INTRODUCTION

1.  The Electoral Commission was brought into existence on 30 November 2000 by the Political Parties, Elections and Referendums Act 2000 (the Act) to administer a new regulatory framework for the reporting of donations to political parties and controls on campaign spending at parliamentary and other elections. It maintains a Register of UK Political Parties and regulates how the parties account for their income and expenditure. The Commission has supervisory powers to monitor compliance with the new arrangements.

2.  Schedule 1 paragraph 17(2) of the Act requires the Commission to prepare accounts in accordance with directions given by the Treasury. I conduct my audit of the accounts under the authority of Schedule 1 paragraph 18 of the Act.

3.  In addition to my examination and certification of the accounts under Schedule 1 paragraph 18, paragraph 16 (1) of Schedule 1 of the Act requires that the Comptroller & Auditor General shall in each year carry out an examination into the economy, efficiency or effectiveness (or any combination thereof) with which the Commission have used their resources in discharging their functions and report the results to the Speaker's Committee.

4.  The Class XVIII, C, Vote 1 Appropriation Account for 2000­01 covers the first four months of the Commission's operations. In relation to this first period of operation, in addition to examining and certifying the accounts, my work has concentrated on providing advice to the Commission's staff; and reviewing the adequacy of the emerging internal control environment as a basis for sound governance and the management of public funds.

CORPORATE GOVERNANCE AND INTERNAL FINANCIAL CONTROL

5.  My staff carried out a review of the accounting and financial procedures, and the internal financial controls, put in place by the Commission in the first months of operation. A number of the systems and procedures in place during this period were temporary in nature and subject to change and development as the Commission set up more permanent arrangements for its evolving operations. For instance, with relatively few transactions in the period, the Commission did not operate an integrated general ledger but maintained a standalone database of transactions for bookkeeping purposes.

6.  My staff reviewed these procedures to confirm that appropriate arrangements were in place to ensure adequate financial control over the authorisation and recording of payments and receipts. In the first few months of the Commission's existence the Chief Executive or the Principal Establishment and Finance Officer authorised all payments in the absence of a system of delegated authorities and devolved budgets.

7.  As the Commission expands its activities it will need to introduce more sophisticated financial procedures if it is to successfully handle the increasing volume of transactions efficiently and effectively. For example, the Commission will need resource based financial systems; improved strategic planning processes; more detailed budget management arrangements; clearer lines of accountability and effective internal audit and risk assessment. The delegation of budgets, and the establishment of procedures for the authorisation of transactions below the level of the Chief Executive, will be of central importance in this process. Although not subject to audit in this financial period my staff noted that such systems and procedures were being steadily introduced throughout the 2001/02 financial year.

8.  The Commission is now in the process of reviewing and developing systems based on an improved framework of control with financial and budgetary reporting, delegation of authority and segregation of duties.

CAPITAL EXPENDITURE

9.  Approximately half of the £1.4 million spent by the Commission in the 2000/01 financial year represented expenditure on capital assets for carrying out the Commission's activities. Further capital expenditure will be incurred in 2001/02, as the Commission continues to develop their systems, and as the Scottish, Welsh and Northern Ireland offices are set up.

10.  My staff carried out a review of this year's capital expenditure, focussing on the Commission's largest supplier in the 2000/01 period, Anite Government Services Limited (AGSL). AGSL were paid £428,000 in 2000/01, principally for the provision of application software and services, including the development of a Register of UK Political Parties. The Commission set up a project management group to manage the AGSL's deliveries against the Commission's requirements. Our review confirmed that this expenditure had been closely managed and that the contract had progressed to time and budget.

CURRENT EXPENDITURE

11.  Current expenditure, excluding grant payments, amounted to £654,000 in 2000/01. This comprised staff costs of £218,000, accommodation costs of £226,000 and other administrative costs of £210,000. My staff carried out a review of this expenditure to confirm that payments had been properly authorised, accurately recorded, correctly brought to account and were proper to the Electoral Commission.

GRANTS

12.  My staff also reviewed all grant payments made to political parties in 2000/01. These grants are paid to assist parties in meeting start­up costs associated with the new requirements placed on them by the establishment of the Commission, for example in the accounting and reporting of income and expenditure. Expenditure on grant payments amounted to £41,000, which was lower than the Commission had expected. This is because the Political Parties, Elections and Referendums Act received Royal Assent and the Commission was set up on 30 November 2000, several months later than expected. The number of grants paid in the 2000/01 financial year was correspondingly lower than would have otherwise been the case.

13.  Grant expenditure is expected to rise for 2001/02 and subsequent years. The Commission has a broad remit, which includes the promotion of awareness of electoral and democratic systems, and the provision of assistance to those involved in the electoral process. The Commission will be commencing grant payments in respect of policy development in 2001/02 and will continue to pay start up grants deferred from 2000/01.

14.  The Commission have significant discretion in the making of grants and it will be important to ensure that effective procedures are put in place to ensure entitlement, value for money where appropriate, and accountability in the making of grant payments. We have advised the Commission on the drafting of their guidelines for policy development grants, and will continue to provide advice at the Commission's request.

TRANSFER OF LGCE FUNCTIONS TO THE COMMISSION

15.  The Electoral Commission is to take over the functions of the Local Government Commission for England (LGCE) from 1 April 2002, together with the related local government boundary functions of the Secretary of State for Transport, Local Government and the Regions. LGCE staff expect to be co­located with the Electoral Commission at the Commission's current accommodation in Central London.

16.  The merger of organisations gives rise to important considerations of value for money and financial control, particularly in relation to the bringing together of different, and in some cases evolving, financial systems; the integration of roles and responsibilities; and budget management. At the time of the 2000/01 audit only limited preparatory work had been undertaken in anticipation of the merger. My staff will review developments as part of the 2001/02 audit and provide advice to the Commission as required.

CONCLUSION

17.  My staff were satisfied that in this first period of operation, the Commission took appropriate steps to establish adequate interim financial controls to secure the proper management and expenditure of Voted funds.

18.  As the Commission evolves, my staff will continue to monitor the economy, efficiency and effectiveness with which the Commission uses its resources.

John Bourn

Comptroller and Auditor General

National Audit Office

February 2002