Scottish Enterprise: Financial Management
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NATIONAL AUDIT OFFICE REPORT BY THE COMPTROLLER AND AUDITOR GENERAL Scottish Enterprise: Financial Management ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 22 JULY 1996 LONDON: HMSO HC 667 Session 1995-96 Published 16 August 1996 E8.15 This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance tith Section 9 of the Act. John Bourn National Audit Office ComptioUer and Autitor General 19 Jufy 1996 The ComptroUer and Auditor General is the head of the National Audit Office emploflng some 750 staff. He, and the NAO, we totfly independent of Government. He certfles the accounts of W Government departments and a tide range of other pubhc sector bodies; ad he has statutory authority to report to Parliament on the economy, efficiency and effectiveness tith which departments and other bodies have used their resomces. Contents Page S-ary and conclusions 1 1 ktrodnction md scope of the National Audit Office’s review 8 2 Propriety and fiancial control 12 3 Securing value for money 25 1. Moray, Badenoch and Strathspey Enterprise’ 2. Grampian Enterprise Limited 3. ScotOsh Enterprise Tayside 4. Hfe Enterprise 5. Lothian and Edinburgh Enterpflse Ltd d8& 6. ScoMsh Borders Enterprise 0° 7. Lanarkshire Development Agency ~& 6. Dumfties and Galloway Enterpflse b 9. Enterprise Ayrshire Q; 10. Glasgow Development Agency ~$ 11. Renfrewshire Enterprise a 12. Forth Valley Enterpdse 13. Dunbartonahire Enterprise 0 . @n do n n G Q W ScotOsh Enterpflae Area A n Highlands and Islands Enterprise Area 1 ‘ Operated jointly by Sco~sh Enterpflse and Highlands and Islands I Summary and conclusions 1 Scottish Enterprise were established as an executive non-departmental pnbhc body in Aprfl 1991 with responsibfities for furthering economic developmenfi enhancing skiDs and capacities; improving the environment and increasing efficiency and international competitiveness in Scotland. 2 They are funded primarfly by grant-in-aid from tbe Scottish Office Education and Industry Department (the Department). Since 1991, Scottish Enterprise have spent E2.3 bi~om f465 miUion in 1995-96. At 31 March 1996 they held fixed assets of land, buildings and divestments valued at f 184 Won. 3 Scottish Enterprise themselves directly fund operations and projects of a broad and strategic nature. However, so that decieions concerning economic, environmental and training developments involve and draw upon local and business communities, Scottish Enterprise main activities, including government training programmed, are dehvered under contract by 13 Local Enterprise Compaties. In 1995-96, these Compaties directly spent 76 per cent of Scottish Enterprise funds. 4 This report records the National Audit Office’sfindings on the arrangements made by Scottish Enterprise to secure propriety, financial control and value for money in the use of these resources. Propriety and financial control 5 The National Audit Office found that Scottish Enterprise activities are undertaken Within a sound framework of accountabihty and internal controls. This framework works well and further improvements being developed by Scottish Enterprise should enhance the efficiency of the controls. Key features of corporate governance, propriety and financial control have been estabhshed for Scottish Enterprise and for Local Enterprise Companies. 6 Scottish Enterprise have a comprehensive accountabfi~ framework to meet the control risk present in the enterprise network. This is founded on a Management Statement issued by the Depmtment. The statement sets out responsibtities for the Scottish Enterprise Board and the Scottish Enterprise Chief Executive, who is also the Accounting Officer. 7 The Enterprise and New Towns (Scotland) Act 1990 provides for the audit of Scottish Enterprise hy the Comptroller and Auditor General. 8 The Department monitor Scottish Enterprise activities md have commenced a quinqnennial pohcy, finance and management review of their functions. 9 Scottish Enterprise have developed and adopted their own code of practice on Corporate Governance and intend to further improve openness in their activities. 10 A range of internal mechanisms exist to control Scottish Enterprise activities, These include: an Audit Committee; internal fiancial control systems; and financial monitoring wMch includes effective mechanisms to monitor the activities of Local Enterprise Companies. 11 Scottish Enterprise have responded promptly to the fidings of financial monitoring and have strengthened financial control systems as a resdt. 12 Local Enterprise Companies are private companies constituted under the Companies Act 1985 with Memoranda and Articles of Association which cannot be changed without the consent of Scottish Enterprise and the Department, Accountability for and control of Scottish Enterprise resources used hy Locaf Enterprise Companies rests onthetermsofoperattngcontractsbemeen the LOCN Enterprise Companies and Scottish Enterprise, 13 Local Enterprise Companies have voluntarily adopted a code of Corporate Governace based on that developed hy Scottish Enterprise. They maintain registers of directors’ interests which they make puhhc and they also hold pubhc meetigs to pubticise their annual reports and accounts. From October 1996, they W make avaflable details of grmts, equity funds and loans they award, 14 Operating contracts require Local Enterprise Companies to: maintain financial systems and controls which ensure the proper use of public funds; establish an audit committee; and ensure that their internal audit arrangements are effective. Scottish Enterprise assist Local Enterprise Companies with financial, legal and operational guidance and advice, and they monitor the companies’ financial systems. 15 Within this overaU satisfactory framework, the National Audit Ofice identtiled an area where there was scope for reviewing current arrangements. 16 The ComptroUer and Auditor General, in his report on the accounts of the Scottish Enterprise Network, is required to give an additiond opinion as to whether their financial hansactions conform to the authorities which govern them. Local Enterprise Compaties, as private companies Umited by guwantee, pubhsh annual accounts audited by external auditors, in accordance with the Compaties Acts, and auditing standards. Such an audit report is an expression of the auditors opinion of the ‘truth and fakness’ of the financial statements and thek preparation in accordance with the Companies Act. The Comptroller and Auditor General has no rights of access to Local Enterprise Companies, though Scottish Enterprise have arranged for the National Audit Office to obtain information for the audit of Scottish Enterprise. This can mean the National Audit Office visiting Local Enterprise Companies and theti external auditors. Scottish Enterprise should review the range of options, including the role of Local Enterprise Companies’ external auditors, available to provide assurances on Local Enterprise Companies compliance with the financial provisions of their operating contracts and on the proper use of public funds. Options should seek to provide a level of assurance consistent with that currently given by the Comptroller and Auditor General on tbe regularity of transactions in the Scottish Enterprise Network accounts, whilst minimizing the audit burden on Local Enterprise Companies and maximizing the efficiency and effectiveness of the arrangements. Securing Value for Money 17 Scottish Enterprise have established a framework of controls which are designed to secure value for money. Since 1991 they have made improvements to the framework and further improvements are in hand. 18 Most of Scottish Enterprise’s proWammes are dehvered under contracts with Local Enterprise Compafies. Any interested party may at any time apply to operate a Local Enterprise Company. Since 1991 Scottish Enterprise have been contracted to the same Local Enterprise Companies without competitive tendering they have, however, sought to make the contracting process more transparent 3 and in 1995 irwited bids to maage specfic Locaf Enterprise Companies. They have arrmgements in place to consider bids from interested parties to operate Local Enterprise Companies, but no such bids have emerged. 19 In the absence of externsd competition Scottish Enterprise have to rely on alternative mechanisms to secure vahse for money in Local Enterprise Company sertices. These include detaifed scrutiny of business plans, negotiations on training budgets, Internal Audit examination, project appraisal, and retiews of best practice. 20 Under the terms of the Management Statement Scottish Enterprise delegated to Local Enterprise Compaties autbori~ to approve expenditure on enterprise, entironmentd and constdtartcy projects within specified Emits. The Statement also protides for the operation of training programmed to be ftiy delegated to the Local Enterprise Compties. However no financial Uits are re@ed to be set for these programmed. The National Audit Office found that Local Enterprise Compafies comphed with Scottish Enterprise delegated authorities, but that at one of the four Local Enterprise Companies they tisited scope existed to improve local delegated authority. Scottish Enterprise have estabhshed sound delegated authority procedures but need to continue to remind Local Enterprise Companies of the need to adopt best practice in establishing and applying their own local levels of delegated authority. 21 Scottish Enterprise require Local Enterprise Companies