This article is an excerpt from the 2023 edition of The Art of Tendering: A Global Due Diligence Guide.
In its November 2021 audit entitled Inquiry into management fees paid by South Auckland Middle School and Middle School West Auckland in 2018, New Zealand’s Controller and Auditor-General found that the Combined Establishment Board for South Auckland Middle School and Middle School West Auckland failed to implement proper conflict controls before paying itself $450,000 in service fees for services rendered to two schools out of the trust funds that it managed for those schools.
As the audit detailed, the Board’s trustees were provided a new mandate to oversee education trust funds for two former private charter schools that were absorbed into the public school system. The audit reviewed the fees charged by the Board to the new schools, which the report found “were significantly higher than normally seen in other schools under similar circumstances.” The audit found that the Board failed to follow proper procurement practices in its provision of services to the new schools since the Board failed to formalize an agreement with a defined scope of work before it paid itself for its services. Further, the audit found that the Board lacked records showing how it determined the nature of services that it performed or how it assessed the appropriateness of the fees it charged for those services. The audit also determined that the Establishment Board failed to identify the conflict of interest that arose in charging fees to an entity that it controlled:
We also found the members of the Establishment Board failed to recognise that a conflict of interest arose when they effectively decided to pay money to themselves, and this meant they took no steps to manage the conflict. The shared membership of the Establishment Board and Villa Education Trust was a potential conflict of interest that crystallised into an actual conflict of interest when the Establishment Board considered engaging Villa Education Trust. In a situation like this, we expect a public organisation to recognise the conflict and put a process in place to manage it.
Where a decision is made that results in payments being made to the decision-makers (even if they are acting in a different legal capacity), there is an obvious risk that it could be seen as a personal benefit.
While the Board argued that there was no conflict of interest since the Minister of Education was aware the school board’s existing duties before appointing its trustees to oversee the trust fund for the two new schools, the Controller and Auditor-General disagreed, stating that “we do not accept that the Minister or the Ministry’s involvement here absolved the Establishment Board of its responsibility to identify and appropriately manage conflicts of interest.”
The Controller and Auditor-General also reminded the of the high standards of probity and transparency that apply to the management of public funds:
I expect more from a public organisation spending public money. It is the responsibility of those governors and managers making decisions to be able and prepared to account for what has happened. The circumstances of this payment create a perception of a lack of integrity. Acting with integrity and being seen to act with integrity are fundamental to maintaining the public’s trust and confidence in public organisations and in the public sector as a whole.
Information about how the fees were determined, agreed, paid, and managed, and what was received for the payment, should be available to our auditor when asked for in the first instance. That information is part of orthodox procurement and contract management and should be properly documented. If that information was prepared and made available, it might not have been necessary for us to carry out all the work involved in this case to find out the circumstances of a payment like this.
As this case study illustrates, public institutions are subject to high standards of accountability when managing public funds. They should establish proper conflict controls and record-keeping practices to better ensure the proper administration of those funds.
