Scottish Government Annual Audit Report 2018/19

Scottish Government 2018/19 Annual Audit Report Prepared for the Scottish Government and the Auditor General for Scotland December 2019 Who we are The Auditor General, the Accounts Commission and Audit Scotland work together to deliver public audit in Scotland: • The Auditor General is an independent crown appointment, made on the recommendation of the Scottish Parliament, to audit the Scottish Government, NHS and other bodies and report to Parliament on their financial health and performance. • The Accounts Commission is an independent public body appointed by Scottish ministers to hold local government to account. The Controller of Audit is an independent post established by statute, with powers to report directly to the Commission on the audit of local government. • Audit Scotland is governed by a board, consisting of the Auditor General, the chair of the Accounts Commission, a non-executive board chair, and two non-executive members appointed by the Scottish Commission for Public Audit, a commission of the Scottish Parliament. About us Our vision is to be a world-class audit organisation that improves the use of public money. Through our work for the Auditor General and the Accounts Commission, we provide independent assurance to the people of Scotland that public money is spent properly and provides value. We aim to achieve this by: • carrying out relevant and timely audits of the way the public sector manages and spends money • reporting our findings and conclusions in public • identifying risks, making clear and relevant recommendations. Scottish Government 2018/19 Annual Audit Report | 3 Contents Key messages 4 Introduction 6 Part 1 9 Audit of 2018/19 annual report and accounts Part 2 14 Financial management Part 3 20 Financial sustainability Part 4 24 Governance and transparency Part 5 28 Value for money Appendix 1 30 Action plan 2018/19 Appendix 2 44 Significant audit risks identified during planning Appendix 3 50 Summary of national performance reports 2018/19 4 | Key messages 2018/19 annual report and accounts 1 The financial statements of the Scottish Government give a true and fair view of the financial position and expenditure and income of its core portfolios and bodies within the consolidated accounting boundary. The expenditure and income were incurred or applied in accordance with any applicable enactments and guidance, and the other information in the annual report and accounts was consistent with the financial statements and prepared in accordance with legal requirements. Financial management 2 The Scottish Government operated within its 2018/19 budget limits. The Consolidated Accounts show that total net expenditure was £36,137 million, £778 million less than budget. 3 In recent years, the Scottish Government has taken a direct role in providing financial support to private companies. In 2018/19, the Scottish Government provided a further loan of £30 million to Ferguson Marine Engineering Limited (FMEL) in addition to a loan of £15 million in 2017/18. The Scottish Government impaired the value of the loans to nil at the end of the financial year due to its assessment of the recoverability of these amounts in light of the challenging financial position of FMEL. The valuation of loans and guarantees to other private companies also declined significantly during 2018/19. 4 Other than payroll, the Scottish Government’s main systems of internal control operate effectively covering SEAS (General ledger); Payables; Receivables and Banking. Improvements are required in some areas, mainly Payroll and SEAS, to ensure controls operate as expected and risks are minimised. Financial sustainability 5 The Scottish Government needs to improve the quality of financial reporting to better support Parliament. In May 2019, the Scottish Government published its second medium-term financial strategy, but it does not reflect all the basic components of a medium-term financial plan. It does not include indicative spending plans or priorities, or links to outcomes and there is no detail on how the Scottish Government would address a possible £1 billion shortfall due to forecast errors. In addition, the Government has still not fulfilled its commitment to publish a consolidated account covering the whole devolved public sector in Scotland. This would fill an important gap and improve strategic public financial management, support Parliamentary scrutiny and enable better decision making. 6 Overall, the Scottish Government's preparations for EU withdrawal were reasonable and proportionate given the considerable level of uncertainty over the detailed implications of withdrawal. Although plans were untested with the postponement of the withdrawal date, the initial work undertaken provides a good basis for the Scottish Government to develop further its resilience arrangements in anticipation of the UK's withdrawal on 31 October 2019. Key messages | 5 Governance and transparency 7 The Scottish Government made some improvements to its governance arrangements during 2018/19 including the appointment of new Non- Executive Directors. They have also taken some initial steps to improve the effectiveness of their role in sponsoring public bodies. The Government's Audit and Assurance Committee needs to provide greater scrutiny and challenge to support the advice and assurances given to the Permanent Secretary as the Principal Accountable Officer. This is particularly important given the scale of challenges facing the Scottish Government including the implementation of new powers, continued pressures on public finances and the uncertainty and risks associated with the UK's withdrawal from the European Union. Value for money 8 The Scottish Government’s performance report provides only very limited information on the Scottish Government's own progress towards its overall aims and objectives. This means that the reader is unable to see the links between the money spent by the Scottish Government, what it has achieved, and progress made towards achieving national outcomes. 6 | Introduction 1. This report summarises the findings from our 2018/19 audit of the Scottish Government. 2. The scope of our audit was set out in our Annual Audit Plan presented to the Scottish Government Audit and Assurance Committee on 11 March 2019. This report comprises the findings from: • an audit of the Scottish Government’s annual report and accounts • consideration of the four audit dimensions that frame the wider scope of public audit set out in the Code of Audit Practice 2016 as illustrated in Exhibit 1. Exhibit 1 Audit dimensions Source: Code of Audit Practice 2016 3. The main elements of our audit work in 2018/19 have been: • a review of the Scottish Government's main financial systems • an audit of the Scottish Government's 2018/19 annual report and accounts including the issue of an independent auditor's report setting out our opinions • consideration of the four audit dimensions of public audit. Introduction | 7 Adding value through the audit 4. We aim to add value to the Scottish Government through the audit by: • identifying and providing insight on significant risks, and making clear and relevant recommendations for improvements that have been accepted by management • reporting our findings and conclusions in public • sharing intelligence and good practice through our national reports (Appendix 3) and good practice guides • Providing clear and focused conclusions on the appropriateness, effectiveness and impact of corporate governance, performance management arrangements and financial sustainability 5. In so doing, we aim to help the Scottish Government promote improved standards of governance, better management and decision making and more effective use of resources. Responsibilities and reporting 6. The Scottish Government has primary responsibility for ensuring the proper financial stewardship of public funds. This includes preparing an annual report and accounts that are in accordance with the accounts direction from the Scottish Ministers. The Scottish Government’s annual report and accounts includes the following: • Performance Report • Accountability Report (which includes the Corporate Governance Report and Remuneration and Staff Report) • Financial statements and supporting notes. 7. The Scottish Government is also responsible for establishing appropriate and effective arrangements for governance, propriety and regularity that enable the board to successfully deliver its objectives. 8. Our responsibilities as independent auditor are established by the Public Finance and Accountability (Scotland) Act 2000 and the Code of Audit Practice 2016, and supplementary guidance and International Standards on Auditing in the UK. 9. As public sector auditors we give independent opinions on the annual report and accounts. Additionally, we conclude on: • the appropriateness and effectiveness of the performance management arrangements, • the suitability and effectiveness of corporate governance arrangements, • the financial position and arrangements for securing financial sustainability. 10. In doing this we aim to support improvement and accountability. Further details of the respective responsibilities of management and the auditor can be found in the Code of Audit Practice 2016 and supplementary guidance. 11. This report raises matters from the audit of the annual report and accounts and consideration of the audit dimensions. Weaknesses or risks identified are only those which have come to our attention during our normal audit work and may 8 | not be all that

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