Corporate governance report

Director's report

The Board

Our Board is responsible for the overall direction and performance of our organisation, including our efficiency and effectiveness as a public body. Members come from a variety of business backgrounds and bring with them a wealth of knowledge and expertise.

Our Board currently comprises Donald MacRae (Chair), three further non-executive members, and the CEO, Alan Sutherland. Members of the Board are appointed by Scottish Ministers. The length of appointments may vary to ensure continuity of membership but is usually three or four years.

There is the possibility of a further term, subject to evidence of effective performance and satisfying the skills, knowledge and personal qualities required on the Board at the time of re- appointment. The membership during the year is detailed below.

Name	Position	Initial appointment date	Re-appointment date	End date
Donald MacRae	Chair	01/07/2016	01/05/2022	30/04/2026
Jo Armstrong	Member	01/07/2016	01/07/2020	30/06/2024
Ann Allen	Member	01/07/2020	-	30/06/2024
Robin McGill	Member	01/01/2020	-	31/12/2024

Directors

Alan Sutherland was the only Director equivalent during the financial year. As well as being the CEO and Accountable Officer, Alan Sutherland is also an executive member of our Board.

Interests held by the Board

We ask our Board Members and Directors to complete a declaration of interest and we publish a register of interests on our website. During the year, neither the Board Members nor Directors held interests in other bodies with which WICS has dealings.

Auditors

Under the Public Finance and Accountability (Scotland) Act 2000, our independent auditors are appointed by the Auditor General for Scotland. Audit Scotland has been appointed as our external auditors for a five-year period from 2022-23 to 2026-27.

The appointment is undertaken in accordance with the Code of Audit Practice approved by the Auditor General.

The fees paid to Audit Scotland in respect of the independent statutory audit for the financial year 2022-23 are £18,200 (2021-22: £13,940).

All relevant audit information has been made available to our auditors, and the Accountable Officer has taken steps to ensure that the auditors are aware of any relevant audit information.

Other information

In the year to 31 March 2023, we did not have any notifications of data breaches to the
Information Commissioner’s Office.

Significant events since the end of the financial year

There are no significant events to report after the end of the financial year.

Statement of Accountable Officer's responsibilities

Under the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005, Scottish Ministers have directed us to prepare for each financial year a statement of accounts in the form and on the basis set out in the Accounts Direction. The financial statements are prepared on an accruals basis and must give a true and fair view of our state of affairs and our income and expenditure, statement of financial position and cash flows for the financial year.

In preparing the financial statements, the Accountable Officer is required to comply with the requirements of the Government Financial Reporting Manual (FReM), and to:

• Observe the Accounts Direction issued by Scottish Ministers, including the relevant accounting and disclosure requirements, and apply suitable accounting policies on a consistent basis.
• Make judgements and estimates on a reasonable basis.
• State whether applicable accounting standards, as set out in FReM, have been followed, and disclose and explain any material departures in the financial statements.
• Prepare the financial statements on a going concern basis.

The Permanent Secretary has appointed the CEO as Accountable Officer of WICS. The responsibilities of an Accountable Officer, including responsibility for the propriety and regularity of the public finances for which the Accountable Officer is answerable, for keeping proper records and for safeguarding our assets, are set out in the SPFM published by Scottish Ministers.

So far as the Accountable Officer is aware, there is no relevant audit information of which our auditors are unaware. The Accountable Officer has taken all the steps that he ought to have taken to make himself aware of any relevant audit information and to establish that our auditors are aware of that information.

The Accountable Officer confirms that the annual report and accounts are fair, balanced and understandable and that he takes personal responsibility for the annual report and accounts and the judgments required for determining that it is fair, balanced and understandable.

Governance statement

The Governance Framework

We are a non-departmental public body. The broad framework in which we operate is set out in a Framework Document, which defines key roles and responsibilities which underpin the relationship between us and the Scottish Government. While this document does not confer legal powers or responsibilities, it forms a key part of our accountability and governance framework.

Non-departmental public bodies are directed by Scottish Ministers to comply with the SPFM. The SPFM provides guidance on the proper handling of public funds to ensure:

• Compliance with statutory and parliamentary requirements.
• Value for money.
• High standards of propriety.
• Effective accountability and robust systems of internal control.

The SPFM is issued by Scottish Ministers to provide guidance to the Scottish Government and other relevant bodies on the proper handling and reporting of public funds. It sets out the relevant statutory, parliamentary and administrative requirements, emphasises the need for economy, efficiency and effectiveness, and promotes good practice and high standards of propriety.

The Accountable Officer is responsible for maintaining a sound governance framework that supports the achievement of the organisation’s policies, aims and objectives set by Scottish Ministers, while safeguarding the public funds and assets for which he is personally responsible, in accordance with the responsibilities assigned to him.

The purpose of the governance framework

The governance framework comprises the systems, processes, culture and values which govern our activities and behaviours. It enables us to monitor the achievement of our strategic objectives and to consider whether those objectives have led to the delivery of appropriate, cost-effective services.

The system of internal control is a significant part of that framework and is designed to manage risk to a reasonable level. It cannot eliminate all risk of failure to achieve policies, aims and objectives and can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an on-going process designed to identify and prioritise the risks to the achievement of our policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically.

The governance framework has been in place for the full year ended 31 March 2023 and up to the date of approval of the annual report and accounts.

The Board

The role of the Board is to provide strategic leadership, direction, support and guidance to ensure that we deliver and are committed to delivering our functions effectively and efficiently and in accordance with the aims, policies and priorities of Scottish Ministers.

Board Members have corporate responsibility for ensuring that we fulfils our statutory duties, any targets agreed with Scottish Ministers and for promoting the efficient and effective use of staff and other resources in accordance with the principles of Best Value.

The Board meets regularly and during 2022-23 held five formal meetings. At each formal meeting the Board has a mandate to focus on strategic issues relating to monitoring Scottish Water’s performance, the SRC and developments in the retail market. The Board held five further informal meetings to discuss current issues and matters arising.

A full description of our Board’s role and responsibilities is detailed within its Scheme of Delegation. Board Members are required to comply with the Code of Conduct for Members of the Board. Board Members discharge their duties in accordance with the guidance set out in appointment letters and in On Board: a guide for members of statutory boards .

As well as attending Board meetings and strategy meetings, Board Members carry out non- executive engagement with stakeholders. Reports of engagement activity are provided at each subsequent Board meeting to ensure that the activity is noted and to give members and management the opportunity to discuss issues arising from this activity.

Corporate Plan

Our Corporate Plan reflects our strategic aims and objectives as agreed by the Scottish Ministers. The plan should include the key objectives and associated key performance targets for the period covered by the plan, and the strategy for achieving those objectives. It should set out how these will contribute towards the achievement of the Scottish Government’s primary purpose and how they align with the National Performance Framework. We have developed a comprehensive plan for the current regulatory period (2021-27) which outlines the specific measures against which we will measure and report on our success against our objectives.

Risk management

All bodies to which the SPFM is directly applicable must operate a risk management strategy in accordance with relevant guidance issued by Scottish Ministers. The general principles for a successful risk management strategy are set out in the SPFM and we have used this to derive our own risk management strategy.

Our risk management strategy makes clear the roles and responsibilities for achieving an effective control framework. The focus of our strategy is a risk register which identifies potential or actual risks to the achievement of the objectives set out in our Corporate Plan.

Risks are assessed in terms of the likelihood of them occurring, the impact they would have if they did occur, and their proximity (how soon they are likely to occur).

The Board is responsible for defining the organisation’s risk appetite. The risk register is populated by contributions from all staff, and each risk is scored and set a realistic target to reduce the level of the risk. The action plans in place to reduce risk ratings are subject to continual review. They are monitored by staff internally and reviewed by our Audit and Risk Committee (ARC) on a quarterly basis. The Accountable Officer reviews the register prior to its submission to the ARC. The Board is informed of significant changes to the register or new risks.

As part of the Corporate Plan for 2021-27, we have identified the risks associated with the delivery of the objectives set out in the Plan. During the year, the Board monitored the strategic risk register and the action plans set out by management to address the risks.

Audit and Risk Committee (ARC)

The Board has appointed the ARC to assist in fulfilling the Board’s statutory and fiduciary responsibilities by reviewing the comprehensiveness and reliability of assurances on governance, risk management, the control environment and the integrity of financial statements and annual report. Members are appointed to the ARC by the Board. The ARC is governed by its Terms of reference and remit.

The ARC meets to receive reports from internal and external auditors and our employees. The internal and external auditors may attend all meetings of the ARC and they may contact the Chair of the ARC at any time to express specific concerns identified during audit work.

The ARC meets at least four times a year. During the year the ARC was chaired by Robin McGill. There are a further two non-executive members. The non-executive members are appointed by the Board based on the breadth of skill, knowledge and experience they can bring to the ARC.

The ARC operates independently and reports to the Board. The ARC presented the annual report of the ARC to the December Board meeting, which outlined the work undertaken by the ARC to review our control systems and financial reporting processes to measure and manage the risk inherent in the delivery of the organisation’s objectives. The report reiterated the findings from Audit Scotland’s 2022-23 audit in relation to the wider control issues identified as part of the annual audit. The report outlined the remedial actions agreed by the senior management team and the ARC has reprioritised future internal audit reviews to ensure the issues identified are addressed. The ARC also noted that it will monitor the action plan agreed with Audit Scotland. In light of this and based on the assurance provided by the Internal Auditor’s Annual Report, the ARC recommended that the Board approve this annual report and financial statements.

Internal audit

Internal audit has been provided by Grant Thornton since April 2018. At the start of each financial year, a programme of work is agreed with the internal audit team to provide assurance that key risks are being managed effectively and value for money is being achieved. It is a risk-based plan, considering our risk management framework, our strategic objectives and priorities, and the views of senior managers and members of the ARC.

Before each audit, the scope of work is approved by the senior management team and the ARC. The auditors prepare a report for the ARC following each audit. We produce a quarterly report for the ARC explaining progress with management actions.

The overall audit opinion for the year was that “reasonable assurance can be given on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control”.

Significant governance issues

There have been no governance issues identified during the year that are significant in relation to our overall governance framework. However, during the year, some weaknesses were identified in relation to our travel and expenses policy. Following a revision of the policy in January 2023, the Accountable Officer is committed to building on the changes made to the policy and strengthening further our expenditure in this area.

There were two items of expenditure identified that required retrospective approval by the Scottish Government. Again the Accountable Officer is taking action to address the weaknesses that led to the oversight of appropriate approval.

Review of effectiveness

As Accountable Officer, I have responsibility for reviewing the effectiveness of the systems of internal control. My review of the effectiveness of these systems is informed by the work of the internal auditors and the executive managers within the organisation. The executive managers have responsibility for the development and maintenance of the internal control framework. I also rely on the comments made by the external auditors in their management letter and other reports. I have been advised on the effectiveness of the systems by the ARC.

Remuneration and staff report

Remuneration policy

The Board and CEO’s remuneration packages are agreed within the parameters set by the Scottish Government’s pay policy. The Scottish Government approves the daily fee to be paid to the Chair and members, as well as approving the CEO’s remuneration package.

Board Members contribute at least one day per week in support of our’ activities. The Chair devotes at least two days per week in support of our activities.

There is no separate remuneration committee and remuneration related issues are brought to the attention of the Board as they arise. No performance payments were made in 2022-23 in accordance with the Scottish Government pay policy.

Directors' salary and pension entitlements

The overall remuneration of the CEO in the year was £178,283 (2021-22: £183,240). The only other director of the organisation was Ian Tait, the Deputy Chief Executive, who retired on 2 May 2022. The total remuneration of the Directors, including accrued pension benefits was as follows:

2022-23				2021-22
Audited information	Gross salary £(000)	Pension benefits £(000)	Total £(000)	Gross salary £(000)	Pension benefits £(000)	Total £(000)
Alan Sutherland, CEO	165-170	5-10	175-180	180-185	-	180-185
Ian Tait, Deputy CEO	10-15	-	10-15	120-125	-	120-125

The 2022-23 CEO pension benefits disclosed in the table above relates to pension contributions paid in prior years that now count towards the pension benefits figure, due to the changes to Pension Lifetime Allowance announced in the March 2023 UK Government budget.

Both the CEO and the Deputy Chief Executive were ordinary members of the Falkirk Council Pension Scheme. The CEO withdrew from the Scheme on 31 March 2017 and the Deputy Chief Executive retired on 2 May 2022. Therefore, no payments were made to the scheme by or on behalf of the CEO during the year and only for the Deputy Chief Executive up until the date of retirement.

The accrued pension benefits in the table above have been calculated as the real increase in pension multiplied by 20 plus the real increase in any lump sum less the contributions made by the individual. The real increases exclude increases due to inflation or any increase or decreases due to a transfer of pension rights. Retirement benefits of the Directors are as follows:

Audited information				Cash equivalent transfer value**
Alan Sutherland	Accrued pension as at 31 March 2023 and related lump sum £(000)	Accrued pension as at 31 March 2022 and related lump sum £(000)	Change in pension net of inflation and related lump sum £(000)	At 31 March 2023 £(000)	At 31 March 2022 £(000)	Increase net of members' contributions £(000)
	35-40 plus lump sum of 30-35	30-35 plus lump sum of 30-35	0-2.5 plus lump sum of 0-2.5	676	601	22
Ian Tait	-	40-45 plus lump sum of 30-35	-	-	692	-
**The cash equivalent transfer value (CETV) is the actuarially assessed value of the retirement scheme benefits accrued by a member at a point in time. The increase shown is the difference between the CETV value calculated at 31 March 2023 and 31 March 2022. As Alan Sutherland is a deferred pensioner, no contributions were paid during the year. There was no CETV to disclose for Ian Tait as at 31 March 2023 due to his retirement during the year.

The Directors’ normal retirement age is 67, which is the earliest date at which the member can take full benefits without consent and without reduction. There are no other benefits to which the Directors would become entitled on early retirement.

No bonus payments or benefits in kind were paid to the CEO during 2022-23 (2021-22: £nil). The total remuneration of the CEO and other Director was £190k - £195k (2021-22: £300k - £305k). This decrease is due to the retirement of the other Director in May 2022. The Director was not replaced directly.

Board Remuneration

The remuneration of the Board Members, other than the CEO, was as follows: 

Audited information	2022-23 total £(000)	2021-22 total £(000)
Donald MacRae	35-40	35-40
Jo Armstrong	15-20	15-20
Robin McGill	15-20	15-20
Ann Allen	15-20	15-20

Board Members are not members of the pension scheme. No benefits in kind were paid in the year.

Non-salary rewards (audited information)

Each staff member received a £100 gift voucher during 2022-23, which is treated as a taxable benefit. The total amount paid directly to employees was £2,600 (2021-22: £2,900). The tax and national insurance payments due on this benefit, £1,133 (2021-22: £1,299) was paid on behalf of the employees by WICS.

Fair pay disclosure (audited information)

The range of staff remuneration is £25k-30k to £165k-£170k (2021-22: £20-25k to £180-£155k). Our highest paid director is the CEO at £165k-£170k (2021-22: £180k - £185k), a decrease of 7% from the previous year. The average salary for all employees, excluding the CEO, is £70k -£75k (2021-22: £65k -£70k), representing a 5% increase from the previous year.

Reporting bodies are required to disclose the relationship between the remuneration of the highest paid director in their organisation and other employees. Total remuneration of the CEO, the highest earner in the organisation, has decreased from the previous year. Together with the general increase of salaries of other employees, this has resulted in the ratio between employees at all salary ranges and the CEO to be lower compared to the previous year. This is demonstrated in the table below.

Audited information	2022-23 £(000)	2021-22 £(000)
Highest paid Director's total remuneration (£)	165k-170k	180k-185k
Salary: 25th percentile (£)	34,682	32,004
25th percentile pay ratio	4.9	5.7
Salary: 50th percentile (£)	42,268	42,038
50th percentile pay ratio	4.0	4.3
Salary: 75th percentile (£)	96,835	98,555
75th percentile pay ratio	1.8	1.9

Average number of persons employed

The average number of full-time equivalent persons employed during the year was 26 (2021-22: 28), including the CEO. These were employed in the following areas:

Audited information	Year ended 31 March 2023	Year ended 31 March 2022
CEO and Directors	1	2
Other employees	25	26

Staff composition

At the end of the financial year, the number of employees of each sex was as follows: 

	Male	Female	Total
Directors	1	-	1
Other employees	12	12	24

Total staff costs for the year were £2,691,278 (2021-22: £2,946,372). Staff costs are outlined in more detail in note 3.5.4 of the financial statements. All employees hold permanent (UK) employment contracts, with the exception of the equivalent of 0.5 FTE relating to agency staff. The cost during the financial year of agency staff was £26,649 (2021-22: £35,167).

Equality and diversity in our workplace

We are committed to valuing and promoting equal opportunities and diversity in all areas of recruitment, employment, training and managing people and to providing benefits to our employees. We are also committed to complying with our general public-sector duty to eliminate unlawful discrimination and promote equality of opportunity. In this respect, we promote and support a culture where all employees can develop their full potential, irrespective of any protected characteristics they may have. Our staff handbook outlines our policy regarding equal opportunities.

Our performance and activities in the area of mainstreaming equality are set out in the Equality Mainstreaming Report 2019-21 on our website. This year we have focused our attention on raising awareness by offering equality, diversity and inclusion training to all our employees. We held an
in-person session in September 2022, supported by external professionals. The session generated a lot of good conversation and engagement between employees. We have been working on the outputs from the session and will continue doing so throughout the next year. We are continuing to promote flexible working and have started to take steps to consider the ‘right to disconnect’ and what more can be done to support our staff in their employment.

We follow the Scottish Government’s Pay Policy. This has prioritised protecting those on low pay
through a progressive approach delivered through the application of tiered pay increases.

We offer a free, confidential Employee Assistance Programme to all staff. This service provides counselling, signposting and information to help staff with personal or work-related problems that may be affecting their health, wellbeing or performance. It is accessed either online or through a 24-hour Freephone service.

Health, safety and wellbeing

It is our policy to safeguard the health, safety and welfare of all employees by providing healthy and safe working conditions. We consider a positive health and safety culture to be an essential part of the way we conduct our business. We acknowledge that, as a business, we have a responsibility to suppliers and other stakeholders in relation to health and safety matters. Our health and safety policy outlines the responsibilities we have toward employees and provides guidance on health and safety issues.

Our employee handbook outlines the procedures in place for managing staff in a supportive way. We are committed to supporting employees who are absent due to sickness, and we have flexible policies relating to the return to work for employees who have been absent for health and other personal reasons or following maternity or paternity leave.

We actively encourage education and training for all employees. Our performance management and development policy are used to identify training needs and opportunities for development.

Sickness absence and staff turnover

The average length of time that each employee was absent due to sickness was 1 day (2021-22: 4.7 days). We have found that employee sickness rates have reduced significantly since the office moved to a home working model. This will be considered when looking at the future model for the working environment.

Staff turnover in the year was 20% (2021-22: 3.6%). Due to the low number of employees in the organisation, turnover can vary considerably. There was little staff turnover during COVID-19. Of the five leavers during 2022-23, one related to a retirement and another a fixed term contract.

Exit packages

There were no voluntary exit packages or compulsory redundancies in the year.

Parliamentary accountability report

Funding

We have a Corporate Plan in place, agreed with Scottish Ministers and published on our website. We agree with the Scottish Government the issues to be addressed in the plan and the timetable for its preparation and review. The finalised plan reflects our strategic aims and objectives as agreed by Scottish Ministers, indicative budgets and any priorities set by Scottish Ministers.

Under the 2002 Act as amended by the 2005 Act, we are funded by a levy paid by Scottish Water. Following approval by Scottish Ministers of our Corporate Plan, the Sponsor Directorate instructs Scottish Water to pay the amount determined to us on a monthly basis. Fees are payable by licensed providers on a cost recoverable basis, sufficient to meet the costs we incur in exercising our functions relating to water services and sewerage services.

The Corporate Plan, or elements thereof, is updated between Strategic Reviews as and when considered necessary and a copy is provided to the sponsor unit prior to the start of the Strategic Review period.

Losses and special payments

There were no losses or special payments in the year (2021-22: £nil).

Gifts

A gift of £100 was made to each employee during the year. The total value of the benefit was
£2,600 (2021-22: £2,900).

Contingent liabilities

At the time of signing the report and financial statements, we were in the process of dealing with the Inland Revenue Department in New Zealand in relation to taxation obligations arising from the work being carried out on the Three Waters Reform Programme in New Zealand. Although no liabilities are expected to arise from this work, the work with the IRD was not concluded. More information on this work can be found in note 3.5.12 (iii) Contingent liabilities.

Alan D A Sutherland, Chief Executive Officer
December 2023

Independent Auditor's Report

Independent auditor's report to the members of the Water Industry Commission for Scotland, the Auditor General for Scotland and the Scottish Parliament

Reporting on the audit of the financial statements

Opinion on financial matters

I have audited the financial statements in the annual report and accounts of the Water Industry Commission for Scotland for the year ended 31 March 2023 under the Water Industry (Scotland) Act 2002, as amended by the Water Services (Scotland) Act 2005. The financial statements comprise the Statement of Comprehensive Net Expenditure, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Equity and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards, as interpreted and adapted by the 2022/23 Government Financial Reporting Manual (the 2022/23 FReM).

In my opinion the accompanying financial statements:

• give a true and fair view of the state of the body’s affairs as at 31 March 2023 and of its
  net expenditure for the year then ended;
• have been properly prepared in accordance with UK adopted international accounting standards, as interpreted and adapted by the 2022/23 FReM; and
• have been prepared in accordance with the requirements of the Water Industry (Scotland) Act 2002, as amended by the Water Services (Scotland) Act 2005 and directions made thereunder by the Scottish Ministers.

Basis for opinion

I conducted my audit in accordance with applicable law and International Standards on Auditing (UK) (ISAs (UK)), as required by the Code of Audit Practice approved by the Auditor General for Scotland. My responsibilities under those standards are further described in the auditor’s
responsibilities for the audit of the financial statements section of my report. I was appointed by the Auditor General on 2 December 2022. My period of appointment is five years, covering 2022/23 to 2026/27. I am independent of the body in accordance with the ethical requirements that are relevant to my audit of the financial statements in the UK including the Financial
Reporting Council’s Ethical Standard, and I have fulfilled my other ethical responsibilities in accordance with these requirements. Non-audit services prohibited by the Ethical Standard were not provided to the body. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Conclusions relating going concern basis of accounting

I have concluded that the use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

Based on the work I have performed, I have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the body’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from when the financial statements are authorised for issue.
These conclusions are not intended to, nor do they, provide assurance on the body’s current or future financial sustainability. However, I report on the body’s arrangements for financial sustainability in a separate Annual Audit Report available from the Audit Scotland website.

Risks of material misstatement

I report in my separate Annual Audit Report the most significant assessed risks of material misstatement that I identified and my judgements thereon.

Responsibilities of the Accountable Officer for the financial statements

As explained more fully in the Statement of Accountable Officer's Responsibilities, the Chief Executive, as the Accountable Officer, is responsible for the preparation of financial statements that give a true and fair view in accordance with the financial reporting framework, and for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Accountable Officer is responsible for assessing the body’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is an intention to
discontinue the body’s operations.

Auditor's responsibilities for the audit of the financial statements

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. I design procedures in line with my responsibilities outlined above to detect material misstatements in respect of irregularities, including fraud. Procedures include:

• using my understanding of the central government sector to identify that the Water Industry (Scotland) Act 2002, as amended by the Water Services (Scotland) Act 2005, and directions made thereunder by the Scottish Ministers are significant in the context of the body;
• inquiring of the Accountable Officer as to other laws or regulations that may be expected to have a fundamental effect on the operations of the body;
• inquiring of the Accountable Officer concerning the body’s policies and procedures
  regarding compliance with the applicable legal and regulatory framework;
• discussions among my audit team on the susceptibility of the financial statements to material misstatement, including how fraud might occur; and
• considering whether the audit team collectively has the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations.

The extent to which my procedures are capable of detecting irregularities, including fraud, is affected by the inherent difficulty in detecting irregularities, the effectiveness of the body’s controls, and the nature, timing and extent of the audit procedures performed.

Irregularities that result from fraud are inherently more difficult to detect than irregularities that result from error as fraud may involve collusion, intentional omissions, misrepresentations, or the override of internal control. The capability of the audit to detect fraud and other irregularities depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved.

A further description of the auditor’s responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website www.frc.org.uk/auditorsresponsibilities. This description forms part of my auditor’s report.

Reporting on regularity of expenditure and income

Opinion on regularity

In my opinion in all material respects the expenditure and income in the financial statements were incurred or applied in accordance with any applicable enactments and guidance issued by the Scottish Ministers.

Responsibilities for regularity

The Accountable Officer is responsible for ensuring the regularity of expenditure and income. In addition to my responsibilities in respect of irregularities explained in the audit of the financial statements section of my report, I am responsible for expressing an opinion on the regularity of expenditure and income in accordance with the Public Finance and Accountability (Scotland) Act 2000.

Reporting on  other requirements

Opinion prescribed by the Auditor General for Scotland on audited parts of the Remuneration and Staff Report

I have audited the parts of the Remuneration and Staff Report described as audited. In my opinion, the audited parts of the Remuneration and Staff Report have been properly prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005, and directions made thereunder by the Scottish Ministers.

Other information

The Accountable Officer is responsible for the other information in the annual report and accounts. The other information comprises the Performance Report and the Accountability Report excluding the audited parts of the Remuneration and Staff Report.

My responsibility is to read all the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or my knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If I identify such material inconsistencies or apparent material misstatements, I am required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work I have performed, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

My opinion on the financial statements does not cover the other information and I do not express any form of assurance conclusion thereon except on the Performance Report and Governance Statement to the extent explicitly stated in the following opinions prescribed by the Auditor General for Scotland.

Opinions prescribed by the Auditor General for Scotland on Performance Report and Governance Statement

In my opinion, based on the work undertaken in the course of the audit:

• the information given in the Performance Report for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005, and directions made thereunder by the Scottish Ministers; and
• the information given in the Governance Statement for the financial year for which the financial statements are prepared is consistent with the financial statements and that report has been prepared in accordance with the Water Industry (Scotland) Act 2002, as amended by the Water Services etc. (Scotland) Act 2005, and directions made thereunder by the Scottish Ministers.

Matters on which I am required to report by exception

I am required by the Auditor General for Scotland to report to you if, in my opinion:

• adequate accounting records have not been kept; or
• the financial statements and the audited part of the Remuneration and Staff Report are not in agreement with the accounting records; or
• I have not received all the information and explanations I require for my audit.

I have nothing to report in respect of these matters.

Conclusions on wider scope responsibilities

In addition to my responsibilities for the annual report and accounts, my conclusions on the wider scope responsibilities specified in the Code of Audit Practice are set out in my Annual Audit Report.

Use of my report

This report is made solely to the parties to whom it is addressed in accordance with the Public Finance and Accountability (Scotland) Act 2000 and for no other purpose. In accordance with paragraph 108 of the Code of Audit Practice, I do not undertake to have responsibilities to members or officers, in their individual capacities, or to third parties.

Richard Smith CPFA, Senior Audit Manager, Audit Scotland
December 2023