The National Audit Office (NAO) has published its main supply estimate for 2021-22 showing a net resource budget of £80.52m. This is a 5.6% increase on 2020-21 when it had a budget of £76.,22mk. It also shows a capital budget of £2.3m up from £1.5m in 2020-21.

The main estimate also shows the NAO expects to receive £23.8m income in 2021-22, up by £700,000 compared to last year’s budget. The majority of this income will be the fees it charges for the audits of the majority of non-departmental bodies, companies, charities and international bodies.

The NAO does not however charge a fee for the audits of central government departments or executive agencies so these need to be funded from its £80.52m budget alongside its running costs, local audit code and guidance activities and programme of value for money work and other support for Parliament. The increased budget will need to fund the increased costs that are likely to arise from the increased audit risk from the pandemic such as additional review, longer audits, larger sample sizes and the need to bring in specialist expertise.

The NAO’s COVID-19 cost tracker shows that the government’s response to the COVID-19 pandemic has cost an estimated £372bn with a significant proportion involving extra spending in 2020-21. Such spending, together with the fact that the government had to put in place measures quickly to respond to the pandemic and often prioritised fast payment over strengthened controls, means there is a significantly heightened risk of fraud as the NAO reported in its good practice guidance on fraud and error. In addition, there are increased balance sheet risks from the unprecedented £92bn of loans and guarantees issued by government as well as from the wider economic uncertainty.

Unsurprisingly, one of the audits most affected is that of the Department for Health and Social Care (DHSC), which has been at the frontline of the government’s response and has spent an estimated additional £92bn. As the NAO states in its recent report on the initial learning from the government’s response to the COVID-19 pandemic, the £10.2bn DHSC spent on personal protective equipment (PPE) by January 2021 carries a particularly high risk of fraud.

There are also new balance sheet risks that add to the complexity of the audit including in respect of inventory, which historically was a relatively small value inf the DHSC accounts with a total value of £1.652bn as at 31 March 2020. However, with the enlarged PPE stockpiles and the ongoing vaccine rollout, we can expect the value as at 31 March 2021 to be significantly more material. Fast moving and widely dispersed inventory of this nature is challenging to audit at the best of times, even without COVID-19 restrictions limiting the ability for NAO staff to physically attend stock counts.

There is also likely to be significant additional audit work required for other lead response departments such as HMRC, MHCLG and BEIS.

BEIS has spent an estimated £59bn in response to the pandemic and its interventions have included the £23bn Bounce Back Loan Scheme. BEIS provided 100% guarantees to banks without receiving consideration to underwrite the loans they issued to businesses. The NAO have estimated that between 35% and 60% of the loans may not be repaid. Accounting standards do not envisage entities entering into such transactions so the NAO will have to exercise significant judgment, and potentially bring in specialist expertise, to audit both the accounting policies adopted by BEIS and the estimate of the liability.

Oliver Simms, Manager, Public Sector Audit and Assurance for ICAEW, commented: “We welcome the budget increase given to the NAO, which recognises the important role it continues to play in providing confidence to Parliament and the public that the government has spent taxpayer’s money appropriately in response to the COVID-19 crisis, as well as highlighting the instances where it has not.

“The 5.6% rise is however a relatively modest increase compared to the £372bn cost of measures taken in response to COVID-19 and the increased fraud and balance sheet risks. The NAO will need to consider how it ensures high quality audits while staying within the confines of its budget envelope.”