COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 20 Jan 2005

Teagasc Accounts 2003.

Mr. J. Flanagan (Director, Teagasc) called and examined.

Chairman

I welcome everybody to the meeting. I wish to make witnesses aware that they do not enjoy the absolute privilege which applies to the members of the committee. Members and witnesses' attention is drawn to the fact that from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997, grants certain rights to persons who are identified in the course of the committee's proceedings. These rights include the right to give evidence, the right to produce or send documents to the committee, the right to appear before the committee either in person or through a representative, the right to make a written and oral submission, the right to request the committee to direct the attendance of witnesses and the production of documents, the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons being invited before the committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of these rights and provided with a transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interest of justice.

Notwithstanding this provision in the legislation, I should remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside of the House or an official either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions within Standing Order 156 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister or the merits of the objectives of such policy or policies.

I welcome Mr. Flanagan, the director of Teagasc, and I invite him to introduce his officials.

Mr. Jim Flanagan

I thank the Chairman for the invitation to appear before the committee. With me are Mr. Tom Kirley, director of administration, Ms Susan Kearney, head of finance, and Dr. Liam Donnelly, director of food research.

Chairman

I invite officials from the Department of Agriculture and Food to introduce themselves.

Ms Bridie O’Neill

Thank you, Chairman. I am the principal officer in charge of crop policy and the State bodies division. I am accompanied by Mr. Tom O'Connell, assistant principal officer in the same section.

Mr. Purcell

Two issues came to light on the audit of the Teagasc 2003 accounts which raised concerns in my mind about the effectiveness of the governance structure in the organisation. One involved the way in which the organisation reacted to information relating to false expenses claims while the other suggested a passive attitude to a conflict of interest which arose in the provision of services to the organisation.

I will first deal with the expenses claims. The authority was notified by anonymous letter in June 2001 that certain staff were receiving additional free mileage and subsistence payments at a particular Teagasc centre. When this was referred to the centre there was a prompt response stating that all expenses claims were in order. In July 2002 the administrative officer at the centre became aware of information which suggested that certain travel claims made by a member of staff were not bona fide. When challenged, the staff member accepted that the claims were false but no further action was taken on the basis that the amount involved was small. In May 2003 the director of the authority received another anonymous letter alleging failure to deal with false expense claims by an unnamed staff member at the centre. On this occasion the internal auditor was asked to investigate the matter. His investigation found that the staff member had been submitting expense claims for some time for journeys that had not been undertaken and had also inflated claims for collecting material on his way to work. The amount calculated as having been paid for journeys not undertaken was €77,636 and this amount together with interest of €52,420 is subject to repayment by the staff member. No amount was calculated for repayment in respect of the inflated claims on the grounds that the staff and management at the centre had acted in the mistaken belief that the inflated claims were in compliance with the regulations.

I had a difficulty about the way in which this matter was handled by the authority. I appreciate that information provided anonymously must be examined with great care and with a fair degree of scepticism. On that basis one could perhaps excuse the less than thorough response to the letter of June 2001. However, the way in which the discovery of the false claims in July 2002 was followed up was unsatisfactory to say the least. Given that the false claims were made over an extended period and that inflated claims were regarded as being proper, it casts doubts over the efficacy of the financial control environment in the centre over the years.

I will now cover the conflict of interest case at a different centre. Work associated with computerised on farm data capture had been outsourced to a service provider since 1995. The business providing the services was 50% owned by a Teagasc employee who was responsible for related work at the centre. The value of the work outsourced was €336,000. No competitive tendering for the work took place. Teagasc discontinued using the service provider in July 2004 and alternative arrangements involving data transfer over telephone lines to the central database have been put in place. My concern in this case centres on an apparent laissez-faire approach on the part of local management at the centre to compliance with ethical standards and to financial control standards. The response of the director of the authority to the issues is set out in the supplement to my audit report, which is before the committee.

Chairman

I ask Mr. Flanagan to make his opening statement.

Mr. Flanagan

Teagasc had a very successful year in 2003 during which it completed a very active programme and carried out significant rationalisation to reduce its cost base. It continued to provide economic analysis to guide and support negotiations on the mid-term review of the EU Common Agricultural Policy and to inform decisions on the most effective implementation strategies.

Our food research capacity was greatly assisted by the establishment of the alimentary pharmabiotic centre, a joint venture involving the Teagasc centre at Moorepark and University College Cork. This project was awarded €16.5 in funding from Science Foundation Ireland to support its programme. A new planned biotechnology centre at Oak Park in Carlow was commissioned and the new animal and food biotechnology centre at Moorepark was brought to near completion. These facilities together with newly recruited scientists will lead to an enhanced research programme. The Teagasc advisory services established a specialised planning post-Fischler programme aimed at assisting farmers to adapt to the radical policy changes.

E-learning was advanced with the establishment of an on-line learning website and pilot courses which will lead to the development of an e-college. Teagasc is consolidating its resources into fewer centres and improving the facilities at remaining centres. The key elements achieved in 2003 were the sale of head office in Dublin, centres in Clonroche and Lullymore and the advisory office at Corduff, County Dublin and the relocation of staff to alternative Teagasc facilities. In the process €18 million was made available to allow for the removal of the accumulated deficit and to provide funds to cover the cost of restructuring and capital investment. This rationalisation and reorganisation programme will be completed during 2005.

During 2003, expenditure was deliberately curtailed pending agreement on the use of funds generated from the disposal of assets. While the agreement was received in September 2003, this was too late to allow for much of the money to be spent in 2003 in accordance with principles of good governance. These delays contributed to the accumulation of a significant surplus at the end of the year.

Overall, 2003 was a significant and successful year for the organisation. The restructuring and rationalisation that has taken place has reduced substantially our cost base going forward and will allow us focus future recruitment and investment towards the emerging priorities of the agriculture and food sectors.

Chairman

May we publish the statement?

Mr. Flanagan

Yes.

Deputy Ardagh

I welcome Mr. Flanagan. Teagasc's mission statement reads:

The Teagasc Mission is

To provide an independent and authoritative research knowledge base, technology transfer and training services for the sustainable development of agriculture and the food processing industry to enable it to respond profitably to consumer demands and requirements and contribute to a vibrant rural economy and society.

While I am an urban person and not a rural person, I appreciate the work that Teagasc does and I believe it is fulfilling its mission as set out in a substantial way, as can be seen by the products being developed and the way farmers are becoming more professional. To a large extent these improvements are down to Teagasc and its excellent scientists, researchers, trainers and workers. I am delighted to see that Science Foundation Ireland is working with Teagasc and a particular multinational, the name of which I do not know and which has contributed a further €3.5 million. I am sure Mr. Flanagan will tell us its name shortly. It is correct that the rural economy should develop higher value products and become more professional, which I hope will keep it one step ahead of the other food producers around the world.

Having said that the corporate governance within the organisation does not inspire confidence in me. The audit committee is mentioned. Who is on this committee?

Mr. Flanagan

The audit committee is a committee of the Teagasc authority. It has four members of the authority plus one outside adviser, who was added recently.

Deputy Ardagh

In a report of Teagasc, I would have expected that the audit committee would have been identified given the way corporate governance is going at the moment and the responsibilities of audit committees in substantial organisations like this. The members of the authority are outlined on page 5 of the report. Can Mr. Flanagan identify which of them are on the audit committee?

Mr. Flanagan

Yes, Michael O'Dwyer is the chairman. Tom O'Dwyer, who is chairman of the authority, is a member of the audit committee, as is Jim Beecher and Jerry Henchy.

Deputy Ardagh

Who is the outside adviser?

Mr. Flanagan

A person called Ronan Tierney.

Deputy Ardagh

What attributes does such an adviser need to be chosen?

Mr. Flanagan

Mr. Tierney is now a consultant in accountancy and audit, and would be an expert in risk management. The audit committee thought it would benefit from the involvement of a professional audit person to provide——

Deputy Ardagh

I agree wholeheartedly. How often does the audit committee meet?

Mr. Flanagan

The audit committee meets four times each year. Under the rules it has set for itself, it has to meet at least four times a year. In practice, it has met four times in each of the past two years.

Deputy Ardagh

Who else attends the meetings of the audit committee?

Mr. Flanagan

The internal auditor, the director and the director of administration attend the meetings.

Deputy Ardagh

Can the internal auditor and the members of the audit committee meet without the director or the director of administration also being present?

Mr. Flanagan

That has not happened in my experience of the past two years.

Deputy Ardagh

Mr. Flanagan should consider it. In my experience, the presence of a director or director of administration, or someone else of that level, can have a restraining effect on the interaction between the audit committee and the internal auditor. When the director and the director of administration are absent, there can be an opportunity for more forthright questions and delving into certain matters. I suggest that Teagasc should consider that.

Mr. Flanagan

I will definitely take that suggestion on board. I will pass it on to the chairman of the audit committee.

Deputy Ardagh

I have looked at the signed accounts. Dr. Tom O'Dwyer, the chairman of Teagasc, has signed four documents — the statement of internal financial control, the statement of responsibilities of the authority, the income expenditure account and the balance sheet. Mr. Flanagan signed the income expenditure account and the balance sheet and Mr. Beecher signed the statement of responsibilities of the authority. At what meeting were the accounts signed? Were they signed after a meeting? At what stage were they signed?

Mr. Flanagan

The Teagasc authority normally considers the accounts in draft form in April or May. The accounts are audited by the office of the Comptroller and Auditor General. They are formally signed when the Comptroller and Auditor General says that the audit has been completed and that the accounts are the final agreed accounts.

Deputy Ardagh

At what stage does the board consider the accounts, including the various reports?

Mr. Flanagan

As far as I know, the initial accounts have been available by the end of February in every year to date, including last year. We are supposed to have our accounts done by the end of February and I think we have met that deadline on every occasion. The accounts are normally placed before the authority at its April meeting. There is a meeting in the first few days of March, but the authority does not consider the draft accounts until its April meeting. The authority gives its view of the draft accounts at that point. The accounts are not finalised until the middle of the second half of the year, when they are signed. The authority agrees to sign the accounts after it has considered any comments made by the Comptroller and Auditor General.

Deputy Ardagh

I congratulate Teagasc on its timing of its accounts, which compares well with that of any other organisation examined by the Committee of Public Accounts. I would like to discuss the signing of the accounts in the middle of the third quarter of the year. What is the procedure for the signing of the accounts? Are they produced at a board meeting? When does the chairman sign the accounts? When do Mr. Beecher and Mr. Flanagan sign them? Are they signed at the board meeting in the middle of the third quarter?

Mr. Flanagan

No. The board will have provisionally approved the draft accounts. Any significant changes that occur in respect of the accounts, as a result of the Comptroller and Auditor General's comments, are brought to the attention of the authority during the year as they occur. A draft version of the addendum to the accounts was published this year, for example. When we receive such a draft, it is brought to the attention of the authority, which is then aware of its existence. After we have been notified that the accounts have been finally cleared by the office of the Comptroller and Auditor General, we try to arrange for them to be signed by the chairman and another member of the authority as quickly as possible thereafter, so that we can publish them as early in the year as possible. The accounts were signed within approximately three days of receiving such notification this year. By that point, all material changes would have been brought to the attention of the authority during the year and nothing new needed to be cleared by the authority. The chairman takes it on himself to sign the accounts, having received clearance from the authority to do so.

Deputy Ardagh

Did the authority examine all the pages between page 54 and page 74, including the statements and the notes?

Mr. Flanagan

The authority examined all the figures and statements, but it did not necessarily examine all the notes.

Ms Susan Kearney

It would have had access to the notes. When the draft accounts were prepared for the end of February, they included the notes to the accounts. The notes were available, therefore.

Deputy Ardagh

Did the draft accounts include the draft statements at that time?

Mr. Flanagan

Two of the statements were specifically brought to the attention of the authority and agreed, after they had been agreed with the Comptroller and Auditor General during the year. The statement on internal financial control, which was subject to amendment during the year, was brought to the attention of the authority when it was agreed with the Comptroller and Auditor General as the final statement.

Deputy Ardagh

It was amended during the year. What amendment was made to it?

Mr. Flanagan

A draft of the statement of internal financial control was discussed with the office of the Comptroller and Auditor General and a final version was brought to the attention of the authority during the year after it had been agreed.

Deputy Ardagh

That was earlier in the year — before 14 September.

Mr. Flanagan

It would have been in June or July.

Deputy Ardagh

The first sentence of the statement reads "On behalf of the authority of Teagasc, I acknowledge our responsibility for ensuring that an effective system of internal control is maintained and operated". According to the third paragraph, the authority has taken steps to ensure that an appropriate control environment is in place by clearly defining management responsibilities, authority and accountability, by establishing formal procedures for monitoring the activities and safeguarding the assets of Teagasc, as well as by developing a culture of accountability across all levels of the organisation. The statement records that the system of internal financial control is based on a framework of regular management reporting, administration procedures, including segregation of duties, and a system of delegation of accounting. That was agreed in June or July. Page 50 features some of Teagasc's response to the Comptroller and Auditor General's questions on governance shortcomings.

The Comptroller and Auditor General's response states:

The Director informed me that the failure in the control environment was attributable to a culture of unwarranted trust in the integrity of some staff by certain key members of management at the centre. The focus of management was on operations with inadequate attention to financial controls.

The Director stated that Teagasc does not have written procedures for dealing with the discovery of fraud and hitherto relied on local management to initiate appropriate action where fraud was discovered or suspected. In the incident of July 2002, the normal procedures were not followed.

At the third bullet point on page 51, the annual report states:

Procedures to deal with control failures identified outside of the Internal Audit process will be strengthened.

Written procedures for dealing with fraud and irregularities will be promulgated and enforced vigorously.

It appears to me that for the chairman, Dr. Tom O'Dwyer, to sign on behalf of the authority, a statement that says all of the internal controls were such as I have read out raises questions. I am open to contradiction, but this is the part of the financial statement to which the board does not pay as much attention as it should, compared to the part that deals with the statement of income and the balance sheet, with accompanying notes. I am not just pointing to Teagasc. This occurs in boards throughout the country in so far as they are not up to the standard I would wish in the governance section of the business. The Comptroller and Auditor General says throughout the report that the operations are very important. I am not asking for expressions of mea culpa or anything, but would like to see more emphasis on good governance, particularly as regards internal control, the audit committee and the functions and responsibilities of the authority and its members. Has Mr. Flanagan anything to say on that?

Mr. Flanagan

The two incidents that are the subject of the addendum, are not the norm throughout Teagasc. When we carried out a significant review to determine whether they were isolated incidents we concluded that they were. We were asked why this had occurred in these two incidents. The answer I gave to the Comptroller and Auditor General related to those two specific incidents and the managers involved. I would not wish to see generalised the answers given in respect of those two specific cases.

Deputy Ardagh

Surely they are generalised in Mr. Flanagan's answer that there is "a culture of unwarranted trust in the integrity of some staff by certain key members of management at the centre".

Mr. Flanagan

That was in those specific areas. We also said that when we looked at other areas-——

Deputy Ardagh

The word "culture" implies something that is pervasive throughout an organisation.

Mr. Flanagan

The intention was to indicate that this was very localised. However, I accept that in the past the Teagasc authority may not have been as conscious of good governance and the type of matters indicated by the Deputy that should have warranted more attention. It concentrated, perhaps, more on the programme and the results achieved as well as on how the organisation was performing in the public domain. The authority has learned a considerable amount from these two incidents and has focused more on the type of issues the Deputy highlighted. It reviews expenditure regularly in reports throughout the year. When the issue arose the authority was reasonably satisfied that the monthly oversight of expenditure and completion of projects etc. was deemed to be sufficient and that no explicit review of internal financial controls had been carried out in 2003. The very last sentence in the chairm an's statement on internal financial control says: "No specific review of the system of internal control was carried out during 2003".

The Teagasc authority, at that point was not conscious of the need to carry out a specific review. This was pointed out by the Comptroller and Auditor General. In 2004 the authority asked management to produce a detailed review of all our internal financial controls. It devoted a significant amount of time to examining those and made a number of recommendations for strengthening them. However, this emphasis on the need for internal financial control was instigated by the experience learned from those two incidents.

Deputy Ardagh

I thank Mr. Flanagan.

Deputy Hayes

On the issue of employee conflict of interest, what service did the company in which its employee was involved provide?

Mr. Flanagan

Teagasc has a system called dairy lists where detailed accounts are compiled on 14 co-operating farms to provide a base of information about what is happening on good farms. These data were collected manually and had to be input to a computer-readable medium. Initially the data were key punched and in more recent times were entered into a computer system. Some initial analysis was done of this data. Essentially the service provided was the entry of hand-written farm data on to a computer system.

Deputy Hayes

Was this individual doing this work or was it just his company? Did he actually input the information?

Mr. Flanagan

The individual concerned and a partner set up a company and they employed one or two persons to do this work. They did not do it themselves.

Deputy Hayes

Based on this experience is it now Teagasc policy not to use external services associated with any employee of the company?

Mr. Flanagan

Again, so far as we are aware, this was an isolated incident. Management would not approve of any arrangement such as this or replicate it. Apparently, a crisis arose initially as regards getting this work done and this employee offered to organise the service. It is quite specialised in terms of what has to be done and the employee involved felt he was doing Teagasc a service in resolving the problem it had at the time. Management considered this to be a useful solution and was not aware at the time that it was contrary to good corporate governance. There was not the same emphasis on corporate governance then that there is now. When management at senior level in head office became aware of this through an internal audit check, it immediately found it most undesirable and resolved that it should be stopped at the earliest possible opportunity.

Deputy Hayes

Teagasc is always pleading that money is being cut back and looking for more finance from Government. Was this not an opportunity for the company to do the job itself. Why did it not look at the possibility of doing it within the company, given the level of redundancies, closures and cutbacks it has experienced? Was that not a way to develop the organisation and provide a really good service?

Mr. Flanagan

The local management took the view that it was getting a good cost-effective service from this company. In a subsequent review we asked whether we were paying above or below the average rate for the job. We were probably paying below the odds for the service. Local management formed the view that it was a very cost effective service to Teagasc, even though it was contrary to good governance, as pointed out in the addendum.

Deputy Hayes

It begs the question whether the man was encouraged to set up a company to provide that service?

Mr. Flanagan

Initially, there was a crisis and he, with the senior manager of the day, was encouraged to do it, but unfortunately the subsequent managers assumed incorrectly that this was approved and above board when it was set up initially. It was working satisfactorily, the job was being done and the management thought it was good value. The issue of good governance did not occur to them until the breaches of good governance was pointed out by the internal auditor.

Deputy Hayes

I note from the opening statement that Teagasc has consolidated its position and changed direction. What concerns me is the closure of small offices throughout the country at a time when local government is moving from the idea of a single head office and is opening up in several locations in the county. Why is Teagasc closing centres that have traditionally provided a very good service on the ground and is that not detrimental to the future development of agriculture?

Mr. Flanagan

Teagasc was operating from approximately 130 centres around the country, with some offices employing one or two people. We felt we had too many offices, each incurring costs for security, lighting and so on. We decided to reduce the number of offices to 100 and used four criteria in reaching the decision, first, distance from other offices. If there were two offices of ten miles of each other, we considered that with modern roads and cars one did not need offices that close to one another. The second criterion was the size and standard of the existing office. The level of control with one or two advisers is not as great as there is no peer interaction that gives people an opportunity to discuss work and keep them updated on new developments. An advisory office should have a staff of four or five to be cost effective, to have critical mass and to give people an opportunity to interact with each other. By and large the offices that we propose to close are not necessary to provide a good service to our clients. The nature of farming and the nature of advice is changing and one can use the telephone. The considered view was to close the smaller offices and that plan was agreed by the authority and by the parent Department and Teagasc is proceeding with it. Teagasc will not proceed beyond the current plan.

Deputy Hayes

I am amazed that Teagasc did not consult one critical group, the users of its service. In my area two offices have been affected and the farmers who use the service are annoyed in both cases. I question the effectiveness of four or five people in an office rather than having a person with local knowledge who is close to the area and readily accessible to the users. Most farmers are now part-time and many have other jobs. I firmly believe that the wrong decision was reached and that the decision was based on what suited Teagasc management. Was there any outside assessment of it?

Mr. Flanagan

The management were faced with a decision to operate more efficiently within a reduced budget and responded to it. The management makes proposals to the authority and in this case a substantial majority agreed the proposal. One could predict the answer one would get from the local community if one asked about the closure of the local office. The authority and management believe they did the right thing in the interest of the whole organisation.

Deputy Hayes

Did Teagasc have an outside body assess the situation? I think it was a major mistake not to engage with the local people. The number of private consultants dealing with REPS and other schemes is mushrooming. Young well educated advisers are honing into the business and taking it from Teagasc.

Mr. Flanagan

Teagasc is quite happy to compete. Teagasc has no ambition to be the only or main provider of REPS services and has about 40% of the REPS business and is quite happy with that share of the market. It is good for all concerned, including farmers that there is competition in the provision of that service. We do not see an advantage in Teagasc having a monopoly of any service.

Chairman

Who oversees the expenses claims? I note that a gentleman was claiming too many expenses. What is the function of the Department of Agriculture and Food in regard to expenses?

Ms O’Neill

The director and the Teagasc authority are responsible for running Teagasc. They have their own accounts system and their own internal audit. They are subject to audit by the Comptroller and Auditor General just like the Department. The Department's concern is that when problems in governance arise, appropriate corrective action is taken. In the two instances mentioned, Teagasc outlined the steps it has taken and will take and the Department is happy about that.

Chairman

What action is being taken against the official involved?

Mr. Flanagan

The official involved has been required to repay the amounts mentioned by the Comptroller and Auditor General. This was the amount claimed for journeys not made plus interest calculated at the standard rate. The person has been reduced in grade and in salary and has been re-assigned to another area. The Comptroller and Auditor General mentioned the incident from July 2002 as a breach of good governance, when the head of the Department and the head of administration found out that there was a problem and did not adequately deal with it. They were subject to disciplinary action and standard procedures were followed. They were considered to have not acted properly. Both were reduced in salary by about €5,000. They appealed that to an external appeal body and the decision to discipline them was upheld by that body. They have both been disciplined for not acting properly.

Chairman

What category of staff were they?

Mr. Flanagan

One was the head of the Department and the other was head of administration at the centre.

Chairman

The other case drawn to our attention by the Comptroller and Auditor General was about a person who allegedly had a conflict of interest. Mr. Flanagan said that it arose from the fact that at a particular pressure point, an arrangement was made between the manager of the centre and the official involved to process data and that it was necessary at the time. He went on to say that by the time it was discovered, everybody relevant had retired.

Mr. Flanagan

Not everybody. Just the original people involved.

Chairman

Subsequent managers and superiors were not aware that there was anything untoward occurring. Is that a correct explanation?

Mr. Flanagan

That is substantially the explanation. Subsequent managers were asked to say why they allowed this to continue and they said that this was a system which they inherited and which was working well. While they had some concern about it, they were not conscious that it was such a clear breach of good governance procedures. It was intended that when farm account systems evolved and these 14 farms were doing their own accounts using computers, there would be an electronic transfer from the farm to the centre. They all said that they would introduce these computer systems in all 14 farms in order that the need for manual collection of the data would no longer arise. This automation of the farm accounts took much longer than expected. In the meantime, the managers decided that the system in place was working well and was cost effective. Therefore, they let it continue.

Chairman

A person employed by Teagasc signs a contract of employment. Does this contract have an exclusivity clause that commits the employee to providing his or her services fully to Teagasc and to no one else? Should the managers not have recognised the conflict of interest for that reason alone?

Mr. Flanagan

That is correct, unless the person gets the activity approved by the director. There are quite a number of people in Teagasc that engage in activities such as farming in their own farms. That is accepted as a legitimate activity. If we applied the contract of employment very strictly, we would have to tell our staff that they could not engage in farming any land they own. There is nothing absolute about any of these. The employee concerned has said that with the knowledge of the head of the centre at the time, he agreed to provide this service almost as a favour to Teagasc. He assumed that when he had the approval of his superior officer, he did not specifically need to seek approval of the director. That is his explanation and he felt that he had done nothing wrong in the circumstances.

Chairman

In the notes on the balance sheet, Teagasc has 612.3 hectares of land valued at €5.8 million, yet no re-evaluation has taken place since 1975-80. That is very outdated for asset valuation in a balance sheet.

Mr. Flanagan

It is outdated, but it is standard practice. I would like to ask my head of finance about that.

Ms Kearney

The assets on the balance sheet would be valued at the historical cost. That would be in line with our accounting policies as approved by the Comptroller and Auditor General. It would not be normal to revalue the land assets.

Chairman

There is property with a book value of €1.4 million but it was disposed of at €17.7 million. Is it normal practice that State assets would be so under-valued when they go to market?

Ms Kearney

That is normal practice.

Chairman

Would it not be more appropriate for the shareholder and the tax-payer to have a notion of the value of the asset bank held by a company such as this? There is an on-going political debate that rises and falls as to whether State assets should be realised and whether State assets held by Departments and State agencies are used to fullest effect. It is impossible to make that valuation if the values are historic and if a State asset which has a book value of €1.4 million realises €17.7 million. Are there no plans to revalue?

Mr. Flanagan

Yes.

Chairman

What gave rise to the re-evaluation between 1975 and 1980? Why are the values of 1922 not used, if that is the custom?

Mr. Flanagan

Teagasc would essentially follow State policy in such matters. We have no difficulty in revaluing all our assets and putting them in our accounts. It is our understanding that assets are valued at this original cost depreciated and there is not a policy that they should be revalued on an ongoing basis. There would be no difficulty in doing it if it was standard policy to do so. Our understanding is that it is not.

Chairman

Fair enough. As is not our job to comment on policy, we will move on. By 31 December 2002, Teagasc had a bank balance of €622,000. The following year, on 31 December, Teagasc had a bank balance of €19.1 million, an increase of 3,000%. If one considers Teagasc's overdraft balance for corresponding years, for 2003 it was €493,000 but at the end of 2002 was €6.7 million. Can Mr. Flanagan explain the improvement in that 12 month period? Had it anything to do with the date?

Mr. Flanagan

There are two issues involved. The Teagasc bank balance or its overdraft at any point in time depends on the day. Our big expenditure is salaries. We receive funding on a monthly basis from the Department of Agriculture and Food. For example, we might get €10 million but when we pay all our expenses towards the end of the month, most of that is gone. There is a timing issue related to the end of the month when we get our monthly advance from the Department and pay salaries.

The second point is that we were allowed to retain the proceeds from the sale of assets. We are allowed to use those proceeds for our capital programme, to a large degree in substitution for a grant-in-aid for capital. We have an additional amount of money at present and have committed to spending most of it through ongoing capital projects for which we must pay. At present, the balance is exceptionally high for those two reasons.

Deputy Fleming

With regard to property, while the Chairman referred to the question of cost, I note from the accounts that the book value of assets disposed of was €672,000. However, the proceeds achieved from the sale of those assets was €17.652 million, a multiple of 26, which is a great increase. I understand it is standard accounting policy to list assets at historic cost basis until a valuation is subsequently made. However, it is clear from the accounts that Teagasc is sitting on land with a book value of €5.8 million and buildings with a book value of €49 million. Are they undervalued by the same multiple of 26 when compared to market value or did Teagasc pick the properties it felt would achieve the biggest surpluses when it decided on the properties it intended to sell? In other words, when Teagasc was deciding which properties to sell, were the estimated proceeds over the book value one of the key factors taken into account?

Mr. Flanagan

The estimated book value versus the market value was not a consideration in deciding which properties to sell. The value of the existing land and buildings would be the original cost depreciated. I am not aware there was any recent revaluation of assets.

Deputy Fleming

When Teagasc decided to dispose of its headquarters in Sandymount and the properties in Wexford, Kildare and Dublin, I presume the properties were valued before the "for sale" sign was put up. I presume Teagasc was advised on the estimated value before it went to the market.

Mr. Flanagan

A property valuer gave us an estimated value and we then put the properties on the market. They were sold either by tender or by auction.

Deputy Fleming

Were the values achieved close to the advice on the market value?

Mr. Flanagan

In two cases the market value achieved was considerably in excess of the estimate. In the other cases, the value achieved was close to the estimate.

Deputy Fleming

Did that not prompt the thought in anybody's mind that Teagasc should perhaps revalue the rest of its property, even if this was not to be included in its financial statements? Any business should know the value of its assets. Teagasc would not have to change its accounting policy or annual statement but I would be surprised if the thought of valuing its assets did not cross somebody's mind. Did Teagasc value only those four properties?

Mr. Flanagan

The view of Teagasc was that it would cost a lot of money to have the assets valued and that we needed some reason for spending that money. We have a good idea of the asset value. If we were to go to the expense of having an asset valued, there generally would have to be a specific reason to incur that expense or we would not do it.

Deputy Fleming

On a different topic, decoupling, does Teagasc expect a reduction in the need for its services based on the volume of general agricultural activity? What is Mr. Flanagan's assessment of how this will impact on Teagasc?

Mr. Flanagan

With decoupling, in one sense we expect a reduction in demand for our services in that there will be fewer farmers seeking those services. However, while there will be fewer farmers, we would expect a higher proportion of the remaining farmers to use our services. On balance, we expect a slight overall reduction in the demand for our services. This is why Teagasc has made a decision to downsize — at present, we are talking about a 10% downsizing — in anticipation of reduced demand, largely due to the substantial decrease in the number of farmers.

Deputy Fleming

Is this an additional 10% downsizing?

Mr. Flanagan

No, the downsizing carried out over the past year or two has been of the order of 10%.

Deputy Fleming

Teagasc did not know about decoupling at that stage.

Mr. Flanagan

We knew the reform was coming and that the number of farmers was decreasing by 2-3% every year. By projecting forward four or five years, we expected the number of farmers to be fewer if for no other reason than the historic trend.

Deputy Fleming

Teagasc's income and expenditure account shows a surplus of €24 million on the year's activities. The biggest element of this was the €17 million realised from the sale of its assets. Therefore, Teagasc had a surplus of €7 million regardless of the sale of the assets. Why did it need this cost-cutting if it had an operating surplus of €7 million in 2003? Given that Teagasc was in such a healthy state of operating profit, how did it convince its mother Department that it needed such cost-cutting measures?

Mr. Flanagan

We had a balanced budget during 2003.

Deputy Fleming

It was a surplus budget not a balanced budget.

Mr. Flanagan

In 2003 our operating current account had a surplus of, in round figures, €3 million. This was because 2003 was a difficult year in that the provision of funding from our parent Department related to how we might use the proceeds of assets. It was September before we got an agreement that we could use some of the sale-of-assets money for capital expenditure. We did not know whether our current income was sufficient to pay for our expenses. Therefore, we were frugal throughout the year and did not commit to a number of expenses, such as repairs and renewals, because we did not know the sum of current spending money until September. When September came, it was difficult to spend money in the last few months of the year while following the rules of good governance. Therefore, the year ended and we had not spent as much as we had planned. It is something of an accident related to the manner in which we got approval of our budget in 2003 from our parent Department.

Deputy Fleming

I will conclude by commenting on this issue and one other topic. It is cold comfort for those who lost their jobs or local facilities to find at the end of the year that Teagasc was in surplus all the time although it was not aware of this until notified of the figure in September. As a Government party member, I was not aware when this debate was ongoing that Teagasc would have a surplus for the year under review. Some senior Government members expressed the view that these cost-cutting measures and the closure of offices were possibly necessary in view of Teagasc's financial situation. If it had been made clear during that period that Teagasc would turn in a several-million profit for the year, there would have been a slightly different view of the plan.

Mr. Flanagan

May I make a comment?

Deputy Fleming

I am concerned to see this emerging now. The pain has already been delivered when it may not have been necessary.

Chairman

At the time, it was claimed the cutbacks were largely justified because Teagasc was subject to the entire run of cutbacks that took place across Departments in 2003. The explanation was that the cutbacks were more or less unavoidable on financial grounds and actions in this regard were defended by Ministers on that basis. Can the delegation comment on this?

Mr. Flanagan

The rationalisation programme was directed towards planning for future years. If one closes offices or takes other downsizing measures, that is not reflected in what happens in any one year. We are planning to live within the anticipated level of grant-in-aid we get in future years, which is reflected in what we got this year and last year. A surplus or deficit in any one year is not a good measure of what one needs to do on average over a number of years. We assume our grant-in-aid will stay at approximately the same level as that provided in the last two years and we must plan to leave within those means.

The surplus in 2003 was somewhat fortuitous and related to events in that year. It should not be taken as an indicator of what will happen over the next five or ten years and for which we must plan.

Deputy Fleming

I wish the Comptroller and Auditor General to clarify a point. Without going into the content, can he explain the inclusion of a supplement to the audit report about the issues that have been discussed? Is there no mechanism for the publication of this supplementary report other than its inclusion in the annual report? Could it be included in Teagasc's appropriations accounts or is that system only available to Departments?

Mr. Purcell

Deputy Fleming has hit the nail on the head. It is not a Vote matter or a departmental matter. Unless I were to issue a special report relating to matters of value for money or general issues arising in a particular sector, I have no other means than to bring to the attention of the committee and the public issues that I feel merit scrutiny on the grounds of public accountability.

Deputy Fleming

It is disproportionate and incongruous that three pages of the annual report for an organisation with a turnover of €168 million and a profit of €24 million should set out the details of an individual staff member's travel expenses. This committee has an important function and we should not spend the day discussing the case of one official who falsely over-claimed for expenses. I hope we will not spend our time dealing with these types of issues. There must be a better way of ensuring accountability than having the national Parliament's Public Accounts Committee delving into a three-page report in the annual report of an organisation such as Teagasc. It does not do good service to the function of the committee when we deal such with an organisation with assets the value of which we are unaware and which is engaged in many different activities. I hope we have more serious issues to discuss at future meetings.

I have a question for the delegation from the Department of Agriculture and Food. During the course of the year when the case for the closure of offices was being publicly defended by the Minister, were departmental officials aware there was likely to be a surplus on the day-to-day activities of Teagasc?

Ms O’Neill

Mr. Flanagan has explained that a major part of the surplus arose from the unusual capital disposals that took place in that year.

Deputy Fleming

However, there was still a surplus regardless of those disposals.

Ms O’Neill

It was a smaller surplus. Mr. Flanagan has also explained that Teagasc was holding onto money because it had commitments for the surplus. Therefore, it was not a real surplus.

On the closure of offices, Teagasc has the delegated authority to provide a particular service. It is for Teagasc to decide the number of local offices required to deliver that service. It is not a matter for the Department. Decisions regarding the closure of offices are taken initially by Teagasc.

Mr. Purcell

I wish to take up Deputy Fleming's point. I can only operate within the legislation. I differ with Deputy Fleming on the matter of the importance of serious lapses in governance, as I would regard them, and how they were handled. There must be a mechanism through which such lapses are brought to account. It is up to the committee to decide which accounts, reports and supplements it examines. Some five years ago, I produced a value-for-money report on the effectiveness of Teagasc, which examined the way in which it measured its performance. If I recall correctly, that report received approximately 20 minutes of the committee's time. Committees differ and different memberships of the same committee differ.

I identify with what Deputy Fleming and the Chairman have said about the valuation of assets. As has been stated here, there are a number of ways within the accounting standards in which assets may be reflected in the balance sheet of a company or organisation. These include historical cost, value in use, real value, among others. I do not know if I have said it in the matter of Teagasc but I have encouraged other organisations, including the health boards, to reflect the estimated market value of their marketable assets. This should be included in the balance sheet or at least in a note. The same applies for investments, which are invariably recorded at cost in a balance sheet. I would always suggest to organisations that they put in the market value of investments, but such suggestions are not always accepted. I would welcome the support of the committee with regard to the bodies with which I deal and which are subject to my audit remit. The committee could recommend the realisable value of marketable assets should be shown as a note in the accounts. That would certainly give me support. When I put that suggestion to organisations, having reviewed their files, some comply but others say what they are doing is in accordance with accounting standards. It certainly is, but they are public organisations and should show that. However, the board may decide not to do so. I would be grateful for any help I can get with regard to this matter from the committee.

Deputy Fleming

This committee would want to avoid a situation whereby every State organisation gets market values on all property at the end of every financial year. It would be a bonanza for auctioneers and valuers. However, there must be a medium. I asked if there was any other way of reporting this issue. We know there was not. It is an important issue given that it is the annual report. The point could have been made in one page instead of four or five pages. It should not have dominated my reading of the financial report, which it did. It is up to me to read what I want, but it is a question of proportionality with regard to the amount of space given to a particular topic. We can agree to differ.

Mr. Purcell

I can identify with what the Deputy is saying. The audit report must be the standard audit report that accompanies the accounts of an organisation. I must have some linkage, which the director referred to as an addendum. I call it a supplement. I recognise this and it has happened in other organisations in the past. I am thinking in terms of the large organisations responsible for industrial development when similarly there were audit supplements. I accept that the IDA or Enterprise Ireland must put their best foot forward——

Deputy Fleming

That is not good reading for a State organisation.

Mr. Purcell

It is not. I accept that. However, until the legislation is changed there must be a vehicle to raise issues where I think there should be public accountability. In the past, I tried to have a report that would tie up all these loose ends without affecting the statutory audit report, which is more or less a certificate in standard form. That is not provided for under the legislation, and was challenged at that time. I appreciate what the Deputy is saying and his concern, but until Members of the Houses, in their capacity as legislators, get around to doing something about the matter I will continue to have a problem in that regard.

Chairman

We have given the matter an hour and a quarter, which is not an inordinate amount of time to give to Teagasc. As are not a mutual admiration society, we tend to concentrate on the inadequacies of an organisation rather than on all of its good work. Lapses in corporate governance is a big issue for this committee. It might only be €70,000 today, but it could be €70 million with regard to another agency tomorrow. The principles are the same. Internal procedures must be in place to enable organisations to have the highest possible standards in corporate governance. Even though the amounts today are small, dedicating an hour and a quarter of our time to the issue was fully justified.

I thank delegates for their co-operation and readiness in answering all questions. No doubt they will have a future opportunity to show this and other committees the good work they continue to do.

It is proposed to note the accounts. Is that agreed? Agreed.

The committee adjourned at 3.05 p.m. until 11 a.m. on Thursday, 27 January 2005.