Compliance with the Code for Business Development Boards 1995

Key results of our review

We identified 17 cases of grants approved by six Business Development Boards that did not comply with the criteria contained in the Code for Business Development Boards 1995. This is a serious matter because of its implications for the Ministry of Commerce in making payments which are other than in accordance with the appropriation provided by Parliament, and are therefore unlawful.

The six Boards we reviewed were conscious of their responsibility to comply with the Code. We found no instances where they purposely disregarded the limits of their authority.

The current arrangements that separate who approves grants (Boards) and who pays them out (the Ministry) create a division of responsibility and accountability which is unusual and gives rise to a duplication of effort because both the Ministry and the Boards must satisfy themselves of the validity of the grant approvals given. The more usual arrangement for similar grant schemes is that the entity that has the power to approve a grant is also funded to pay out the grant.

The Ministry acted promptly and correctly when it realised that it was dealing with payments for which there was no appropriation.

The Code is operable as it stands, but it could be amended to give Boards a more precise guide to its application. Nevertheless, Boards need to be more careful in ensuring that they meet the criteria in the Code.

Some criteria in the Code allow Boards to determine whether they have been met. When Boards exercise that discretion, they need to ensure that they gather and keep adequate evidence to support their decisions.

In reviewing grant approvals, the Ministry should recognise the degree of discretion and judgement allowed to Boards and should not import its own standards of judgement. The Ministry should also ensure that (as far as practicable) it assesses Board decisions using substantively the same information as that which was available to the Boards when they made their decisions.



Business Development Boards (Boards) are established under the Business Development Boards Act 1991. The functions given to the Boards under that Act are:

  • To advise the Minister on business matters in their regions.
  • To promote business growth in their regions by undertaking the activities specified in the Code for Business Development Boards 1995 (the Code).

The activities specified in the Code are to administer the Government's Business Development Programme, and to provide advice to the Minister on the programme and on business development in the regions.

Boards are responsible for approving grant applications from small and medium business enterprises. In approving the grants, Boards are required to check that both the applicant and the goods and services to be provided meet the criteria set out in the Code. The Ministry of Commerce (the Ministry) pays the grants on the basis of the Boards advising it that the applicant has paid the qualifying costs which are in line with the grant approval.

The Ministry of Commerce Review

In April and May 1997, the Ministry undertook a review of Business Development Boards' grant approval files, as part of its evaluation of the effectiveness of the Business Development Programme. The Ministry reviewed 473 grant approvals. The sample covered all 21 Business Development Boards (Boards) and each grant criterion type.

On 30 June 1997 the Ministry sent the Minister a draft report of the findings from its review.

The Ministry at this time was advised by the Crown Law Office that payments for grants approved in breach of the Code criteria would be contrary to the appropriation provided by Parliament. Consequently, such payments would be contrary to the Public Finance Act and, therefore, unauthorised and illegal. Accordingly, in making decisions on grant applications, Boards must comply with the grant criteria determined in the Code.

In July 1997 the Secretary of Commerce:

  • wrote to all Board Chairpersons advising them of the outcome of the file reviews; and
  • sent the Boards detailed reports which differentiated between the Boards' compliance with the Code and their application of the Ministry's guideline notes in Introducing the Business Development Programme.

On 6 August 1997 the Ministry reported to the Minister of Business Development (the Minister) that "a large proportion of clients are receiving grant funding for which they or the project are not eligible". It reported that it had found that "6% of applicants should not have been eligible for entry into the grant scheme and 28% of the approved projects should not have qualified for assistance."

Parliament validated the resulting unappropriated expenditure 3 on the basis that the Ministry was to:

  • develop procedures to be in place by 1 September 1997 to assist Boards to comply with the Code; and
  • put in place a monitoring and evaluation regime - including random checks of files - for 1997-98.

In late-August 1997 the Ministry issued Boards with checklists, a model for recommendation reports, and standard claim verification forms to assist them to comply with the Code. The Ministry subsequently undertook further reviews to determine the extent of compliance with the Code after I September 1997, and determined that there was ongoing non-compliance. As a result, the Secretary of Commerce then decided (after consultation with the Treasury and the Audit Office) to temporarily suspend payments of grants to avoid further breaches of the Public Finance Act 1989.

On 19 November 1997 the Ministry wrote to the Audit Office seeking "formal audit review" of three grant approvals which it considered might have breached the Code.

Cabinet, on 24 November 1997, agreed to a further validation of grant payments which may have been in breach of the Code, up to the date that Boards were instructed not to give any further grant approvals.

On 26 November 1997 the Minister instructed Boards to immediately suspend giving grant approvals on the grounds of the difficulty of administering the Business Development Programme and achieving full compliance with the Code, and the associated risk of unappropriated expenditure.

On 17 December 1997 six Boards 4 initiated legal action to set aside the order made by the Minister. A seventh Board5 declared an intention to join the legal action, although subsequently it did not do so.

On 22 December 1997 the Ministry - at the request of the Minister - asked the Audit Office to undertake an audit of each grant approval file in which the Ministry had identified breaches of the Code in the April-May 1997 review.

On 24 February 1998 the High Court declined the six Boards' request to have their grant approval powers reinstated immediately. The Court considered that the Minister should be given time to complete investigations and noted that the current Audit Office review should provide guidance for the Minister as to the extent of non- compliance. The Court indicated that suspensions could be uplifted on a board-by- board basis in the future.

Why We Agreed to do Our Review?

The Audit Office had a twofold interest in performing a review:

  • As the controller of withdrawals of money out of the Crown Bank Account, we were concerned at the Ministry believing that some grant payments it had made were not for a lawful purpose and not in accordance with an appropriation provided by Parliament, and therefore were contrary to sections 4 and 9 of the Public Finance Act 1989.
  • As statutory auditor we are concerned that the public sector entities we audit comply with applicable legislation. The suggestion that the Boards were not complying with the Code falls within that concern.

We were also mindful of the Minister's request (of 22 December 1997) for us to undertake an audit of the files identified by the Ministry in April-May 1997 as containing breaches of the Code.

We decided to conduct our own review to establish the position for ourselves:

  • given the differing views of the Ministry and the Boards;
  • in light of some information from our annual audits of Boards that indicated (but was not conclusive of) breaches of the Code; and
  • in order to properly discharge our controller responsibilities under section 22 of the Public Finance Act.

Objective of Our Review

Our objective in conducting the review was to:

  • establish whether and (if so) to what extent breaches of the Code might have occurred; and
  • consider what remedial action might be required to avoid future non-compliance with the law.

Scope of Our Review

Our review covered a total of 47 grant approval files:

  • 35 grant approvals were reviewed to assess compliance with the Code. Of these approvals, the Ministry had previously found 26 to be in breach of the Code and 9 to have involved breaches of the Ministry's guidelines.
  • 12 grant approval files were reviewed to ascertain whether the Boards were applying the new checklists issued by the Ministry.

Our review sought to determine whether the Boards, in approving the grants, had complied with the criteria in the Code. We did not review compliance against criteria in other documents, such as the guidelines mentioned above, for the reasons given in paragraph 132.

This report does not consider the matters which are still before the High Court as to whether the Minister appropriately applied clause 11 of the Code in instructing Boards to suspend grant approvals.

Our Method of Review

We visited six Boards 6and, for the sample set out in paragraph 121, examined the documentation for the grant approvals that they had given.

For the purposes of our review we applied our own checklist drawn up from the Code requirements. A copy of the Audit Office's checklist appears in Appendix I on pages 33-35.

During our review we formed the opinion that the application of some requirements of the Code was straightforward (e.g. "was the applicant registered in New Zealand for tax purposes?"), while other criteria lacked prescription and involved discretion and judgement on the part of the Board (e.g. the "new market" criterion). Where the requirement was prescriptive, we ensured that the Board had strictly complied with it. For other requirements involving discretion, we looked at the process the Board followed to assure itself that the application was eligible for grant assistance.

This process requires the Board to:

  • recognise that compliance with the Code required it to gather sufficient information and make a judgement; and
  • have documentary evidence that it had made reasonable enquiries to justify the applicant's compliance with the requirements of the Code.

In instances where the Board's enquiries were obviously not sufficiently wide, or its analysis of the evidence it had gathered was fundamentally wrong, did we consider the Board's decision to be in breach of the Code.

Status of the Code

The Ministry has been advised by the Crown Law Office that any rules or guidelines applying to the operations of a Board have to - in terms of section 7(2)(c) of the Business Development Boards Act 1991 - be specified in the Code. Therefore, when approving grant applications, Boards must ensure that the application complies with the rules and guidelines specified in the Code. Non-compliance is a breach of the law.

The Code can only be amended, or revoked and a new Code issued in its place, by the Minister after consultation with the Boards. The amendment or new Code has to be published in the Gazette and a copy presented to the House of Representatives. Neither the Boards nor the Ministry can unilaterally add to, improve, or otherwise change the rules and guidelines specified in the Code.

Status of Other Advice

Boards are required to observe the rules and guidelines specified in the Code in terms of section 8 of the Business Developments Boards Act 1991.

Any other material provided to Boards - such as the guidelines promulgated by the Ministry, information circulated amongst Boards, letters, and other directives - is simply advice. In following such advice, Boards should be aware that:

  • If the advice is contrary to the Code and they act on it, they are in breach of the Code and therefore are acting unlawfully.
  • Compliance with the advice does not necessarily ensure compliance with the Code, especially if the advice is more permissive than the Code.
  • The advice cannot impose restraints on Boards greater than those provided for in the Code.
page top