Finance Committee

I'll move on to item 3, which is the scrutiny of the estimate for 2025-26 on the interim report of Audit Wales. I'm glad to see four witnesses with us this morning. It's good to see you. Are you able to introduce yourselves for the record, please? We'll start with Ian.

Ian Rees ydw i, cadeirydd bwrdd Archwilio Cymru.

Croeso.

Adrian Crompton, the Auditor General for Wales.

Kevin Thomas, executive director of corporate services at Audit Wales.

Ann-Marie Harkin, executive director for audit services, Audit Wales.

Grêt. Croeso cynnes.

A warm welcome to you and thank you for the documentation we've had in advance. We've seen each other fairly recently as well, so it's good to see you again. We'll now go on to some questions on the estimate and then on the interim report. We've got quite a lot of questions to get through, so brevity on all sides would be appreciated this morning, otherwise we're probably going to run over time, and I know we're all fairly busy. So, I'd like to start, if I may, to understand the overall levels of cash and resources being requested for 2025-26. So, your estimate notes the pressure on public finances. How does your estimate for 2025-26 reflect a prudent approach to operating Audit Wales and account for those pressures?

Iawn, fe wnaf i ateb hwnna. Mae'n braf iawn gweld y pwyllgor eto. Diolch am y gwahoddiad. Fe wnaf i droi i'r Saesneg.

The board has been very much aware of the pressures on public finances when considering the estimate for 2025-26. I think that this has manifested itself in the requirements to continue to provide high-quality audit in the public sector to ensure the best use of public funding and also in the continual value-for-money drive in Audit Wales's work. The estimate doesn't really contain any significant proposals for areas of new spend; it's very much focused on maintaining the progress we made during the last year against our No. 1 organisational priority, which we discussed with the committee a few weeks ago, namely eliminating the backlogs of work that built up through the pandemic. And I can report to the committee, firstly, that the board provided considerable challenge to the executive in considering the draft estimates. And while we note it's important that ongoing savings become more and more difficult to achieve, we were keen to ensure ongoing efficiencies and we'll continue to set a target for savings, and they're targets we'll be monitoring against as we go along.

We consider as a board that the increase in fee levels proposed is both modest and reasonable and hasn’t been challenged by any of our audited bodies. Also, we consider that the estimate documents that you’ve already received, specifically part 2 of the submission, provide considerable evidence of the need for the increases in funding. So, as a consequence, as a board, we consider that the estimate, as presented, reflects a relatively modest and realistic target for increase of funding from the Welsh Consolidated Fund and that the request is supported by considerable evidence.

Could you remind us what percentage rise that will be as an overall percentage figure?

The percentage increase in the WCF element is 2.9 per cent.

It's 2.9 per cent—lovely, thank you. You've talked about savings and you've halved the savings target for 2025-26, compared to 2024-25, from £400,000 to £200,000. We previously discussed the financial sustainability review group that we've got, in October 2023, and you wrote to us about the activities, including the right size of budgets and restructuring and zero-based budgeting. Can you outline how that all has worked together and why a cut in the size of the savings target? Thank you.

Sure. So, the £400,000 savings target for this year we've achieved, and we've achieved that in the shape of genuine recurring savings and efficiencies. So, that rolls directly into the estimate that you’ve got before you. Had we not done that, the estimate would have been correspondingly higher.

We’ve cut the savings target for next year—you’re right. On the one hand, we felt it really important that we still have a target that we’re aiming to achieve, but it is becoming increasingly difficult to do that. And one of the reasons I think it’s important for the committee to understand is that that savings target relates only to the WCF element of our work. So, two thirds of our income comes from our fee-generated work. We are achieving efficiencies in that space too. We may go on to talk about some very significant savings for next year’s audit amongst the larger bodies that we believe we can deliver. But none of that contributes to this target because we’re not a private firm—we don’t keep the profit, as such, that we can make from those sorts of savings. So, any reductions in costs that we see there is of benefit to the wider public sector and our audited bodies, but not to Audit Wales as an organisation. So, our savings target relates only to the WCF element and, bluntly, that therefore relates to staff in our corporate areas and some audit staff who are WCF funded and our non-staffing budgets, which, as the committee knows, over the last few years, we’ve attacked very vigorously around travel and subsistence and our estate, and so on.

Okay. Thanks for that. Last year, you talked about the presentation of your estimate and the issues around understanding precisely what level of increase you'll be requesting. Part of that issue related to the money moving from one spending area to another, which had the effect of offsetting the headline increase. Your budget line for movements in working capital for 2025-26 is £40,000—£160,000 less than it is in 2024-25. How is this £160,000 being utilised, and are there any other areas where you're moving funding between lines?

That is quite an accounting question, and so I'm going to defer to an accountant, who is sitting by my side, to answer it, but, fundamentally, we're not moving budgets between lines. But I'll ask Kev to respond.

Okay. Thank you, Kevin.

So, the £160,000 will only be used this year if needed. If not, it would be returned in full along with any other unused cash at year end to the consolidated fund. As Adrian said, we're not moving any budget or funding between budget lines. This just reflects the timing of any cash receipts and any expenditure that we make. We do know that, last year, the inclusion of elements of estimated movements in working capital caused some confusion, so we've removed the contingency element of any movements in working capital—so, that's debtors, creditors and provisions—as they can't be accurately estimated in advance. Having said that, those movements in working capital will inevitably impact our cash position, because almost 70 per cent of the cash required for Audit Wales activities comes from audited bodies through fees, rather than from the consolidated fund. What we have included in the estimate, specifically, is £40,000 that relates to the fund, and it's required to enable us to utilise a provision that we've built up over a number of years to settle the dilapidations payment for the existing west Wales office when we move out of that in the spring of next year to new accommodation.

Okay. Thank you for that explanation. That helps. You've previously told us that the movement in working capital relates to that normal contingency, and you were talking about that just now, through year-end movements. Does that remain the same, and can you explain if there are any challenges to going down that route that you've just outlined?

Sure. So, as I said, for ease of understanding, we've removed those contingency elements of movements in working capital. The only movement that we've included is the area where we have some real certainty, which is that dilapidations provision for our west Wales office. Any actual movements will be reported in full in our annual report and accounts at year end. In the event that we have unused cash, that's returned in full to the consolidated fund, as we have in previous years. In the event that we have an increased cash requirement in 2025-26 as a result of those sorts of movements, they might need to be reflected in a supplementary estimate, because we have no provision to carry cash forward from one year to the other, because of that full repayment at year end.

So, you could make those decisions in-year, bring back a supplementary or report it at the end of the financial year. Are there any issues that you could foresee where you'd need to speak to this committee—if they're larger than you expect, whether or not we need to be aware of that—or is it purely more of a technical movement of capital around?

I think we would need to come back to the committee at year end if that became a certainty, because we can't predict that until the end of the year.

Fine. Okay. Thank you very much. I'll bring Rhianon Passmore in at that point. Thank you very much, Rhianon. Let me just make sure that you're unmuted. There we are, you're unmuted. Thank you.

Thank you very much. Just for clarity—apologies if I've missed this—the £109,000 increase in cash, or the 1.2 per cent, for 2025-26, could that just be elaborated upon, as to what that is for? I'm not quite clear that I've got that from your previous commentary.

Sure. Because we no longer include the contingency element for movements in working capital, we've made no specific reference to any movements, with the exception of that one where we've got certainty, that point around the dilapidations provision—

I've got that, yes.

We know that that's caused some confusion in previous years, so we've done two additional things with this year's estimate. Firstly, we've provided a breakdown of non-cash movements in exhibit 11. That sets out in detail those movements, and there's a footnote there that, again, provides additional detail. We've also, in appendix 1 to the estimate, set out a line-by-line analysis by each budget line of the differences between resource and cash. So, that's detailed in full. The main—

But that doesn't really help me. In terms of £109,000, what is the—? I can understand the context and the background, but what is the £109,000 for?

It's the net increase in cash for the year, having taken account of all of the various movements that we’ve put forward in the estimate. That’s the additional cash requirement.

So, ‘It’s the net increase for cash during the year’ is the response, yes? Yes. Okay. Thank you very much. I might have to come back to that.

I’m going to go on to my questioning, then, in terms of the estimates for 2025-26. You talk about staff costs linked to your aspirations to bring audit deadlines back in line with the pre-pandemic performance. Your estimate says the increase in staff will be met entirely from fees. Is there any impact from this approach to other areas of work, such as work that’s not funded through fees, related costs such as travel and subsistence, training, travel time et cetera, all of those additionalities. Is there any knock-on?

Thanks, Rhianon. I’ll ask Ann-Marie to come in with a more expert view, but fundamentally no impact on the Welsh consolidated fund side of the organisation. We believe, on the additional staff-related costs like training and development and travel and so forth, there may be some fluctuation but we don’t believe there’s a requirement for us to reflect that explicitly in the estimate. Ann-Marie, is there anything you want to add to that?

No. I mean, we’ve had to accelerate some training—for example, auditing of groups—but that’s been contained within the existing budget. You’ll note that, over the last couple of years, T&S costs, travel and subsistence costs, have come down. You’ll see in this estimate we’re proposing to increase them a little bit this year. That’s because staff are increasingly having to go back to audited bodies, at the audited bodies’ request and also because we believe that that’s the best way to do an efficient, high-quality audit. So, there will be some impact there, but everything we're containing within our existing resources.

In regard to the increase in staff being met entirely from fees, is that something that you can retrospectively predict, and what happens if it isn’t?

If the costs weren't met from within the fees, the costs of the audit—. I think we make sure that we budget in such a way that the costs are met from within audit fees. And of course if an audit runs over, if the costs are greater than we estimate initially—

I’ll repeat my question, I wasn’t clear, I’m sorry. So, you say, the estimate says, the increase in staff—in staff—will be entirely met from fees. So, my question relates to the increase in staff.

Well, they’re audit staff that we’ve had to increase. So, we’ve had to recruit additional senior auditors, and the costs of those staff will be met from fee rates, yes.

Okay. So, my question really, and I’m sorry to labour the point, is that you say they will be met from fees, but I’m just trying to get a picture as to how much you can predict that fee to be able to sustain an additionality in staff costing. Because you’ve got that information. So, you’re entirely confident, then, that that will be the case, that it will be met from fees that you are yet to collect.

A lot of planning, we understand what’s needed, we know how many staff we need, we staff accordingly, and the costs of those staff are met by the fees that we charge to the audited bodies.

Fine. So, what I’m still asking is, you know in advance then that you will be able to sustain those staff on fees that you’ve not yet collected. Is that a correct interpretation?

Yes.

There's a 'yes', Rhianon.

Okay. That's the response. Thank you so much. I’m going to move on. Staff pay was a significant point—. Oh, sorry, I think Peter Fox wants to come in, Chair.

Can we unmute Peter, please? There we are. Thank you.

Thank you. I just wanted to follow on from Rhianon’s question. I’m sorry, Rhianon, if you were going to come back to it. But, whilst we are on those costs and staffing costs and things, it would be remiss of us not to reflect briefly on what the budget said this last week and the increase to national employers’ costs. I don’t know how you see that and how you will reflect that in the estimate. I’m not sure how it totally works, recognising that a third of your income comes from the consolidated fund and the rest is from fees, how you might be treated, or how you perceive you might be treated. I just wondered if you’ve got any thoughts about how you might need to factor that into the estimate.

Thanks, Peter. Yes, a really important point. Obviously, the timing meant we've not reflected that change in our estimate. Our working assumption at the moment is that, if funding is passported from Westminster to the Welsh Government and the wider public sector, we, I assume, like the other directly funded bodies, would have to come to you either with a refreshed estimate process or with a supplementary at the start of next year to cover those costs. In terms of the split of that additional cost between the Welsh consolidated fund and fees, my proposal would be that we seek that directly through the WCF, because of course audited bodies will be facing the same costs. They ought to be compensated for their additional employer costs, but not for additional audit fees. So, that would seem the fairest way of doing it. In terms of quantum it's around about £200,000 of additional cost.

And have you looked at the Office for National Statistics definition of public sector and whether or not you believe that you fall into that, so it means that therefore that passported money should come to you, or—? Where do you where do you sit in that?

I would say we're firmly in the public sector. I can't think of another sector we're in. Certainly, when we've seen similar changes with national insurance rates in the past, that's exactly how it has operated.

Because we had a very lengthy—well, fairly lengthy—discussion on this in the Chamber yesterday and the day before, so it was just getting that clarity. So that's fine; thank you. I'll bring—. On that, then, we'll watch and see how that works and then we'll have to either see how you handle—. So, your proposal at the moment would be, if you're able to, to make the changes to the estimate in time, but probably that's not going to happen, it will probably be a supplementary at a later date to mop up any changes.

That would be great from our perspective. I can imagine from the committee's perspective you've got three directly funded bodies all similarly affected and you'll want to see consistency in approach. So, we're happy to work with you and the others to do that.

We'll work through that as time goes by. So, lovely. I'll bring back Rhianon now. Thank you.

I'm not going to pursue that, then, as we seem to have got a way forward. As I said, staff pay is a significant point, as you know, in the estimates for 2024-25. This does talk about an inflationary pay uplift for staff. Can you be more specific about what this means and what value this estimate is budgeting to provide for this purpose in total from the Welsh consolidated fund funding? If you can find the meat in that question, that would be really useful.

Sure. Thanks, Rhianon. I think when we were putting the estimate together we had a slight nervousness about putting numbers in about our assumption for pay for next year. However, I think Ian and I think we're in a slightly different position now. Last year the relationship with our unions was really, really positive. That was manifested in one way in the way that we were able to settle on pay for 2024-25 early, so that staff saw the benefit of that from April. We'd very much like to do similar this year, and so I want our approach to be complete transparency and openness with our union partners. So, we have factored into the estimate you've got before you an assumption that our pay bill for next year will increase by 3.5 per cent, which we know we'll be able to afford. If we're to go above that in any way then it can only be affordable if we can identify ongoing recurring savings, which, as I touched on earlier, is not impossible, but challenging. But that would be our position for the opening conversations with the unions.

So, your working assumption is that you wouldn't be coming back to us for any additional funding; you'll find that from efficiencies if you needed to give a pay award that's higher than what you've budgeted for.

Correct.

Okay, thank you. Rhianon.

I think Mike wants to come in.

Oh, Mike. There we are. If we could—. Hang on. There we are, Mike—you're unmuted. Thank you.

Just following on from what you said, Cadeirydd, in most organisations, and Rhianon, Peter and I have worked in councils, where there's an expectation of efficiency savings year on year and it's built into the budget. Shouldn't you have been looking to make substantial efficiency savings over the years? And shouldn't there be benefits from ICT? ICT always seems to be a cost—it never seems to appear on the other side, as a benefit.

Thanks, Mike. Absolutely, completely agree. Technology and our data analytics work in particular is delivering concrete savings to us. If you take a look at our fee scheme, we anticipate that, next year, the fee levels that we'll actually charge to some of our larger audits will decrease by around 3 per cent, after taking account of the uplift in our fee rates. And in part, that is driven exactly by what you described—so, the use of technology to improve the audit process and reduce the amount of time and, therefore, cost that we incur. As I said earlier, two thirds of our budget is outwith this conversation. So, we're driving efficiencies in that way, but they're not efficiencies that we can then benefit from as an organisation—they're efficiencies that audited bodies benefit from, in the shape of lower fees.

Diolch. Rhianon.

Thank you. Just very, very quickly: in terms of the negotiations that you were talking about with trade unions, were those for 2025—obviously, I presume not—or were you talking about last year's negotiations?

So, when do you think that your negotiations with the trade unions will be concluded for—

So, we'll start early in the new year, and, certainly, from our perspective, our aim will be to get those concluded by March so that we can reflect that in staff pay from the start of the next year.

Okay. Thank you.

Okay. Thank you. You've estimated a 5 per cent staff turnover. Is there a, or what is the, level of risk associated with that figure, and how dependent is your budget on those savings being delivered, bearing in mind your appointment of senior staff?

The 5 per cent figure we have had as a working assumption in putting our estimates together for many years—certainly, all of the time that I've been in this position. I don't believe we've seen turnover lower or significantly lower than that at all, in my period of time. And as we've discussed previously in the committee, currently, it's a fair bit higher still. So, I think the level of risk of falling below that level is small. If it were to manifest itself, and I don't think it will, but, if it were, it's a relatively easy thing for us to manage in-year—not desirable, because it would mean holding off on training, recruitment and so forth. But it's, in my view, a very small level of risk going into next year.

The flip side of that—[Interruption.] Sorry, Rhianon. The flip side of that is, obviously, if it escalates, there's probably a higher risk involved—and we've talked about this before. Can you remind us where your current staff turnover rate is, and how you're trying to drive it down towards 5 per cent?

It's currently at around 8.5 per cent.

Eight and a half. Okay. And you're trying to drive that down towards 5 per cent, so 5 per cent is probably more of an aspirational target rather than a—

Yes. We have a KPI target of between 5 per cent and 10 per cent, and the working assumption for the construction of an estimate is 5 per cent.

Okay. Thank you. Rhianon.

And I suppose that the follow-up question, really, is: how dependent is your budget on those savings being delivered?

It's an important factor, but, as I've said, it's one that is not new. It's our routine working assumption; it's been borne out year after year. So, I think the point about the potential risk of turnover being higher is probably more likely, but, of course, there's usually a consequential reduction then in income because we've got staff vacancies.

Okay. Thank you. I'm going to move on to your budget lines that you've allocated for cash for the rent-free period in the new Cardiff office. So, we've seen an increase in the cash requested to cover the end of that rent-free period, but, in the 2024-25 timescale, you've talked about a rent-free period in the Cardiff office. So, to what budget lines did you allocate cash in 2024-25, and what impact does that have for those areas of spending in 2025-26?

As you say, Rhianon, we had a rent-free period on our new office as part of the lease deal in 2024-25, and it's typically what you negotiate with a landlord on a new lease. As a result of that, because it was rent free, we requested less cash than we required for the resource associated with the lease, because in terms of resource, we account for the lease costs evenly over the whole lifetime of the lease. We've provided some detail about our accommodation budget in exhibit 3 and again in appendix 1 to the estimate.

In terms of our resource expenditure for 2025-26, that has reduced slightly because of the anticipated savings from the move in our west Wales office next year. But, as you say, our cash requirement has increased, because of the end of that rent-free period. We did provide the committee with some correspondence following last year's evidence session, which set out in some detail the implications in terms of cash and resource of that rent-free period as part of the new lease arrangement.

So, in regard to budget line allocation, that would be within—I'm trying to unpick what you said—2024-25, is that correct?

We accounted for the resource in 2024-25, as we have 2025-26 and thereafter, but we didn't have that cash requirement last year. We now have that because the rent-free period is over, so we've now got that cash requirement in the budget for 2025-26.

Right. So, we're clear. Thank you so much. I'm going to move on in terms of more specific funding increases that you've requested. I'll try and whizz through these. They are important, but if you could be brief in your responses, if you can.

The supporting information includes a request for a £172,000 increase from the Welsh consolidated fund relating to audit work to match increases in fees. It talks about £97,000 relating to Senedd reform and future generations work. Is this ongoing funding, and what will the £97,000 be used to fund?

'Yes' to 'is it ongoing?' The £97,000—I think we talked about it last year—was reflected in the regulatory impact assessment for the Bill on changing the shape of the Senedd and its term length. The £97,000 is a direct result of that. I'm required, under the future generations Act, to undertake a body of work across what is now 56 bodies captured by the future generations Act. That is relatively fixed and defined by legislation, so I have to do it. The £97,000 is the arithmetical consequence of squeezing that work from five years into four.

Because of the Senedd term.

Exactly. Yes. I'm required to complete that body of work in a Senedd term, and so I have to do it in four years rather than five.

So, that will be the cost for the reduction in timescale then, and that's just in relation to the future generations work.

That's right.

It's nothing to do with Senedd reform.

The £97,000 is to undertake work under the future generations Act; the reason why we have to ask for more money is because of Senedd reform.

Got you. Thank you. You've requested an additional £30,000 in 2025-26 for the graduate trainee programme. The supporting information outlines increases in staff costs for trainees and apprentices, training, and programme management. Can you provide information on the non-pay cost increases within that £30,000, please?

Trainees and apprentice schemes are Ann-Marie's baby, so I'll ask her to respond.

Absolutely. Thanks, Rhianon. We've provided the additional detail I think you asked for last year in exhibit 9. The non-pay costs, as you'll see, include the cost of professional training for the accountancy studies, and there's also a small budget there for a trainee conference that we provide every year. The programme management costs then, where you can see a £10,000 increase, that relates to lost time from audit managers and audit leads who have to support the programme right from recruiting through to supporting them as they are undertaking their professional studies. We've also got a dedicated trainee counsellor who is there to actually support the programme, liaise with the institute, et cetera.

Thank you. Finally, in regard to your request for an increase of £10,000 from the WCF associated with staff time relating to your good practice exchange—and these are all great things to do—do you have staff who work exclusively on this? Given the resourcing challenges you face and the pressures around delivering audit programmes to your statutory timescales, how are you demonstrating value for money from this work? I appreciate it's a small amount of work, but small amounts of money add up, don't they?

We do have a dedicated team. It's small; it's three members of staff in our GPX team. Scope for moving them across to support our statutory work is not there, unfortunately. None of them are professionally qualified, so they wouldn't be suitable to do that, even if we wanted to. The GPX programme, I think, punches way above its weight. If you're interested in its value for money, I would point primarily to the feedback that we get from participants, which is consistently in the high eighties and above in terms of satisfaction with the events and outputs we produce. Most recent examples would be a couple of sessions we held, one in north Wales, one in south Wales, which Ian attended, which were designed to support people on public sector audit committees. Really well attended, with super levels of response from everyone involved. So, as I say, it's a small team, but it punches way above its weight. The costs that are included in the estimate are for that team, but also the contribution of time and expertise from other members of Audit Wales in delivering the work.

Okay. Thank you very much, Chair.

Diolch, Rhianon. Mike Hedges.

I want to talk about cyber security. I know you've got a £40,000 increase there. I'm going to ask is that enough or too little, and you're going to say the answer is both. You could spend huge sums of money on cyber security. Why is it going up by that amount, rather than more or less?

Thanks, Mike. You'll remember that this time last year the committee supported us with additional funding for a cyber incident response retainer contract. That gives us 24/7 access to specialist consultants who are able to help us in the event of a cyber attack and to restore our systems quickly. That contract allows us to, I suppose, recycle credits in the event that we don't have an attack into proactive cyber security consultancy. So, as part of the contract, the provider ran a workshop for staff and members of our board—Ian attended as chair of audit committee at the time—to look at areas where we could potentially strengthen our arrangements as well as considering the adequacy of what we've got. The key area that came out of that workshop was the creation of immutable backups. This is a relatively new development whereby we would have backups that can't be destroyed or tampered with by cyber attackers, and that's a key part of a criminal's strategy around ransomware. So, that £40,000 investment is very much targeted at the creation of these immutable backups.

Just like banks. The major high-street banks do that, don't they? If anything ever goes wrong, they might lose a day, but they can always go back to a safe previous version.

That's right, and these immutable backups just cannot be altered in any way, and that would be a step forward from what we have at the moment.

We talked about data analytics earlier. It's £214,000; you spoke very highly of it. Where do I see the gain on it? I see the cost. Where do I see the gain?

I'm going to sound like a stuck record. Most of the gain you will see in the shape of the fees that we have to charge to our audited bodies, so we're applying data analytics tools now routinely to our audits—certainly the big audits that we undertake—and they are contributing directly into the reduction in fees that we anticipate for next year.

Something Rhianon asked questions on earlier is the office move. The final phase of the office move programme is due to be completed next year with the relocation of your west Wales office. Can you share information on the new lease costs, as well as any other costs, and details of projected savings?

As you say, the final part of our estate strategy is a move of our west Wales office next spring. We anticipate annual savings of about £10,000 a year from that new arrangement, so moving down from £85,000 to about £75,000 per annum. As part of that move, we've also included £60,000-worth of capital costs, so that's the investment in the fit-out of that new office.

I'm pleased to say that the new office is shared space with the Welsh Government, so it makes good use of surplus public sector space. But, of course, we do need to fit that out for our own requirements, including important privacy and security measures, because of the confidentiality of the information that we're dealing with.

That's similar to what you did in north Wales, isn't it?

Exactly, yes.

Adrian, did you want to come in on that?

Can I just come back, very briefly, on Mike's previous question about data analytics? I answered it briefly with a response around the efficiencies we're seeing it drive in our audit work, but there are two other important themes, actually, that the committee should be aware of. Some of our DA tools do not result in direct financial savings to us or to audited bodies, but they do improve the quality of the audits that we do, so we're able to undertake more thorough, complete audits as a result of the application of technology, which is fantastic. Mike and Rhianon may also see some of the results coming through in work that we have delivered to the public accounts committee. We produced some work recently that identified direct savings from the prescription of medicines for community pharmacies, amounting to over, I believe, £700,000. That was a direct result of a piece of data analytics work that we had undertaken. So, those three themes: direct savings to us or our audited bodies; improvement in audit quality; or direct savings to the wider public sector. That is where you would see the benefits of our DA work.

Thanks for that clarification. Mike.

Your capital costs will drop slightly. All I'm going to say is 'Well done'. I think that we do tend to be, or I certainly tend to be, overcritical of some things, rather than talk about the positives. Well done on that. And indeed, you're expecting them to be maintained at that lower level for each year up to 2028-29. How does that fit in with your ICT replacement strategy?

Thanks, Mike. Yes, as you say, we're looking to reduce our capital programme by about £30,000 each year, and the committee will remember that we'd underspent on our capital programme last year. Going forward, I suppose there are two key elements of our capital programme. The first, as you rightly say, Mike, covers our IT kit. So, although we've moved away from on-premises infrastructure to renting services in the cloud, we still need to maintain high-quality and reliable equipment for our staff. So, the large part of the IT expenditure is on the three-year rolling programme for our laptop replacement. That helps us to minimise downtime for our auditors and audit teams. The other element of the capital programme relates to our change programme. That's any new systems that we might need, or any replacements or upgrades to existing systems.

Thank you. And finally from me, the supporting information talks about developing a proof of concept for phase 2 of your financial audit platform. How will you undertake this work and, given comments you made about a delay with your SharePoint-based audit management system, what are the risks involved, the timescales, and the overall potential costs, including comparison with the costs of the existing system? And I'll throw the word 'savings' in there as well.

Thanks, Mike. The audit platform you're referring to is the fundamental piece of kit that we use for all of our accounts audit. It stores all of the information that's required for that work. So it's fundamental to our work.

Until around three years ago, we used an industry-standard platform for that. That contract came to an end and we decided to try to develop our own system in SharePoint. That we have done successfully. Over that period, we've spent, I would say, in the region of £100,000 to £150,000 on doing that. To put that in context, for the previous industry-standard system we paid £80,000 a year, in terms of licensing. So, if we assume a 10-year lifespan for our system, that is a very significant saving to the public purse—well over £0.5 million. What we want to do next is to build in some greater automation into that system to improve it still further. That’s what we’re proposing in this estimate. Our expectation is we’ll go about that in the same way, so largely driven in-house, with a bit of external consultancy drawn in. I believe we’re talking in the region of about £50,000 for that work.

So, I would say, massive value for money compared with what we used to have and the alternatives that are out there. And just to put the whole thing in perspective, the National Audit Office in London were at a similar position three years ago. They decided to develop their own system. They have many large and very complex audits, so they need a slightly different system to us, but they reported to the Westminster Public Accounts Commission recently that they’d capitalised around £5 million in developing that system. So, massive credit to our staff, I think, for delivering something that works for us, does exactly what we need it to, but for a tiny fraction of the cost.

Thank you very much.

Diolch, Mike. Before we move on to the fee schemes—and this may be a question, possibly, for Ian—you’re requesting an increase of £25,000 in relation to governance costs and highlight board development as one of the drivers. And I know you’ve spoken about developing the board as one of your priorities. What’s that funding for, and why is it necessary?

Okay, thanks. Diolch yn fawr. Quite simply, it’s for an independent review of board effectiveness. Now, in line with good practice, the board evaluates its own performance on an annual basis, and we’ve just completed that process now. But in line with good practice again, every three to five years, the evaluation must be performed by an independent external consultant, and we’re currently in the planning process for that independent review. The budget amount the last time this was performed—we spent around £21,000 plus VAT in 2021. So, that level, plus a little bit of inflation, brings us to £25,000. But, having said that, we’ll be seeking to scope and secure a provider within or under that budget.

And then we have recently, as I mentioned, just completed our own self-assessment, and also the audit committee—our own audit committee—looked at an internal audit review on corporate governance. So, they are feeding into it, so that will hopefully make some savings. And, of course, the outcome of the review will be reported in the governance statement through the annual report and accounts next year.

Okay, diolch. Thanks for that. I'll bring in Peter Fox now for a final few questions. Peter.

Thank you, Chair, and it's good to see you all this morning. Just a couple of questions on your draft fee scheme. It’s commendable that you’re managing to keep charges reasonably low, with the new fees reasonably low—I think it’s just under 1.7 per cent. I just wonder how you managed to reach that figure. And I think you may have already talked about that through the benefits of analytic tools and things like that, but I don’t know if you want to share anything further on that, Adrian.

Absolutely. Thank you, Peter. It’s a really important point for us to share with the committee. So, you’re right, we have driven down our costs as best we can, reflected in the 1.7 per cent. But I’ve got to be open: we are also benefiting this year because we are essentially a little overstaffed, to try to catch up with the backlog of work we face, and those fee-earning staff contribute to our organisational overheads. So, that is one of the reasons why, this year, we’re able to increase fee rates by only 1.7 per cent, but anticipate a higher than that increase in our staff bill, bluntly. That’s good for everybody this year, but, of course, we anticipate that, in two or three years’ time, that will start to unwind as we’ve dealt with the backlog and are back to a steady state.

So, we’re starting to work through now the options for how we manage that process and what the regime looks like at that time. We could just simply slowly revert back to a steady state, but that might potentially lead to an above-anticipated increase in fee rates in future years. The more interesting and exciting option, I believe, would be for us to maintain our staffing at around that level, but use that additional resource to broaden our portfolio of work, so to stretch outside the statutory work that we’re required to deliver, keep that as our No. 1 focus, but to spread into other areas of commissioned work. Now, if we were to do that, I'd be very keen to engage with the committee about the desirability of that and how we go about it, and the Welsh Government as well. But it seems to me a win-win, because it's good for Audit Wales, it's good for audited bodies in terms of the fees that we have to charge them, because it's making a small net contribution to the public purse as a result.

Thank you for that. That makes a lot of sense, obviously, as long as—as they clearly would—the fees cover all of your on-costs and things, which clearly you'd work through. I was interested, and it's again commendable, that there could be a potential reduction for local government bodies, going forward. So, is that due to this same sort of thinking then? How are you proposing to achieve that?

They're two slightly different things. So, the actual fees that bodies pay is a function of our fee rates. So, how much we charge our staff out at, but also the volume of time and work that goes into an individual audit. Ann-Marie might want to say a little more, but we have learned lessons from the new approach that we applied last year and this, so we believe that we can see some efficiencies there. I've mentioned the use of technology, which is helping to drive that down as well. Ann-Marie, anything that you'd like to add?

Only to say that I think that the committee might well remember that, two years ago, when we spoke to you, we were highlighting quite a significant increase in the fee rates that we were going to need to charge, and the amount of time and the grade that would be needed to audit bodies, following the implementation of the new auditing standard ISA 315. And, at the time, the committee said to me, 'When will it settle down? Will there be any efficiencies going forward?' And I think, Peter, that we are seeing now that, for the larger bodies in particular, we are identifying some efficiencies, with a more risk-based focused approach with our audit methodology.

We're seeing that with the larger bodies, and that's playing out in the fee scales, which obviously are local government fee scales. I would say that what we're seeing in the central Government, those smaller bodies, is actually not the same picture. So, in some cases, we may see some increases there. And of course, even in local government bodies, the fee scales are there, the fee rates are there, but the amount of time that we have to spend on an audit depends as much on the quality of the information that we're given as the amount of work that we need to do to meet auditing standards as well. But it is good. It's good news.

And the NHS this year.

For the NHS this year, yes, we saw a reduction. We're thinking that we've seen a reduction of around £100,000 overall, although please do not hold me to that, because my audit managers will not be happy because I haven't seen the final figures yet. So, subject to scrutiny in due course, but we are seeing efficiencies in the NHS and the local government bodies, those larger bodies.

Thanks, Ann-Marie. I've another point on fees before I move on. Clearly, you're having a lot of extra work with town and community councils. There's a lot of extra time having to be spent on them. Do you see as a result of that, in this next round, that you might have to increase costs for town and community councils?

No, not necessarily, really, other than for the fee rate increases themselves. I think that what you'll see with the new fee scales is a reflection of our experience over the last three years. The previous fee scales were based on certain assumptions when we took the work back in-house. The reality of the situation over the last three years and the data that we've got proves that, actually, we were probably overly optimistic, and so we've had to adjust the fee scales accordingly.

Before I bring Peter back in, I remember, I think it was in one of our meetings, that we talked about late fees, or people not necessarily paying up on time. Is that being factored into any assumptions on fees? I seem to remember that it was to do with smaller amounts, but across town and community councils. Is that something that's starting to resolve itself, or—?

We are getting to a better position now. So, we've chased up a lot of outstanding debts this year and have seen some significant benefit from that. Our assumptions about creditors and debtors, going back to earlier questions that Kev responded to, are reflected in that working capital assumption there. So, we will always have that at a fixed point in time. But we are getting back to a much better position in terms of the timeliness of delivery of our work on town and community councils. I'm giving evidence, coincidentally, next Thursday to the Local Government and Housing Committee on exactly that subject. But, yes, nonetheless, it remains a very large volume of very small audits that we have to get through every year, but it is the regime.

Thank you. Peter.

Yes, just a couple of questions now from me, just to consider progress against the annual plan as demonstrated within the interim plan. So, the first one really is just looking at one of your priority areas, to develop and implement a three-year quality monitoring programme to support your whole-organisation approach to managing the risk of audit quality. Now I know that you’ve rated that as 'improvement needed'. Can you outline why and what activity you’re going to do to try to rectify that?

Okay. So, thanks, Peter. It's a new audit quality management standard, an international standard on quality management 1—ISQM1. It was introduced about a year ago, issued by the Financial Reporting Council to support and enhance audit quality. And what it requires us to do is to take more of a whole-organisation approach to managing the risks to audit quality, which requires us to look further than just the audit process itself, looking at things like ethical arrangements, performance management, our learning and development arrangements. And we have to get assurance around those as part of this ISQM1.

We have put a monitoring programme in place; we've done the evaluation, we've put a monitoring programme in place. I think what the interim report is reflecting is the fact that I would like to be further through that three-year monitoring programme than I am. Why am I not further through? Well, we’ve had resource constraints, we’ve had a key member of staff off sick. I’m putting additional capacity into the team, so I am hopeful that we will catch up—that’s certainly my intention.

Yes, thanks, Ann-Marie. That makes sense.

In a similar vein then, the interim report suggests that you are currently on track to deliver 100 per cent of audit work by the statutory, or agreed, deadline. Given we are now approaching the 30 November deadline for local government audit, is that likely to change or are you still on target for 100 per cent?

We're still on target to deliver all of the local government audits where accounts were delivered to us for audit by the required deadline of 30 June. So, it's an agreed deadline, 30 June. In all cases of those bodies that met that deadline, we will meet the 30 November deadline. We do have a small number of LG bodies that didn't meet that deadline. We are anticipating that we'll get those done by February. So, it's a much improved picture from last year. And just by way of additional information for the committee, we met 100 per cent of our NHS accounts delivered on time, the audits of those, and our central Government bodies as well. So, it's a much better picture this year. Are we there yet? No, but we will be by 2026.

And the local authorities that didn't meet that deadline, was it fairly close to that deadline, or were there quite a few—?

It's a mixed picture. We've still got some 2022-23 audits outstanding in three local government bodies and one national park. And these are issues that the client bodies are experiencing themselves, so we're working with them to support them. Obviously, we'll do the audit as soon as we can—

But you're hoping to get them done, mop those up by—

Yes, we are, by February if we can. That would be the plan, although maybe I'm being overly optimistic in some cases where we haven't done the 2022-23 as yet.

Thank you. Peter.

Thanks. That answered my next question. You're on top of it and you're not necessarily concerned, so—.

My final question then, Chair, and that is: you’re currently showing the proportion of trainees who have achieved first-time passes as requiring 'significant improvement'. At this point in the year, is that concerning or not?

It's probably not ideal, but you will have noticed from the last couple of annual report and accounts that our trainee passes took a bit of a dip. That was, I think, a reflection of a more relaxed attitude that we took to exam failures, post COVID initially, and also, I think, a reflection, as you know, of the number of applicants that we've had to the trainee programme. So, I think that's reflected in, for example, the fact that some of the results that we've had in this financial year that have impacted this have been in respect of the 2023 cohort, where we've only now got five people in that group. So, as you can see, we had five people—three passed, two didn't. That takes your success rate through to 60 per cent, which pulls the overall target down. We've managed to recruit 26 trainees this year. The results we've had from them so far are really, really good, so I'm hopeful that that statistic now, that KPI, will improve.

Thank you. Mike Hedges, did you want to come in on some of that?

I'll come in on something you spoke about earlier, when you talked about small audits. One of the most significant audits you carried out when I was a member of the Public Accounts Committee was the audit of the Wentloog drainage, which some people may remember, but that identified a whole range of problems. So, I just want to say that we do appreciate, or I certainly appreciate, the work you do on some of these smaller audits, which can be really important.

Thank you so much. I'll take that back to the team, Mike, because I think that'll be gratefully received. I think you're right on small audits. You do find that you get more problems, very often, actually, and so I think it's definitely worth recognising that.

Diolch yn fawr iawn. Thank you very much for that. We've managed to get through a lot of ground in that hour, so I appreciate everybody's co-operation in getting through quite a lot of fairly technical stuff as well. Thank you very much for your answers and to my fellow Members for keeping to time, which is always good when chairing. There will be a transcript available for you to check for accuracy, and then we will be reporting fairly quickly on this session as well.

So, I'll move on to item 4, which is a motion under Standing Order 17.42(ix) to resolve to exclude the public from the remainder of this meeting, and the meetings on 20 November and 27 November. Is everybody content? Yes. I'm seeing nods. Thank you very much. So, we'll now go into private. Diolch.