PUBLIC AUDIT FORUM. Propriety and Audit in the Public Sector

Transcription

1 PUBLIC AUDIT FORUM Propriety and Adit in the Pblic Sector Agst 2001

2 Plp sed in the manfactre of this paper is bleached by a totally chlorine free process (TCF - Totally Chlorine Free)

3 THE PUBLIC AUDIT FORUM Pblic sector adit has a key part to play in safegarding pblic money, ensring proper accontability, pholding proper standards of condct in pblic services and helping pblic services achieve vale for money. The Pblic Adit Form was established in 1998 by the then for national adit agencies: the National Adit Office (NAO), the Northern Ireland Adit Office (NIAO), the Adit Commission for Local Athorities and the National Health Service in England and Wales, and the Acconts Commission for Scotland. It brings together the adit agencies on a prely advisory basis to provide a focs for developmental thinking abot pblic adit. It has a remit to bild on the existing co-operation between the national adit agencies: to enhance the efficiency and effectiveness of pblic adit, to provide a strategic focs on isses ctting across their work and to help develop broadly consistent approaches to pblic adit. A key element in the Form is a consltative form which draws on the experience and expertise of pblic aditors, the bodies they adit, the aditing profession and the wider commnity. The crrent membership is set ot overleaf. The Pblic Adit Form has pblished the following reports to date: The Principles of Pblic Adit: a statement by the Pblic Adit Form (October 1998) The Service which Aditees can Expect from Pblic Aditors: a consltation docment (October 1998) Implications for Adit of the Modernising Government Agenda: a paper by the Pblic Adit Form (April 1999) What Pblic Sector Bodies can expect from their Aditors: a consltation paper (Jne 1999) What Pblic Sector Bodies can expect from their Aditors (final paper March 2000) Propriety and Adit in the Pblic Sector: a consltation paper (May 2000) Data Matching and the Role of Pblic Sector Aditors: a consltation paper (Agst 2000) Adit Implications of Electronic Service Delivery in the Pblic Sector (April 2001) This report, past pblications and other information abot the Pblic Adit Form are available on its web site at The Secretary is David Corner, who can be contacted on at the National Adit Office, Bckingham Palace Road, London SW1W 9SP.

4 MEMBERSHIP OF THE CONSULTATIVE FORUM OF THE PUBLIC AUDIT FORUM Tim Brr Depty Comptroller and Aditor General National Adit Office (Chairman) John Sweetman Cabinet Office Phillip Ward Department of Transport, Local Government and the Regions Janet Eilbeck PricewaterhoseCoopers Robert Black Acconts Commission for Scotland Dr Peter Collings Scottish Exective John Dowdall Northern Ireland Adit Office Martin Evans The Adit Commission for Local Athorities and the National Health Service in England and Wales Neil Kingham Local Government Association Lew Hghes Aditing Practices Board Gilbert Lloyd KPMG Caroline Mawhood National Adit Office Andrew McCormick Northern Ireland Office Brian Glicksman HM Treasry Jlie Barnaby Department of Health Alan Meekings District Adit David Richards National Assembly for Wales Peter Makeham Department for Edcation and Skills Vernon Soare Chartered Institte of Pblic Finance and Accontancy Egene Sllivan RSM Robson Rhodes Stephen Thornton NHS Confederation Norie Williamson Convention of Scottish Local Athorities Penny Yong Consmers Association David Corner National Adit Office (Secretary)

5 Contents Foreword 2 Introdction 4 Prpose and scope 4 Backgrond 4 The Concept of propriety 7 The definition of propriety 7 Parliament's expectations 8 The principles of propriety 8 Relationship of propriety to other concepts 9 Sorces of gidance on propriety 11 Laws on Corrption 12 Committee of Pblic Acconts 12 The Nolan Committee on Standards in Pblic Life 15 Comptrollers and Aditors General 15 Adit Commission 16 Acconts Commission for Scotland 17 Aditor General for Scotland (AGS) 17 Aditor General for Wales (AGW) 17 Failres of propriety 18 Failres of fairness 19 Misse of pblic office for personal or political prposes 20 Inadeqate stewardship of pblic fnds 21 Safegards against failres of propriety 23 The ethos of the organisation 24 Appropriate governance arrangements 25 Codes of condct 25 Small organisations 27 External safegards against impropriety 28 Propriety and Adit 29 Independent Scrtiny 29 Respective roles of aditors, boards and other governing bodies, and management with regard to propriety 31 Adit work in general 31 The Role of Internal Adit 33 Propriety in the context of the financial statements adit 33 Propriety as a specific review 35 Procedres when possible impropriety is discovered 38 Reporting on the adit of propriety 39 Appendix 41 1

6 Foreword Pblic servants are expected to observe the highest standards of condct. They mst act with propriety, particlarly in the care and management of pblic fnds. The Nolan Committee's first report "Standards in Pblic Life" (May 1995) sed a broad definition of propriety, stating: "We take propriety to encompass not only financial rectitde, bt a sense of the vales and behavior appropriate to the pblic sector." However, the definition of appropriate behavior is not constant bt changes over time with pblic and parliamentary expectations. This means that it is necessary to nderstand pblic and parliamentary expectations in order to flly appreciate the natre of propriety. While acknowledging the wide compass of propriety, pblic sector aditors are especially concerned with matters which have an impact on the finances or governance of the bodies they adit. This focs is indicated in the definition of propriety provided in HM Treasry's gidance Government Acconting: "Propriety is the reqirement that expenditre and receipts shold be dealt with in accordance with Parliament's intentions and the principles of Parliamentary control, inclding the conventions agreed with Parliament." It shold, however, be noted that Government Acconting is directed at UK central government bodies and does not provide a niversal definition of propriety. And even within that sector, the conventions agreed with Parliament are not drawn together or set down in one place. All of the national adit agencies have reported on cases of impropriety and expect that their aditors will be aware of propriety isses when ndertaking their work. It was for this reason that the Form decided to prepare a paper on the sbject. This paper is a gide, rather than a standard setting docment. Its prpose is to promote a common nderstanding of what constittes propriety in the United Kingdom pblic sector, and as sch it is aimed at those involved in the governance, management and adit of organisations in the pblic sector. We hope that the paper will help pblic sector managers nderstand what is expected of them and clarify the type of work that aditors of pblic sector bodies may ndertake in this area. It shold also help inform private and volntary sector bodies dealing with the pblic sector of Parliament's expectations of pblic sector activity. For pblic sector aditors it shold provide a handy work of reference to inform the jdgements they make in planning, execting and reporting on their work. 2

7 While propriety is not amenable to precise definitions or standards, being a reflection of Society's changing expectations of the pblic service, mch can be learnt from stdying the views on what is expected of pblic bodies and their employees set ot in reports on the sbject and in codes of condct. Examples of cases where impropriety has been reported are similarly helpfl. The larger part of the paper therefore brings together these isses in a strctred format. The remainder of the paper explores the ways in which aditors have responded to the expectation that they shold take action where impropriety has occrred in pblic sector bodies. We consider that this paper shold be of particlar interest both to the management of bodies across the pblic sector and to all those who ndertake adits in the pblic sector. We are therefore pleased to endorse this paper. Sir John Born Comptroller & Aditor General and Aditor General for Wales, National Adit Office, Bckingham Palace Road, London SW1W 9SP Sir Andrew Foster Controller of Adit, The Adit Commission for Local Athorities and the National Health Service in England and Wales, 1 Vincent Sqare, London SW1P 2PN Robert Black Aditor General for Scotland, 110 George Street, Edinbrgh EH2 4LH John Dowdall Northern Ireland Comptroller and Aditor General, Northern Ireland Adit Office, 106 University Street, Belfast BT7 IUE 3

8 Introdction "This contry has long enjoyed a reptation for the honor and integrity of its pblic instittions. That reptation has been based pon a widely shared tradition of pblic service. All responsible individals, inclding politicians, pblic servants of all kinds, have a dty to sstain this tradition..." (Nolan Committee) Prpose and scope 1. The scrtiny of the standards employed in the condct of pblic bsiness, highlighted by the Committee of Pblic Acconts and the Nolan Committee, together with the ever changing pblic sector environment, has led to a focs on propriety, reglarity, governance and accontability. This paper addresses propriety, as set ot in box 1. Box 1: The prpose of this paper The prpose of this paper is to provide management and aditors with an nderstanding of propriety in the pblic sector and the implications for its adit. It covers the following isses: the concept of propriety, drawing on Parliament's expectations; failres of propriety; safegards against failres of propriety; adit approach to propriety. 2. The isses raised affect bodies and their aditors across the pblic sector and are not restricted to any particlar segment or specialism. Box 2 sets ot this paper's intended adience. While the paper discsses the implications of propriety on adit, and provides examples to nderpin its content, there is no intention to replace specific gidance issed for parts of the pblic sector. This paper shold be read in conjnction with sch gidance. Backgrond 3. The isse of propriety lies at the very heart of pblic administration. The frameworks that have been developed to ensre the highest standards of propriety in the delivery of pblic services have evolved over many years. There is no definitive code or gidance that sets ot exactly all the activities or behaviors that will infringe these standards. 4

9 Box 2: The intended adience of this paper The intended adience is those involved in the management, governance, administration and adit of organisations that derive their fnding, either in whole or sbstantially, from the pblic prse. We hope that management find this paper to be a sefl starting point when devising or revising controls, governance arrangements and codes of condct. We think that it wold be appropriate for copies to be made available to board members, adit committee members, relevant finance staff and internal aditors. (We are happy for the paper to be freely copied and are willing to provide additional original copies.) The paper shold give management an indication of the range of roles that aditors play with regard to propriety as well as giving aditors an overview. We also hope that this paper will be a particlarly sefl gide to those who are embarking on a partnership or contractal relationship with pblic bodies. 4. Today's standards of propriety, against which the United Kingdom pblic sector operates, date back to the nineteenth centry. The Northcote and Trevelyan report of 1853 condemned the nepotism and incompetence and other defects in the Civil Service and initiated fndamental change that led to the development of a framework of principles and standards in pblic life. This framework draws on the traditional vales of pblic service and is nderpinned by legislation, case law, internal codes and rles, well established procrement procedres and pblic scrtiny of performance, inclding adit. Most of these vales have been reaffirmed over recent years, reflecting how important it is for standards to be reviewed and scrtinised to ensre they remain at the heart of pblic life. 5. In Janary 1994, the Committee of Pblic Acconts (PAC) issed a report on the "Proper Condct of Pblic Bsiness". This report drew on several of the Committee's earlier reports to highlight "a nmber of serios failres in administrative and financial systems and controls within departments and other pblic bodies, which have led to pblic money being wasted or otherwise improperly spent." These cases highlighted changes in administrative cltre and led the Committee to arge: "it is important to ensre that proper standards are maintained in the condct of pblic bsiness... Some allege that the drive for economy and efficiency mst be held back to some extent becase of the need to take specific care with pblic money. Others arge that if economy and efficiency are to be forcibly prsed then traditional standards mst be relaxed. We reject both these claims... Qite apart from the important moral and other aspects involved, we consider that any failre to respect and care for pblic money wold be a most important case of a decline in the efficiency of pblic bsiness. Bt there is no reason why a proper concern for the sensible condct of pblic bsiness and care for the honest handling of pblic money shold not be combined with effective programmes for promoting economy and efficiency... We believe it is important that the drive to provide improved services at redced cost shold be sstained and that this drive shold not be stifled by nnecessary breacracy. At sch time it is even more essential to maintain honesty in the spending of pblic money and to ensre that traditional pblic sector vales are not neglected in the effort to maximise economy and efficiency." 5

10 6. In October 1994, Lord Nolan was invited to chair a Committee to enqire into the growing pblic concern abot standards in pblic life, and the Committee has sbseqently issed a series of reports on varios aspects of sch standards. The Committee's First Report fond that the erosion of pblic confidence in the holders of pblic office was a serios matter and it made nmeros recommendations to help detect and deter wrongdoing with the aim of restoring respect for ethical vales inherent in the idea of pblic service. The Committee warned that nless the strictest standards are maintained, and where necessary restored, corrption and malpractice can become a part of the way of life. 7. The Committee also stressed that changes in the pblic sector had increased the need to take action. Decentralisation, contracting ot, the greater interchange between pblic and private sectors and more se of short term contracts mean that the assimilation of a pblic service cltre by everyone operating in that environment cannot be assmed. Pblic servants need to be told what is expected of them, and the message needs to be systematically reinforced. 6

11 The Concept of propriety The definition of propriety 8. Propriety is concerned with the way in which pblic bsiness shold be condcted. There are a nmber of different interpretations of this concept. Dictionary definitions refer variosly to 'appropriateness', 'rightness', 'correctness in behavior or morals', 'conformity with convention in condct'. In the context of pblic administration, the Nolan Committee has defined propriety as encompassing: "not only financial rectitde, bt a sense of the vales and behavior appropriate to the pblic sector." Similarly the Pblic Acconts Committee has sed phrases sch as 'the standards of pblic condct' and 'care for the honest handling of pblic money' and 'traditional pblic sector vales'. 9. While these concepts of propriety are wide, pblic sector aditors are especially concerned with the financial aspects of propriety, that is the proper condct of affairs that have financial implications. This is embodied in the definition of propriety set ot in Government Acconting: "Propriety is the reqirement that expenditre and receipts shold be dealt with in accordance with Parliament's intentions and the principles of Parliamentary control, inclding the conventions agreed with Parliament." 10. It shold be noted, however, that Government Acconting is directed at UK central government bodies and does not provide a niversal definition of propriety. And even within that sector, the conventions agreed with Parliament are not drawn together or set down in one place. 11. The Aditing Practices Board provides a sefl footnote that distingishes propriety from reglarity in its revised Practice Note 10, Adit of Financial Statements of Pblic Sector Entities in the United Kingdom: "Whereas reglarity is concerned with compliance with appropriate athorities, propriety goes wider than this and is concerned more with standards of condct, behavior and corporate governance. It incldes matters sch as fairness and integrity, the avoidance of personal profit from pblic bsiness, even-handedness in the appointment of staff, open competition in the letting of contracts and the avoidance of waste and extravagance." (The Aditing Practices Board practice note does not set ot to formally define propriety or give gidance on the aditor's responsibilities regarding propriety.) 7

12 Parliament's expectations 12. An nderstanding of propriety reqires an appreciation of Parliament's expectations abot the way pblic bsiness is to be condcted. Parliament has not set ot any fixed definition of propriety, bt its expectations are clear from the comments of its Committee of Pblic Acconts (PAC) and frther details are given at paragraph 38 onwards. The principles of propriety 13. While the principles nderlying the concept of propriety hold tre across different parts of the pblic sector, their practical application may vary. This is likely to evolve as vales and behavior which nderpin the cltres of organisations are affected by internal and external pressres for change. 14. The Nolan Committee set ot seven core principles inherent in the ethics of pblic service that shold reflect the expected vales and behavior for the operation of the pblic sector. These 'principles of pblic life' have been endorsed by Government and are set ot in box 3 below. Box 3: The Nolan Committee's Seven Principles of Pblic Life Selflessness Holders of pblic office shold take decisions solely in terms of the pblic interest. They shold not do so in order to gain financial or other material benefits for themselves, their family, or their friends. Integrity Holders of pblic office shold not place themselves nder any financial or other obligation to otside individals or organisations that might inflence them in the performance of their Official dties. Objectivity In carrying ot pblic bsiness, inclding making pblic appointments, awarding contracts, or recommending individals for rewards and benefits, holders of pblic office shold make choices on merit. Accontability Holders of pblic office are accontable for their decisions and actions to the pblic and mst sbmit themselves to whatever scrtiny is appropriate to their office. Openness Holders of pblic office shold be as open as possible abot all the decisions and actions that they take. They shold give reasons for their decisions and restrict information only when the wider pblic interest clearly demands. Honesty Holders of pblic office have a dty to declare any private interests relating to their pblic dties and to take steps to resolve any conflicts arising in a way that protects the pblic interest. Leadership Holders of pblic office shold promote and spport these principles by leadership and example. 8

13 15. The central themes of the seven principles that relate to propriety are: the avoidance of bias throgh conflict of interest, whether actal or potential; the avoidance of personal gain from pblic fnds; openness and accontability. 16. Underlying the concept of propriety, thogh not expressly mentioned in the seven principles, are also: the proper stewardship of pblic fnds; the dty to phold the law. 17. The Nolan principles are addressed to the 'holders of pblic office'. In other words, propriety is likely to relate mch more to the behavior of individals, or grops of individals, than to organisations. Where organisations are seen to have failed in their "corporate" responsibilities in this area, it is invariably the actions (or inactions) of individals associated with them which bring abot sch failre. 18. Acts of impropriety may be legally distinct from omissions of propriety, even thoght the effects on pblic sector organisations are often the same. The distinction is important when dealing with individals accsed of impropriety. 19. An act of impropriety depends very mch on a person knowingly committing it while having a motive involving some aspect of personal gain or nworthy objective. Hence "wilfl miscondct", when sed in this context, is an accepted definition. Pblic servants shold conform to standards of correctness in behavior and morals, and sch standards shold relate to fairness, integrity and the avoidance of waste and extravagance. However, there are examples of breaches of these principles that do not stem from an nworthy motive and/or are not always entered into knowingly. Some, for example, cold be attribted to incompetence. Given an absence of motive and knowledge, sch instances may not be considered acts of impropriety bt rather as omissions of propriety. Reckless indifference in the condct of dties, however, cold be constred as wilfl miscondct and wold constitte an act of impropriety. Relationship of propriety to other concepts 20. Propriety is concerned with standards of condct, behavior and, in particlar, fairness, integrity and the maintenance of a responsible attitde to pblic office. The concept of propriety is different, althogh not nrelated, to other concepts of behavior, both positive and negative. Other relevant concepts are set ot below. In the determination of propriety, it is appropriate to reflect pon the relevance of those other concepts before reaching jdgement. The behavior in qestion may be more appropriately analysed in terms of these other concepts. 9

14 21. Accontability is the process whereby pblic service bodies and the individals within them are held to accont for their decisions and actions, inclding their stewardship of pblic fnds and all aspects of performance. Individals and organisations can be accontable to different constitencies in different ways. Individals are, in the first instance, accontable within their organisations throgh internal governance procedres and throgh the scrtiny of internal adit, while bodies in the pblic sector are ltimately accontable to the pblic throgh the democratic process. Pblic sector bodies and holders of pblic office are also separately accontable for the se of pblic fnds (and this is assisted by appropriate scrtiny by external adit). This particlar aspect of accontability is achieved by all parties having a clear nderstanding of their responsibilities, having clearly defined roles throgh robst strctres and by providing an accont of: the setting and achievement of operational objectives and priorities; proper and efficient se of pblic money; management processes; qality of service(s) provided. 22. Intentionally avoiding or confonding the process of ensring accontability by blrring roles or weakening strctres is in itself improper as it will hinder the reporting of stewardship of pblic resorces. Unintentional weakening of accontability may facilitate failres of propriety and improper behavior by, for example, presenting opportnities for private gain from access to pblic money. 23. Reglarity, or legality, is concerned with compliance with athorities in terms of athorising legislation and associated reglations. While the concept of propriety is nderpinned by compliance with athorities, and in particlar with legislation, it goes wider than this and covers condct and behavior nconnected with athorities. Non compliance with athorities may not always constitte an act of impropriety. Where it is inadvertent, it may be an omission of propriety, depending on the circmstances. Impropriety more sally involves a deliberate act or a wilflly careless one. 24. Probity is generally accepted to be eqivalent to honesty and integrity and is central to the Nolan principles. Probity can also be considered as the avoidance of frad or corrption. Probity is therefore central to the concept of propriety. However, while failres of probity are likely to be contrary to law, many failres of propriety may be less clear ct. 25. Vale for money is concerned with the establishment of arrangements for secring economy, efficiency and effectiveness in the se of resorces. A failre to secre vale for money may be indicative of poor management bt does not necessarily constitte improper behavior. Improper behavior might reslt from the wilfl failre to avoid waste, for example, throgh entering into significant nfavorable contracts. Conversely, there may be occasions where better vale for money may be obtained from a 10

15 particlar corse of action, bt to follow sch a corse wold involve improper behavior. Where there seems to be sch a conflict, pblic servants will need to be able to demonstrate that they have properly exercised discretion in the pblic interest. 26. Frad is generally accepted to mean the se of deception to obtain financial advantage. By definition, all frads are improper, in the meaning of contrary to expected standards of condct. However, the concept of impropriety can go mch wider than frad and improper behavior, and will not necessarily be contrary to law or capable of prosection. 27. Corrption is associated with the exercise of inflence and is seen as the offering, giving, soliciting or acceptance of any indcement or reward which cold inflence the actions taken by an organisation, its board (or members) or officers. By definition, all acts of corrption are improper. 28. While propriety shares many of the characteristics of other more readily identifiable concepts, jdgements on propriety mst necessarily be sbjective, being dependent on the particlar circmstances of the case and, most crcially, on Parliament's expectations of what is proper for a pblic official and on proportionality. The primary test is therefore to consider the attitde of the Committee of Pblic Acconts. Sch attitdes are illstrated in box 4, paragraph While the foregoing are more in the natre of concepts, it is important to reflect on strctral isses which impact on this area and their definitions, particlarly governance and internal control. 30. Governance can be defined as the systems and frameworks by which organisations are directed and controlled. Good governance of an organisation encompasses the establishment of proper standards of behavior, for example, throgh codes of condct. Bt as governance also covers areas sch as internal control, reporting and accontability, it goes beyond matters of behavior and is conceptally different to propriety. 31. Internal control systems constitte an organisation's network of systems necessary to provide reasonable assrance that organisational objectives will be achieved. In doing so, they provide a safegard over the se of pblic money and resorces. A breach of internal control does not itself constitte an improper action. However, wilfl disregard of internal controls or failre to establish internal controls in an area of material financial risk might constitte impropriety, since it wold constitte an irresponsible attitde to the stewardship of pblic fnds. It shold be noted, however, that not all impropriety arises from abses and failres of internal controls. Sorces of gidance on propriety 32. There is gidance on propriety from varios sorces, generally dependent on the specific part of the pblic sector concerned. The Appendix provides a bibliography of gidance available on propriety and propriety-related isses, by sector and by sbject. The web-site version of this docment contains links to the major reference sites. 11

16 33. It is recognised that certain of the areas covered are strictly those of governance. They are inclded, however, as they provide the parameters of behavior expected of those responsible for the operations of pblic sector organisations. 34. There are also sorces of gidance that ct across sectors bt apply to particlar professions, or members of particlar professional instittes. For example, the Chartered Institte of Pblic Finance & Accontancy ( has prodced, for its members, a consltation draft for a revised standard of professional practice on ethics. This specifically addresses isses of condct. Laws on Corrption 35. The general provisions in criminal law in relation to corrption in pblic service are long standing. Board members and concillors, together with employees of pblic bodies are covered by the Prevention of Corrption Act In essence, it is an offence for someone corrptly to accept, obtain, agree to accept or attempt to obtain any gift or consideration. This applies if it is an indcement or reward for doing, or not doing, anything or showing favor, or disfavor, to any person while acting for another, inclding an employer. 36. More stringent provisions may apply to corrption involving members or employees of pblic bodies nder the Prevention of Corrption Act Employees of pblic bodies may be reqired to prove that the receipt of payment or other consideration from someone seeking to obtain a contract is not corrpt. (The provisions of this Act do not, however, appear to be compatible with the Hman Rights Act 1998, which reqires that accsed persons be presmed to be innocent.) 37. The Pblic Bodies Corrpt Practices Act 1889 has certain other provisions, inclding possible disqalification from office, that apply only to members and employees of pblic bodies. There is also a common law offence of miscondct in pblic office. This incldes receipt of a bribe by someone who has a dty to do something in which the pblic is interested, either to act in a manner contrary to his dty or to show favor in the discharge of his fnctions. Committee of Pblic Acconts 38. The Committee of Pblic Acconts (PAC) was established in 1861 with a primary prpose of examining the acconting for, and the reglarity and propriety of, expenditre. The reports issed by the PAC provide important insight into Parliament's expectations regarding the condct of pblic bsiness and the general standards of governance and propriety that pblic bodies are expected to phold. A representative selection of comments made by PAC in the past five years is given in box 4 below. 12

17 Box 4: Parliament's expectations - a selection of the Pblic Acconts Committee's comments on propriety 1. "We consider that arrangements to ensre proper arm's length relationships are essential in cases where Non-Departmental Pblic Bodies have significant financial relationships with sbsidiary companies. "We are particlarly concerned that the former Director General and Acconting Officer and the former Finance Director had conflicts of interest althogh the former Director General had resigned as a director of S Limited when potential conflicts of interest had been broght to his attention, he had remained a director of the sbsidiary company, B Limited. "The Concil created a complex strctre of charitable and trading companies beyond the control of the sponsoring department. We note with serios concern that the holding company for these activities, the Trst Company, having been set p apparently to trade otside the control of the Department, was largely pblicly fnded. "We are concerned that, despite Treasry gidance, the Department and the Concil have not secred the necessary safegards for assets held by the Trst Company. "We are very concerned that the Concil awarded a contract to B Limited for twenty years to manage the Concil's annal exhibition and seminar as this does not allow the Concil reglarly to test the market. "We are concerned that the contract was let, the change in contractor was, nevertheless, made expressly to allow redndancy money to be paid to staff who were then re-employed by the management by-ot company." (PAC 2nd report 1994/95) 2. "To avoid any qestion of impropriety, detailed reasons shold always be recorded whenever a contract is not awarded to a tenderer who sbmits the lowest bid and is jdged capable of meeting the key performance criteria. This wold also provide a basis for informing the other short-listed firms why their bids had been nsccessfl." (PAC 6th report 1994/95). 3. "We find it astonishing that the management at the embassy also allowed their staff to se pblic money to gain p to 670,000 from maniplating the local crrency markets. "It is clearly nsatisfactory that was able to gain a kick-back of $50,000 throgh negotiating what may have been a needlessly expensive five-year lease for the ambassador's residence. We do not agree that there was no loss to pblic fnds as a conseqence. At the very least the bribe paid to cold have been taken off the price of the lease. "We are concerned that there were no job specifications for locally-engaged staff, that to...was able to recrit local staff known to him and that those appointed may not have been the best candidates. We are distrbed that some embassy staff were nder an obligation to...and therefore sbject to pressre from him, for example not to apply the fll range of checks over transactions in which...or others may have had an improper interest. In sch a sitation the scope for frad and corrption was enhanced and irreglarities made difficlt to detect." (PAC 33rd report 1994/95) 4. " We are distrbed that so many conflicts of interest shold have arisen on this one project sch conflicts give rise to potential dangers for the taxpayer, not only in terms of vale for money bt of propriety in the se of pblic money. We emphasise that nobody involved in pblic sector transactions shold have the opportnity to inflence bsiness in their own favor. "We are concerned that orders for items to a vale of 23.4 million were placed withot competition we expect all pblicly-fnded procrement to be condcted as far as possible on a competitive basis in order to promote vale for money and to act as a safegard against impropriety. "It was clearly wrong for some bidders to have been given more time to prodce their docmentation when this extension was not made available to all of them. And we agree with the Administration that it is not acceptable for a bid to be altered after the opening of sealed tenders. (PAC 12th report 1996/97) 13

18 Box 4: Parliament's expectations - a selection of the Pblic Acconts Committee's comments on propriety contined "The aditors estimated that Mr had athorised the charging to the Corporation of 9,210 of his own private expenditre and a frther 2,080 of private expenses for other members of staff. The Committee considers that Mr 's condct, while Chief Exective, did not meet the standards expected of those entrsted with the se of pblic fnds, notably in his handling of travel and personal expenditre." (PAC 25th report 1996/97) 6. "The former Institte Director was able to draw p his own rles for handling grievances or complaints, even for complaints involving himself. As a reslt, some individals had to se otside channels sch as the press This was a totally nacceptable way to deal with the legitimate concerns of staff abot the management of the Institte and its governance."we consider it inappropriate that severance settlements shold inclde increased benefits to reflect the personal circmstances of individals." (PAC 26th report 1998/99) 7. "We are deeply concerned at the extravagant spending particlarly on overseas trips by the Principal and Depty Principal. Apart from the total cost - over 210,000 - and excessive individal expense items, the absence of these two can only have added to the management problems." (PAC 37th report 1998/99) 8. "We condemn the cataloge of mismanagement at the College's Training Shop inclding what seems to s to be an almost total disregard for basic tenets of financial control, and exposre to potential conflicts of interest. For example, over 13,000 was paid for driving services provided by a son of the head of the Shop, bt there was no evidence that the work was competed." (PAC 2nd report 1999/00) 39. The PAC Report on "The Proper Condct of Pblic Bsiness" 1 is also a valable sorce for details of failings in key areas of propriety. It emphasises that, at a time when fndamental changes are taking place in the way in which government departments and pblic bodies carry ot their work, it is important to ensre that proper standards are maintained in the condct of pblic bsiness. A nmber of failings are set ot in key areas: financial control; compliance with rles; stewardship of pblic money and assets; getting vale for the taxpayers money. 40. A checklist for each of these failings is set ot detailing points that pblic bodies need to keep in mind in order to gard against the risk of sch lapses in the proper condct of pblic bsiness. The aim is to help all departments and pblic bodies to avoid ftre departres from the high standards demanded by Parliament and the pblic. 1 Hose of Commons, Committee of Pblic Acconts 8th Report The Proper Condct of Pblic Bsiness 14

19 The Nolan Committee on Standards in Pblic Life 41. The Nolan Committee's First Report (May 1995) covered the standards in pblic life relating to Members of Parliament, Ministers and Civil Servants and Exective Qangos and NHS bodies. It made a nmber of recommendations to promote higher standards in the condct of pblic servants, inclding the seven principles of pblic life (see box 3, paragraph 14). 42. The Committee's work has gone on to consider standards of condct in other areas of the pblic sector. The Second Report (May 1998) covers standards in local pblic spending bodies (frther and higher edcation bodies (inclding niversities), grant maintained schools, registered hosing associations, training and enterprise concils and local enterprise companies). The Third Report (Jly 1997) covers standards of condct in local government in Great Britain. The Forth Report (November 1997) reviews progress on implementation of the Committee's recommendations made in the First and Second Reports abot exective non-departmental pblic bodies, NHS bodies and local spending bodies. Comptrollers and Aditors General 43. In the United Kingdom, the Comptroller and Aditor General (C&AG) is reqired to provide independent assrance, information and advice to Parliament on the proper acconting for, and se of, pblic resorces. In addition to reporting on the financial statements of central government bodies, the Comptroller and Aditor General may report to Parliament any matters relating to the acconts, inclding failres of propriety and financial control. These reports, which may be sbmitted with the adited acconts or presented separately, deal with failres of propriety that the C&AG considers Parliament shold be informed of. In determining whether Parliament shold be informed of any failre of propriety, the C&AG will consider the size, natre and wider importance of the isse as well as any previos interest expressed by the Pblic Acconts Committee. These reports may form the basis of a frther enqiry by the Pblic Acconts Committee. 44. Broadly speaking, central government expenditre that has been devolved to Scotland or Wales is now adited by the Aditor General of that contry rather than the C&AG, thogh the latter reports on the fnding provided to the devolved administrations from the consolidated fnd. In the case of Northern Ireland, devolved expenditre is adited by the Northern Ireland Comptroller and Aditor General. Before devoltion, the Northern Ireland Comptroller and Aditor General reported to the Westminster Pblic Acconts Committee on central government expenditre particlar to Northern Ireland, bt he now reports to the Northern Ireland Assembly's Adit Committee. Like the United Kingdom C&AG, his work incldes reports on failres of propriety in Northern Ireland central government agencies. 15

20 Adit Commission 45. The Adit Commission has not issed specific gidance on propriety. Its Code of Adit Practice incorporates the responsibility for aditors to review and, where appropriate, report on the arrangements pt in place by adited bodies to maintain proper standards of financial condct, as well as those relating to the prevention and detection of frad and corrption. 46. The Code of Adit Practice also contains a smmarisation of stattory gidance and that prodced by appropriate parties for local athorities and health bodies, sch as the NHS Exective. It sets ot that adited bodies shold set in place proper arrangements for: implementing and monitoring compliance with appropriate corporate governance arrangements; articlating and promoting appropriate vales and standards across the organisation; developing, promlgating and monitoring compliance with codes of condct that advise members and officers of their personal responsibilities and expected standards of behavior; developing, promlgating and monitoring compliance with standing orders or financial reglations, inclding instrctions on reglating the handling of contracts; developing and implementing anti-frad and corrption strategies; developing and implementing arrangements for receiving and investigating allegations of breaches of proper standards of financial condct, frad and corrption. 47. In addition, the Commission has issed: a Frad and Corrption Adit Manal, which provides gidance and advice to aditors in carrying ot work in relation to frad and corrption. This incldes sggested controls as well as adit tests; national reports and annal pdates on the qantity of reported frad and corrption within Local Government and the NHS; varios Technical Releases on the expected controls and the adit approach to frad and corrption, inclding, for example, the implications of a pblic interest report on a metropolitan borogh concil, which covered isses as to the way the athority handled gifts and hospitality, the letting of contracts and failre by members to meet appropriate standards of condct. 16

21 Acconts Commission for Scotland 48. While in England and Wales reports and isses that reslt from local athority adits are made by aditors, in Scotland they are made by the Controller of Adit to the Acconts Commission. The Commission then considers the reports together with any views of the concils or interested individals and then makes recommendations. Where there is a qestion of impropriety leading to loss the Controller of Adit isses a special report. There are a few past examples of where the Secretary of State implemented a srcharge order. As with England and Wales, srcharging has, however, now been abolished in Scotland. 49. The Commission has issed two papers on major areas of risk arising from re-organisation: Local government re-organisation and the stewardship of pblic fnds; A matter of trst: gidance on NHS trst re-organisation. These docments deal with, among other things, isses of propriety and good governance in the re-organisation process and the accompanying risks that are involved. 50. Qestions of propriety in relation to arms-length bodies are dealt with in the Commission's Code of Gidance on Fnding External Bodies and Following the Pblic Pond, prodced jointly with Convention of Scottish Local Athorities (CoSLA), together with operational gidance on the application of the Code. They explain the importance of the principles of openness, integrity and accontability in the relationships between local athorities and external bodies. This Code is particlarly relevant in these days of partnership and otsorcing, and it covers reqirements for stating the prpose of fnding, financial regimes, monitoring agreements, representation, limitations and accontability. Aditor General for Scotland (AGS) 51. From 1 April 2000, the Aditor General for Scotland is responsible for reporting to the Scottish Parliament on accontability for the resorces of the Scottish Exective, the NHS in Scotland and other bodies in receipt of fnds voted by the Parliament. His fnction is one of the essential elements of the accontability framework set ot in the Scotland Act 1998 and the Scottish Parliament's Pblic Finance & Accontability (Scotland) Act Adit Scotland provides services to both the Aditor General for Scotland and the Acconts Commission. Aditor General for Wales (AGW) 52. In Wales, following appointment on 1 Jne 1999 nder the Government of Wales Act 1998, the Aditor General for Wales is responsible for reporting to the National Assembly for Wales on its acconting for resorces voted to it by Parliament. In addition to adit, the Aditor General may also carry ot examinations into the economy, efficiency and effectiveness with which the Assembly has sed its resorces in discharging its fnctions.the National Adit Office in Wales crrently provides the services necessary for the Aditor General to carry ot his dties. 17

22 Failres of propriety 53. There have been varios recorded instances of failres of propriety over the past few years. A selection of these cases is set ot in this section to illstrate the nderstanding of propriety pt forward in this docment. Not all the examples can be read across to every sitation that arises in the pblic sector. Therefore, within the boxes in this section, frther explanation and gidance to sers is noted in italics. Freqently the cases may also have involved frad or other breaches of law, and generally there is not a clear ct distinction. 54. The cases are set ot nder three broad headings: failres of the principle of fairness, in the treatment of staff, sppliers or cstomers, whether de to conflicts of interest or other reason; misse of pblic assets or resorces for personal or political prposes; failre to exercise reasonable stewardship over pblic assets or resorces. In many cases, the failre of propriety may cover more than one of the three headings. 55. There are a nmber of common nderlying cases which have led or can lead to failres of propriety. These inclde: the presence of an overbearing individal as chief exective or chair of the board, or its eqivalent, reslting in a bypassing or ignoring of controls or standards of propriety; the assmption of significant new responsibilities by the organisation to which management or board, or both, do not respond adeqately; the cltre of the organisation leading to nsatisfactory cstoms and practices and a relctance to change or to address problems; ignorance of the rles or expectations of proper behavior, especially in small organisations, de partially to a failre to edcate and advise those with responsibility; over-zealosness to achieve objectives leading to a disregard for the appropriate operation of controls; a poorly designed or poorly operated control environment. 18

23 Failres of fairness 56. Instances of failres of fairness freqently involve preferential treatment in making appointments either of contractors or of staff. This may or may not involve personal gain to the pblic officer throgh his or her relationship to the contractor or persons concerned. In this context, board members, or their eqivalent, and management shold ensre that their actions are fair and seen to be fair. Two areas where this perception may be called into qestion are the acceptance of hospitality and the existence of conflicts of interest. 57. Hospitality is clearly a potentially dangeros area. The acceptance of generos hospitality by a pblic officer may create an obligation to the donor or the donor's organisation that can only be flfilled throgh preferential treatment. While it is recognised that most offers of hospitality are not intended to create an obligation to the host, normal practice in the pblic and private sectors may differ. There may be problems of perception, and particlar care needs to be exercised when a contract award or renewal is in prospect. The potential recipient always needs to have regard to the associated sensitivities. 58. Althogh, strictly speaking, falling nder the heading of 'inadeqate stewardship of pblic fnds', the giving of hospitality by pblic officials may also give rise to impropriety where it may be perceived as an inappropriate se of pblic fnds. This is particlarly so where the pblic officials benefit themselves from hospitality given to others or can expect to receive similar or more expensive hospitality in retrn. 59. Obviosly there shold be a sensible balance. By way of example, a semi social lnch, at an nextravagant vene, in mid-term of a contract can be a very sefl way of keeping in toch and spporting day-to-day relationships. On the other hand, lavish entertaining and foreign trips are rarely jstified. 60. While the instance may be considered trivial and nrelated to any particlar bsiness relationship, it shold be defensible. Organisations will have their own codes of practice for dealing with, and recording, instances where hospitality is accepted. In general, the test for potential recipients, however, shold be: "Cold I satisfactorily defend this before the Pblic Acconts Committee and the pblic?". It wold also be helpfl if organisations defined their own limits of acceptability. Generally, any hospitality that is fnded by pblic money, and which cold be considered sbstantial, shold be recorded. 61. Similarly, conflicts of interest may affect the ability to be objective in one's dealings and to be open handed in the condct of a body's affairs. Conflicts often arise over the appointment, for financial reward or otherwise, of connected parties. These may be family, personal connections, or bsiness and political associates, inclding companies or bsinesses. The appointment may be as spplier, contractor, agent, employee, board member, consltant, and internal or external aditor. 19

24 62. When dealing with appointments as a spplier of goods or services, boards and management need to look beyond the bare facts of the case and to consider whether they may pt their organisation and its officers and employees in a position where there is potential for conflict. Again, this shold be avoided as it is often difficlt for the pblic to differentiate between the potential for, and actal existence of, conflict. The perception of conflict may be as nfortnate as its reality. 63. Most organisations maintain registers of personal interests, bt these tend to only record direct relationships, sch as shareholdings or directorships. As the preceding paragraphs indicate, bsiness connections may be throgh family or friends. Also, of themselves, registers do not prevent conflicts of interest, or the appearance of sch conflicts. It is therefore advisable for the avoidance of dobt, that those in positions of inflence shold ensre that their behavior is beyond qestion when considering the award of appointments or contracts. Box 5, below, illstrates nacceptable behavior that reslts in failres of fairness. Box 5: Examples of failres of fairness favoritism shown in employing family members; (the exercise of favoritism when making appointments is improper, as is a failre to disclose an interest in relation to family, friends and bsiness connections) appointment of an individal to head a department whose main spplier was owned by the appointee; letting of contracts by directors to an organisation rn by their partners; formation of a company by a chief prchasing officer which became a significant spplier to a related organisation; failre to award a contract withot clear reasons being given or recorded; avoidance of proper tendering procedres reslting in the award of contracts to a related company; se of an independent conslting firm to appraise bids for compter software and sbseqent award of a software contract to them; awarding planning permission for major capital constrction withot disclosing the fll facts concerning potentially competitive developments. Misse of pblic office for personal or political prposes 64. The misse of pblic fnds for personal or political prposes is mainly concerned with obtaining personal benefits from pblic office. This may freqently involve conflicts of interest from the otset and frad or breach of reglations. Examples are given in box 6. 20