Holding democracy to account: government and the National Audit Office

The National Audit Office (NAO) is now over 40 years old, but it has its origins in the nineteenth century. In their new book, Henry Midgley, Laurence Ferry and Aileen Murphie offer an overview of the constitutional, political and human legacies of the NAO’s predecessor, the Exchequer and Audit Department, followed by a close examination of the NAO’s leadership and decision-making since its inception. They conclude that any debate about the organisation’s future is in fact a question about how the UK should be working to ensure democracy and good government.

The National Audit Office (NAO) was established in 1983. It is the government’s auditor: this means that it has two main responsibilities. The first is to audit the government’s accounts: the accounts are published financial records of everything that a government department or agency has spent during a year, everything they owe and everything they own. The second is that the NAO audits the value for money of public services: this means that it examines the economy, efficiency and effectiveness of government spending. The NAO’s value for money reports go to the House of Commons where they become the basis for hearings by the Public Accounts Committee (PAC) whereas the accounts are mainly intended for the departmental select committees to use in their work scrutinising the government.

Audit is often misunderstood at Westminster as something that is technical and dull. Its origins give us a clue that it is not. Audits have been conducted of the UK government since the Middle Ages with the first occurring in the reign of Henry IV in 1406. The first modern audit arose in the 1860s. Since the ‘Glorious Revolution’ in 1688, the English and then the UK Parliament had asserted that the Crown must submit both its plans for taxation and its plans for expenditure to the House of Commons for annual approval. In the nineteenth century, the leading Liberal politician, William Gladstone, thought that this system of parliamentary approval for spending required more teeth. Gladstone proposed to create a new officer, the Comptroller and Auditor General (C&AG), who together with their staff in a new audit office would do two things to make parliamentary control real. Firstly, as Comptroller, this new official would check that all moneys which the government had requested from parliament were released to the Treasury from the Bank of England only for the purposes that parliament had authorised. Secondly, as Auditor General, this new officer would check whether money had been spent in accordance with parliament’s intentions when it granted the money. The Auditor General would report back on whether the money had been spent in line with parliament’s intentions in a report attached to the department’s own accounts (which set out its spending for the previous year). Gladstone’s proposals for this new position and new office formed the basis of the Exchequer and Audit Departments Act 1866 which created the Comptroller and Auditor General and his office, the Exchequer and Audit Office. Significantly, in the early twentieth century, parliament added on a new obligation: the auditor should report on waste as well as illegality in expenditure. Creating this new officer and his staff, in Gladstone’s view, closed the circle of parliamentary control over money.

By 1983, the UK state was very different: it was much larger, after fighting two world wars and the creation of the welfare state. The state itself was pivoting away from defence spending and towards spending on health and welfare. The advent of new public management – a set of reforms designed to make the state more efficient and more like the private sector – under Margaret Thatcher led to changes in what Whitehall viewed as good management. The old Gladstonian auditor was replaced therefore by a new auditor, the NAO, after a long struggle with the Treasury, which wished to preserve the status quo. The new NAO retained its Gladstonian function as a check on government power – but now had new responsibilities. The power to investigate waste was codified as a power to report on the efficiency, effectiveness and economy of public policy (collectively called value for money in the UK). The C&AG’s independence was formalised by making them an Officer of the House of Commons. The C&AG now reported directly to the Commons, rather than appending their reports to government accounts. Since 1983, the legislative framework for the NAO has remained largely unchanged.

But this doesn’t mean that the way that the NAO has interpreted its role has remained unchanged. There have been significant alterations over the years and in our book, Holding Government to Account: Democracy and the National Audit Office, we chronicle how this role has developed. Value for money has not meant the same thing across time. For John Bourn, C&AG from 1988 to 2008, this meant that the NAO had to dig into the effectiveness of public services. Bourn’s NAO conducted original research about the ways that people’s lives were impacted by the way that schools, hospitals and the police force were organised. NAO reports inaugurated new approaches to stroke care and developed scripts for 999 operators to use to answer calls. Amyas Morse (C&AG 2009-2019, now Lord Morse of Aldeburgh) had a very different approach. Morse did not view this research capability as audit: he redirected the NAO’s efforts to examining the internal management of departments. Morse, presiding over the NAO’s response to austerity, wrote reports about how managers within government struggled to match the expectations of ministers regarding service provision and the budgets they had been assigned. His reports took the perspective of a rational individual trying to discover the flaws which lay behind the failures of the government to achieve its own objectives.

The audience for these reports has also been seen in different ways by different C&AGs. Gordon Downey (C&AG 1983-1988) saw his role as predominately a parliamentary one. He ruled out in public being a consultant to the public sector. As his deputy, David Myland, made clear in a letter sent out to departments in the mid-1980s, the NAO’s role was important regardless of whether public services improved or not. This accountability role endured: during the pandemic, the NAO continued to audit government services though other inspectors paused their work, however it became less important. John Bourn, to prevent New Labour attacking the NAO, argued that the NAO was the government’s advisor, identifying problems in the public sector for resolution. Bourn was frustrated to find repeated errors in public administration and the NAO pivoted to working on these problems rather than just discovering and reporting about individual services to parliament. Amyas Morse and Gareth Davies (the current C&AG, appointed in 2019) built on Bourn’s tactical feint and turned it into an organisational objective. Both developed thematic work, around IT and government contracting for example, to be used by the government. These dual mandates conflict within the organisation.

This conflict between administrative rationality and constitutional accountability comes to the surface most clearly around the accounts. Gladstonian accounts were designed to check the legality of public spending. From the early 1990s onwards, moves to reform government accounts developed. These adopted a commercial model for the accounts. The NAO insisted that whatever resulted from these moves was consistent with the principles of the 1688 settlement and Gladstone’s vision for public sector audit. However, over time, this objective became less clear even in the minds of the auditors.  Increasingly, the audit focused more and more on compliance with commercial reporting standards and less and less on the old principles of regularity or even newer additional principles of transparency. The new accounts have been criticised by a series of parliamentary committees because they do not display the information that MPs require to evaluate public services, but the NAO has stood as a defender of the accounts, and an ally of the Treasury in rebutting this criticism. Furthermore, over time the audit of the accounts has become more and more central to the NAO’s activity: with most staff and most of its money spent on conducting these audits and value for money becoming more and more marginalised.

The discussion about all three of these changes (and others discussed in the book) has largely proceeded behind the scenes in parliament and government. The C&AGs themselves, as we show in our book, have played a key role but they have been joined by governments and MPs. Governments from New Labour onwards have been concerned at times to clip the NAO’s wings. MPs have played a supportive role: the NAO only exists because of a backbench revolt to secure a more powerful auditor in the 1980s. Margaret Hodge (now Baroness Hodge of Barking), who chaired PAC from 2010 to 2015, reshaped the NAO’s remit, pushing Morse and the NAO into examining tax evasion and starting a nationwide conversation about how HMRC treats the likes of Google and Amazon. Chairs of PAC or the Public Accounts Commission such as Robert Sheldon, David Davis, Alan Williams and Edward Leigh fought long battles to support the NAO and its rights and powers. Geoffrey Clifton-Brown (a long-standing PAC member, who has chaired the committee since September), Richard Bacon (Chair of the Public Accounts Commission since 2020) and former PAC chair Meg Hillier (who now chairs the Treasury Select Committee) helped the organisation through the political swirls of Brexit and Covid-19.

What issues does this leave us as citizens of the UK to consider? One thing that our book shows is that audit is not a timeless, unchanging thing but evolves in line with the political circumstances of the time. Sometimes it expands – to include green issues, for example – (firstly under Bourn and even more extensively under Davies), sometimes it contracts (from the research-intensive focus of Bourn to the managerial mindset of Morse) and sometimes it refocuses (away from Gladstonian rigour and towards commercial accounting in its financial audit), but it is never constant. The NAO is a key constitutional instrument of the House of Commons: the auditors are the only people who work for the Commons who can see any government document they want, who have sizeable resources devoted to scrutiny and have the day-to-day contact with the people who deliver government policy necessary to understand what mechanisms underlie that policy. The shape of public sector audit, whether you take a ‘Downey’ parliamentary accountability, a ‘Bourn’ research driven view or a ‘Morse’ managerialist view, really matters. Gladstone’s promise that the circle of parliamentary control was closed by the creation of a state auditor in the 1860s is a promise that remains only partly achieved and its real meaning is, as it has been ever since Gladstone said the words, disputed.

Holding Government to Account: Democracy and the National Audit Office is available now.

About the authors

Dr Henry Midgley is Associate Professor of Accounting at Durham University, he previously worked from 2008 to 2021 at the National Audit Office and on secondment at the House of Commons where he advised MPs on the constitutional role of government accounts and audit.

Professor Laurence Ferry is Professor of Accounting at Durham University (UK) and Senior Distinguished Visiting Fellow at Rutgers (USA). Recently, his research underpinned the Rio Declaration on public audit that influences around 200 supreme audit institutions internationally. He also served on the Redmond Review steering panel for Local Government Audit and Financial Reporting arrangements having previously as a Parliament Fellow/Adviser authored a report on this area for a UK Parliament Select Committee.

Aileen Murphie is an Honorary Professor at Durham University. She worked at the National Audit Office from 1983 to 2021 and then as an advisor to what is currently called the Housing, Communities and Local Government Select Committee from 2021 to 2024.