“blatant conflicts of interest”

When it comes to financial mismanagement it would appear that the Department of Enterprise, Trade and Investment [either under the auspices of the NIO or otherwise] is, as Peter Hain would have it, World Class. Mick noted the NI Auditors report on the role played by LEDU in the establishment and oversight of the Emerging Business Trust (EBT) in February. Today the Commons Public Accounts Committee report on the affair is published [pdf file available here] – BBC report here, Belfast Telegraph report here – Conclusions and recommendations below. Point 13. is worth highlighting too, “It is worrying that the blatant conflicts of interest and other major control weaknesses in this case were not detected by the auditors of LEDU (Deloitte and Touche) or EBT (McClure Watters).”

Conclusions and recommendations

1. One of the most depressing features of this case is that the taxpayer was let down by almost everyone in the chain of responsibility for ensuring proper conduct in relation to EBT. Departments must ensure that their NDPBs and any third party organisation funded by them observe the basic controls and procedures on which confidence in public administration depends. The Department allowed LEDU to operate year after year outside acceptable standards of public administration. This was a dereliction of its responsibility to ensure that the financial and other management controls being applied by LEDU conformed to the requirements both of propriety and good management.

2. LEDU’s problems resulted from a culture which seems to have had no respect for the proper conduct of public business. The new Accounting Officer referred to the ‘arms length relationship’ between the Department and its non-departmental public bodies (NDPBs) as an explanation for the problems encountered in LEDU. Although this relationship was seriously flawed, the Committee agree with the Assembly’s PAC that the problems went beyond the structural framework to the very culture and ethos of these bodies. In another of the Department’s NDPBs the Assembly PAC found “a culture of apathy, incompetence and lack of respect for proper procedures at the top of the organisation. Aspects of this culture appear to extend right to the heart of the Department itself.” This judgement applies equally to LEDU. The Department and its NDPBs need to recognise the scale of the culture change that is necessary.

3. The Department now faces an enormous challenge to restore parliamentary and public confidence in its governance arrangements. Against this background it is not sufficient to try to do better, the Department and its NDPBs must aim to be beyond reproach. Northern Ireland is a relatively small society where close connections between senior civil servants and those who serve on Boards of public bodies is inevitable. In these circumstances it is particularly important to be sensitive to the need to avoid any perception of conflict of interest or impropriety. The Department must ensure that only the highest standards of ethics and propriety operate in bodies under its control.

4. We are in no doubt that the mishandling of this case could have been prevented if the advice in our report on the Proper Conduct of Public Business had been taken seriously by the Department of Enterprise, Trade and Investment. Departments need to ensure that PAC recommendations are fully communicated to those on the front line and are put into effect.

5. This is a case where every one of Lord Nolan’s seven principles of public life have been breached – Selflessness, Integrity, Objectivity, Accountability, Openness, Honesty and Leadership. Mrs Townsley had accepted a number of positions of responsibility where a commitment to the principles of public service was essential. She is a Chartered Accountant and, therefore, required to operate within a framework of ethical standards laid down by her Accountancy Institute. Mrs Townsley’s detailed comments, which were appended to the NIAO Report, fall far short of an adequate explanation for what was a disgraceful conflict of public and private interests. Where there is a perception of serious conflicts, it is not sufficient to declare them, they must be effectively dealt with or avoided altogether. Moreover, the timing and pricing of Mr Townsley’s share purchase is profoundly disturbing and amounts to ‘insider trading’. The Department has referred these matters to the Department of Finance and Personnel to consider what action would be appropriate. We thought it extraordinary that a view had not already been taken on this. In view of the serious nature of the issues involved we are sending a copy of our report to the Institute of Chartered Accountants in Ireland.

6. Departments have a duty to make certain that individuals appointed or re-appointed to Boards can demonstrate that they meet the probity principle, that is, that they are committed to the principles and values of public service and perform their duties with integrity. Departments must have a rigorous process to ensure that candidates for appointments to the Boards of public bodies meet the high standards expected of them.

7. It is unsatisfactory that files relating to Mrs Townsley’s appointments to LEDU were destroyed while she was still active in public life. This case illustrates the importance of retaining these files well beyond the term of appointment. The Department of Finance and Personnel should take the lead in reviewing the retention policy in relation to appointment papers.

8. Departments must also regularly assess the performance of Board or Audit Committee Members and put in place procedures which enable their prompt removal where there is, for example:

a lack of competence;
failure to observe the probity principle; or
an unmanageable conflict of interest.

It is also important that departments share information in a joined-up way to ensure that where there are concerns about the performance or probity of any Board Member this is taken into account in relation to any other public positions which they hold or may apply for.

9. The Department should make compliance with the Code of Practice, issued by the Commissioner for Public Appointments for Northern Ireland, a condition of funding of third party organisations. The Department told the C&AG that Northern Ireland departments are required to follow the guidance issued by the Office of the Commissioner for Public Appointments for Northern Ireland. This guidance extends to Executive NDPBs, Health and Personal Social Services Bodies and, by agreement, to advisory bodies and tribunals but does not apply to third party organisations, such as EBT, which are entirely publicly funded. We are sending a copy of our report to the Commissioner for Public Appointments for Northern Ireland.

10. There are some conflicts of interest that cannot be managed; they can only be dealt with by being avoided altogether. Avoiding unmanageable conflicts not only provides reassurance to the public that decisions taken in public bodies are entirely based on what is in the public interest but protects individuals from any suspicion of bias. Public money should not be committed to any project where an unmanageable conflict of interest exists. For example, when investing in loan or venture funds, Departments and NDPBs should ensure that it is a requirement of funding that consultants acting as managers of the funds should not hold shares or directorships in companies supported by the funds. There should also be a bar on managers undertaking any consultancy work or providing financial services in client companies. These points should have been self-evident; it is disappointing that it is necessary to spell out these details for the Department of Enterprise, Trade and Investment.

11. We recognise the valuable voluntary contribution Board Members make to public life in Northern Ireland but their reputations, as well as the public interest, need to be protected through effective training in their public responsibilities. It is deeply disappointing that, in this case, LEDU did not provide guidance or training to EBT Board Members on conflicts of interest. The Department must take responsibility for ensuring that their own staff, Board Members of NDPBs and third party organisations understand the high ethical standards to which they are required to operate through guidance, education and training, particularly induction training. For Board Members this should include training on their role and responsibilities, including the level of engagement required and the need to exercise a challenge function. Moreover, we want to make it absolutely clear that public bodies have an obligation to safeguard the position of those appointed to public office by ensuring that proper controls and procedures are in place.

12. The Department did not exercise an appropriate level of control over the NDPBs for which it was responsible and did not ensure effective oversight of third party organisations funded by its NDPBs. Three venture funds which received financial support from the Department and its NDPBs were investing in a single company, raising the concern that there may be overlap and duplication of business activities among its other third party organisations. The Accounting Officer’s decision to personally approve the setting-up of any new third party organisations by any of the NDPBs for which he is responsible, is a welcome move. The Department of Finance and Personnel should ensure that all Northern Ireland departments follow suit. The Department should provide an assurance that each third party organisation meets a specific and continuing need, there is no wasteful duplication of effort and that the audit arrangements are robust.

13. It is worrying that the blatant conflicts of interest and other major control weaknesses in this case were not detected by the auditors of LEDU (Deloitte and Touche) or EBT (McClure Watters). It is important that these matters are brought to the attention of the relevant professional body and this Committee informed of the outcome.

14. It emerged in evidence that the unsatisfactory way in which EBT was established was somehow related to the fact that the project was initiated by the International Fund for Ireland and only partly funded by LEDU. The Committee want to make it absolutely clear that when a public body is involved in jointly funding a project, the fact that the funding is shared, in no way diminishes the Accounting Officer’s absolute responsibility to ensure regularity, propriety and value for money.

15. The Committee was astonished at the award of a three year rolling contract to MTF for the consulting services it provided to EBT. The use of rolling contracts for consultancy services in the public sector or publicly funded bodies is most unlikely to deliver value for money. The Department of Finance and Personnel should issue guidance on this.

16. EBT was engaged in high risk loan and share activities. There was no private sector money involved in this project to share the financial risks, yet it was structured as a limited company and placed outside the annual scrutiny of Parliament’s auditors. We welcome the fact that legislation is in hand to provide for the C&AG to audit companies. In our view, it would be an important safeguard against the control failures we have seen if such companies were audited by the C&AG.

17. We found it surprising that the possibility of civil proceedings in relation to the fast-track Arcom loan, and other matters, including the payment of fees for managing loans which had already been written-off, had not been considered. The Department needs to ensure that this is addressed. We noted that the fast track loan was guaranteed by the Department of Trade and Industry’s scheme. We would like to be informed whether all the relevant facts, including conflicts of interest were disclosed to the Department of Trade and Industry.

18. A clear message needs to be sent to senior public officials that any disregard for the proper conduct of public business is a serious disciplinary offence and will not be tolerated. The Department should provide details of the disciplinary action taken in the EBT case and inform the Committee of the outcome when the case is concluded.

19. The Department has taken a long time to deal with EBT and the other investigations. It is important that the three ongoing investigations are brought to a conclusion as soon as possible so that lessons can be learnt and applied throughout departments. The Committee do not wish to be in this situation ever again. The Department should provide a report of the outcome of each investigation as it is concluded together with the findings of the Liquidator’s report into EBT. In order to be satisfied that incomplete investigations are being expedited, the Committee want to see a progress report in six months.

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