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New Text SNH Report. repro 14/2/05 9:58 am Page 28AUDITED FINANCIAL ACCOUNTS ACCSFOR THE YEAR ENDED 31 MARCH 2004FOREWORDHISTORY AND STATUTORY BACKGROUND1. Scottish Natural Heritage (SNH) was set up on 1 April 1992 by the Natural Heritage (Scotland) Act 1991. In 2003-04 our work was paid for by a grant from the Scottish Executive Environment and Rural Affairs Department’s (SEERAD). It came from their budget for “Natural Heritage: Central Government Expenditure”. We are also recognised as a Scottish charity under Section 1 (7) of the Law Reform Miscellaneous Provisions (Scotland) Act 1990.2. The Joint Nature Conservation Committee (JNCC) was set up on 5 November 1990 by Section 128(4) of the Environmental Protection Act 1990. JNCC allows the nature conservation agencies; Scottish Natural Heritage (SNH), English Nature (EN) and Countryside Council for Wales (CCW) to work together to do things that were previously done by the Nature Conservancy Council. The JNCC is funded jointly by SNH, EN and CCW. Our share of JNCC’s net assets has been presented in these accounts in line with the funding agreement between the three country agencies.MAIN ACTIVITIES3. Our legal role is to secure the conservation, enhancement, understanding and enjoyment of Scotland’s natural heritage. In recognition that Scotland’s natural heritage is a local, national and global asset, SNH aims to promote its care and improvement, its responsible enjoyment, its greater ...

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A U D I T E D F I N A N C I A L A C C O U N T S A U D I T E D F I N A N C I A L A C C O U N T S F O R T H E Y E A R E N D E D 31 M A R C H 2 0 0 4
FOREWORD
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HISTORY AND STATUTORY BACKGROUND 1. Scottish Natural Heritage (SNH) was set up on 1 April 1992 by the Natural Heritage (Scotland) Act 1991. In 2003-04 our work was paid for by a grant from the Scottish Executive Environment and Rural Affairs Department’s (SEERAD). It came from their budget for “Natural Heritage: Central Government Expenditure”. We are also recognised as a Scottish charity under Section 1 (7) of the Law Reform Miscellaneous Provisions (Scotland) Act 1990. 2. The Joint Nature Conservation Committee (JNCC) was set up on 5 November 1990 by Section 128(4) of the Environmental Protection Act 1990. JNCC allows the nature conservation agencies; Scottish Natural Heritage (SNH), English Nature (EN) and Countryside Council for Wales (CCW) to work together to do things that were previously done by the Nature Conservancy Council. The JNCC is funded jointly by SNH, EN and CCW. Our share of JNCC’s net assets has been presented in these accounts in line with the funding agreement between the three country agencies. MAIN ACTIVITIES 3. Our legal role is to secure the conservation, enhancement, understanding and enjoyment of Scotland’s natural heritage. In recognition that Scotland’s natural heritage is a local, national and global asset, SNH aims to promote its care and improvement, its responsible enjoyment, its greater understanding and appreciation and its sustainable use now and for future generations. Our mission is “working with Scotland’s people to care for our natural heritage”. RESEARCH AND TECHNICAL SUPPORT 4. We base our research and technical support programme on the Scottish Executive priorities. These include priorities which come from European and international laws, as well as from UK laws and policies. Our Research and Technical Support Strategy explains these priorities and is structured around three main themes; 1) Understanding the state of the natural heritage; 2) Understanding the causes and nature of change in the natural heritage; and 3) Development of good practice in caring for and managing the natural heritage. The programme ranges from basic surveys, designed to gather baseline information on the natural heritage and people’s enjoyment of it, to monitoring programmes show environmental change and help us to understand what is causing this and what might happen in the future. We also use the programme, mostly through demonstration projects, to help us work out effective management techniques. RELOCATION 5. On 2 September 2003 Scottish Ministers issued a Ministerial Direction under Section 11 of the Natural Heritage (Scotland) Act 1991 to the Board of SNH to relocate most of their Edinburgh based operations to Inverness. SNH has prepared a project plan that outlines the elements of the project, the timescale, and project management arrangements. The project comprises accommodation, human resources (HR) and business continuity elements. A Project Board has been established, chaired by SNH’s Chief Executive and is responsible for reviewing progress. SEERAD and Scottish Ministers approve proposals for each project element before financial obligations can be incurred. 6. A series of HR packages were issued to staff in July 2004. In October 2004, staff were issued with estimates of their potent ial redundancy benefits calculated for three illustrative dates, should they decide not to relocate. In October/November, a staff survey was conducted to gauge staff intentions regarding relocation. Analysis of the results from this survey have been used t o inform the calculation of redundancy costs likely to be incurred relating to relocation. Staff will not be required to formall y commit to a course of action until some time in 2005 and some uncertainty remains on staff intentions.
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7. The tender process for a new headquarters building in Inver ness was completed on 16 August 2004 resulting in the appointment of a contractor in October 2004. 8. In our 2004-05 grant-in-aid letter the Scottish Executive undertook to fund all additional net costs arising from the relocat ion project. FINANCIAL RESULTS AND REVIEW OF ACTIVITIES 9. SNH’s financial results for the year to 31 March 2004 are set out in the accounts which follow. They have been prepared in accordance with Section 10 (3) of the Natural Heritage (Scotland) Act 1991 and in a form directed by Scottish Ministers. The direction is reproduced as Appendix 1 to the accounts. The section on accounting policies explains the basis on which the accounts have been prepared. For the first time in the year ended 31 March 2004, SNH managed its resources in-year on an accruals basis. As a Non Departmental Public Body (NDPB), SNH is also required to publish an Annual Report including accounts prepared on an accruals basis. These accounts include a number of notional items and reserved funds in accordance with various accounting conventions. The accruals accounts can present either a surplus or deficit each year. Generally speaking, these surpluses/deficits are not indications of financial performance for the year in terms of under or over spending in relation to grant-in-aid income. Details of the activities undertaken during the year by SNH are contained elsewhere in the Annual Report. In addition, SNH’s Annual Review 2003-04 and Facts and Figures 2003-04 are companion publications to the Annual Report and contain a range of useful facts and statistics about SNH’s work and Scotland’s natural heritage. 10. 2003-4 was a challenging financial year for SNH. It saw the introduction of resource accounting and budgeting (RAB), a new finance system and new chart of accounts. The financial results for the year show total operating expenditure of £58.5m and income (including grant-in-aid) of £56.9m giving an operating deficit for the year of £1.6m. Provision is made for redundancy costs associated with the relocation project and after adding back notional costs of £0.5m there remains a retained deficit for the year of £8.7m. 11. Total capital expenditure for the year amounted to £2.0m which was funded from grant-in-aid. In addition £0.05m of grant-in -aid was received and paid to JNCC for their capital expenditure. 12. SNH successfully managed its finances within the capital and operating budgets set by the department. However, the accounts present a retained deficit for the year of £8.7m af ter adjusting for notional costs. This appears inconsistent. 13. The deficit for the year arises due to the application of particular government accounting conventions and controls: NDPB accounts only show grant-in-aid when it has been received, rather than accrued, i.e. on a cash basis; In our 2004-05 grant-in-aid letter the Scottish Executive undertook to fund all additional costs of the relocation project. Accounting rules as set out in the “Executive NDPBs: Annual Reports and Accounts Guidance”, however, currently prohibit SNH from anticipating such funding as, under the normal conventions applying to parliamentary control over income and expenditure, such grants may not be issued in advance of need. As a result, a debtor for grant-in-aid has not been accrued to match the provision of £7.6m charged to the Income and Expenditure Account in relation to redundancy costs. Grant-in-aid will be received and accounted for as liabilities crystallise. SNH could hold at the year-end to cover short-termthe department placed a limit of £1m on the level of grant-in-aid that requirements; and SNH has a creditor payment policy, which settles invoices automatically when due rather than earlier to manage the accounts presentation. The remainder of the deficit could have been removed if SNH had drawn down grant-in-aid and, before the year end, made payment to creditors in advance of normal commercial practice (i.e. when due). STATE AIDS 14. In May 2001 the European Commission confirmed to the Ministry of Agriculture, Food and Fisheries (MAFF), acting on behalf of UK wide interests, that new nature conservation management agreements entered into after 1 January 2000 were notified as approved State Aids. There have been no further developments on the awaited retrospective notification and approval of management agreements which began before 1 January 2000. In the meantime, Scottish Ministers have agreed that SNH should continue to make payments under all management agreements concluded in good faith before 1 January 2000. This decision recognises the valuable natural heritage benefits for Scotland, which come from these payments, and honours existing legal commitments to owners and occupiers of SSSI’s.
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SUPPLIER PAYMENT POLICY 15. We follow the principles of the Better Payment Practice Code and aim to make all payments either within 30 days of receiving a valid invoice or as agreed in the contract. In the year to 31 March 2004, we paid 82% (2002-03: 96%) of invoices within the due date. We made two payments totalling £271 during the year of statutory interest under The Late Payment of Commercial Debts (Interest) Act 1998. The introduction of a new finance system and related procedures affected our payments performance. FUTURE DEVELOPMENTS 16.THEME 1 - CARING FOR THE NATURAL WORLD Our goal is for people to care effectivel y for the whole of Scotland's natural heritage. 17. Most of the land in protected areas is in use in one form or another and providing a source of livelihood. SNH will continue to develop constructive working relationships with landowners and occupiers and give support to ensure good management whilst recognising the wider needs of the countryside. Through the Natural Care programme, funded schemes are being made available to encourage better management of these special areas. 18. We welcome the opportunity to develop a more flexible and effective SSSI system through the new Nature Conservation (Scotland) Bill. Wider consultation will be key to the new approach, reflecting local circumstances in the way SNH works with owners & occupiers, interested parties and local communities. We hope this will improve perceptions of “Sissies” and engender greater co-operation over their management. 19. We shall work with the Scottish Executive to help take forward the Scottish Biodiversity Strategy; a 25-year vision for biodiversity. A great deal of SNH effort is already directed towards biodiversity delivery such as supporting the restoration of some of the wildlife and habitats lost in the past, encouraging more people from all walks of life to care about biodiversity a nd raising their awareness of its benefits. 20. With the Joint Nature Conservation Committee we shall progress those areas of work that have a UK-wide perspective. Much of this effort will focus on the marine environment including agreeing criteria for selecting new marine Natura sites and developing policy for managing the marine environment more effectively. We will work to identify potential offshore extensions to marine Special Protection Areas and Special Areas of Conservation and carry out consultations with interested parties for an y sites agreed by Ministers. 21.THEME 2 - ENRICHING PEOPLE'S LIVES Our goal is for the natural heritage to add to the quality of people's lives, making environments close to where people live mo re attractive, and creating opportunities for people to enjoy, lear n about and get involved with the natural heritage. 22. We want to see increased opportunities for people in Scotland to enjoy the natural heritage. The availability of a safe, cl ean, healthy and attractive living environment has a big impact on the quality of people’s lives. Efforts will continue, jointly wi th local authorities, to publicise the Scottish Outdoor Access Code and promote the understanding of it. Monitoring will be carried out to gauge the success of the campaign. We will also provide support to local authorities to help them deliver their additional access responsibilities. 23. We want to see well-managed green space in and around cities and towns so that people can enjoy and take pride in their living environment. We will continue to work in partnership with local communities and other groups, including Central Scotland Forest Trust, Greenspace Scotland and the British Trust for Conservation Volunteers, to drive the environmental justice agenda. 24. Our work to raise public awareness of, and involvement with, the natural heritage will also continue through our environment al education programme, public engagement and awareness work and community planning.
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25.THEME 3 - PROMOTING SUSTAINABLE USE Our goal is to make sure that people can benefit from the natur al heritage tomorrow because everyone has looked after it today. 26. The natural heritage is a dynamic entity. As well as providing wildlife, scenery and recreational opportunities it provides the resources our farming, fishing, forestry and tourism industries are based on. It is essential that it remains able to deliver t his role. 27. We want to see land that is managed to provide a range of social and environmental benefits, with more natural and better-connected habitats included within our more intensively used landscapes. We will support the Agriculture Strategy Implementation Group and contribute to the initiatives and projects that will deliver the strategy. We will work to develop proposals for further changes to the Common Agricultural Policy with particular emphasis on the Rural Development Regulation and its funding and we will also contribute to the implementation of t he Forward Strategy for Scottish Agriculture and the Custodians of Change report. 28. We shall continue to support the Scottish Executive and SEPA in the implementation of the Water Framework Directive by delivering SNH’s duties under the Water Environment & Water Services (Scotland) Act 2003. We will support the development of renewable energy where it is undertaken in a way that reduces to a minimum any adverse effects on the natural heritage. 29. The first phase of Strategic Environmental Assessment regulations will come into force from July 2004 and we want to see wel l planned approaches to land and water use to help make sure that the widest possible range of objectives is met while maintaining the high quality of the natural heritage. 30.THEME 4 - WAYS OF WORKING Our goal is to be a responsive, effective, efficient and creditable organisation. 31. SNH continues to be guided by three key operating principles: 32. Partnership – to achieve the best possible outcomes for the natural heritage and the people, SNH must make effective use of partnerships. This helps us to act in an integrated way with other public bodies, voluntary groups and others in the community . 33. Devolved operations – this requires us to maintain a devolved network of offices dispersed around the country with a clear framework of delegated responsibility. 34. Openness – we are committed to being as open and accountable as possible through our Board meetings which are open to the public, our programme of open events held around the country every year and by our accountability, through the Scottish Parliament, to the people of Scotland. 35. In keeping with Government aims to deliver improved public services there will be a continuing focus on our customers. Our objective remains to respond to customer needs and to develop ways of continuing to meet them in the future. 36. SNH will work to assist in the delivery of the Value for Money Review being carried out by the Scottish Executive. We shall investigate the potential opportunities for greater cooper ation with other public bodies that could reduce costs and improve efficiency in central support and back office functions. 37. Our staff is key to the delivery of the programme outlined above. We are committed to the ‘Investors in People’ standard an d continue to pursue a programme of balanced rewards and workloads as a foundation for progressive gains in economy, efficiency and effectiveness, measured through efficiency planning and benchmarking. 38. SNH faces a period of considerable change as a result of our relocation to Inverness. We are working to ensure that the mov e takes place with as little impact on our effectiveness and efficiency as possible and in a manner that is sympathetic to the position of our staff. EQUAL OPPORTUNITIES 39. We seek to give everyone equal opportunities. Our aim is to select, recruit, train, promote and reward on the basis of meri t, ability and performance. We are committed to creating a working environment which does not discriminate on the grounds of age, colour, disability, ethnic or national origin, gender, marital status, religion or sexual orientation.
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EMPLOYEE INVOLVEMENT 40. We involve our employees through our Whitley Council which brings together representatives, management and the Trade Unions in a working environment. We send bulletins containing general news updates and information to all staff. Our staff newspaper “Update” is sent out monthly. We also run a suggestion scheme to improve our effectiveness and good practice. Staff are rewarded for suggestions which are taken up. BOARD MEMBERS 41. In terms of the Natural Heritage (Scotland) Act 1991, the Board membership of SNH shall be not less than eight nor more than twelve persons appointed by Scottish Ministers. Initial appointment is normally for three years, with some appointments then extended for a further three year term. A register of Board Members interests is maintained by SNH Secretariat and can also be accessed on the SNH website www.snh.org.uk . The membership of the Board at 31 March 2004 was as follows: Date of appointment Date of appointment 1st Term 2nd Term John Markland CBE (Chairman) April 1 1999 April 1 2002 Michael Scott (Deputy Chairman) April 1 1999 April 1 2002 Peter Chapman April 1 2000 April 1 2003 Simon Fraser April 1 1998 April 1 2001 Keith Geddes CBE April 1 2001 April 1 2004 Isabel Glasgow April 1 2001 April 1 2004 Nick Kempe April 1 2003 Alice Lambert April 1 1999 April 1 2002 Professor Jeremy Rowan Robinson April 1 1998 April 1 2001 Professor Janet Sprent OBE April 1 2001 April 1 2004 Professor Susan Walker OBE April 1 2000 April 1 2003 In accordance with its aims to be an open and accountable organisation, the eight meetings of the SNH Board held during the year ended 31 March 2004 included open sessions, which the public were free to attend. Agendas and Board papers are published on the SNH website. AUDITORS 42. The Chief Auditor, Audit Scotland East Region is currently the appointee of the Auditor General for Scotland to audit the accounts of Scottish Natural Heritage. 43. The cost of work performed by the auditors for audit services and other regulatory reporting in respect of the financial yea r 2003-04 is £57,000. A further amount of £8,000 is due to Audit Scotland for system work relating to Transform Your Space (part of the Fresh Futures project). Due to the basis of preparation of Fresh Futures accounts this amount is not included in their transactions and therefore not accrued at March 31, 2004.
Ian Jardine Accountable Officer: 16 December 2004
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Under Section 15(7) of the Public Finance and Accountability (Scotland) Act 2000 the Principal Accountable Officer of the Scott ish Administration has designated Scottish Natural Heritage’s Chief Executiv e as the Accountable Officer for Scottish Natural Herit age. The Chief Executive’s relevant responsibilities as Accountable Officer, including his responsibility for the propriety and regu larity of the public finances and for the keeping of proper records, are set out in the non-departmental bodies ‘Memorandum to Accountable Officers of Other Public Bodies’, issued by Scottish Ministers and which is contained as Annex 1 to the Scottish Public Finance Manual obtainable on the Scottish Executive web site www.scotland.gov.uk . With specific reference to the preparation of the annual accounts the Accountable Officer: 1. Has a personal duty to sign the accounts and has personal responsibility for their proper presentation. 2. Must ensure that proper financial procedures are followed and that accounting records are maintained in a form suited to the requirements of legislation and SNH’s Financial Memorandum. 3. Has a consequent duty of being a witness before the Audit Committee of the Scottish Parliament and to answer questions arisin g from the accounts or, more commonly from reports made to the Scottish Parliament by the Auditor General for Scotland.
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STATEMENT OF BOARD MEMBER’S RESPONSIBILITIES
STATEMENT OF ACCOUNTABLE OFFICER’S RESPONSIBILITIES
Under section 10 of the Natural Heritage (Scotland) Act 1991, Sco ttish Natural Heritage is required to prepare a statement of accounts for each financial year in the form and on the basis determined by Scottish Ministers. The accounts are prepared on a n accruals basis and must give a true and fair view of Scottish Natural Heritage’s state of affairs at the year-end and of its in come and expenditure and cash flows for the financial year. In preparing the accounts Scottish Natural Heritage is required to: 1. Observe the accounts direction issued by Scottish Ministers, including the relevant accounting and disclosure requirements, a nd apply suitable accounting policies on a consistent basis; 2. Make judgements and estimates on a reasonable basis; 3. State whether applicable accounting standards have been followed, and disclose and explain any material departures in the financial statements; 4. Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that Scottish Natural Heri tage will continue in operation. 5. In addition Scottish Natural Heritage has general responsibility for t aking such steps as are reasonably open to it to safegu ard its assets and to prevent and detect fraud and other irregularities.
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STATEMENT ON INTERNAL CONTROL Scope of responsibility As Accountable Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of SNH’s policies, aims and objectives, set by Scottish Ministers, whilst safeguarding the public funds and assets for which I am person ally responsible, in accordance with the responsibilities assigned to me. Purpose of the system of internal control The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of SNH’s 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 syst em of internal control has been in place for the year ended 31 March 2004 and up to the date of approval of the annual report and accounts, and accords with guidance from Scottish Ministers. Capacity to handle risk As Accountable Officer, I also have responsibility for deter mining our capacity to handle risk. The following processes have b een established: • A Management Team which meets monthly to review progress against the Corporate Strategy for SNH and consider performance against annual plans. The Management Team comprises the directors of SNH. I act as the sponsor for risk management in SNH; • Regular review of the schedule of delegations to ensure they are appropriate to the level of authority and responsibilities ass igned to staff. Risk and control framework A framework has been established to embed awareness and management of risk as part of our operating principles, including: • Implementation of a robust risk management prioritisation and monitoring system based on risk ranking, likelihood and controls; • Maintenance of an SNH-wide risk register drawn up following staf f and management workshops. The register has identified risk owners who report quarterly on the steps they are taking to manage risks in their areas of responsibility including progress re ports on key projects. SNH’s Management Team and the Audit and Risk Management Committee evaluate these reports. An annual report is prepared for the SNH Board; • Embedding risk management in the decisions and activities undertaken by staff. Risk awareness is included in employee induction and training programmes and assessed as part of the staff appraisal system. The risk register has identified that the risk priorities are in the areas of public or staff safety whilst visiting a National Nature Reserve as a result of natural hazards or the working environment through misadventure or lack of awareness of the risks; information mana gement and loss of Information Systems staff, and failure to ensure business continuity throughout the relocation of headquarters staf f to Inverness. Controls have been identified to address these high level risks. Review of effectiveness As Accountable Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review of the effectiveness of the system of internal control is informed by th e work of the internal auditors and staff within SNH who have responsibility for the development and maintenance of the internal control framework, and comments made by the external auditor s in their management letter and other reports. I have been advised on the implications of the result of my review of effectiveness of the system of internal control by the Board, Audit and Risk Management Committee and plan to address weaknesses and ensure continuous improvement of the system in place.
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The following processes are also in place for reviewing the effectiveness of the system of internal control: • Periodic reports from the Chairman of the Audit and Risk Management Committee to the Board, concerning internal control; • Regular reports from SNH’s internal auditors that include the Head of Internal Audit’s independent opinion on the adequacy and effectiveness of SNH’s system of internal control together wit h recommendations for improvements. The work of the internal auditors is informed by an analysis of the risk to which SNH is exposed. Annual internal audit plans are based on this analysi s. The analysis of risk and the internal audit plans are approved by me and endorsed by SNH’s Audit and Risk Management Committee. The programme of risk and internal audit plans has offered ‘satisfactory’ assurance that SNH continues to have a broadly sound framework of internal control ensuring the effective and efficient achievement of SNH’s objectives. In 2003, Scottish Ministers announced a relocation of SNH headquarters in Edinburgh to Inverness. The project is being managed using the PRINCE2 methodology. An interim annual report on the audit of SNH’s Relocation Project management and controls provided ‘satisfactory’ assurance that the controls are in place to manage the Relocation Project. Four suspected cases of fraud were reported to 31 March 2004. No evidence of systemic internal control weaknesses or failures was identified as a result of these cases. A new fraud policy will be issued in 2004. One significant internal control weakness was identified in 2003/04. A ‘weak’ assurance was given following an audit of SNH’s health and safety system, which concluded in November 2003. In response to the control problems identified an action plan has been developed and ongoing monitoring of implementation established. The proposed actions include: • Improved compliance and quality assurance checks on Health and Safety assessments, safe systems of working and health and safety equipment; • Health and Safety being incorporated into SNH's formal staff appraisal system; • Revised procedures for the health and safety of volunteers and contractors; • The production of an annual Health & Safety report for Management Team and SNH's Board; • Appointment of professionally qualified Health and Safety officer at more senior grade. In 2004, monitoring of the action plan is providing evidence of positive trends in assurance of controls.
Ian Jardine 16 December 2004
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RESPECTIVE RESPONSIBILITIES OF THE SCOTTISH NATURAL HERITAGE BOARD, THE CHIEF EXECUTIVE AND AUDITOR As described on page 33 the Scottish Natural Heritage Board and the Chief Executive are responsible for the preparation of the financial statements and for ensuring the regularity of expenditure and receipts. The Board and the Chief Executive are also responsible for the preparation of the Foreword. My responsibilities, as independent auditor, are established by the Public Fi nance and Accountability (Scotland) Act 2000 and the Code of Audit Practice approved by the Auditor General for Scotland, and guided by t he auditing profession’s ethical guidance. I report my opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance wi th the Natural Heritage (Scotland) Act 1991 and directions made thereunder and whether, in all material respects, the expenditure and receipts shown in the financial statements were incurred or applied in accordance with any applicable enactments and guidance i ssued by the Scottish Ministers. I also report if, in my opinion, the Foreword is not consistent with the financial statements, if S cottish Natural Heritage has not kept proper accounting records, or if I have not received all the information and explanations I require for m y audit. I review whether the statement on pages 34 and 35 complies wit h Scottish Executive guidance on statements on the system of inte rnal control. I report if, in my opinion, it does not comply with the guidance, or if the statement is misleading or inconsistent w ith other information I am aware of from my audit. I am not required to consider whether the statement covers all risks and controls, or form an opinion on the effectiveness of Scottish Natural Heritage’s corporate governance procedures or its risk and control procedures.
BASIS OF AUDIT OPINIONS I conducted my audit in accordance with the Public Finance and Accountability (Scotland) Act 2000 and the Code of Audit Practic e, which requires compliance with relevant United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts, disclosures and regularity of expenditure and receipts shown in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Board and Chief Executive in the preparation of the financial statements, and of whether the accounting policies are appropriate to S cottish Natural Heritage’s circumstances, consistently applied and adequately disclosed. I planned and performed my audit so as to obtain all the information and explanations which I considered necessary in order to provide me with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatem ent, whether caused by fraud or other irregularity or error, and that, in all material respects, the expenditure and receipts shown in the financial statements were incurred or applied in accordance with any applicable enactments and guidance issued by the Scottish Ministers. As disclosed in the Foreword to the accounts, the European Commission has been approached for approval that the system of management agreements operated throughout the United Kingdom up to 1 January 2000 could be deemed as allowable state aid. During 2003/04 Scottish Natural Heritage spent some £2.3 million under such agreements that without European Commission sanction must be deemed irregular. At present the European Commission has not given any indication whether or not they would g rant retrospective approval for such payments or impose any financial sanction. In forming my opinion I also evaluated the overall adequacy of the presentation of information in the financial statements.
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To the members of Scottish Natural Heritage, the Scottish Parliament and the Auditor General for Scotland I have audited the financial statements on pages 38 to 58 under t he Natural Heritage (Scotland) Act 1991. The financial statem ents have been prepared under the historical cost convention as modified by the revaluation of certain fixed assets and in accordanc e with the accounting policies set out on pages 41 to 43. This report is made solely to the parties to whom it is addressed in accordance with the Public Finance and Accountability (Sco tland) Act 2000 and the Code of Audit Practice approved by the Auditor General for Scotland and for no other purpose, as set out in paragraph 43 of the Statement of Responsibilities of Auditors and of Audited Bodies prepared by Audit Scotland, dated July 2001 .
INDEPENDENT AUDITOR’S REPORT
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17 December 2004
Fiona Kordiak CPFA, Chief Auditor Audit Scotland – Audit Services (East Region) Osborne House, 1/5 Osborne Terrace Edinburgh EH12 5HG
OPINIONS
Financial statements
In my opinion the financial statements give a true and fair view of the state of affairs of Scottish Natural Heritage at 31 Mar ch 2004 and of the deficit, total recognised gains and losses and cash flows for the year then ended and have been properly prepared in accordance with the Natural Heritage (Scotland) Act 1991 and directions made thereunder.
Qualified regularity opinion arising from limitation in audit scope
In my opinion, except for the limitation in scope of my work arising from uncertainty over the regularity of payments under man agement agreements entered into prior to 1 January 2000, in all material respects the expenditure and receipts shown in the financial s tatements were incurred or applied in accordance with any applicable enactments and guidance issued by the Scottish Ministers.
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83 ma 85:983 egaP 
No activities were discontinued during the year. The accounting policies and notes on pages 41 to 58 form part of these accounts.
Scottish Natural Heritage INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 MARCH 2004 Notes 2004 2003 £000 £000 (Restated) Income Government grant-in-aid 2 51,725 49,979 External Funding 3 2,717 2,239 Bequests - 13 Income from activities 4 622 367 Other Income 5 147 131 Released from deferred income and reserves. 6 1,720 1,657 56,931 54,386 Expenditure Board and staff costs 7 22,463 20,814 Administrative costs 8 6,960 6,175 Programme expenditure: - Promotion 1,708 1,688 - Research 9 4,111 4,005 - Grants 10 9,143 9,144 - Partnership funding 10 6,465 7,090 - Management Agreements 11 4,434 4,795 - Managed Sites 1,054 1,442 Capital charges: - Depreciation and impairment 18 1,720 1,657 - Notional cost of capital employed 12 468 822 58,526 57,632 (Deficit) on operating activities (1,595) (3,246) Extraordinary expenditure: - Cost of pension fund transfer to PCSPS - (63,837) - Provision for redundancy costs 26 (7,600) -Less - Grant receivable from Scottish Executive - 63,837 Add back of Notional costs 468 1,760 Transfer to Bequest Reserve (2)(15) Retained (Deficit) Surplus for the year (8,729) (1,501) STATEMENT OF RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 MARCH 2004 Notes 2004 2003 £000 £000 (Deficit) Surplus for the financial year (8,729) (1,501) Revaluation of fixed assets 18/28 636 235 Transfer from Capital Asset Fund to Revaluation Reserve 27/28 185 -Appropriation of bequest interest to bequest reserve 28 2 -(Decrease) Increase in share of JNCC reserves 13/28 22 (73) Total recognised (losses) gains since last reported (7,884) (1,339)
NS Hxe ttr .eRopo  1repr05  4/2/N Tew