our role

NATIONAL AUDIT OFFICEANNUAL REPORT 2005

helping the nation spend wisely

Cover pictures (from left to right):

St Stephen’s Tower, Houses of Parliament

Horticulture therapy class at St John’s Day Centre, Islington funded from the Community Participation Fund (National Audit Office report, English Regions - Getting Citizens Involved: Community Participation in Neighbourhood Renewal, HC 1070 Session 2003-04)

Elderly resident of a care home with his nurse (National Audit Office report, Delivering Public Services to a Diverse Society, HC19 Session 2004-05)

PFI contract worker serving food at Darent Valley Hospital (National Audit Office report, Darent Valley Hospital: The PFI contract in action, HC 209 Session 2004-05)

our role

£515 million saved by our work this year, exceeding our target of saving £8 for every £1

spent running the Office.

61 major reports to Parliament published, covering topics from homelessness to directory enquiries, including our 50th published PFI/PPP report – Darent Valley Hospital.

Over £800 billion of government expenditure and revenue audited in 2004-05.

Supplemented our reports on the NHS with a DVD, in which cancer patients were able to talk about their experiences, with a view to improving the patient journey through cancer treatment.

Extended our support to House of Commons Select Committees by providing briefings to the Environmental Audit Committee.

Examined asylum statistics and National Lottery Distribution Balances at the request of government and reported on them publicly.

First Chair of European Union College of Auditors, responsible for auditing all European Union-led military operations and winner of INTOSAI’s Jörg Kandutsch Award for significant achievement and contribution in audit internationally.

Enhanced links with the developing world, especially in Africa where one member of NAO staff received an award from the Queen for his contribution.

KEYRESULTS

CONTENTSThe Comptroller and Auditor General’s overview 4

Our role 6

Accounting for the taxpayer’s money 8

Defence Spending 12

Evaluating services for the consumer 14

Quality of Services 18

Improving financial management for the taxpayer 20

Private Finance and Partnerships 24

Improving services for the consumer 26

Sustainable Development 30

A Global Organisation 32

Our People and Resources 34

Statement on our health and safety policy and practice 36

Statement on maintaining the quality and 37independence of our audit work

List of major reports produced 39

Resource Accounts 42

Statement of financial impacts 73

Management Board 76

contents

THE COMPTROLLER AND AUDITOR GENERAL’S OVERVIEW

The primary responsibility of the nation’s auditors is to hold government to account for the way taxpayers’ money has been spent. Over the last year we audited over 570 accounts covering some £800 billion of revenue and expenditure, and presented 61 major reports to Parliament on the economy, efficiency and effectiveness with which public money has been used to support delivery of services for the public.

We are also keen to be a force for improvement, requiringus to use the experience and skills of our staff to help publicservice managers enhance the performance of the publicservices in which they work and on which we all depend.Our expertise and our independent view of governmentmeans we can offer a unique insight. As the public serviceenvironment changes, we are supporting improvement inan increasingly wide variety of ways, including developingour close links with audit committees, good practiceguidance, briefings, conferences, seminars and workshops,where we aim to help make improvements to publicservices on the ground.

We are in a strong position to offer authoritative analysisand advice on the most topical and important issues of theday. This year I was asked by the Home Office to examinethe reliability of its quarterly asylum statistics and toconsider whether changes in the number of applicationshad had any impact on other forms of migration. I ampleased that we were able to produce very quickly a robustreview to inform the national debate. The contribution we

can make to better regulation, building on our experienceof reviewing departments’ Regulatory Impact Assessments,was recognised in the government’s acceptance ofrecommendations in the Hampton Review that envisage awider role for the National Audit Office in this work.

I am delighted that this year we have again exceeded our target of saving the taxpayer £8 for every £1 that the Office costs to run. But we are equally concerned to champion the interests of citizens as consumers of public services. This year we published, for example, studies which explored the experiences of cancer patients, adult learners, older people looking for work, community groups and the homeless.

In order to rise to the challenge of changing the public sector landscape, we have developed new ways of working and new products that maintain our focus on key issues of public concern. Improving the efficiency of government has continued to be a priority this year, and with the launch of our new Efficiency Centre we will cement our ability to offer expert advice on the progress towards achieving the efficiency savings outlined in the Gershon Review. Another landmark this year came with the publication of our report on Freeview, the first of six planned reviews of the BBC carried out at the request of the Corporation’s Governors. This new role will make a real contribution to enhancing, on behalf of licence payers, scrutiny of the more than £2 billion of public money the BBC receives each year.

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These are substantial achievements, all of which are possible only because of the dedication and skills of our staff, among whom we number qualified accountants, economists, social scientists, business analysts and other specialists. They are supported by talented and able corporate staff with expertise in design, communications, information management and technology, training and development and more. And we often work in partnership with experts in their fields from outside the Office, to ensure that our work is of the highest quality, carried out in the most efficient way and that our recommendations are both innovative and practical.

We work closely with other auditors and organisationsinvolved in assessing and improving public services. Weco-operate with the Audit Commission on a number ofdifferent projects and are signatories to the HealthcareConcordat which aims to ensure a streamlined and strategicapproach to the examination of health services. We havecontinued our work with government departments toenhance corporate governance and financial managementand we have, for example, worked closely with theTreasury to support the production of the first set of UKCentral Government Accounts.

Our close relationship to Parliament is one of our defining characteristics and while most of our work is aimed at the Committee of Public Accounts, we have secured funding to contribute our expertise to the work of other Select Committees. This year, we were able to support Select Committees including the Environmental Audit Committee, the Work and Pensions Committee and the Scrutiny Unit of the House of Commons.

Our reputation leads to demands for our work, not just within the UK but on the international stage. For example, we audit a number of international organisations including the International Criminal Court, the UN World Food Programme and the Council of Europe. We also play a key role in supporting international development and in making sure funds reach those most in need. As well as our work with audit offices in Central and Eastern Europe, we have provided support to our audit colleagues throughout Africa and we hosted a two week World Bank-funded workshop for the Iraq Board of Audit.

Closer to home, I warmly welcome the establishment of theWales Audit Office, headed by the Auditor General forWales, former NAO Assistant Auditor General, JeremyColman. This is an important step forward for publicaccountability in Wales and I look forward to working withJeremy, both bilaterally and through the Public Audit Forum.

As always, this year has brought new challenges, both across the public sector and for the National Audit Office. We have continued to provide assurance to Parliament on the use of public money and provide the Committee of Public Accounts with robust and high quality reports. Our staff have also responded to changes in the audit field in inventive ways, taking on new methods of working, building partnerships and developing innovative outputs – to maximise the contribution we can make.

SIR JOHN BOURN

C&AG’s Overview

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OUR ROLE

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Our service to Parliament and the public sectorWe challenge, holding government to account for the way public money is used; and

We support, by helping public service managersimprove performance.

Our service to the citizenWe promote the interests of the citizen as taxpayer, responsible for meeting the cost of public services; and

We champion the interests of the citizen as consumer, getting the benefit from public services.

Making a contribution to Parliament, our audit clients, and the publicWe hold government to account on behalf of taxpayers by auditing the financial statements of all central government departments, agencies and public bodies and reporting the results to Parliament.

We hold government to account on behalf of citizens as consumers, by publishing reports which look at the experience of people using public services.

Our work to improve financial management of behalf of thetaxpayer saves £8 for every £1 spent running the Office.

We recommend ways in which the delivery of public services could be improved for the benefit of the people using them.

In 2004 we supported, with briefings and letters, the Committee of Public Accounts in 53 hearings; replied to over 670 letters from Members of Parliament and the public; and, at the request of the Public Accounts Commission, increased our support for other Select Committees, such as the Environmental Audit Committee and Public Administration Select Committee.

Giving an independent and authoritative viewThe Comptroller and Auditor General 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 Committee of Public Accounts and approved by the House of Commons.

The Comptroller and Auditor General appoints the837 professional staff of the NAO, who are wholly independent from government and are not civil servants.

Our budget (£77.697 million in 2004-05) is set by Parliament. Nearly a quarter of our budget comes from income generated, including audit fees paid by our international clients. The Public Accounts Commission appoints our external auditors and scrutinises our performance, challenging us in the same we way challenge others.

HOW WE USED OUR RESOURCES

Objective 1 - To certify and report on accounts£34.20m

Objective 2 - Toproduce value for money work£19.46m

Objective 3 - To reviewdepartmental systems£7.72m

Objective 4 - Direct support to Parliament and the public£15.75m

Objective 5 - To carry out the Comptroller function£0.17m

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our role

Our reports are presented to Parliament

and published

The Committee of Public Accounts (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

NAOREPORT

The Accountability Process

PACHEARING

PACREPORT

GOVERNMENTRESPONSE

NAO/PACFOLLOW UP

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We audited over 570 accounts in 2004-05 The Comptroller and Auditor General, with the NAO’s support, has a statutory responsibility to audit the financial statements of all central government departments, agencies and other public bodies, and to report the results of his examination to Parliament.

We form an opinion about whether the financial statements are true and fair and whether transactions within them have appropriate Parliamentary authority. If we identify serious mis-statements, the Comptroller and Auditor General will issue a qualified opinion.

At the end of an audit, we write to the audited body to outline our findings and where necessary, recommend improvements to their systems. If an account is qualified, or if there are significant matters arising, we report thisto Parliament.

Eleven out of 58 2003-04 departmental resource accounts met the pre-summer recess timetable for account preparation, audit and presentation to Parliament, compared with ten 2002-03 accounts. With the exception of two departments, all managed to meet or exceed their previous year’s performance: on average 2003-04 accounts were laid some six weeks earlier.

We undertake reviews which examine corporate governance and financial management, disseminate best practice, and recommend to public sector managers ways in which departments could improve their systems and processes. We produced 81 of these good governance reports and also developed tools to assist audit committees in improving their effectiveness, published guidance and organised conferences and training seminars on issues across the public sector.

The Comptroller and Auditor General is responsible on a daily basis for authorising the issue of public money to government from the Bank of England, having satisfied himself that it is within the limits set by Parliament.

We published 61major reports for ParliamentOur value for money work takes a focused look at how specific government projects, programmes and activities have been implemented. We examine the way policies have been put into effect, but we cannot question the merits of policy objectives.

We assess performance, identify good practice and suggest improvements to economy (minimising costs), efficiency (maximising the ratio of outputs to inputs) and effectiveness (the extent to which what was achieved was what was intended).

We identify potential topics for examination by reviewing the risks to value for money across the whole range of central government spending. But we make sure that our study programme remains flexible enough to respond quickly to emerging issues. The most important factor here is assessing where our work can add most value.

The Comptroller and Auditor General has complete discretion to decide which studies should go ahead.

We discuss our findings and draft reports with the bodies concerned in order to ensure that our reports are accurate, rooted in evidence, balanced and fair, and based on agreed facts.

Value for money reports are presented to Parliament andconsidered by the Committee of Public Accounts, whopublish their own report and recommendations. Twohundred and seventy-six, or 93 per cent, of the Committee’srecommendations were accepted by government.

Our mission and visionOur mission is to help the nation spend wisely.

We aim to achieve this across the whole range of our workby promoting the highest standards in financial managementand reporting, the proper conduct of public business andbeneficial change in the provision of public services.

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ACCOUNTINGFOR THE TAXPAYER’S MONEY

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our role

We play an important part in helping these bodies meet the challenge set by government to produce more timely financial information, which provides a better tool for management, and to improve accountability. Since 2000, we have worked with central government bodies to implement accruals accounting, accepted as best practice in the private sector, in place of cash-based accounting. In the last two years, we have focussed on helping central government departments meet accelerated timetables for the production and laying of departmental resource accounts and we are working toward the publication of the first Central Government Accounts.

Faster Financial Closing is a government initiative designed to follow accepted commercial good practice and increase the timeliness of the accounts by accelerating the production and audit of departmental resource accounts. HM Treasury has announced that all 2005-06 departmental resource accounts should be laid before Parliament by July 2006, some six months earlier than the average laying date for 2001-02 accounts. To help departments meet this challenge, we prepared two guides for public sector finance managers: Ready, Steady, Go, highlighting best practice from both the public and private sectors, and A Practical Guide to Preparing for Faster Closing. Both are available on our website. Individual audit teams have also been working with departments to help them prepare for Faster Closing throughout the year: raising the profile of the initiative within the organisation and working with Audit Committees and departments’

Where’s the money gone?Our work supports Parliament, on behalf of the

taxpayer, to hold government to account for the way it has spent taxpayers’ money. The Comptroller and

Auditor General, supported by the NAO, audits all central government departments, agencies and other public

bodies. He provides independent assurance that the annual financial statements of central government bodies are true and fair, and that the income and expenditure has been

used for the purposes intended by Parliament. In 2004-05, we audited over 570 accounts totalling

together over £800 billion of expenditure and revenue.

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Internal Auditors. In the last year, 11 departments were able to meet thepre-recess timetable for completion oftheir 2003-04 financial statements.This was a small improvement on theprevious year, but significant in-roadshave been made by other largedepartments, around two thirds ofwhich succeeded in bringing theiraccount preparation timetableforwards by three or four months.

In 2005, the government will publish the first set of UK Central Government Accounts which will cover the 2003-04 financial year. Building on our experience of carrying out the dry-run audits over the past two years, we have worked in partnership with the devolved audit offices in Northern Ireland, Scotland and Wales, as well as with private sector auditors to ensure that the timeframe is met for the first year of published Central Government Accounts.

We have been sharing strategies and contributing to workshops to train, impart information and discuss issues. We have worked closely with HM Treasury to resolve any emerging issues and have attended central government workshops organised by the Treasury.

Following recommendations madeby Lord Sharman in his reportHolding to Account – The Review ofAudit and Accountability for CentralGovernment, the Comptroller andAuditor General was appointedas auditor in 2004 of a further 25non-departmental public and healthbodies. For example, the Comptrollerand Auditor General is now theexternal auditor for the Hearing AidCouncil, Seafish Industry Authority,NHS University, NHS Direct,NHS Professionals Special HealthAuthority, and NHS Pensions Agency.

Early in 2005, the Comptrollerand Auditor General was alsomade auditor of the DevelopmentCorporations in Thurrock,Thames Gateway and WestNorthamptonshire, as well as theBritish Transport Police Authority.In all cases, the appointment of theComptroller and Auditor General hasincreased visibility and accountabilityof these bodies to Parliament.

The increasing globalisation of commerce in recent years has led to a growing need for a set of universally accepted accounting standards. To meet this need, use of International Accounting Standards became mandatory for the group accounts of European Union-listed companies on 1 January 2005.

I was attracted to the NAO by its work enhancing public sector financial management and accountability. Good Governance reviews, such as the one on the Ministry of Defence’s contribution during the firefighter’s strike, are an important aspect of this role, allowing us to go beyond our financial audit work to examine in more depth issues that have a significant impact on our clients.

SUSAN RONALDSON, AUDIT PRINCIPAL

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our role

JOBCENTRE PLUS: NEW DEAL TRAINING PROVIDERS

New Deal training programmes are designed to help overcome the barriers faced by some people in moving from benefits to

sustained employment through a range of training opportunities and financial support. In 2003-04, expenditure on New Deal programmes totalled £542 million. The programmes are delivered by a network of private sector

training providers who submit claims for funding to Jobcentre Plus, an organisation offering an integrated work and benefits service to people of working age. We

audited a sample of programmes across seven regions and noted weaknesses in the arrangements for reconciling claims and for monitoring the success of individual

training providers. We recommended that regional Jobcentre Plus offices should challenge training providers more where the results of training programmes do

not meet expectations and keep better documentation of programme attendance and of contract variations. Jobcentre Plus is

implementing our recommendations within its Agency-wide project to reduce non-compliance. We found

that the likely extent of errors in paying providers in 2003-04 was £30 million

but that, by implementing our recommendations, errors could

be substantially reduced in future years.

DEPARTMENT FOR WORK AND PENSIONS CONSOLIDATED RESOURCE ACCOUNT: ENCASHMENT CONTROL

Around 48 per cent of the £88.3 billion benefit and pension payments made by the Department for Work and Pensions in 2003-04 were made

using order books containing individual slips which recipients can cash, mainly over the counter at local Post Offices. In recent years, the Comptroller and Auditor General has limited the scope of his audit opinion on the Department of Work and

Pensions account because the Department had been unable to fully reconcile the value of uncashed order book slips with the payment records. During 2003-04, the Department implemented more robust procedures for reconciliations, which were sufficient to support

an unrestricted audit opinion. However, when we tested these procedures, we found that a quantity of order books are never collected from the Post Office. Further testing revealed that,

for £20 million recorded as unclaimed benefits and therefore not being used, the payees were either deceased or had received payment by other means directly into their bank or building society accounts. This meant that the money was not available for the Department to use for other purposes during the year, although in time the unclaimed benefits would

have been repaid to the Department by the Post Office.

SAVING MONEYBY IMPROVING

SYSTEMS

The United Kingdom Accounting Standards Board intends to bring United Kingdom Accounting Standards into line with international standards over the next few years. There are considerable challenges associated with implementing the new standards, especially with regard to reconfiguring accounting systems. HM Treasury plans to implement the new accounting standards in central government in the same timescale and so the public sector will also face challenges as outlined in our booklet Financial Accounting Update May 2004.

The full nature of these changes will be determined by HM Treasury and the Financial Reporting Advisory Board. We are represented on the Board, an independent body which advises on the application of financial reporting policies and standards for government.

We have an important part to play in holding the government to account for all types of public money. Since its launch ten years ago the National Lottery has raised more than £17 billion for good causes. There was however widespread concern at the level of balances being held

in the National Lottery Distribution Fund which stood at £2.7 billion in March 2004. While money is in the Distribution Fund, it is not delivering the intended benefits in the community. After discussions with the Department of Culture, Media and Sport on this issue, it was announced we would undertake an examination of the management of balances. We found that there was scope for the total balances to be reduced through more grant commitments being made. We pressed lottery distributors to identify whether they could fund more commitments without compromising value for money, set targets for reducing balances in the short-term, and work with funded projects to improve the forecasting of expenditure. We also recommended that the department should set a clear timetable for making decisions on distribution arrangements to help distributors plan better for the future.

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DEFENCE SPENDING

our role

The role, size and complexity of the Ministry of Defencemake it a major central government department. TheMinistry of Defence carries out a diverse range of activities,including deployment of front line troops, major capitalprocurement, recruitment, training, clothing and housingof personnel, provision of full medical and dental services,operation of complex IT and telecommunicationsequipment, and management of one of the largest estatesin the UK. Our defence work has an important part to playin making sure there is accountability to the public andParliament in this complex and costly area.

We audit over 40 defence financial accounts, either under statute or by agreement with government, with net operating costs of £34.5 billion and total net assets of £81.1 billion. The Ministry of Defence’s departmental resource account for 2003/04 was the first to achieve an unqualified opinion from the Comptroller and Auditor General since the introduction of accruals accounting in 1999-2000. We have worked closely with the Ministry to help improve its internal financial management systems and we also contribute to training courses, seminars and workshops for all those involved in preparing the accounts. This year we undertook a joint assignment with the Ministry of Defence’s internal auditors and identified a number of critical success factors to help the Ministry achieve the Faster Closing deadline. The Ministry has already brought forward delivery of the resource accounts by some four weeks year on year since 1999-2000, and we are working closely with the Ministry’s Faster Closing Working Group and internal auditors to achieve the Faster Closing deadline by 2006-07.

The Ministry also works with other departments across central government to provide support where necessary, for example working with the Home Office during the fire-fighters’ strike. Our good governance review of this joint operation, which reported to the management of the Ministry, examined the financial management arrangements in place when service personnel were used during the strike. We made recommendations to improve the Ministry’s financial processes and central guidance for authorising and coordinating expenditure, which would improve the governance arrangements for short-notice, ad hoc operations.

Our value for money programme covers a wide rangeof defence activities across both operational andadministrative areas. Our report on Battlefield Helicoptersreviewed the progress of the Joint Helicopter Commandin coordinating helicopter operations and maintenancesince its inception in 1999. The Joint Helicopter Commandpossesses some 350 military helicopters, manages some£1.4 billion of assets and has an annual budget of£400 million. We found that, despite progress madeby the Joint Helicopter Command, there would beshortfalls in helicopter provision until 2017-18, and maderecommendations that would enable the Ministry to use itsfleet of helicopters more efficiently. We informed Parliamentin the same report that the fleet of Chinook helicoptersthe Ministry accepted into service in 2001 was still unableto fly. Our report and the Committee of Public Accounts’report which followed led to the Ministry putting togethera project to find a quick solution to the technical problemswith the helicopters, so that the Chinooks could be usedas soon as possible, which would principally involvemodifications to equipment in the cockpit.

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our role

As well as producing operational reports, we examine anumber of military procurement issues each year. Followingon from our 2003 report, Operation TELIC – UnitedKingdom Military Operations in Iraq, where we reported toParliament on the military operation in Iraq, this year wereported on the rapid procurement of military equipmentfor operations in both Iraq and Afghanistan. Our report,Rapid Procurement of Capability to Support Operations,examined 312 purchases made in 2002-03 totalling some£660 million and found that many pieces of equipmentwere delivered with impressive speed, reflecting thecommitment and flexible approach adopted by the Ministryof Defence and its suppliers. Nonetheless, there was stillscope for improved management information and strongermanagement of the procurement process to improvedelivery further in this area of significant spending.

Our annual report on the key themes and trends inthe procurement of major defence projects reached itsthirteenth year in 2004. The Major Projects Report 2004examined a sample of projects amounting to £50 billion inexpected procurement costs, including Eurofighter Typhoonand the Astute Class Submarine. We found that the cost andtarget dates of projects were continuing to increase, thoughthe rate of increase was not as steep as we had found in2003. The cost and time increases on these major projectsare mainly due to the inconsistent application of goodprocurement practices such as detailed scrutiny of projectsbefore funding approval. The Ministry has now put in placean action plan to reinforce good practice and measuresagainst which to assess progress.

Building on our work in the Major Projects Report, we have worked with the Ministry of Defence to identify best practices leading to the successful delivery of defence projects. We have recently published the first in a series of reports following our original analysis of the Ministry’s procurement process, undertaken in 2003-04. The report examined what leads to successful decision-making and draws on experiences in delivering major projects in the United Kingdom, overseas and by commercial contractors. From our fieldwork, we developed a ‘gold standard’ of good practice criteria for project control against which projects can be measured, which showed that the ‘softer’ relationship side of project management is key to project success. As well as publishing a report, our detailed evidence, analysis and findings on defence procurement best practice can be found on our website(www.naodefencevfm.org).

Our wide experience of auditing military expenditure led to a

NAO representative, Dabindrerjit Singh Sidhu, being elected as the first Chair of the European Union

College of Auditors in 2004. The College is a six member group of senior representatives from Supreme Audit Institutions in

the European Union. It will be responsible for auditing all European Union-led military operations. Operation Concordia in the former Yugoslav Republic of Macedonia involved military personnel from

27 different countries, including 13 European Union members and was the first European Union-led military crisis management operation subject to audit. The next audit, on Operation Althea in Bosnia, has just commenced. Operation Althea is the largest operation ever launched by the European Union with contributions from twenty-two European Union members and

eleven other countries.

We have also recently been asked to undertake the first audit of the newly established European Defence Agency, which exists

to improve European defence capabilities and co-ordinate joint arms procurement. Our European defence audit work provides an essential accountability mechanism

back to UK taxpayers.

AUDITINGEUROPEANDEFENCE

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EVALUATINGSERVICES FOR THE CONSUMER

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our role

How good is the service?

People using public services justifiably havehigh expectations of the quality of service they

should receive. Public service managers in turn areseeking to reform public service delivery in a way which

is focused on consumers. We hold government to accountfor the quality of the public services it delivers, reporting toParliament on behalf of the people who use those services.

Our work involves surveys and focus groups explicitlydesigned to discover the experiences of consumers.And we are developing innovative new methods ofcommunicating our findings beyond our traditional

audiences to the people who use or deliverpublic services every day.

Our report Delivering public services to a diverse societyevaluated the ways in which central government bodies seek to tailor the delivery of their services to the diverse needs of different groups within society. The government, in its 2004 Equality and Human Rights White Paper, recognised the need to respond to the differing needs of the public in order for public services to reach their full potential. We surveyed 131 government bodies on their approaches to tackling diversity and found that engagement with representative groups, leadership at senior levels and integrating diversity into the business functions of the organisation are key to successful diversification of public service delivery.

Evaluating public services from the consumer’s point of view sometimes requires us to look at issues which stretch across a number of government departments and involve regional and local government or voluntary and community organisations. Our cross-cutting team was established to look at those public services whose delivery involves a number of different government departments. The Comptroller and Auditor General’s report Citizen Redress: What citizens can do if things go wrong with public services, produced in partnership with the London School of Economics and Political Science and University College London, was based on a survey of some 277 central government bodies and a ‘mystery shopper’ exercise which was carried out at 18 major bodies. The report sets out ways in which it could be made easier for citizens to seek redress and includes recommendations to

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Producing the DVD to accompany our report on cancer treatment was an innovative and exciting project to be involved in. It was our first multi-media report and the first where the consumer of the public service - the patient - gave their view. We found many patients wanted to give something back and make a difference that would benefit others.

GUY MUNRO, AUDIT PRINCIPAL

individual departments pointing to good practice on how their redress systems should operate. For example, we emphasised the importance of departments taking into account the individual needs of different social groups in the design and operation of their redress procedures, and recommended they regularly secure the views of citizens on the handling of complaints and appeals.

Our report More than a roof: progress in tackling homelessness is another good example of the work we do to look at public services from the point of view of the people who use them. This report examined what impact the Homelessness and Housing Support Directorate within the Office of the Deputy Prime Minister had made in dealing with homelessness: an issue which encompasses central and local government, and local service providers. As well as carrying out surveys of local authorities and voluntary sector groups and seeking the views of prominent organisations such as Shelter and Crisis, we used focus groups and one-to-one interviews with homeless people to learn about their experiences and feelings about the system. We concluded that more effective ways were needed to reverse the rising trend of people without a home needing help and numbers living in temporary accommodation. There was a need for more hard data to inform the development of policy, particularly on programmes to prevent homelessness occurring. We recommended that the Directorate should gather and disseminate information on which of the homeless prevention schemes employed by local authorities offer best value for money; encourage local authorities to apply the lessons learnt from moving families out of bed and breakfast hotels to other groups in temporary accommodation; and work with the National Asylum Support Service to determine whether it has under-utilised property that might house those with nowehere to live.

An important part of our work to evaluate public services is to look at issues which affect people in the greatest need. In our report Helping Those in Financial Hardship: The Running of the Social Fund we looked at the workings of a service designed to help low-income and vulnerable households meet important or emergency expenses which they cannot afford from their normal income. The Social Fund reaches many people in need, but our report showed that awareness of the Fund needs to be raised and decisions made more consistently across the Fund in order for it to meet its objective of reaching the poorest in society. We made recommendations to improve the efficiency of running the Social Fund and its management of debt which could lead to annual financial savings of up to £8.5 million.

Our planned work in the coming year will continue to evaluate public services on behalf of the consumer. We are undertaking three joint reports with the Audit Commission looking at housing, local bus systems and child obesity from the perspective of the consumer. The reports will assess national, regional and local concerns and responses to these issues.

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our role

A consumer focus was central to our study. We conducted a telephone survey of 180 people who had received grants from the

programme and contacted 100 community groups for face-to-face interviews about their awareness

and perception of the Community Programme. Working with MORI we were able to reach well beyond groups

currently involved in the community networks and build a picture of the broader impact of the Community Programme.

One of our ongoing priorities is to follow through our work with users and stakeholders. We launched our report at the annual conference of the

National Association of Councils for Voluntary Services, the body representing organisations involved in the networks. At the same time we published a guide detailing case examples designed to stimulate ideas and encourage the spread

of knowledge and experience between community empowerment networks.

The presence of the Regions, Regeneration and Renewal team at the Sustainable Communities Summit provided an opportunity to

communicate our work in this area to a wider public. We produced a booklet and CD-ROM bringing together summaries of our

most recent reports and distributed briefing material inviting comments on our current and planned

programme of work.

An increased focus is being placed on the involvement

of community leaders, voluntary groups and neighbourhood residents in the policy decisions that

affect their lives and in the design and implementation of services, especially at the local level. The “new localism”, as it is

often termed, is aimed at enhancing civic life, deepening democratic involvement and contributing to more effective neighbourhood renewal and sustainable communities. Our Regions, Regeneration and Renewal

team is responsible for examining these issues.

In our report Getting citizens involved: Community participation in neighbourhood renewal, we examined the single Community Programme, which provides money for local self-help projects and community networks. The networks send representatives to Local Strategic Partnerships – bodies designed to steer neighbourhood improvement by linking public service

providers with the community, voluntary and private sectors.

We made ten recommendations to help the Office of the Deputy Prime Minister increase the effectiveness of the single

Community Programme. We highlighted the need for clearer communication; greater transparency about processes;

working in smaller geographic areas; and better support to help community representatives

have more impact on Local Strategic Partnerships.

GETTINGCITIZENS

INVOLVED

QUALITY OF SERVICES

our role

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Our value for money work programme provides an in-depthevaluation of public services from a customer perspective.Welfare to Work: Tackling the Barriers to the Employmentof Older People examined the progress made on two ofthe key elements of the government’s employment strategy:improving the position of older people in the labour marketand tackling age discrimination in the workplace. Wefound that good progress had been made in recent years inincreasing the overall employment rate for older people, butthat substantial regional and local variations in employmentrates remain and between 700,000 and one million over50s who would like to work currently do not do so.

As part of our examination, we looked at the local servicesfor the over-50s in London, the Midlands and the NorthEast. These areas were selected because of their relativelylow levels of employment among people aged over 50 anddiffering labour market characteristics. We commissioneda series of in-depth interviews across the three locationswith people aged between 50 and state pension age. Theaims were to explore what were the barriers to work; betterunderstand levels of consumer awareness of the servicesavailable to help overcome the barriers; establish whatservices people use; and obtain their views on the servicesand how they could be improved. In addition, we invitedthe views of people aged over 50, and those who workwith them, on the issues being addressed through a varietyof channels including specialist employment agencies,voluntary groups and publications.

We examined adult education in the report Skills forLife: Improving adult literacy and numeracy. We ranfocus groups with adult learners to find out what theirexperiences have been. We found that, although thegovernment’s Skills for Life target for 2004 had been met,the Department for Education and Skills needs to make surethat the programme is creative and responsive in engagingwith people, especially in those groups which are moredifficult to engage with. For example, better informationneeds to be available on successful schemes, such as thosewhich embed literacy and numeracy learning into coursesteaching vocational skills such as plumbing, or courses thatare attractive to hard to reach learners, such as community-based needlework for Bangladeshi women. Recognising theneed for government departments and local communities towork together to improve adult literacy and numeracy, we

sent our report to local Learning and Skills Councils and allstakeholder departments to raise awareness of the issues.

Our report Improving public transport in England throughlight rail found that light rail systems have broughtsignificant benefits to passengers by delivering fast, reliableservices and have enhanced the image of the cities wherethey have been built. Light rail systems were, however, anexpensive undertaking with rising construction costs andsome were not attracting as many passengers as expected,partly because of a lack of integration between light rail andother transport systems. Some systems were running at aloss, which discouraged the private sector from investing inthe development of new lines.

We recommended specific improvements to the design andplanning of future systems in order to enable the potentialbenefits of light rail to be more fully realised. Shortly afterwe published our report, the Department for Transportacknowledged our concerns and withdrew its final approvalfor three of 14 proposed new systems because of priceescalation. Since then, our report has become a benchmarkdocument within the industry to be used when extendingor building new systems. Members of the study team havespoken at a series of conferences and seminars, and havebriefed the House of Commons Transport Select Committeeand the Scottish Executive on the lessons from our report.

Effective risk management can help to deliver better publicservices by improving efficiency, increasing the reliabilityof decisions and supporting innovation. We highlighted theneed for a more structured approach for dealing with risk inour evaluation of costly and high profile failures in projectsand events of unprecedented scale, such as the responseto foot and mouth disease. Our report Managing Risks toImprove Public Services used examples of departmentswhich had introduced risk management programmes, suchas web-based claims systems at the Department of Tradeand Industry’s Coal Liabilities Unit to reduce the risk ofpaperwork being lost. Our work shows the benefits effectiverisk management could bring to the provision of services.A joint NAO and HM Treasury conference provided aplatform at which key players in central government couldconsider opportunities to take risk management forward inthe context of the Civil Service Reform Programme and toencourage the adoption of best practice.

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our role

We found that patients’ experiences of cancer care had broadly

improved since 2000, when the NHS Cancer Plan was introduced, with encouraging progress

made in most respects. However for some patients, including those with prostate cancer, elements of the

patient experience are not as good as they might be. Our recommendations concentrated on the need to improve the

availability of written and spoken information about their illness, treatment and support services; and about the need for standardised assessments of patients’ physical, psychological and social needs.

In order to drive home the recommendations made in this report and the two other reports, The NHS Cancer Plan: A Progress Report and

Tackling cancer in England: saving more lives, and to facilitate further improvements to the patient journey, we are running

conferences in London and Leeds for patients, stakeholders and experts to discuss solutions to the major issues. We intend

to take the outputs from these conferences to the NHS Cancer Action Team’s Network Development Plan

event in July which is attended by hundreds of cancer health professionals.

19

Our report Tackling Cancer:Improving the Patient Journey,

one of a series of three reportsdealing with cancer, examined

the journey for cancer patients fromthe first appointment with their GPthrough to support in the community

following hospital discharge. Wefocused on patients’ experience and

supplemented our patient survey withvisits to hospitals and hospices responsible

for delivering end-of-life care. A DVD andCD-ROM accompanying the report presented,

in patients’ own words, their experience ofcancer care.

BETTERSUPPORT

FOR CANCERPATIENTS

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IMPROVINGFINANCIAL MANAGEMENT FOR THE TAXPAYER

21

our role

This year we launched our Efficiency Centre, which will bring together expertise from across the Office on efficiency issues. The Centre will build on the work we have already done to provide advice internally to teams undertaking efficiency reviews and externally to departments, and to produce reviews of efficiency on cross-government issues. The first report by the Efficiency Centre, due to be published in 2005, will be a review of the government’s Efficiency Programme as a whole, drawing on examples of good practice in running efficiency programmes outside government. We are also developing a methodology to enable us to assess organisational efficiency.

Some examples of our work examining efficiency in central government include the two reports published on the efficiency gains to be made by managing absence. Managing Sickness Absence in the Prison Servicefollowed up our 1999 report on the same subject. Our recommendation that the Prison Service adopts a more proactive approach to managing sickness absence led to a reduction in the number of staff sick days, from an average of 15.9 days in 1998/99 to 12.7 days in 2004. The consequent saving in staff time, equivalent to £15 millionin staff costs, enabled a considerable resource to be deployed elsewhere in the Prison Service.

Could we get more for less?

Improving efficiency across central government and more widely is a core part of our role, drawing on our skills in accountancy

and business analysis, our view across the whole of central government, and our audit work. We

are enhancing our core outputs of financial audit and value for money reports with a growing

portfolio of work looking at different aspects of governance and we produce good practice

guidance where appropriate.

22

The breadth of high profile projects across government that we examine through our work on PFI/PPP is one of the things that makes the job interesting and challenging. There is also a great deal of interest in our work from overseas – the opportunity to advise on and discuss how PFI/PPP is developing internationally is very rewarding.

LOUISE YAXLEY, AUDIT PRINCIPAL

Our next report on attendance looked at the Department for Work and Pensions, which, like the Prison Service, has historically had high levels of sickness absence. Our report Managing Attendance in the Department of Work and Pensions found that, although the department had designed and introduced appropriate policies, they were not being fully implemented across the organisation. The Department for Work and Pensions has now set out an action plan, which takes account of our recommendations, to communicate its policies better and to support management so that it can identify and tackle problems earlier. An additional product from our work was a report summarising existing research evidence on what works in tackling sickness absence, drawn from evidence in both the public and private sectors, which we sent to hundreds of public bodies. We have also developed an interactive CD-ROM audit tool based on our methodology to allow others to examine attendance management.

In addition to our planned forward programme of work, we retain sufficient capacity to respond to important issues as they arise. In April 2004, we examined the reliability of the Home Office’s quarterly asylum statistics at their request and considered whether other forms of migration had been affected by recent changes in the number of asylum applications. We were asked to publish our report in May 2004 alongside the release of the quarterly asylum statistics to provide independent assurance to Parliament and the public on the reliability of the statistics. We found that the asylum data and statistics were in most respects reliable and that there was no clear statistical evidence that the reduction in the number of asylum applications has had any significant impact on other forms of migration.

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our role

The work on asylum statistics complemented our separate efficiency study Improving the Speed and Quality of Asylum Decisions. This study examined the Immigration and Nationality Directorate’s arrangements for making asylum decisions and the Immigration Appellate Authority’s appeal arrangements, examining the speed and quality of initial decisions and the speed of appeals. We recommended changes that would accelerate the application and appeals process, fundamental to providing an efficient service, which the Immigration and Nationality Directorate has implemented. The changes have also led to a saving of £1 million so far and we expect further savings to be made.

We often revisit subjects to assess the extent to which the NAO’s and the Committee of Public Accounts’ recommendations are being followed through. Our report on sickness absence in the Prison Service was one example. Another example is our report on Inheritance Taxwhich found that, since our 1999 report, there had been a 66 per cent improvement in the efficiency of administering cases, and case backlogs had been more than halved. Implementing recommendations from the Committee’s 1999 report on Inheritance Tax had also allowed sample checks of cases to reflect risks more closely, and improvements to compliance checks on lifetime gifts had secured additional tax of £800,000 a year.

The role of audit committees is integral to good corporate governance in departments and other public bodies. They play a valuable role in improving financial management in organisations and, over the last two years, we have been developing a range of products and tools to assist public sector audit committees. Our self-assessment tool for audit committees is currently being developed into a software application, which will make it easier to use and allow committees to benchmark themselves against others. Another element, a self-assessment checklist, is available on our website and, later in 2005, we will be launching a compilation of practical tips aimed at increasing the effectiveness of audit committees.

PROTECTINGTHE EUROPEAN

TAXPAYER

Our 2005 report and the subsequent report of the Committee of

Public Accounts, issued after a fact-finding visit to the European institutions, found that, despite some improvements in financial management at the

Commission, the European Court of Auditors was still unable to give a positive opinion on the European Union accounts. The

report identified areas where significant improvements were required. Both our report and that of the Committee made recommendations

for the United Kingdom government to use its Presidency of the European Union in the latter half of 2005 to press for urgent

action to support, and encourage other Member States to support, the development of a road-map towards obtaining

a positive opinion from the Court of Auditors on the Community accounts. This road-map, which should include a system for improving internal controls at European and Member State level, is due to be presented by the Commission shortly. Progress on the Committee’s recommendations will be followed up in our next annual report on European financial management due

to be published in 2006.

Our annual report Financial Management in the

European Union aims to improve financial management for the European, not just the UK,

taxpayer. The report summarises the findings of the European Court of Auditors’ review of the Community

accounts and comments on other developments in European Union financial management. By highlighting the key issues from a United Kingdom perspective, our report provides Parliament with an important source of information to assist its scrutiny of both the government

and the European Institutions for the management and spending of European Union funds. It is designed to stimulate debate on how to bring

about improvements.

PRIVATE FINANCE AND PARTNERSHIPS

our role

MAIN POINTS FROM OUR 2005 REPORT

ON DARENT VALLEY HOSPITAL: THE PFI CONTRACT IN OPERATION

The first PFI hospital had been delivered early and the subsequent service delivery overall had been satisfactory.

The Trust had received 30 per cent of the refinancing gains under the sharing arrangements introduced following our earlier

work, but the Trust had also taken on new risks as a result of the refinancing.

Our recommendations included the need to reduce subjectivity in the reassessment of the PFI contractor’s service

performance, the importance of thorough assessments of refinancing proposals and the need for authorities to

plan for the considerable senior management effort that will be needed in managing a

PFI contract.

We passed a notable milestone with the publication ofour 50th Private Finance Initiative (PFI) / Public PrivatePartnership (PPP) report in February 2005. PFI and PPPcontinue to be used for an increasingly wide range ofpublic service projects, including new hospitals, prisons,transport infrastructure, government buildings and themanagement of property estates. The 50th report, DarentValley Hospital: The PFI Contract in Action, continued ouroutput aimed at providing valuable analysis of PFI and PPPprojects with recommendations to help all those who arecurrently developing or managing these types of projects.

We have always sought to keep abreast of marketdevelopments so that our PFI/PPP reports remain bothtopical and useful. There are three elements to ourcurrent PFI/PPP focus. Firstly, we continue to report onhow individual contracts are awarded. Secondly, we areincreasingly reporting on how the deals are working inpractice, either as individual deals or group projects suchas PFI hospitals. Finally, we produce thematic reports onsubjects which have relevance to many PFI/PPP projects:for example, on refinancing, managing PFI relationshipsand PFI construction.

The recommendations from our PFI/PPP reports,highlighted in the box opposite, have advanced the publicsector’s approach to value for money from its PFI/PPPdeals. PFI/PPP deals often raise complex issues and weseek to help departments by drawing out lessons whichwill really make a difference to their understanding andfuture approach.

Over the last six years, recommendations resulting from our PFI/PPP work have saved the taxpayer £750 million. To enhance the effectiveness of our messages we have also offered a range of products to departments on PFI/PPP issues. As well as presenting an annual PFI/PPP Conference, we now run one-day workshops where individual project teams can spend a day with us considering practical issues, such as managing PFI relationships, in greater depth. We also have a directory of our PFI/PPP recommendations which anyone interested can access easily via our website: www.nao.org.uk.

We have a busy programme of further PFI/PPP workin hand. New subjects due to be reported on in 2005include LIFT (the PPP arrangements for GP surgeries),PFI Courts, the Channel Tunnel Rail Link, the refinancingof the Norfolk & Norwich Hospital and the operationalperformance of the PFI hospitals portfolio.

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25

our role

MAKING A DIFFERENCE IN PFI/PPP

A GENERAL METHODOLOGY TO

APPROACHING PFI/PPP PROCUREMENT

In our report Examining the value for money of deals under the Private Finance Initiative, we have set out the questions departments should ask

themselves when taking forward PFI/PPP

procurement.

THE SHARING OF

REFINANCING GAINSContractors may be able to renegotiate

the terms of their financing arrangements to take advantage of reduced risks once the initial stages of a project are completed. It was as a

result of our examination of the first completed refinancing, the Fazakerley prison PFI

contract, that the Treasury negotiated with the private sector arrangements to share refinancing gains.

CHANGING THE APPROACH TO ASSESSING

THE VALUE FOR MONEY OF PFI/PPP DEALS

In 2004, the Treasury issued new guidance on assessing the value for money of PFI/PPP deals. The new guidance reflected the conclusions of a number of NAO reports that departments often did not take account of the inherent uncertainties in public sector

comparators (the assessments of how much it would cost to complete a project by conventional

procurement), and failed to evaluate fully all quantitative and qualitative factors when

making cases for going ahead with PFI/PPP procurements.

DEVELOPING EXPERTISE ON MANAGING

PFI/PPP RELATIONSHIPSAt the heart of any PFI/PPP arrangement is a set of detailed agreements between a range of public and

private sector bodies, setting out what each will contribute and what they can expect of each other. Making these relationships work well is the key to long-term success. We provided an early focus on the importance of such

relationships. We published a report in 2001, Managing the Relationship to Secure a Successful Partnership in

PFI Projects, based on a survey of over 100 PFI/PPP projects. We have followed up the report

with workshops for public sector project teams wishing to learn more about PFI

relationship issues.

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26

IMPROVINGSERVICES FOR THE CONSUMER

27

our role

Could we get better results?

As well as holding service providers to account for the quality of public services, we also undertake work

designed to improve the public’s experience of services provided by the government. Our cross-government perspective enables us to identify areas where public

services could be improved, and make recommendations supported by good practice guidance which focus on

possible improvements to the quality of service delivery. We consult widely and liaise closely with service

providers, consumers and panels made up of sector experts to ensure our recommendations are

robust and practical.

Our report Ministry of Defence: Quality of Housing Services provided to Service Families Overseas looked at the day-to-day management of housing for UK military personnel and their families when based overseas. Poor housing services can affect the morale of military personnel and their families. We wanted to gather the opinions and experiences of those using military housing services in order to improve the quality of service for Service Families. We employed specialist housing consultancy firms to carry out fieldwork for the report. They surveyed 9,500 families in Cyprus, Germany and Gibraltar and benchmarked the quality of military housing services against Housing Associations and local authorities. Of those surveyed, two-thirds were satisfied with their accommodation and the quality of housing services they received, a satisfaction rate comparable to inner London boroughs, but one-third were not satisfied. To improve the quality of housing services, we recommended that the Ministry of Defence works to develop a more customer-oriented housing services culture overseas, akin to the one operating in the UK. We also recommended that the Ministry introduces greater consistency and professionalism in the service it provides and develops ways in which to measure its performance better in order to target those service areas which need to be improved. The Ministry is actively considering our findings and recommendations in its strategic planning for overseas housing improvements.

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In 2000 the government established independent statutory bodies to promote and protect the consumer interest in the energy and postal markets. Energywatch and Postwatch were created with a mandate to ensure that consumers have an effective and strong voice within the regulatory system. Our report Energywatch and Postwatch: Helping and protecting consumers found that, although both bodies have brought benefits to consumers, they needed to develop a better understanding of the nature and extent of consumer problems in their respective markets. Developing a more comprehensive overview, including the needs of the elderly and low income groups, would help both bodies to address systemic and recurring problems faced by consumers.

Both Energywatch and Postwatch responded positively to our examination and findings and have taken action to implement the recommendations. In particular, to develop a better understanding of consumer needs, Energywatch is surveying energy consumers to develop a better understanding of consumer needs. Our analysis also identified ways in which costs could be reduced, including a re-examination of the regional structure and by sharing administrative functions. In response, Energywatch, with the support of Postwatch, has set up a Consumer Action Network to promote the sharing of good practice between consumer bodies and to explore the scope for joint working. Postwatch is now also negotiating a new funding mechanism with the Royal Mail and is centralising its complaint handling function in Belfast.

Our study Improving patient care by reducing the risk of hospital acquired infection: a progress report followed up on the recommendations made in our 2000 report The Management and Control of Hospital Acquired Infection in Acute NHS Trusts in England, which helped place this issue on the public agenda. Our study concluded that while there had been notable progress at Trust-level in putting systems and processes in place and in strengthening infection control teams to improve prevention and control of hospital acquired infection, the NHS still does not have enough information on the extent and cost of the problem.

The NAO positively and effectively influences decisions made by government. Our Patient Choice Study, for instance, made several recommendations which directly impacted on the way the second phase of the Choice Policy was implemented. As a trainee Chartered Accountant, you are constantly moving between audits, college and Value for money projects; there’s always something new to do. That’s exactly why I joined the NAO, and after 18 months I certainly haven’t been disappointed.

HELEN KUDOAH, ASSITANT AUDITOR

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CONSUMERCHOICE

In previous years wehave reported on the introductionof choice into the telecommunicationsindustry and this year our report Directory

Enquiries - From 192 to 118 continuedthis theme by studying the liberalisation of thedirectory enquiries market. This move has given

greater choice to the residential caller and has led tothe introduction of new innovative services. After one yearof competition however, two operators had 80 per cent of

the market, and most residential customers were paying morefor directory enquiry services with no obvious improvement in

quality. We recommended that the regulator could facilitate aneffective competitive market by raising consumer awareness and

encouraging individuals to find out more about the choices available. Wealso found that there was scope for businesses to take greater advantage of

the opportunities created by competition. Raising awareness is central tomaking the ‘choice’ agenda work in practice and to allow consumers to

reap the possible benefits of improved services. We also highlightedlearning points that other regulators should consider when

opening a market to competition, particularly with regard toassessing the quality of existing services and evaluating

whether changes would lead to improvedservices for the consumer.

our role

Our study PatientChoice at the Point of GP

Referral was a real-time examinationof a major NHS project to enable all NHS patients (some

9 million people) referred by their GP for an outpatient appointmentat a hospital to choose the day, time and location of their appointment.

The report was delivered a year before the project was due to be rolled outacross England and aimed to contribute to and support change, thus enabling

the issues raised by our report to be addressed.

We identified the major factors that would support the delivery of Patient Choiceand examined the extent to which the Department of Health and the NHS had

tackled barriers to progress. Recognising the importance of GPs in making PatientChoice a success, we conducted an online survey of 1,500 GPs to develop the most

authoritative and up-to-date picture of their views. We found that the engagementof GPs in the project was low, which could prevent the Department of Health from

realising the benefit of the project if it was not addressed. The Department ofHealth had also purchased an electronic booking system as the most effective

and efficient way of delivering Patient Choice, but we found that it wouldnot be ready everywhere in time to match the Choice deadline. Our

recommendations on GP engagement, electronic booking andalternatives to electronic booking proved constructive and

timely and are being used by NHS organisations tosupport the roll-out of the initiative.

Consumer choice inpublic services, whether we

are choosing telephone directoryenquiry services, energy suppliers ordoctors, is a growing part of citizens’lives. We are responding to the choice

agenda by examining subject areas whichhave a big impact on the consumer andby making recommendations to ensure

that government bodies are able todeliver better public services.

Recommendations from this report included: the development of national mandatory surveillance of hospital acquired infection; infection control as a key component in undergraduate training; infection controls for all staff; public awareness of, and compliance with, good infection control practice; and encouragement of the public’s active participation in improving staff and visitor compliance. Following publication of our report, the

government announced a target to reduce MRSA cases by 50 per cent.

We have promoted the messages from this report widely among NHS Trusts, healthcare inspectorates, trade unions, think tanks, specialist publications, professional organisations and patient groups. Staff from the study team participated in the Cleaner Hospitals Summit organised by the Patients Association earlier this year and in study days and

workshops, have spoken at conferences and written articles to ensure that our findings are passed on to the widest possible spectrum of people involved in hospital cleanliness and good infection control. We are represented on the Towards Cleaner Hospitals and Lower Infection Rates Programme Board which is responsible for driving through improvements in tackling hospital acquired infection.

30

SUSTAINABLE DEVELOPMENTThe remit of the Department for Environment, Food and Rural Affairs is the pursuit of sustainable development, of which environmental concerns are a core part. We carry out a varied work programme on both environmental and wider sustainable development issues, from renewable energy to government progress in meeting international sustainable development targets. As well as our statutory financial audit work and value for money reports on the department, we are undertaking an increasing number of additional pieces of work, including the preparation of briefings for the House of Commons’ Environmental Audit Committee.

The UK is a signatory to the 1997 Kyoto Protocol, an international agreement to reduce emissions of greenhouse gases. The Department for Environment, Food and Rural Affairs introduced the UK emissions trading scheme, to bring about emissions reductions by offering financial incentives to those companies achieving reductions and to help companies gain experience of emissions trading before a European Union scheme was introduced. Our report The UK emissions trading scheme:a new way to tackle climate change noted that the scheme had benefited the environment and the UK economy and that, while some emissions reductions would have occurred anyway, most were attributable to the scheme. During the course of our work, we found that some of the

companies could achieve reductions beyond their targets. Our work helped the Department for Environment, Food and Rural Affairs to improve the operation of the scheme by agreeing further emissions reductions with six of the leading companies. These extra reductions, a 75 per cent increase in the scheme’s effectiveness, would have cost £12 million per year for three years if the department had needed to buy them in the emissions market.

Programmes with an environmental aspect are not only found in the Department for Environment, Food and Rural Affairs. We also reviewed the Department of Trade and Industry’s measures to increase the proportion of the nation’s electricity generated from renewable energy sources in our report Renewable Energy. As a response to global warming, the government has set a target that by 2010, 10 per cent of electricity should be supplied from renewable energy as a response to global warming. We found that, as at March 2004, the proportion of renewable energy generated was 2.4 per cent against a target of 4.3 per cent. However we concluded that the governmentwas likely to get close to achieving 10 per cent by 2010-11if electricity prices remained high and its responses to issuessuch as improving the electricity grid were effective. Ourrecommendations were designed to help the Departmentof Trade and Industry meet the 10 per cent target whileminimising the costs for the taxpayer and consumer.

31

our roleour role

In 2004 we started to provide briefings to the House of Commons’ Environmental Audit Committee. The Committee was first established in 1997 to look at the environmental impact of all government departments and to audit their performance against targets set by Ministers. So far we have completed two short cross-government briefings for the Environmental Audit Committee, which the Committee used as a key source of evidence for their enquiries and which were published as appendices to the Committee’s reports. The work drew on our experience in examining processes, validating and analysing data and our understanding of the framework within which government departments operate.

In July 2004 we provided analysis for the Committee’s Greening Government 2004 report. Our work assessed the Sustainable Development in Government Report 2003 which provides information about the performance of 20 central government departments and their executive agencies in nine areas of sustainable development for the financial year 2002-2003. In March 2005, as the basis for the Committee’s World Summit on Sustainable Development: A UK Progress Report, we looked at the extent to which the United Kingdom has delivery mechanisms to enable progress to be planned, co-ordinated, tracked and demonstrated against the commitments made at the World Summit on Sustainable

Development held in Johannesburg in 2002. We are in the process of doing further work for the Committee on departments’ annual reporting of sustainable development and progress on sustainable procurement.

We were also asked by the Environment Agency to reviewits Environmental Accounting System. The Agency launchedan Environmental Accounting Initiative in 1997, the keyobjective of which was to develop a system to captureinformation about, and report on, areas of the Agency’sexpenditure that have an impact on the environment. Itincludes measures such as kilowatts of electricity and cubicmetres of water used. In our review, we highlighted theAgency’s significant progress in developing the system, whilepointing to areas where further progress could be madethrough improved training, embedded use of the systemwithin the Agency and improved usefulness of the reportsproduced. The Agency accepted our recommendationswhich, once implemented, will strengthen theenvironmental management of its business.

And, closer to home, at the NAO we have an activeSustainable Office Group, whose aim is encourage NAOstaff to ‘think global, act local’. Comprised of over 40members, the Group’s current areas of focus are: minimisingwaste; reducing energy consumption; encouragingsustainable procurement; and promoting sustainable travel.

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A GLOBALORGANISATION

32

The strong reputation of our work leads us to play a prominent role on the international stage. We seek opportunities to work with other nations and international organisations to improve public audit and accountability. We are keen to raise the profile of the United Kingdom through these activities, all of which are self-financing. This work also provides excellent opportunities for our staff to apply their expertise in a new context, share and learn from best auditing practice and develop additional skills. In 2004-05 we sent some 100 people to 33 projects around the world. In 2004, based on the recommendation of a panel of our INTOSAI peers, the NAO received the prestigious Jörg Kandutsch Award for significant achievement and contribution in audit, including our technical support to capacity-building projects in other SAIs and as the auditors of international organisations.

An expanding range of audit appointments and productsThe Comptroller and Auditor General is the appointed auditor of major international bodies including the United Nations (UN) World Food Programme, the International Labour Organization, the International Criminal Court, the Pan-American Health Organization and the Organisation for Security and Co-operation in Europe. In 2004, we took up appointment as external auditors of the Council

of Europe, the International Oil Pollution Compensation Supplementary Fund and the World Meteorological Organisation and were reappointed auditors to the Commonwealth Secretariat for a further three years, after an open competition. In addition to London-based staff, we have NAO teams based in Rome and Geneva.

We have expanded the service we give to our international audit clients beyond financial and value for money reports. We work with them, their governing bodies and individual donors to contribute to improvements in governance and accountability more widely by undertaking examinations into corporate governance and financial management, and specific performance audit work. The Comptroller and Auditor General continues to play a leading role as a member of the Panel of External Auditors of the United Nations and Specialized Agencies, helping to improve external oversight arrangements in the United Nations.

A leading role instrengthening co-operationWe make an important contribution to the globalmembership of INTOSAI. At the Triennial Congress inOctober 2004, we presented a key paper on developingmultilateral and bilateral co-operation amongst memberaudit institutions, which was adopted as one of fourstrategic goals for INTOSAI over the next five years. We alsocontinue to lead INTOSAI’s Working Group on Privatisationand sit on its Task Force on Fighting Against InternationalMoney Laundering. We have also become members of anew Task Force aimed at helping more SAIs develop thecapacity to carry out the audit of international institutions.

In May 2004, we hosted the Third EUROSAI/OLACEFS seminar in London. Over 100 delegates from more than 30 audit institutions and other organisations throughout Europe and Latin America shared their experiences of e-government and the challenges of training and equippingstate auditors for their role in audit in the 21st century.

CONTRIBUTINGTO THE

INTERNATIONAL DEVELOPMENT

AGENDA

Our 2004-05 workprogramme also maintained our

activities with Supreme Audit Institutionsunder the European Union enlargementprogramme while also providing trainingand support to developing countries as far

apart as Mongolia, Jamaica and Peru.

In March 2005, we hosted a two weekWorld Bank funded workshop for experiencedauditors from the Iraq Board of Audit (WaadRashid Hasan, Director General, Board of

Supreme Audit of Iraq is pictured above). Thisproject was the first stage in re-developing links

between the two institutions and helpingIraqi auditors re-engage with recent

developments in audit.

We are committedto supporting our audit

colleagues throughout Africa.Over the last year we have

provided assistance in Ghana,Nigeria, Mauritius, Mozambique

and the Gambia. At the invitation of theAuditor General of the Gambia, and with

support from the Department for InternationalDevelopment, we seconded an experienced

auditor to the Gambia for six months, to assist withthe fifteen year backlog of unaudited accounts.We have also forged links with wider regional

initiatives in Africa, working withthe South African, Swedish and Dutch

audit offices to improve publicaudit in the continent.

Since August 2000 I have been living andworking in Ghana managing projects

funded by the European Union, Departmentfor International Development and theDanish International Development Agencyto modernise the Ghana Audit Service.While I am deeply honoured to receivean OBE, it is also a tribute to the projectteam from the NAO and Sweden who

have made substantial contributions toimprove the quality of public audit in Ghana.

I am grateful also for the support of my familyand everybody else who has been involved in

our work in Ghana.

WILF HENDERSON OBE, AUDIT MANAGER

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There is growinginternational awareness of

the important role Supreme AuditInstitutions (SAIs) can play in supporting

development and in making sure that fundsreach those most in need. In addition to our

leading contribution to making capacity buildingpart of the INTOSAI agenda, we have helped theWorld Bank, the European Union and internationaldevelopment agencies strengthen their support for

SAIs. We also have members of staff secondedto the United Kingdom Department for

International Development’s governanceteam and to the International Board of

Auditors for NATO.

a global organisation

In the European Union arena we chair thekey Technical Working Group on Co-operationbetween the Member State audit institutionsand the European Court of Auditors. We also workclosely with Contact Committee colleagues and others(such as the EUROSAI Training Committee, the INTOSAIDevelopment Initiative and SIGMA (an Organisation fundedby the European Union and OECD which promotes goodgovernance in Central and Eastern European countries) inbuilding links with and assisting the SAIs of countries whichare working to join the European Union in the future.

In 2004, we co-edited a Good Co-operation Practice Guidewith SIGMA, highlighting good practice and lessons learnedfrom a wide range of small scale audit activities carried outjointly by the SAIs of European Union Member States andthe European Court of Auditors with the SAIs of CandidateCountries as part of the European Union enlargementprogramme. It has since been widely publicised in theEuropean Union, EUROSAI and INTOSAI.

Bilateral connections withaudit offices across the world We also work closely with audit offices in other countries on a bilateral basis. In 2004-05 we were pleased to accept an invitation from the Chamber of Accounts of the Russian Federation to carry out a functional review of their work. Elsewhere we have bid for and been awarded European Union funded projects to help strengthen the capacity of the Supreme Audit Institutions of Croatia, Latvia, Lithuania and Turkey.

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OUR PEOPLE AND RESOURCES

The Freedom of Information Act, along with the Modernising Government Agenda, mean that Public authorities are paying more attention to knowledge and records management issues. Our job has been to help the NAO respond to these challenges - all our records are public records! Together, we are responsible for managing the NAO’s information, advising staff on procedures and legislation, and assisting staff in implementing new systems to make our records management more efficient and effective

NORA MILLER, LIBRARY MANAGERPAT RYAN, RECORDS MANAGER

We employ professionally qualified accountants and accountancy trainees to undertake our financial audit work. Seventy trainees a year are recruited to our graduate scheme to study for the Institute of Chartered Accountants of England and Wales accountancy qualification. Our trainees consistently achieve high results and two of them won ICAEW prizes for their exceptional exam performance in the last year. Our value for money work requires equally skilled staff. We recruit high calibre staff with a variety of technical and subject expertise as well as those with on-the-ground experience of the different sectors we examine. For example, we employ experts in areas such as statistics, environmental issues, defence and business analysis. Our well-qualified corporate service staff support our work and ensure that the NAO operates smoothly.

We have recently appointed two new Board Members. Anna Simons, formerly Head of UK Corporate Clients at BNP Paribas, will be responsible for our work on the National Health Service and for the portfolio of work covering public private partnership deals and the private finance initiative. Gabrielle Cohen has been promoted from within the NAO where she trained as an auditor and most recently has been Director of Communications and Corporate Affairs. Gabrielle will be responsible for communications, corporate affairs, business development, relations with Parliament and increasing the impact of our work.

We contribute to and are represented on influential committees and working groups in the accountancy profession and across the public sector. The Comptroller and Auditor General continues as Chairman of the Review Board and Chairman of the Professional Oversight Board for Accountancy. Other staff are represented on the Financial Reporting Advisory Board, on the Councils of the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Public Finance, and on the Accounting Standards Board and Auditing Practices Board, among others.

Our staff are also active in the community. Our community investment programme continues, under which members of NAO staff offer e-mentoring to secondary school pupils, weekly reading support to primary school pupils and support to a local homeless shelter. Many of our staff serve as school governors and on other local committees.

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Developing our staff2005 is the second year of our leadership and management development programme, unlockingourpotential. unlockingourpotential comprises a range of challenging and exciting core programmes supplemented by a wide variety of challenging guest speakers on staff and organisational development issues. Alongside existing programmes for our auditors/analysts, managers, directors and Board-level staff, we have introduced two new dimensions this year. We now have a programme aimed at developing our secretarial staff further, and we have launched a Talent Management Programme aimed at those people who show strong potential to achieve the most senior positions. To date236 people have attended one of our core programmes.

Two of our unlockingourpotential programmes include an external case study where staff visit a host organisation and are able to use their existing skills in a new environment and put into practice new skills learnt on the programme. Two particularly successful case studies were at YO! Sushi, a restaurant chain, and Groundwork, an environmental regeneration charity.

On the directors’ and senior managers’ programme, YO! Sushi set the task of identifying ways in which the company could expand their business in the UK. Following a day of intensive fieldwork, the group presented their findings and a written report to YO! Sushi’s

Chief Executive, Robin Rowland. Robin said that, “The NAO’s case study of YO! Sushi’s operations and growth strategy was for both parties incisive and a lot of fun. The high level of the delegates’ personal interest and challenging interaction with the YO! Sushi management team gave great credibility to the course output, and many recommendations have already been acted upon.”

Groundwork Camden and Islington is an environmental regeneration charity which focuses on sustainable development in communities in the UK which are in need of investment and support. The NAO group was asked to give a critical assessment of Groundwork’s evaluation strategy and make recommendations on how Groundwork can meet their target of evaluating 60 per cent of projects. After a day of fieldwork which included interviewing people in the local community, the group presented their recommendations and a newly designed questionnaire to Groundwork Camden and Islington’s senior managers and trustees. Following the project, Donna Lister, formerly Operations Director at Groundwork said, “We were all really impressed with what the team had come up with in the short space of time available. The report will be circulated to an evaluation group meeting for a full discussion about what happens next.”

I joined the NAO with a background in social science research techniques and defence technology policy, and a few years later I am responsible for directing our value for money work on defence. I found the unlockingourpotential programme I attended incredibly powerful; it

gave me the opportunity, and some of the tools, to take a hard look at

my own management and leadership approach, and has certainly helped me

prepare for a senior role.

MARK ANDREWS, DIRECTOR

our people

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STATEMENTON OUR HEALTH AND SAFETYPOLICIES AND PRACTICE

Our health and safety policy is reviewed annually to ensure compliance with legislation and is publicised to remind all of our staff of the importance of health and safety in the working environment.

We have a good safety record. Over the past year we recorded 22 accidents, two of which were required to be reported under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations. Although this represents an increase over the previous year, we believe that this is largely due to improved staff awareness, borne out by near-miss reports that previously would not have been received.

The main risks to staff continue to be slips, trips and falls and the risks associated with the use of Display Screen Equipment. To manage these risks we are continuing a programme to replace our existing office furniture with new workstations incorporating improved cable management and we take every opportunity to raise trip hazard awareness. We operate an ongoing system of Display Screen Equipment Risk Assessments and have particular arrangements in place for home working and new and expectant mothers.

We also publish health and safety advice and guidancefor staff. In July 2004 we published Travelling and WorkingAway from the Office. This provided guidance on keyhealth and safety issues that should be considered by staffwho work and travel away from the office either in thiscountry or abroad. In December 2004 we issued summaryguidance to all staff on the NAO’s Health and Safety policy,organisation and arrangements. In addition, in October2004, we participated in the European Safety and Health atWork Week which focused on building in safety. This was avery successful event attended by over 200 staff.

We continue to use the services of external experts in a number of areas. In July 2004 we commissioned an external audit of our health and safety systems and procedures. This resulted in some enhancements to our management of health and safety, including the appointment of a full time health and safety professional in a new post of Health and Safety Manager. We also arranged environmental monitoring of our working environment in June and December 2004. These surveys confirmed that the air quality and comfort conditions met required standards, based on air sampling (checks for dust particles, micro-organisms and the levels of ozone, carbon dioxide and carbon monoxide), as well as air temperature and humidity, airflow and lighting.

The occupational health and welfare provision, including our Employee Assistance Programme, continues to operate well.

The NAO has a Health and Safety Committee which meets twice a year and reports to the Management Board. The Committee includes staff and Trade Union representatives.

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STATEMENTON MAINTAINING THE QUALITYAND INDEPENENCE OF OUR WORK

We recognise the crucial importance of maintaining our professional reputation and ensuring that we have safeguards in place to manage any risks to the quality and integrity of our work. Key elements of our approach include:

Maintaining independence and objectivityThe staff of the National Audit Office are appointed by the Comptroller and Auditor General who, as an Officer of the House of Commons, is totally independent of Government. We comply with the ethical guidance of the accountancy profession, and all staff are required to sign an annual Code of Conduct statement, declaring that they have complied with the Office’s policies on personal and professional conduct, including independence. Assignment directors in charge of individual audits are periodically rotated to minimise the risk of over-familiarity.

The National Audit Office will be complying with the Auditing Practices Board’s Ethical Standards and International Standards on Auditing (UK and Ireland) for the audit of 2005-06 accounts onwards. This will ensure that the Office’s practices reflect best practice.

Ensuring high calibre and competent staffOur policies and procedures on staff recruitment, retention, training and appraisal ensure an appropriate number and mix of competent high calibre staff for our work, including temporary staff that we employ. Staff remuneration and promotion are based on assessments of competencies, performance and experience, informed by a comprehensive appraisal process and assessment centres for more senior promotions. Our staff are required to undertake and maintain a minimum of 220 hours of training and development over a rolling three year period, in accordance with agreed personal development plans and the requirements of their professional bodies, and this is monitored centrally.

We require our sub-contractors also to meet high standards of independence, professional conduct and competence. These requirements are set out in our framework agreements and contracts, and we have procedures in place to monitor compliance.

Quality controlOur financial audit quality control procedures are designed to ensure that our work is carried out in accordance with Office policies, wider professional standards and the audit regulations and guidance of the three UK chartered accountants’ institutes.

Central to this process is assignment manager and director review at all stages of the audit process before the audit certificate is signed, supported as necessary by consultation with experts from outside the audit team. Such review includes assessment at the outset of an assignment of whether the proposed audit team have the skills, experience, independence and time to perform the audit work assigned to them. In addition, for those financial audits where there are particular concerns of public interest or high audit risk, a further review is carried out by a director who is independent of the audit, before the audit certificate is signed.

Similar review procedures are applied to our value for money work, with studies subject to five quality thresholds at which risks and quality are fully considered by management before the work proceeds further. Our reports are approved personally by the Comptroller and Auditor General before publication, following a process in which our audited bodies are asked to agree the facts in the report, and other stakeholders are asked to comment. Many of our value for money reports are informed by a broad panel of experts on the subject in question, who comment on the scope of our report, the issues addressed and the methodology we employ.

statements

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The National Audit Office will, along with auditors in theprivate sector, be complying with the International Standardon Quality Control 1 (ISQC 1). ISQC 1 establishes standardsand provides guidance regarding the Office’s responsibilitiesfor its systems of quality control. The Standard requires thatthese systems be in place by15 June 2005.

Quality reviewFor financial audit, an annual programme of cold reviews of a number of audits is conducted. Reviews, which take place after the account has been certified and are led by a financial audit director independent of the audit, assess whether sufficient and appropriate evidence to support the opinion has been collected and evaluated, and whether National Audit Office and wider professional standards have been maintained. The sample is designed to be broadly representative of account type and complexity.

As is normal practice for the major audit firms, our financial audit practice is also subject to annual review by an independent monitoring body, the Quality Assurance Directorate of the ICAEW, who evaluate our compliance with the profession’s Audit Regulations.

For value for money audits each published report issubject to an independent external review by eitherthe London School of Economics or Oxford University.Experts from these institutions assess the publishedreports against a range of agreed criteria, includingthe appropriate use of methods, and the robustness ofconclusions and recommendations. Both LSE andOxford have set up rigorous moderation procedures toensure that the academic staff carrying out the reviewsapply uniform standards.

Reviews of internal and external quality assurance programmes for both financial audit and value for money work feed into a learning process which is designed to disseminate wider lessons to all of our audit staff.

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MAJOR REPORTSPRODUCED FROM APRIL 2004 - MARCH 2005

Publication HC Session

Cross-government

Improving IT procurement HC 877 2003-2004

Managing Risks to Improve Public Services HC 1078 I & II 2003-2004

Delivering Public Services to a Diverse Society HC 19 I & II 2004-2005

Citizen Redress: What citizens can do if things go HC 21 2004-2005wrong with public services

Improving Public Services through Better Construction HC 364 I & II 2004-2005

Culture, Media and Sport

The Royal Parks - An Executive Agency HC 485 2003-2004

Managing National Lottery Distribution Fund balances HC 875 2003-2004

The British Library - Providing services beyond HC 879 2003-2004

the Reading Rooms

VisitBritain: Bringing visitors to Britain HC 1160 & SE/2004/248 2003-2004

UK Sport: Supporting elite athletes HC 182 & SE/2005/9 2004-2005

Defence

Battlefield Helicopters HC 486 2003-2004

Major Projects Report 2004 HC 1159 I & II 2003-2004

The Rapid Procurement of Capability to Support Operations HC 1161 2003-2004

Quality of Housing Services to Service Families Overseas HC 342 2004-2005

Education

Skills for life: Improving adult literacy and numeracy HC 20 2004-2005

Improving School Attendance in England HC 212 2004-2005

English Regions

Getting Citizens Involved: Community Participation HC 1070 2003-2004in Neighbourhood Renewal

More Than a Roof: Progress in Tackling Homelessness HC 286 2004-2005

Environment, Food and Rural Affairs

UK Emissions Trading Scheme: A New Way to HC 517 2003-2004Combat Climate Change

Helping Farm Businesses in England HC 1028 2003-2004

Foot and Mouth Disease: Applying the Lessons HC 184 2004-2005

major reports

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Europe

Financial management of the European Union: HC 529 2003-2004A progress report

Financial Management of the European Union HC 289 2004-2005

Law, Order and Central Institutions

Health and Safety Executive: Improving health HC 531 2003-2004and safety in the construction industry

The Management of Sickness Absence HC 533 2003-2004in the Prison Service

Improving the Speed and Quality of Asylum Decisions HC 535 2003-2004

Asylum and migration: a review of Home Office statistics HC 625 2003-2004

Facing Justice: tackling defendants’ non-attendance at court HC 1162 2003-2004

Reducing Crime: the Home Office working with Crime HC 16 2004-2005and Disorder Reduction Partnerships

Reducing Vehicle Crime HC 183 2004-2005

National Health Service

Improving patient care by reducing the risk of hospital HC 876 2003-2004acquired infection: a progress report

Improving Emergency Care in England HC 1075 2003-2004

Reforming NHS Dentistry: ensuring effective HC 25 2004-2005management of risks

Patient Choice at the Point of GP Referral HC 180 2004-2005

Darent Valley Hospital: The PFI Contract in Action HC 209 2004-2005

Tackling Cancer: Improving the Patient Journey HC 288 2004-2005

The NHS Cancer Plan - A Progress Report HC 343 2004-2005

Other Reports

Inland Revenue Standard Report HC 1062 2003-2004

BBC Freeview See note 1 below 2003-2004

Audit of HM Customs & Excise systems and HC 119 2004-2005accounts 2003-04

Overseas affairs

Visa Entry to the United Kingdom: The Entry HC 367 2003-2004Clearance Operation

Department for International Development: HC 664 2003-2004Responding to HIV/AIDS

1 Presented to Parliament in accordance with the Amendment to the Agreement between the Secretary of State for Culture, Media and Sport and the BBC dated 4 December 2003.

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major reports

Public Private Partnerships

PFI: The STEPS Deal HC 530 2003-2004

London Underground: Are the Public Private HC 644 2003-2004Partnerships likely to work successfully?

London Underground PPP: Were they good deals? HC 645 2003-2004

Regeneration of the Millennium Dome HC 178 2004-2005and Associated Land

Regulation

Ofgem - Social Action Plan and Household Energy Efficiency HC 878 2003-2004

Energywatch and Postwatch: Helping and HC 1076 2003-2004protecting consumers

Directory Enquiries - From 192 to 118 HC 211 2004-2005

Revenue Departments

Inland Revenue: Inheritance Tax HC 17 2004-2005

HM Customs and Excise: Gambling Duties HC 188 2004-2005

HM Customs and Excise: Stopping illegal imports HC 365 2004-2005of animal products into Great Britain

Trade and Industry

Renewable Energy HC 210 2004-2005

Financial Support for Post Offices HC 287 2004-2005

Transport

Improving public transport in England through light rail HC 518 2003-2004

Network Rail - Making a Fresh Start HC 532 2003-2004

Tackling congestion by making better use of HC 15 2004-2005England’s motorways and trunk roads

Work & Pensions

Welfare to Work: Tackling the Barriers to the HC 1026 2003-2004Employment of Older People

Managing Attendance in the Department for HC 18 2004-2005Work and Pensions

Helping Those in Financial Hardship: The Running HC 179 2004-2005of the Social Fund

Transfer of property to the private sector under the HC 181 2004-2005expansion of the PRIME Contract

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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.

The Comptroller and Auditor General is supported by the National Audit Office. The senior executive management team comprises the Deputy Comptroller and Auditor General and the Assistant Auditors General. As at 31 March 2005, the National Audit Office employed some 837 staff based mainly in offices in London, Blackpool, Cardiff and Newcastle.

The Cardiff Office provided financial and value for money audit services and administrative support to the Auditor General for Wales, who reimbursed the costs incurred. Following enactment of the Public Audit (Wales) Act 2004, staff in Cardiff transferred to the Wales Audit Office on 1 April 2005.

The financial statements on pages 52 to 72 have been prepared by the National Audit Office as required by statute, on a resource basis.

Aim and Objectives The National Audit Office’s aim is to help the nation spendwisely. There are two parts to this: the formal statutory dutyto provide independent information, assurance and adviceto Parliament on the use of public resources, and a widerrole helping to promote better financial management andvalue for money and improve public services. This widerrole is achieved by making well-founded recommendationsand ensuring that good practice identified and developedduring the course of the National Audit Office’s work isdisseminated widely.

The National Audit Office has identified five main objectives:

Financial audit: providing assurance that departments’and other bodies’ financial statements have beenproperly prepared and give a true and fair view; thatresources have been properly applied to the purposesintended by Parliament; and providing assurance onthe assessment and collection of tax revenue.

Value for money: providing Parliament with independent information and advice about economy, efficiency and effectiveness. The Office aims to produce about 60 reports each year examining the whole range of public services.

Reviews of departmental systems: encouraging good governance and providing assurance on the management of risk through reviews of financial systems; validating systems underpinning Public Service Agreement targets; and work on regulatory impact assessments.

Direct support to Parliament and the public andwork for other organisations: supporting theCommittee of Public Accounts and other SelectCommittees; responding to enquiries from Membersof Parliament and members of the general public; andthe provision of advice and training to support theeffective scrutiny of public finances in other countries.

Comptroller function: the Comptroller and Auditor General’s statutory responsibility to approve the release of funds from the Exchequer to departments.

The cost, and any associated revenues, of the National AuditOffice’s work in meeting each of these objectives is shownin the Statement of Resources by Objective on page 57.

RESOURCE ACCOUNTS2004-05

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Main Activities The main activities of the Comptroller and Auditor General and the National Audit Office are:

providing independent assurance and advice to Parliament on the proper accounting for central government expenditure, revenue and assets and on regularity and propriety, through auditing the annual accounts of public bodies;

providing independent advice to Parliament on whether public bodies have used resources economically, efficiently and effectively; and

providing independent assurance, information and advice to other public, international and overseas bodies.

Most of these activities are funded by parliamentary grant.However, income is generated from certain audits and fromthe provision of other services such as advice and training.

Operating and Financial Review

Parliament approved an increase of £3.4 million in the National Audit Office’s net resources in 2004-05 to enable the Office to respond to a number of key developments including:

new audits of special health authorities, and non-departmental public bodies transferred following Lord Sharman’s report;

additional support to Parliament, including work for Select Committees;

progress on the audit of central government accounts for 2003-04, the first year for which the Comptroller and Auditor General will issue a formal opinion and report to Parliament;

undertaking good governance work, focusing on areas where there are potentially significant risks to regularity, propriety or financial control, to promote the better use of resources; and

responding to requests for advice and support from Members of Parliament and citizens and from a wide range of organisations, including the Auditor General for Wales.

The Office was successful in meeting its objectives in 2004-05 and:

completed the audit of 577 accounts, including56 departmental resource accounts covering over £400 billion expenditure and assets in excess of £200 billion;

worked towards forming an opinion on the first audited accounts for central government as a whole for the financial year 2003-04 and provided regular feedback on work underpinning the introduction of whole of government accounts;

delivered 61 value for money and other major reports to Parliament;

delivered 81 good governance reports to audited bodies;

completed the first round of a biennial review programme examining systems underpinning Public Service Agreement targets;

supported the Committee of Public Accounts in53 hearings and provided advice in response to requests from other Select Committees, including the Public Administration, Transport and Environmental Audit Committees;

handled a complex and wide range of inquiries, including 673 items of correspondence, 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 reimbursed the costs involved;

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.

From its work, the Office secured £515 million independ-ently validated savings for the taxpayer in 2004, meeting its target of achieving an eightfold return on its net costs.

In achieving this performance, the Office used £77.126 million resources. Resources were used to recruit additional staff and expert consultancy input to meet a growing and more complex workload. After taking account of £17.500 million income appropriated in aid, the Office’s net resource requirement in 2004-05 was £59.626 million, £0.571 million (0.9 per cent) less than the sum approved by Parliament in the Supply Estimate. Less resources than planned were required for the Office’s international technical assistance programmes, due to slippage in the timing of some projects, but this was partially offset by additional work on other objectives, including financial audit.

resource accounts

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Capital investment amounted to £1.446 million. The Office used resources to support additional investment in information technology assets needed for its operations. These included hardware and software to manage value for money studies more effectively and to support the production of business management information, additional laptops to support mobile computing and planned replacement of equipment reaching the end of its useful working life.

The Office required cash amounting to £59.684 million in 2004-05 to finance its activities, £0.216 million (0.4 per cent) less than the sum approved by Parliament in the Office’s Supply Estimate.

Going Forward

The National Audit Office’s Supply Estimate for 2005-06provides for a gross resource requirement of £82.0 million,which after taking account of income of £16.3 million,leads to a net resource requirement of £65.7 million.After taking account of £1.8 million needed for highersuperannuation contributions in 2005-06, the resourceswill be used to:

support the Treasury in securing the faster closure of departmental resource accounts;

respond to the Public Accounts Commission’s concerns about the level of fraud and error in social security benefits;

help provide effective Parliamentary oversight of public expenditure on health – extra resources will be used to provide assurance on corporate governance and accountability issues in an area where significant structural changes are taking place;

support developments in corporate governance arrangements in the public sector, particularly the assessment and management of risk;

address the increasing complexity of value for moneywork – there will be increasing use of externalspecialist expertise in value for money work, and theOffice will be seeking to further develop its efficiencywork in support of government programmes;

increase support to Select Committees;

respond to increasing demand from Parliament and the Government for National Audit Office expertise.

Investing for the future

The National Audit Office’s fixed asset base comprisesits headquarters building, with associated fixtures andfittings, and information and communications technologyequipment and software. The Office is reviewing itsaccommodation requirements to identify options thatwill meet its needs now and into the future. The Officecontinues to expand its asset base to support the increasinguse of information technology in its work and to refresh itsinformation technology hardware and software.

Comptroller and Auditor General Under the provisions of 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. 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 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 in 2004-05 comprised the non-executive Chairman of the Audit Committee, the Deputy Comptroller and Auditor General, and six Assistant Auditors General. 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 and Auditor General. One Assistant Auditor General has been appointed by the Comptroller and Auditor General as the Board Member responsible for Finance whose responsibilities are the same as those set out in Government Accounting for the Finance Directors of government departments.

None of the Board members held company directorships or significant interests which might conflict with their management responsibilities.

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Board Members The Board members during 2004-05 were:

Comptroller and Auditor General Sir John Bourn KCB

Chairman of the Audit CommitteeJohn Scotford CBE

Deputy Comptroller and Auditor General Tim Burr

Assistant Auditors General Jeremy ColmanWendy Kenway-SmithCaroline MawhoodJim RickletonMartin SinclairMichael Whitehouse (responsible for finance)

Audit Committee The Audit Committee is chaired by a non-executive, John Scotford – former President of the Chartered Institute of Public Finance and Accountancy - and comprises two other non-executive members, Sir Michael Davies and Christine Freshwater, the Deputy Comptroller and Auditor General, and a Director. The Audit Committee meets three times each year and addresses issues raised by the National Audit Office’s internal and external auditors. The Audit Committee provides 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 National Audit Office employees, 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 arrangements for the Comptroller and Auditor General are covered by the Superannuation Act 1972 and are analogous to those of a member of the Principal Civil Service Pension Scheme 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, 2004-05.

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 pension liability up to the normal retiring age in respect of such employees is charged to the account in the year in which the early retirement decision is made to create a provision for future pension payments.

Further details about pensions are disclosed within notes 1.10, 3 and 13 of the accounts.

Public Accounts Commission The National Audit Act 1983, which established the National Audit Office, also established the Public Accounts Commission consisting of the Chairman of the Committee of Public Accounts, the Leader of the House of Commons and seven other Members of the House. Under the Act, and in respect of the National Audit Office, the Commission are responsible for the:

appointment of the Accounting Officer;

examination of the annual Supply Estimate; and

appointment of the auditors of the annual accounts.

resource accounts

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Accounting Officer The Public Accounts Commission has appointed theComptroller and Auditor General as the Accounting Officerfor the National Audit Office. His responsibilities as theAccounting Officer and for the National Audit Office’ssystem of internal control are set out on pages 47 to 49.

Code 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 Haines Watts(Chartered Accountants and Registered Auditors) as theauditors of the National Audit Office for the three yearsending 31 March 2004 and have extended the appointmentfor a further two years ending 31 March 2006. In additionto their work to form an opinion on the financialstatements, the auditors are paid to provide value formoney reports to the Public Accounts Commission andaudit some of the Office’s claims related to internationaltechnical cooperation. Details of the cost of external auditservices are disclosed in note 4 to the accounts.

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 2005 has been based on continuous monitoring of payments since the start of the year. On this basis, approximately 94 per cent of payments met the policy criteria.

Post Balance Sheet Events The Cardiff office transferred to the Wales Audit Office on 1 April 2005 under the provisions of the Public Audit (Wales) Act 2004. Details of expenditure and balances relating to this event are separately disclosed in notes to the accounts. There have been no other events since the Balance Sheet date that would impact upon the financial statements for the year ended 31 March 2005.

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. Assistant Auditor General Jim Rickleton has had 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 on issues and practices which are relevant to disabled people.

John Bourn 30 June 2005Comptroller and Auditor General

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STATEMENT OF ACCOUNTING OFFICER’S RESPONSIBILITIES Under the National Audit Act 1983, 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 proper records and for safeguarding the Office’s assets, are set out in the Accounting Officer’s Memorandum issued by the Public Accounts Commission.

STATEMENT ON INTERNAL CONTROL Scope of responsibility I have been appointed as the Accounting Officer for the National Audit Office by the Public Accounts Commission, which is responsible for examining the National Audit Office Supply Estimate, for appointing the auditor of the National Audit Office, and for presenting the annual financial statements to the House of Commons. I am accountable to the House of Commons through the Commission.

As Accounting Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of the National Audit Office’s policies, aims and objectives, while safeguarding the public funds and assets for which I am personally responsible, in accordance with the responsibilities assigned to me by the Commission.

The purpose of the system of internal control The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of the National Audit Office’s policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively, and economically. The system of internal control has been in place in the National Audit Office for the year ended 31 March 2005 and up to the date of approval of the annual report and accounts.

Capacity to handle risk The Management Board have identified strategic risks which could affect the achievement of the National Audit Office’s policies, aims and objectives and which need to be managed actively. Under the National Audit Office’s risk management arrangements, senior members of the Office are personally responsible for the management of these risks.

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The Office has established processes designed to:

maintain a policy framework within which risks are identified, managed and regularly reviewed;

embed risk management by assigning specific responsibility for strategic risks to Board Members and allocating responsibility for operational risks to specific directors;

ensure adoption of a consistent approach to the assessment of each operational risk which helps form a judgment on the status of the strategic risks for consideration at each Management Board meeting;

encourage identification and management of risks by Assistant Auditors General and their directors through reviewing risks at their board meetings and promoting understanding of the importance of managing the risks to all their staff; and

institute separate specific risk management arrangements with a Senior Responsible Officer (usually at Board level) for specific projects of significant monetary value or unique requirements.

The Office provides training and guidance to managers and staff on managing risks and further training and guidance is provided, as appropriate, in response to new risks. In 2004-05, the Office introduced a new leadership and management training programme called unlockingourpotential to support learning and development in key areas of management excellence.

The risk and control framework My responsibilities as Parliament’s auditor mean that theNational Audit Office has to maintain the highest standardsof propriety and regularity, make effective use of itsresources, and produce high quality work for Parliament.

The Office maintains a risk register which identifies strategic and operational risks that could affect the achievement of its aim to help the national spend wisely. The register is reviewed by the Management Committee, Audit Committee and Management Board. The current strategic risks are:

failure to complete, to professional standards and within designated timescales, the financial audit of the accounts for which I am the appointed external auditor;

failure to deliver 60 major reports of appropriate quality to Parliament;

not meeting the target agreed with Parliament toidentify through our work annual financial savingsequivalent to 8 times the net running cost of the Office;

failure to manage the resources voted by Parliament efficiently and effectively;

damage to the reputation and integrity of the National Audit Office should staff not act with propriety in the performance of their duties and exercise good stewardship in their use of resources;

ensuring my remit is not curtailed or opportunities to extend my remit on behalf of Parliament or acquire new business, where appropriate, are not missed.

Proper consideration and mitigation of risk is crucial to the effectiveness of the system of control. The principal features of the high level controls include:

a formal corporate governance and internal control system detailing the aims and principles through which the Office conducts its business. This includes manuals setting out operational and financial procedures and delegated authorities, codes of professional conduct setting out the standards expected of staff, an anti-fraud strategy and response plan and a whistle blowing policy to enable staff to report concerns over any aspect of the Office’s business;

annual confirmation by all staff of compliance with the code of professional conduct;

regular monitoring of the execution of financial audit, value for money studies and other work through monthly reports to the Management Committee;

development and maintenance of appropriate methodologies to apply to the work which are communicated to staff. These include:

on financial audit:

policies and procedures to ensure compliance with auditing standards and auditing regulations are set out in mandatory guidance; and

access to advice provided by a specialist technical team, independent of the operational audits, who also review proposed qualified audit opinions and reports.

on value for money audit

a framework of quality thresholds established for staff to assess progress; and

peer review and external challenge through expert panels to ensure that audit conclusions are robust and supported by strong evidence.

human resource strategies to recruit, retain and develop sufficient professional staff;

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an appropriate management framework and guidance to staff to ensure agreed financial impacts are achieved and independently verified;

regular business management reports measuring key performance indicators including budget setting and monitoring; and

regular horizon scanning to identify potential changes in client base and opportunities to expand influence.

Review of effectiveness As Accounting Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review of the effectiveness of the system of internal control is informed by the work of the internal auditors and the executive managers within the National Audit Office who have responsibility for the development and maintenance of the internal control framework, and comments made by the external auditors in their management letter and other reports. I have been advised on the implications of the result of my review of the effectiveness of the system of internal control by the Board and the Audit Committee and a plan to address weaknesses and ensure continuous improvement of the system is in place.

The effectiveness of the system of internal control was maintained and reviewed through:

a Management Board which met regularly to consider the strategic direction of the Office and performance against objectives. The Board comprised myself, the senior members of the Office, the Chairman of the Audit Committee and the Director of Communications and Corporate Affairs;

a Management Committee which met on a weekly basis to consider strategic, operational and financial issues. The Committee comprised the Deputy Comptroller and Auditor General and senior members of the Office;

an Audit Committee, comprising three non-executive members, including a non-executive Chairman, the Deputy Comptroller and Auditor General and a National Audit Office Director, which met to monitor the operation of internal controls. The Chairman reports to me on the work of the Audit Committee;

risk management arrangements, described above, under which key risks which could affect the achievement of the Office’s objectives have been managed actively, with progress being reported regularly to senior management;

internal and external validation of the quality of the National Audit Office’s certification and value for money work. This includes:

obtaining the views of clients on the conduct, quality and impact of the Office’s work through interviews and questionnaires as part of formal consultation on the completion of assignments;

an annual programme of quality assurance reviews of individual financial audits by Directors not involved in the audit;

a comprehensive review of financial audits by the Quality Assurance Directorate of the ICAEW;

self review of completed value for money studies; and

independent external assessment of value for money studies and reports which are shared with audited bodies.

regular reports by internal audit to standards defined in the Government Internal Audit Standards, which include an independent opinion on the adequacy and effectiveness of the Office’s internal controls, together with recommendations for improvement, where necessary; and

the work of the external auditor in forming an opinionon the financial statements, in validating the financialimpacts claimed and in reporting the results of valuefor money examinations of the Office’s activities.

The National Audit Office continues to keep its arrangements under review in response to external developments, including changes in the business environment. During the year, it continued to develop and strengthen corporate governance and risk management in line with evolving best practice, and to further embed its risk management arrangements throughout the Office. A reappraisal of strategic risks was undertaken during the year which led to the identification and compilation of the risks set out above. The Office has also strengthened its financial budgeting and monitoring arrangements so as to improve responsiveness to new priorities.

I am able to report that there were no material weaknesses in the Office’s system of internal controls in 2004-05 which affected the achievement of the Office’s policies, aims, and objectives.

John Bourn 30 June 2005Comptroller and Auditor General

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INDEPENDENT AUDITOR’S REPORT TO THE HOUSE OF COMMONS This report is made solely to the House of Commons in accordance with the National Audit Act 1983. Our work has been undertaken so that we might state to the House of Commons those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the House of Commons for our audit work, for this report, or for the opinions we have formed.

We have audited the financial statements on pages 52 to 72under the National Audit Act 1983. These financialstatements have been prepared under the historical costconvention as modified by the revaluation of certain fixedassets and the accounting policies set out on pages 58 to 59.

Respective responsibilities of the Accounting Officer and Auditors As described on page 47, 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 auditors, are established by statute and we have regard to the standards and guidance issued by the Auditing Practices Board and the ethical guidance applicable to the auditing profession.

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, 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 review whether the statement on pages 47 to 49 reflects the National Audit Office’s compliance with the Treasury’s guidance on the Statement on Internal Control. We report if it does not or if the statement is misleading or inconsistent with other information we are aware of from our audit of the financial statements. We are not

required to consider, nor have we considered whether the Accounting Officer’s Statement on Internal Control covers all risks and controls. We are also not required to form an opinion on the effectiveness of the entity’s corporate governance procedures or its risk and control procedures.

Basis of Opinion We conducted our audit in accordance with United Kingdom 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 misstatement, 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 2005 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;

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.

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Supplementary statement by the Auditors in respect of material included at pages 1 to 41 of this Annual Report,not included in the Accounts containing the financial statements to which the audit opinion above relates.

In respect alone of our responsibility under UnitedKingdom auditing standards to read the other informationincluded with financial statements on which we express anaudit opinion. We have read the additional information onpages 1 to 41 which was not included within the accountscontaining the financial statements on which we reachedthe audit opinion set out in our auditors’ report above andconsidered whether it is consistent with the auditedfinancial statements. We have considered the implicationsfor our audit opinion if we have thereby become aware ofany apparent mis-statement or material inconsistencieswith the financial statements. We have not considered theeffects of any events since the date of our Report.

In this regard, our audit opinion on the financial statements is unchanged.

The maintenance and integrity of the NAO’s website is the responsibility of the Accounting Officer; the work carried out by the auditors does not involve consideration of these matters and accordingly the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Haines WattsChartered Accountants and Registered Auditors

30 Camp RoadFarnborough

HampshireGU14 6EW

30th June 2005

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SCHEDULE 1

Summary of resource outturn

2004-05 2003-04

Estimate Outturn Net totaloutturn

comparedto Estimate:

Gross A in A Net Total Gross A in A Net Total saving or Prior yearexpenditure expenditure (excess) outturn

Note £000 £000 £000 £000 £000 £000 £000 £000

Request for Resource 1* 6 77,697 17,500 60,197 77,126 17,500 59,626 571 56,390

Total Resources 77,697 17,500 60,197 77,126 17,500 59,626 571 56,390

Non Operating Cost A in A - - - -

Net Cash Requirement 59,900 59,684 216 55,727

* Request for Resource 1: Providing independent assurance to Parliament and other organisations on the management of public resources.

Administrative expenditure and associated non-cash items incurred in the provision of 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; and the provision of independent assurance, information and advice to a wide range of other public, international, and overseas bodies.

Summary of income payable to the Consolidated Fund.

In addition to appropriations in aid, the following income related to the National Audit Office and is payable to the Consolidated Fund.

Forecast Outturn2004-05 2004-05

Note Income Receipts Income Receipts£000 £000 £000 £000

Total 5 - - 51 -

The notes on pages 58 to 72 form part of these accounts

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Reconciliation of resources to cash requirement

Estimate Outturn Outturncompared

to estimate:saving/

(excess)Note £000 £000 £000

Net Total Resources 60,197 59,626 571

Capital:

Acquisition of fixed assets 7&8 1,455 1,446 9

Investments - - -

Non operating cost A in A - - -

Proceeds of fixed asset disposals 7&8 - - -

Accruals adjustments:

Non-cash items 4 (3,350) (2,664) (686)

Changes in working capital other than cash 12 438 418 20

Changes in creditors falling due after more than one year - - -

Use of provision 13 1,160 858 302

Net Cash Requirement 59,900 59,684 216

The notes on pages 58 to 72 form part of these accounts

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SCHEDULE 2

Operating Cost Statement for the year ended 31 March 20052004-05 2003-04

Note £000 £000

Administration costs

Staff costs 3 45,919 41,808

Non-staff administration costs 4 31,377 29,607

Gross administration costs 77,296 71,415

Operating income 5 (17,551) (14,860)

Net operating cost 6 59,745 56,555

Net resource outturn 6 59,626 56,390

The Public Audit (Wales) Act 2004 passed during the year created the Wales Audit Office. As a result, on 1 April 2005 the NAO office in Cardiff ceased operations and the office, staff and equipment transferred to the Auditor General for Wales. In 2004-05 work undertaken from the Cardiff office for the Auditor General for Wales was undertaken on a repayment basis.

The 2004-05 Operating Cost statement above comprises:-

2004-05 2004-05Continuing DiscontinuingOperations Operations

£000 £000

Staff costs 43,671 2,248

Non-staff administration costs 30,846 531

Gross administration costs 74,517 2,779

Operating income (14,831) (2,720)

Net operating cost 59,686 59

Net resource outturn 59,567 59

There were no acquisitions or disposals during the year.

Statement of Recognised Gains and Losses for the year ended 31 March 2005

2004-05 2003-04Note £000 £000

Unrealised gain/loss on revaluation of tangible fixed assets 15 379 (1,233)

The notes on pages 58 to 72 form part of these accounts

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SCHEDULE 3

Balance Sheet as at 31 March 2005

31 March 2005 31 March 2004Note £000 £000 £000 £000

Fixed assets

Tangible fixed assets 7 22,531 22,057

Intangible fixed assets 8 1,355 1,315

23,886 23,372

Debtors falling due after more than one year 9 144 198

Current assets

Debtors 9 7,644 6,443

Cash at bank and in hand 10 216 223

7,860 6,666

Creditors (amounts falling due within one year) 11 (4,484) (3,762)

Net current assets 3,376 2,904

Total assets less current liabilities 27,406 26,474

Creditors (amounts falling due after more than one year) 11 - -

Provisions for liabilities and charges 13 (3,080) (3,415)

24,326 23,059

Taxpayers’ Equity

General Fund 14 17,738 16,780

Revaluation reserve 15 6,588 6,279

24,326 23,059

John Bourn 30 June 2005Comptroller and Auditor General

The notes on pages 58 to 72 form part of these accounts

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SCHEDULE 4

Cash Flow Statement for the year ended 31 March 2005

Note 2004-05 2003-04£000 £000

Net cash outflow from operating activities (Note i) (58,408) (53,583)

Other amounts received - -

Capital expenditure (Note ii) (1,446) (1,488)

Payments of amounts due to the Consolidated Fund - (821)

Financing (Note iii) 59,847 55,931

(Decrease)/increase in cash in the period (7) 39

Notes to the Cash Flow StatementNote i: Reconciliation of operating cost to operating cash flows

Net operating cost 59,745 56,555

Adjust for:

Non-cash transactions 4 (2,664) (3,823)

Movements in working capital other than cash 12 469 (63)

Use of provisions 13 858 914

Net cash outflow from operating activities 58,408 53,583

Note ii: Analysis of capital expenditure

Fixed asset additions 7&8 1,446 1,488

Net cash outflow for capital expenditure 1,446 1,488

Note iii: Analysis of financing and reconciliation to the net cash requirement

From the Consolidated Fund (supply) - current year 59,677 55,766

From the Consolidated Fund (non-supply) 4 170 165

Net financing 59,847 55,931

Decrease/(increase) in cash 10 7 (39)

Net cash flows other than financing 59,854 55,892

Adjustment for payments and receipts not related to Supply:

Amounts due to the Consolidated Fund received in prior year paid over - -

Amounts due to the Consolidated Fund received in current year and not paid over - -

Consolidated Fund standing services - payments (170) (165)

Net cash requirement (Schedule 1) 59,684 55,727

Amount of grant actually issued to support the net cash requirement £59,900,000.00

The notes on pages 58 to 72 form part of these accounts

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SCHEDULE 5

Statement of resources by objective for the year ended 31 March 2005

2004-05 2003-04Gross Income Net Gross Income Net£000 £000 £000 £000 £000 £000

Objective 1Financial Audit: providing Parliament with assurance that departments’ and other bodies’financial statements have been properlyprepared and give a true and fair view; that resources have been properly applied to the purposes intended by Parliament; andproviding assurance on the assessment and collection of tax revenue 34,196 11,654 22,542 31,022 9,138 21,884

Objective 2Value for money work: providing Parliamentwith independent information and adviceabout economy, efficiency, and effectiveness.The Office aims to produce about 60 reportseach year examining the whole range of public services 19,462 314 19,148 18,870 54 18,816

Objective 3Reviews of departmental systems: encouraging good governance and providing assurance on the management of risk through reviewsof financial systems; validating systemsunderpinning Public Service Agreement targetsand work on regulatory impact assessments 7,723 - 7,723 6,698 - 6,698

Objective 4Direct support to Parliament and the public and work for other organisations: supportingthe Committee of Public Accounts and other Select Committees; responding to enquiries from Members of Parliament and members of the general public; and the provision of advice and training to supportthe effective scrutiny of public financesin other countries 15,747 5,583 10,164 14,655 5,668 8,987

Objective 5Comptroller function: the Comptrollerand Auditor General’s statutory responsibilityto approve the release of funds from the Exchequer to departments 168 - 168 170 - 170

TOTAL 77,296 17,551 59,745 71,415 14,860 56,555

The National Audit Office maintains a resource management system which links the cost of individual assignments to one of the five objectives. Indirect costs are allocated pro-rata to staff costs.

The notes on pages 58 to 72 form part of these accounts

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Notes to the resource accounts

1 Statement of accounting policiesThe financial statements have been prepared in accordance with section 4 of the National Audit Act 1983. The Act requiresthe National Audit Office to prepare resource accounts and, in meeting this requirement, the Office has followed theResource Accounting Manual (RAM) issued by HM Treasury. The accounting policies contained in the RAM follow UKgenerally accepted accounting practice for companies (UK GAAP) to the extent that it is meaningful and appropriate to thepublic sector. Where RAM permits a choice of accounting policy, the accounting policy which has been judged to be themost appropriate to the particular circumstances of the National Audit Office for the purpose of giving a true and fair viewhas been selected. The National Audit Office’s accounting policies have been applied consistently in dealing with itemsconsidered material in relation to the accounts.

Accounting convention1.1 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 assets1.2 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, assets are measured at cost including any costs such as installation directly attributable to bringing them into working condition. Where significant, 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 assets1.3 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, and where significant, 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.

Depreciation1.4 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. A full valuation was undertaken at 30 September 2003 and an interim revaluation at 31 March 2005, at which time the lease had 107 years remaining. Depreciation is charged on the revalued amount over the remaining term of the lease.

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Stocks and long term contract balances1.5 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 income1.6 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 Resource Accounting Manual (RAM) is treated as operating income. Operating income is stated net of VAT (see note 5).

Capital charge1.7 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 3.5 per cent (2003-04 3.5 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 leases1.8 The total cost of operating leases is expensed in equal instalments over the life of the lease.

Foreign exchange1.9 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.

Pensions1.10 Present and past employees of the National Audit Office are covered by the provisions of the Principal Civil Service Pension

Scheme (PCSPS) which are described at Note 3(b). The defined benefit elements of the schemes are unfunded and are non-contributory except in respect of dependants’ benefits. 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. In respect of the defined contribution elements of the schemes, the NAO recognises the contributions payable for the year.

Provisions1.11 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 timevalue of money is significant, the estimated risk-adjusted cash flows are discounted using the Treasury discount rate.

Value Added Tax1.12 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.

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2 Remuneration of the Comptroller and Auditor GeneralBy statute the remuneration of the Comptroller and Auditor General and associated employer’s national insurance contributions are met directly from the Consolidated Fund, rather than from Supply. For the year ended 31 March 2005 the amount paid in respect of the Comptroller and Auditor General’s remuneration was £150,878 (2003-04 - £147,198) and the employer’s national insurance contributions were £18,706 (2003-04 - £18,250). These costs are included under Other Administration Costs and are referred to as Consolidated Fund Standing Services (see notes 4, 14).

3 Staff costs and numbers3(a) Staff costs consist of:

2004-05 2003-04£000 £000

Wages and salaries 36,204 33,764

Social Security costs 3,235 2,959

Other pension costs 6,480 5,085

Sub total 45,919 41,808

Less recoveries received in respect of outward secondments (note 5b) (633) (633)

Total net costs 45,286 41,175

3(b) Pension arrangements

The Principal Civil Service Pension Scheme (PCSPS) is an unfunded multi-employer defined benefit scheme but theNational Audit Office is unable to identify its share of the underlying assets and liabilities. A full actuarial valuation wascarried out at 31 March 2003. Details can be found in the resource accounts of the Cabinet Office: Civil Superannuation(www.civilservice-pensions.gov.uk).

For 2004-05, normal employer contributions of £5,370,000 were payable to the PCSPS (2003-04: £5,085,000) at one of four rates in the range 12 per cent to 18.5 per cent of pensionable pay based on salary bands. Rates will increase in 2005-06 and are subject to revalorisation of the salary bands. Employer contributions are to be reviewed every four years following a scheme valuation by the Government Actuary. The contribution rates reflect benefits as they are accrued, not when the costs are actually incurred, and reflect past experience of the scheme. As a result of changes to staff pay and bonus arrangements £1,110,000 in additional pension contributions was paid to PCSPS based on an actuarial assessment of additional costs to the Scheme.

From 1 October 2002, existing staff had the option of being a member of one of three statutory based "final salary" defined benefit schemes (classic, premium, and classic plus). The three options which were available to existing staff are described at paragraphs (i) to (iii) below. Employees joining after 1 October 2002 may choose between membership of premium or joining a good quality "money purchase" stakeholder based arrangement with a significant employer contribution (partnership pension account). This scheme is described at paragraph (iv) below.

(i) Classic Scheme

Benefits accrue at the rate of 1/80th of pensionable salary for each year of service. In addition, a lump sum equivalent tothree years’ pension is payable on retirement. Members pay contributions of 1.5 per cent of pensionable earnings. 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.

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(ii) Premium Scheme

Benefits accrue at the rate of 1/60th of final pensionable earnings for each year of service. Unlike classic, there is no automatic lump sum, but members may commute some of their pension to provide a lump sum up to a maximum of 3/80ths of final pensionable earnings for each year of service or 2.25 times pension if greater (the commutation rate is £12 of lump sum for each £1 of pension given up). For the purposes of pension disclosure the tables assume maximum commutation. Members pay contributions of 3.5 per cent of pensionable earnings. On death, pensions are payable to the surviving spouse or eligible partner at a rate of 3/8ths the member’s pension (before any commutation). On death in service, the scheme pays a lump-sum benefit of three times pensionable earnings 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. Where the member’s ill health is such that it permanently prevents them undertaking any gainful employment, service is enhanced to what they would have accrued at age 60.

(iii) Classic Plus Scheme

This is essentially a variation of premium, but with benefits in respect of service before 1 October 2002 calculated broadly as per classic.

Pensions payable under classic, premium, and classic plus are increased in line with the Retail Prices Index.

(iv) Partnership Pension Account

This is a stakeholder-type arrangement where the employer pays a basic contribution of between 3 per cent and 12.5 per cent(depending on the age of the member) into a stakeholder pension product. The employee does not have to contribute but wherethey do make contributions, these will be matched by the employer up to a limit of 3 per cent (in addition to the employer’sbasic contribution). Employers also contribute a further 0.8 per cent of pensionable salary to cover the cost of risk benefit cover(death in service and ill health retirement). The member may retire at any time between the ages of 50 and 75 and use theaccumulated fund to purchase a pension. The member may choose to take up 25 per cent of the fund as a lump sum.

Employer contributions of £21,424 were paid to one or more of a panel of four appointed stakeholder pension providers. Employer contributions are age-related and range from 3 to 12.5 per cent of pensionable pay. Employers also match employee contributions up to 3 per cent of pensionable pay. In addition, employer contributions of £1,761 (0.8 per cent of pensionable pay) were payable to the PCSPS to cover the cost of the future provision of lump sum benefits on death in service and ill health retirement of these employees.

No contributions were due or prepaid to the partnership pension providers at the balance sheet date.

3(c) The average number of whole-time equivalent persons employed (including senior management) during the year was as follows:

2004-05 2003-04Number Number

Objective 1:Financial audit 381 371

Objective 2:Value for money 199 204

Objective 3:Reviews of departmental systems 85 65

Objective 4:Direct support to Parliament and the public and work for other organisations 170 166

Objective 5:Comptroller function 2 2

Total 837 808

Senior managers work on all objectives.

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3(d) The salary and pension entitlements of the most senior managers of the National Audit Office were as follows:

(2003-04 figures are in brackets)

Name and Title Salary Real Total CETV at Real (as defined increase accrued 31 March increase

below) in annual annual 2005 in CETV pension pension

and related and relatedlump sum lump sumat age 60 at age 60 at

31 March2005

£000 £000 £000 £000 £000

Tim Burr 145-150 2.5-5.0 65-70 1,197 50Deputy Comptroller and Auditor General (140-145) (2.5-5.0) (60-65) (1,087) (56)

Jeremy Colman 125-130 0-2.5 10-15 257 21Assistant Auditor General (115-120) (0-2.5) (10-15) (224) (19)

Wendy Kenway-Smith 110-115 0-2.5 10-15 165 14Assistant Auditor General (115-120) (0-2.5) (10-15) (141) (15)

Caroline Mawhood 115-120 2.5-5.0 40-45 672 52Assistant Auditor General (110-115) (0-2.5) (35-40) (583) (31)

Jim Rickleton 100-105 2.5-5.0 30-35 425 59Assistant Auditor General (90-95) (2.5-5.0) (25-30) (342) (34)

Martin Sinclair 110-115 2.5-5.0 35-40 498 49Assistant Auditor General (105-110) (2.5-5.0) (30-35) (423) (36)

Michael Whitehouse 110-115 2.5-5.0 35-40 503 51Assistant Auditor General (100-105) (2.5-5.0) (30-35) (424) (41)

John Scotford was non-executive chairman of the Audit Committee and non-executive member of the Management Board. During 2004-05, he was paid a salary of £6,500, (2003-04, £7,850) based on the number of meetings attended, received no benefits in kind and no pension entitlement.

Jeremy Colman resigned with effect from 31 March 2005 on his appointment as Auditor General for Wales.

Wendy Kenway-Smith’s salary is based on a four day working week.

Salary

(i) ‘Salary’ includes gross salary; performance pay or bonuses; overtime; reserved rights to London weighting or London allowances; recruitment and retention allowances; private office allowances and any other allowance to the extent that it is subject to UK taxation.

Pension

(ii) The pension arrangements are as described in Note 3(b) above. The pensions information in Note 3(d) has been supplied by the Department for Work and Pensions, the National Audit Office’s pensions administrators.

Benefits in kind

(iii) None of the above received benefits in kind during 2004-05.

Employer contributions to partnership pensions

(iv) None of the above benefited from such contributions during 2004-05.

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Cash equivalent transfer values

Column 5 of the table in Note 3(d) shows the member’s Cash Equivalent Transfer Value (CETV) accrued at the beginning and the end of the reporting period as notified by the Department of Work and Pensions, the National Audit Office’s pensions administrators. Column 6 reflects the increase in CETV effectively funded by the employer. It takes account of the increase in accrued pension due to inflation, contributions paid by the employee (including the value of any benefits transferred from another pension scheme or arrangement) and uses common market valuation factors for the start and end of the period.

A CETV is the actuarially assessed capitalised value of the pension scheme benefits accrued by a member at a particular point in time. The benefits valued are the member’s accrued benefits and any contingent spouse’s pension payable from the scheme. A CETV is a payment made by a pension scheme or arrangement to secure pension benefits in another pension scheme or arrangement when the member leaves a scheme and chooses to transfer the benefits accrued in their former scheme. The pension figures shown relate to the benefits that the individual has accrued as a consequence of their total membership of the pension scheme, not just their service in a senior capacity to which disclosure applies. The CETV figures, and the other pension details, include the value of any pension benefit in another scheme or arrangement which the individual has transferred to the Civil Service Pension arrangements and for which the Civil Superannuation Vote has received a transfer payment commensurate to the additional pension liabilities being assumed. They also include any additional pension benefit accrued to the member as a result of their purchasing additional years of pension service in the scheme at their own cost. CETVs are calculated within the guidelines and framework prescribed by the Institute and Faculty of Actuaries.

4 Non-staff administration costs

2004-05 2003-04£000 £000 £000 £000

Professional services bought in 13,750 10,569

Accommodation 3,744 4,038

Travel, subsistence, hospitality 3,461 3,059

Office supplies/equipment 2,979 2,951

Recruitment and training 2,483 2,330

Other costs 1,868 2,430

Operating lease (Buildings) 171 179

Operating lease (Vehicles) 9 10

Consolidated Fund Standing Services 170 165

Remuneration to external auditors for other work 58 39

External auditor’s fee 20 14

28,713 25,784

Non cash items:

Cost of capital charge 830 841

Provision for early departure costs 523 1,675

Depreciation & amortisation 1,311 1,298

Disposal of fixed assets - 9

2,664 3,823

31,377 29,607

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5 Income and appropriations in aid5(a) 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:

Estimate OutturnIncome Receipts Income Receipts

£000 £000 £000 £000

Operating income and receipts - excess A in A - - 51 -

Other operating income and receipts not classified as A in A - - - -

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 - - - -

- - 51 -

Operating Income

Operating income not appropriated in aid (i.e. transferred to the Consolidated Fund) is analysed for resource budgeting purposes between that which is included in public expenditure and that which is not (see Note 6). In 2004-05 all operating income not classified as A in A was within public expenditure.

5(b) Analysis of operating income by classification and activity

2004-05Resource outturn Operating cost

statement

Netted off Appropriated Payable to Incomegross expenditure in Aid Consolidated included in

in sub-head Fund Operating Cost Statement

£000 £000 £000 £000

Appropriated in Aid:

Audit fees - 11,602 51 11,653

Other miscellaneous income - 5,265 - 5,265

Secondment income - 633 - 633

Total operating income - 17,500 51 17,551

2003-04Resource outturn Operating cost

statement

Netted off Appropriated Payable to Incomegross expenditure in Aid Consolidated included in

in sub-head Fund Operating Cost Statement

£000 £000 £000 £000

Appropriated-in-Aid:

Audit fees - 9,138 - 9,138

Other miscellaneous income - 5,089 - 5,089

Secondment income - 633 - 633

Total operating income - 14,860 - 14,860

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5(c) Analysis of income from services provided to clients

2004-05 2003-04

Income Full cost Surplus/ Income Full cost Surplus/(deficit) (deficit)

£000 £000 £000 £000 £000 £000

Audit Fees 11,653 11,767 (114) 9,138 9,233 (95)

Other miscellaneous income 5,265 5,216 49 5,089 5,089 -

Secondment income 633 633 - 633 633 -

17,551 17,616 (65) 14,860 14,955 (95)

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 outturn2004-05 2003-04

£000 £000

Net operating cost 59,745 56,555

Operating income not classified as A in A 51 -

Consolidated Fund standing services (170) (165)

Net resource outturn 59,626 56,390

Net operating cost is the total of expenditure and income appearing in the operating cost statement (Schedule 2). Net resource outturnis the total of those elements of expenditure and income that are subject to parliamentary approval and included in the NationalAudit Office’s Supply Estimate. The outturn against the Estimate is shown in the summary of resource outturn (Schedule 1).

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7 Tangible fixed assets

Long Computers Furniture Totalleasehold & other fixtures &

land & equipment fittingsbuildings

£000 £000 £000 £000

Cost or Valuation:

At 1 April 2004 21,115 3,337 824 25,276

Additions - 865 205 1,070

Disposals - - - -

Revaluation 110 - - 110

At 31 March 2005 21,225 4,202 1,029 26,456

Depreciation:

At 1 April 2004 1,243 1,674 302 3,219

Charged in year 251 636 88 975

Disposals - - - -

Revaluations (269) - - (269)

At 31 March 2005 1,225 2,310 390 3,925

Net Book Value:

at 31 March 2005 20,000 1,892 639 22,531

at 31 March 2004 19,872 1,663 522 22,057

Notes:

Land and buildings (the Office headquarters) were revalued at £20,000,000 (2003-04: £20,000,000) as at 31 March 2005 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. Drivers Jonas valued the building on an open market basis at £23,500,000 (2003-04: £22,000,000).

The fixed asset balances above include assets held at the Cardiff office which were transferred to the Wales Audit Office on1 April 2005 under transfer orders arising from the enactment of the Public Audit (Wales) Act 2004. The assets comprised computersand other equipment with a net book value of £5,000 and furniture, fixtures and fittings with a net book value of £22,000.

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8 Intangible fixed assetsSoftware licences andimplementation costs

£000

Cost or valuation:

At 1 April 2004 3,488

Additions 376

Disposals -

Revaluation -

At 31 March 2005 3,864

Amortisation:

At 1 April 2004 2,173

Charged in year 336

Disposals -

Revaluations -

At 31 March 2005 2,509

Net Book Value:

at 31 March 2005 1,355

at 31 March 2004 1,315

9 Debtors2004-05 2003-04

£000 £000

Amounts falling due within one year:

Work in progress 3,465 3,662

Deposits and advances 424 353

Trade debtors 2,783 1,575

Prepayments and accrued income 845 725

Other debtors 127 128

7,644 6,443

Amounts falling due after more than one year:

Deposits and advances 144 198

Total 7,788 6,641

There is £51,000 (2003-04 - £NIL) related to excess appropriations in aid from work in progress that will be due to the Consolidated Fund once the debts are collected (see note 12).

Included in advances is £39,000 relating to advances for housing costs made under the Office’s relocation scheme to staff in the Cardiff Office. These balances were transferred to the Wales Audit Office on 1 April 2005 in accordance with orders under the Public Audit (Wales) Act 2004.

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68

10 Cash at bank and in hand2004-05 2003-04

£000 £000

Balance at 1 April 2004 223 184

Net cash (outflow)/inflow (7) 39

Balance at 31 March 2005 216 223

The following balances at 31 March are held at:

Office of HM Paymaster General 200 201

Commercial banks and cash in hand 16 22

216 223

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 - -

Amounts issued from the Consolidated Fund for Supply but not spent at year end 216 223

216 223

11 Creditors2004-05 2003-04

£000 £000

Amounts falling due within one year:

VAT 326 193

Trade creditors 405 188

Other creditors 77 367

Accruals and deferred income 2,381 1,964

Payments received on account 1,028 827

Total excluding amounts due to the Consolidated Fund 4,217 3,539

Amounts issued from the Consolidated Fund but not spent at year end 216 223

Consolidated Fund extra receipts received and receivable and other income due to be paid to the Consolidated Fund 51 -

Sub total 4,484 3,762

Amounts falling due after more than one year:

Other creditors: capital creditor - -

Total 4,484 3,762

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12 Movements in operating working capital other than cash2004-05 2003-04

£000 £000

Total movements:

Increase/(decrease) in debtors 1,147 570

(Increase)/decrease in creditors (excluding amounts due to the Consolidated Fund) (678) (633)

469 (63)

Less movements not relating to supply:

(Increase)/decrease in A in A debtor (note 9) (51) 821

Increase in Supply working capital 418 758

13 Provisions for liabilities and chargesEarly departure costs

£000

Balance at 1 April 2004 3,415

Provided in the year 523

Provisions utilised in the year (858)

Balance at 31 March 2005 3,080

Some £859,000 of the provision will be used during the next financial year and approximately £1,683,000 will be used during the next two to five years. On the basis of the ages of the retirees, expenditure is likely to be incurred over a period of up to 10 years.

The Treasury discount rate will change from 3.5 per cent to 2.2 per cent on 1 April 2005. The provision balance will increase by £130,000 as a result.

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 pension liability up to the normal retiring age in respect of such employees is charged to the account in the year in which the early retirement decision is made to establish a provision for the estimated payments discounted by the Treasury discount rate.

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70

14 Reconciliation of net operating cost to changes in general fund2004-05 2003-04

£000 £000

Net operating cost for the year (Schedule 2) (59,745) (56,555)

Income for 2004-05 not appropriated in aid payable to Consolidated Fund (51) -

Receipts for 2003-04 not appropriated in aid paid to Consolidated Fund - -

Parliamentary funding: drawn down 59,677 55,766

Parliamentary funding: deemed Supply 223 184

Realised element of Revaluation Reserve transferred to general fund (note 15) 70 77

Transferred from Consolidated Fund for standing services 170 165

Consolidated Fund creditor for cash unspent (216) (223)

Non-cash charges:

Cost of capital 830 841

Net increase/(decrease) in General Fund 958 255

General Fund at 1 April 16,780 16,525

General Fund at 31 March 17,738 16,780

15 Revaluation reserve2004-05 2003-04

£000 £000

Balance at 1 April 6,279 7,589

Unrealised gain/(loss) on tangible fixed assets during the year (see note 7) 379 (1,233)

Transferred to General Fund (70) (77)

Balance at 31 March 6,588 6,279

The revaluation reserve reflects the unrealised element of the cumulative balance of indexation and revaluation adjustments.

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16 Commitments under leasesCommitments 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.

2004-05 2003-04£000 £000

Obligations under operating leases comprise:

Land and buildings:

Expiry within 1 year 27 -

Expiry within 2 to 5 years 8 171

Expiry thereafter - -

Other:

Expiry within 1 year 3 -

Expiry within 2 to 5 years - 10

Expiry thereafter - -

Land and buildings leases expiring within 2 to 5 years in 2003-04 include a lease for office accommodation in Cardiff which, following the enactment of the Public Audit (Wales) Act 2004 was transferred to the Wales Audit Office on 1 April 2005.

17 Capital commitmentsThe National Audit Office had no capital commitments as at 31 March 2005.

18 Other financial commitmentsThe National Audit Office has entered into a non-cancellable contract for electronic document management software. Under the terms of the contract £54,000 will become payable in 2005-06, subject to the implemented software meeting agreed performance targets. There were no other financial commitments.

19 Contingent liabilitiesThe National Audit Office had no contingent liabilities at 31 March 2005.

20 Related party transactionsThe National Audit Office is headed by the Comptroller and Auditor General and was established by the National Audit Act 1983. It is independent of Government and is accountable to Parliament through the Public Accounts Commission.

Sir John Bourn, the Comptroller and Auditor General, was also the Auditor General for Wales until 31 March 2005. The National Audit Office provided services to the Auditor General for Wales. The fee for the services provided in 2004-05 amounted to £2,720,000 and was set on a basis designed to recover full costs.

The Office also 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 entities which 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.

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21 Notes to Statement of Resources by objectiveStaff 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 distribution of the related gross administration cost.

22 Financial InstrumentsFRS 13, Derivatives and Other Financial Instruments, requires disclosure of the role which financial instruments have had duringthe period in creating or changing the risks an entity faces in undertaking its activities. Because of the largely non-trading nature ofits activities and the way in which it is financed, the National Audit Office is not exposed to the degree of financial risk faced bybusiness entities. Moreover, financial instruments play a much more limited role in creating or changing risk than would be typicalof the listed companies to which FRS 13 mainly applies. The National Audit Office has no powers to borrow or invest surplusfunds and except for relatively insignificant forward purchases of foreign currency, financial assets and liabilities are generated byday-to-day operational activities and are not held to change the risks facing the department 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 significant, although some international contracts are denominated in euros or dollars. The volume and value of transactions denominated in euros has grown in recent years and the Office operates a euro bank account to handle euro denominated transactions. This helps manage potential exposure to exchange rate fluctuations.

23 AccountabilityNo exceptional kinds of expenditure, such as losses and special payments, which require separate disclosure because of their nature or amount were incurred.

24 Actual outturnResources

Request for resource 1: Net total outturn £59,625,923.13. Actual amount of saving compared with Estimate: £571,076.87.

Cash

Net cash requirement: Outturn net cash requirement £59,683,798.69, which is £216,291.31 less than the Estimate.

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STATEMENTOF NATIONAL AUDIT OFFICE FINANCIAL IMPACTS FOR 2004

The statement of financial impacts represents the National Audit Office’s estimate of the financial impact of its work in 2004. Financial impacts arise when the Office has established, and the relevant department(s) have agreed, that a recommendation would either reduce the resources employed to achieve their objectives, improve efficiency or effectiveness, or increase revenue. They include direct cash savings, efficiency improvements, where more or better quality outputs are achieved from a given amount of resources, and improvements in revenue collection.

The statement of financial impacts has been prepared in accordance with internal guidance issued to all National Audit Office staff. The guidance provides staff with a protocol for calculating, agreeing and recording financial impacts. It requires each estimate to be clearly documented, setting out the methodology used (including any formula adopted), and to be agreed with the department concerned. Estimates are subject to internal quality assurance by senior management, and Assistant Auditors General are required to sign off impacts with a value exceeding £10 million.

Following a review of the arrangements in 2004 by Haines Watts, our external auditors, the Office has taken action to implement recommendations to:

widen the spread of financial impacts across departments;

review the period for which financial impacts may reasonably be reported;

standardise and formalise departmental agreement to financial impacts;

adopt a more uniform approach to reviewing previous impacts;

commission internal audit to carry out an annual review; and

seek external audit validation of reported financial impacts.

Revised guidance covering these issues was issued to all staff in June 2004.

statement of impacts

74

In 2004, the National Audit Office achieved estimated financial impacts totaling £515 million. The statement below analyses contributions of £5 million or more to the total.

VFM £m

Estimated impact of National Audit Office dissemination of PFI good practice 94arising from around 50 individual reports

Share of PFI refinancing gains following recommendations by the National 33Audit Office and the Public Accounts Committee

Payment of social security benefits to overseas customers. Stronger checks on eligibility for pensions 32

Reduction in processing times and backlog of incapacity and disability 32benefit claims, contributing to a reduction in overpayments

Reduction in sickness absence rate and number of medical retirements in the Prison Service 24

Income tax self assessment – greater tax yield arising from increased use of daily penalties 17

Transfer of social housing: improvements to financial assessment of proposals 14

Improved procurement of scientific equipment for research proposals at a research council 10

Gambling duties – additional revenue from license duty, identifying 10missing returns, expired licenses and unregistered operators

Improved procurement arising from Purchasing Professional Services report 10

OPRA: tackling the risks to pension scheme members – more efficient management of workload 9

Improved BBC licence fee collection and reduced evasion 8

Better management information and procurement for Defence-related research and technology 7

Reduction in price of handset rental from BT 6

Tighter targets for emission of greenhouse gases (UK emissions scheme) 6

Items below £5 million 23

TOTAL 335

Financial Audit £m

Recovery of duplicate payments made to pension providers from the National Insurance Fund 62

Health - avoidance of unaffordable capital costs on the Paddington Health Campus 37

Reduction in VAT payments to fraudulent traders 26

Social security benefits - identification of uncashed instruments of payment where no payment 20was due as the claimant had already been paid by alternative means

Reduction in revenue losses through tobacco smuggling. 12

Improved financial controls leading to reduced errors in payments to training providers 10by the Department for Work and Pensions

Items below £5 million 13

TOTAL 180

GRAND TOTAL 515

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INDEPENDENT STATEMENT TO THE PUBLIC ACCOUNTS COMMISSION The Comptroller and Auditor General has asked us to carry out an independent review of the Statement of financial impacts for 2004 and progress on the recommendations made in our report last year to the Public Accounts Commission.

Respective responsibility of the Accounting Officer and the Auditors The Accounting Officer is responsible for the measurement and reporting of the financial impacts achieved by the National Audit Office. We examine whether the information reported is reliable and fairly presented.

Basis of validation workThe validation includes an examination, on a test basis, of evidence relevant to the amounts and disclosures included in the Statement. It also includes an assessment of the significant judgments and methodologies made by the National Audit Office in the Statement’s preparation. We have also taken assurance from the work of the Office’s internal audit service.

Conclusion The information in the statement of financial impacts is reasonably stated based on the underlying methodologies and assumptions under which the calculation is made and is supported by robust processes.

The National Audit Office has taken appropriate action in response to the recommendations made in our report last year to the Public Accounts Commission.

Haines Watts

30 Camp RoadFarnborough

HampshireGU14 6EW

30 June 2005

statement of impacts

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MANAGEMENT BOARD MEMBERS 2005

Comptroller and Auditor General

Sir John Bourn KCB

Deputy Comptroller and Auditor General

Tim Burr

Assistant Auditors General

Gabrielle Cohen

Wendy Kenway-Smith

Caroline Mawhood

Jim Rickleton

Anna Simons

Martin Sinclair

Michael Whitehouse

Non-executive member

John Scotford CBE

CONTACT USFor further information about the National Audit Office please contact:

National Audit Office, London157-197 Buckingham Palace RoadVictoria LondonSW1W 9SP

Tel: 020 7798 7400Fax: 020 7798 7710E-mail: pressoffice@nao.gsi.gov.uk

Website: www.nao.org.uk

Regional Offices

National Audit Office, Blackpoolc/o Department of Social SecurityFylde Benefits and War Pensions DirectorateNorcrossBlackpoolFY5 3TA

Tel: 01253 333432Fax: 01253 333771

National Audit Office, Newcastle3rd FloorHigham HouseNew Bridge Street WestNewcastle Upon TyneNE1 8AU

Tel: 0191 269 1826Fax: 0191 269 1850

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78

helping the nation spend wisely

The National Audit Office scrutinises public spending on behalf of Parliament.

The Comptroller and Auditor General, Sir John Bourn, is an Officer of the House of Commons. He is the head of the National Audit Office, which employs some 800 staff. He, and the National Audit Office, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

Our work saves the taxpayer millions of pounds every year. At least £8 for every £1 spent running the Office.

For further information about the National Audit Office please contact:

National Audit OfficePress Office157-197 Buckingham Palace RoadVictoria, LondonSW1W 9SP

Tel: 020 7798 7400

Email: enquiries@nao.gsi.gov.uk

This report can be found on the National Audit Office web site at www.nao.org.uk