The early years
The National Audit Office has existed in its present form since 1983. A public audit function for central government within the UK has a much longer history:
- The earliest surviving mention of a public official charged with auditing government expenditure is a reference to the Auditor of the Exchequer in 1314.
- The Auditors of the Imprest were established under Queen Elizabeth I in 1559 with formal responsibility for auditing Exchequer payments.
- This system gradually lapsed and in 1780, Commissioners for Auditing the Public Accounts were appointed by statute.
- From 1834, the Commissioners worked in tandem with the Comptroller of the Exchequer, who was charged with controlling the issue of funds to the government.
Gladstone’s reforms
Parliament had for several centuries been responsible for raising revenue and authorising expenditure – and the nation had fought a civil war largely on this issue – but Parliamentary control and scrutiny of public spending was weak.
It was not until the 1860s that the first major steps towards proper financial accountability to Parliament were taken.
The champion of reform was William Ewart Gladstone, who was Chancellor of the Exchequer from 1859-1866.
As Chancellor, Gladstone initiated major reforms of public finance and Parliamentary accountability:
- His 1866 Exchequer and Audit Departments Act required all departments to produce annual accounts known as appropriation accounts.
- The Act established the position of Comptroller and Auditor General (C&AG) and an Exchequer and Audit Department (E&AD) to provide supporting staff from within the civil service.
The C&AG was given two main functions:
• to authorise the issue of public money to government from the Bank of England, having satisfied himself that this was within the limits Parliament had voted, and
• to audit the accounts of all government departments and report to Parliament accordingly.
Parliamentary audit
Exchequer and Audit Departments Act 1866
The 1866 Act established a cycle of accountability for public funds:
• The House of Commons authorises expenditure
• The Comptroller and Auditor General controls the issue of funds
• Accounts are produced by departments and audited by the Comptroller and Auditor General
• The results of the C&AG’s investigations are considered by a dedicated parliamentary committee, the Committee of Public Accounts (PAC), established in 1861 by Gladstone.
From the 1870s, the PAC took evidence from senior officials, normally Heads of Departments, who were designated as Accounting Officers by the Treasury.
Exchequer and Audit Departments Act 1921
Initially, the C&AG and his staff were required to examine every transaction.
This became more unrealistic as the level of government activity expanded, particularly during the First World War.
The 1921 legislation allowed the C&AG to rely in part on departmental systems of control and thus examine a sample of transactions, rather than all of them.
This Act also required the C&AG to report to Parliament that money had been spent in accordance with Parliament’s wishes.
1980s reforms
From the 1960s onwards, concerns were expressed by Parliamentarians and academics that the scope of public audit needed to be modernised to reflect the significant changes in the role of government over the course of the twentieth century.
In particular, it was argued that there was a need for a specific power to allow the C&AG to report to Parliament at his own discretion on the value for money achieved by government departments.
Reformers also argued that more robust arrangements should be put in place to ensure the independence of public auditors from government.
These changes were reflected in the National Audit Act 1983. This was originally a private member’s bill, which commanded wide all-party support.
Under the Act, the C&AG:
- Formally became an Officer of the House of Commons,
- Was given the express power to report to Parliament at his own discretion on the economy, efficiency and effectiveness with which government bodies have used public funds.
- The Act also established the National Audit Office (NAO) to replace the Exchequer and Audit Department in support of the C&AG
- The Act established The Public Accounts Commission (TPAC) to oversee the work of the NAO. TPAC is responsible for setting the annual funding of the NAO, appointing the NAO’s external auditors and considering their reports.
2000s reforms
By the turn of the century, legislative change was again required to reflect further changes to the way that government was structured. Reform addressed the C&AG’s role in relation to non-departmental government bodies and the governance arrangements of the NAO.
Government Resources and Accounts Act 2000
Under the Government Resources and Accounts Act 2000, resource (accrual) based accounting and budgeting for Department Accounts was introduced. Accounts were previously prepared on a cash basis. The Act also provided for the preparation and audit of consolidated accounts for the whole public sector (Whole of Government Accounts), to be audited by the C&AG.
In 2001 Lord Sharman’s review of audit and accountability for central government, “Holding to Account”, was published. In response to Lord Sharman’s report the government accepted the principle that the C&AG should audit all Non-Departmental Public Bodies, and that the audit appointment should be set out in statute. The government undertook to include this audit provision when new bodies are set up, and to use a provision in the Government Resources and Accounts Act to put the C&AG’s audit of existing bodies onto a statutory footing. For public bodies established as companies, the government agreed to rectify a provision in companies’ legislation that prohibited the C&AG being appointed the auditor of companies. This was addressed in the Companies Act 2006, and the C&AG is now able to compete for the audit of public bodies established as companies.
Budget Responsibility and National Audit Act 2011
In 2007 TPAC commissioned a review of corporate governance at the NAO. As a result of the review, the Commission made a number of recommendations that have now been incorporated into the Budget Responsibility and National Audit Act (BRANA).
The Act established the NAO as a corporate body led by a Board consisting of four executive members (including the C&AG as Chief Executive) and five non-executive members (including a Chair).
The Board is charged with setting the strategic direction for the NAO and supporting the C&AG, who retains their independence in terms of their statutory functions and their audit judgements. The C&AG will also remain an independent Officer of the House of Commons but now has a fixed term of ten years instead of an unlimited tenure.
Local Audit and Accountability Act 2014
The Local Audit and Accountability Act 2014 provided for the abolition of the Audit Commission, and the introduction of new arrangements for the audit of local public bodies such as local authorities and local NHS and policing bodies. The C&AG took on from the Audit Commission the role of preparing the Code of Audit Practice which sets out what local auditors are required to do to meet their responsibilities under the Act.