Part 1: Nature and Scope of Our Audit

• Why We Carried Out Our Audit
• Our Objectives
• Our Mandate for the Audit
• What We Did
• What We Did Not Look At

Why We Carried Out Our Audit

1.1
The Ministry of Social Development (the Ministry) has systems to measure payment accuracy and the measures are audited and reported annually. (See Part 5 on pages 55-70 for comment on the specific measures.)

1.2
In view of the very substantial sums involved and the implications of inaccurate benefit payments for the welfare of both taxpayers and beneficiaries, we considered it necessary to supplement our annual audit with a special audit of the soundness of the Ministry’s systems for benefit administration and accuracy measurement.

Substantial Sums of Public Money Involved

1.3
In 2002-03, the Ministry was responsible for the administration of nearly $12,000 million of Crown funding for income support for beneficiaries (see Figure 1).

Figure 1
Expenditure on Income Support 2002-03

* Includes supplementary benefits paid with the main benefits listed.

Source: Ministry of Social Development Annual Report 2002-2003, parliamentary paper G.60, 2003, pages 131-132.

Implications for Taxpayers and Beneficiaries

1.4
The Ministry’s Annual Report 2002-2003 records that, across the whole year, it provided assistance and support to:

• almost 840,000 people who received an income support benefit or pension;
• almost 215,000 people who received a Student Loan or Student Allowance; and
• 1.35 million people who received a Community Services Card.

1.5
Income support is intended to enable people to participate in their communities and the lab our market, and therefore has a vital role in meeting a number of the Government’s key goals – including:

• growing an inclusive, innovative economy for the benefit of all;
• providing strong social services;
• improving skills; and
• reducing inequalities in health, education, employment and housing.¹

1.6
Inaccurate benefit payments can result in costs to both the Ministry and beneficiaries.

1.7
The Ministry incurs direct costs from the administrative actions associated with identifying and correcting any errors. These actions can include:

• reviewing and correcting the amount of benefit payable;
• establishing any over-payment as a debt owed to the Crown;
• processing an application by the beneficiary for a review of (or an appeal against) the decision to establish the over-payment; and/or
• attempting to recover the debt.

1.8
Opportunity costs arise from Ministry staff having to spend time and effort on correcting benefits instead of undertaking other work (such as employment promotion) that might also assist a beneficiary.

1.9
Beneficiaries can suffer hardship when payments are made incorrectly. Under-payments deprive them of income to which they are entitled. Over-payments generally must be repaid, placing financial pressure on beneficiaries – often for extended periods.

1.10
It is also important that Parliament is assured that taxpayer-funded benefits are being paid to the people whom Parliament intended and in the intended amounts.

Our Objectives

1.11
In conducting our audit, we sought to provide Parliament with assurance that:

• the Ministry has effective systems and methods for ensuring benefit accuracy; and
• Parliament can place reliance on the performance data that the Ministry reports.

Our Mandate for the Audit

1.12
We conducted the audit under section 16(1)(a) of the Public Audit Act 2001, which provides that –

The Auditor-General may at any time examine –
(a) the extent to which a public entity is carrying out its activities effectively and efficiently.

1.13
When conducting the audit, we have at all times kept in mind the need to observe section 16(4) of the Public Audit Act. That is, we must limit our examination under section 16(1)(a) to the extent to which the Ministry is carrying out its activities effectively and efficiently in a manner consistent with applicable Government policy to which the Ministry is required to adhere.

1.14
We were also conscious that the Ministry’s objectives to assess benefit eligibility are determined by statute (see paragraphs 2.8-2.10 on page 29).

What We Did

1.15
We interviewed the Ministry’s National Office staff and staff in five regions (Auckland South, East Coast, Nelson, Waikato, and Wellington). Staff in the regions included:

• Regional Commissioners;
• Regional Operations Managers;
• service centre managers;
• team coaches; and
• case managers.

1.16
We reviewed the type of reporting carried out for both internal and external use. We also visited a training centre for case managers.

What We Did Not Look At

1.17
If an inaccuracy results in an over-payment of a benefit, the beneficiary will generally need to repay the over-paid amount. The Ministry classifies over-payments into four types:

• fraud and abuse;
• data matching;
• over-payments/other; and
• recoverable special needs grants and advances.

The Ministry reports debt under either “fraud” or “data match debt” categories.

1.18
In 2001 the Ministry commissioned a research economist, Dr Anne Heynes, to undertake a study on the causes of innocent over-payment debt. Her report² identified, among other items, areas requiring further research – including:

• the circumstances or reasons that led to the establishment of innocent over-payment debt (noting that survey methods might be required as this information cannot be accurately determined from available data); and
• specifically, whether each new such over-payment that arose through beneficiary or staff error requires new information to be collected – this information would also need to be obtained from a survey.

1.19
We have not sought to explore debt management in our report, but note that the research requirements that Dr Heynes identified mirror some of our conclusions and recommendations.

1.20
Our audit also did not look at certain well-publicised issues (briefly outlined below) of:

• entitlement to third-tier benefits; and
• application of Court decisions.

Entitlement to Third-tier Benefits

1.21
The Ministry and advocacy groups have conflicting views about entitlement to certain third-tier benefits – particularly the Special Benefit. We have not addressed this issue because the Ministry is currently looking into variability between its service centres when granting third-tier benefits, in the light of submissions by advocacy groups.

Application of Court Decisions

1.22
The law relating to social security benefits is complex. The statutory basis is primarily the Social Security Act 1964, on which there is a continuously developing body of case law. The Act is also subject to frequent amendment.

1.23
One widely publicised case concerned the 1996 decision of the Court of Appeal in the case Ruka v Department of Social Welfare.³ The decision substantially altered the test to be used to determine whether a beneficiary was in “a relationship in the nature of a marriage”. It had important social security and legal consequences for a person considered to be in such a relationship.

1.24
In September 2000 the (then) Associate Minister for Social Services commissioned a barrister, Frances Joychild, to undertake a review in response to public criticism of the way in which the former Department of Social Welfare and then the Department of Work and Income had responded to the decision. Ms Joychild’s report⁴ found that:

• investigators had not changed their decision-making behaviour to match the interpretation outlined in the Court of Appeal decision; but
• since December 2000 the decision had been correctly applied.

1.25
One contributory reason had been the Departments’ failure to amend manuals and guidance materials between November 1996 and mid-2000 to reflect the decision. Ms Joychild’s report highlighted problems in ensuring consistency of interpretation between service centres.

1.26
We did not examine this matter because the Ministry was concurrently responding to Ms Joychild’s report.⁵

1: Ministry of Social Development, Departmental Forecast Report 2002-2003, parliamentary paper E12.FR2002, page 5.

2: Heynes, A, The Causes of Innocent Overpayment Debt: A research report prepared for the Ministry of Social Development, Ministry of Social Development, October 2001.

3: [1997] 1 NZLR 154.

4: Joychild, F, Report to the Minister for Social Services, Review of Department of Work and Income Implementation of the Court of Appeal Decision, Ruka v Department of Social Welfare [1997] 1 NZLR 154, Ministry of Social Development, June 2001.

5: Ministry of Social Development Response to the Joychild Report or Implementation of the Ruka Decision, Report to the Minister of Social Services and Employment, 2002.