible to include such a requirement within the new standing orders, then provision be made in the primary legislation.

Matters relating to the Auditor General for Wales

Paragraph 2.19 of the White Paper proposes that, following the creation of a legally separate Ministerial authority, the Auditor General for Wales should be appointed by Her Majesty on the nomination of the Assembly (rather than the Secretary of State for Wales as at present). Existing arrangements reflect the Public Audit Forum’s "Principles of Public Audit" which, amongst other things, suggest that public bodies with responsibility for executive functions should not be able to appoint their own external auditors. The reconstituted Assembly will not have "executive" functions, and would therefore be an appropriate authority for recommending such an appointment. However the legislation, like that in place for Scotland, Northern Ireland and Westminster, should ensure that the Auditor General, in exercising his or her functions, is not subject to the direction or control of Ministers or the Assembly. For this reason, the Wales Audit Office should also receive its financing direct from the Welsh Consolidated Fund (rather than from Ministers) following Assembly approval of the annual budget prepared by the Auditor General.

The 1998 Act currently requires the Assembly’s Audit Committee to seek the advice of the Secretary of State if it wishes to modify the Auditor General’s budget. This safeguard, included because the Assembly is currently constituted as a single corporate body, has not been needed to date. Given the separation proposals, the Secretary of State’s "backstop" role could safely be dropped in favour of a more consultative approach between the Auditor General and the Audit Committee as has been the case in practice.

Schedule 17 to the 1998 Act lists a number of public bodies that fall within the Auditor General’s remit. This list can only be amended by Order by or with the consent of the Secretary of State. Given the proposed separation, it would be appropriate for the reconstituted Assembly to be given primary powers to update this list as and when necessary.

I hope the above thoughts are helpful to the Scrutiny Committee. The Wales Audit Office is grateful for the support given to its work by all parts of the current National Assembly for Wales. We would, of course, be very pleased to advise further as required on the financial aspects of the forthcoming legislation.

Jeremy Colman