Part 6: Board chairpersons’ expenses

Central government: Results of the 2003-04 audits.

Background
Appropriateness and reasonableness of expenditure – our expectations
The audit work we undertook
Our findings
Our conclusions
Appendix – Entities whose chairperson’s expenses were examined

Background

6.1
Recent inquiries we have undertaken – in particular, the inquiry into expenses incurred by the former board chairperson of New Zealand Post, TVNZ Limited, and Industrial Research Limited¹ – identified weaknesses in controls over the expenses incurred by members of some boards of public entities.

6.2
Given those concerns, we asked our appointed auditors, as part of the annual audits for 2003-04, to review the systems, policies and procedures applying to board members’ expenses. The entities in which this audit work was undertaken are listed in the Appendix to this article on pages 70-73.

6.3
We asked our auditors to examine the expenses incurred by each board chairperson (“the chairperson”) to ensure that all such expenditure was appropriate, reasonable, and in accordance with the entity’s policies and procedures. We asked our auditors to report on the results of their work to the Office of the Auditor-General, as well as to the appropriate entities. We report on these results in this part.

Why the board chairperson?

6.4
All board members incur a range of expenses in the course of their duties. We decided to focus on chairpersons’ expenditure for the following reasons:

In general, the chairperson is most heavily involved in representing the interests of the board and the entity to stakeholders, and is therefore likely to incur the majority of board expenditure.
Given the chairperson’s key leadership position in the entity, it is important that their expenditure is subject to processes for approval and authorisation that provide the necessary independent scrutiny and transparency.
Chairpersons are in a position of authority and influence, and as such should be setting an example of appropriate standards of accountability for their entity’s expenditure.
Good policies and procedures protect chairpersons from allegations that public funds may have been spent wastefully or dishonestly.

6.5
In our 2004-07 Strategic Plan (issued in January 2004), we signalled our intention to enhance the level of work done in annual audits in the areas of waste, probity, and governance. The work done by our auditors as part of the 2003-04 annual audits is the first step in this development.

Appropriateness and reasonableness of expenditure – our expectations

6.6
In reaching a view as to whether the chairperson’s expenditure was reasonable and appropriate, we required our auditors to have regard to the following principles:

Compliance with relevant policies and procedures. All expenditure should be incurred in accordance with approved policies. Policies should be approved by the board and be reasonable.
Appropriately authorised. The chairperson’s expenses should be authorised by the chair of the audit committee, or a director of similar standing, or by 2 other members of the board. The chairperson’s expenses should not be authorised by a subordinate.
Reasonableness. Business expenditure should be necessary and reasonable in the context of public sector expectations and the entity’s business. Wasteful or excessive expenditure is not acceptable.
Supporting documentation showing clear business purpose. All claims for payment should be supported by GST receipts or other validating documentation, and submitted as soon as possible after the expenditure is incurred. Supporting documentation should clearly state the business purpose of such expenditure, ensuring that no private benefit was derived from it.

6.7
Our auditors were also asked to have regard to the following:

the Directors’ Fees and Reimbursement Guidelines prepared by the Crown Company Monitoring Advisory Unit (CCMAU) and issued by the various responsible Ministers to companies in February 2004. The guidelines cover the payment of directors’ fees and reimbursement of directors’ expenditure for all State-owned enterprises and Crown-owned companies that CCMAU monitors on behalf of shareholding Ministers. The guidelines pull together a range of best practice already widely accepted in the governance community, and which CCMAU believes should already have been reflected in entities’ policies and procedures. However, in issuing the guidelines, CCMAU noted that the policies and procedures adopted by individual boards for the control of board expenditure were an operational matter for each board to determine.
the Institute of Internal Auditors’ 1996 publication A Management Guide to Discretionary Expenditure.
Annex 5 of the Cabinet Office Circular CO(03)4 Allowances under the Fees and Travelling Allowances Act, which applies to all statutory bodies, non-statutory bodies and committees in which the Crown has an interest. Such bodies comprise most Crown entities (including tertiary education institutions and district health boards), trust boards, advisory bodies and committees, Royal Commissions and commissions of inquiry, statutory tribunals, individuals appointed as statutory bodies that are not covered by the Remuneration Authority, and subsidiary bodies of statutory entities.

6.8
We expected our auditors to use their judgement when reviewing and assessing chairpersons’ expenditure. In particular, we expected them to take into account the specific requirements of the Auditor-General’s Auditing Standard (AG-3): The Auditor’s Approach to Issues of Performance, Waste and Probity.

6.9
Our expectations in relation to each category of expenditure are set out below. We developed those expectations from the above publications, as well as from the inquiries we have undertaken, taking into account what we believe to be current best practice.

6.10
We intend to publish comprehensive guidance on sensitive expenditure in the public sector. The audit work we have undertaken will contribute to the development of that guidance.

6.11
Types of expenditure incurred by the chairperson differed from entity to entity. However, we categorised this expenditure into the following general categories:

domestic and international travel;
accommodation;
entertainment and hospitality; and
other expenditure, covering items such as communications and telephones (including cellphones), vehicle use, car parking, airline membership, gifts, and the use of laptop computers.

6.12
Expectations specific to each category are set out below, as well as some generally applicable expectations regarding authorisation and credit card use.

Domestic and international travel

6.13
We expected entities to have a policy for both domestic and international travel covering all types of travel undertaken by the entity, including board members’ travel. Unless it is impracticable to do so, all travel arrangements should be approved in advance.

6.14
Proposals for significant travel should be accompanied by the following details (usually in the form of a business case for significant international travel):

persons travelling;
business purpose (what benefits are to be achieved);
entity and people to be visited;
class of travel;
dates of travel; and
estimated cost.

6.15
All travel should be justifiable as entity business, and expenditure should be economical and efficient, having regard to purpose, distance, time and urgency. Methods of travel (air, train, motor vehicle) should be appropriate to the circumstances.

6.16
The business purpose of the travel should be clear from the documentation accompanying approvals or claims for reimbursement. Travel should be by economy or business class, with first class travel to be chosen in exceptional circumstances only. Economy class should be chosen for air travel of up to 4 hours, except where the distance/hours travelled and work schedule on arrival make a business class fare necessary.

6.17
Only in exceptional circumstances should the entity meet the costs of a spouse/ partner or other family member(s) travelling with the chairperson. For example, an entity would meet the travel cost of the spouse/partner of a chairperson attending a significant function where the spouse/partner was expected to accompany the chairperson.

6.18
Travel rewards (for example, frequent-flyer points) accumulated on business travel should not be used for personal benefit. Entities should monitor and control the rewards accumulated by board members from business travel and ensure that they are available to reduce the cost of future business travel by board members or staff.

6.19
Claims for meals and daily allowances should comply with the entity’s policies. Travel claims should also comply with those policies, and be completed in a timely manner.

Accommodation

6.20
We expected the entity to have a policy providing guidance on the quality and type of accommodation considered acceptable. Hotels or other accommodation should not be of an extravagant standard. All payments should be supported by receipts and evidence of business purpose.

6.21
The choice of accommodation or hotels should be made in accordance with the entity’s list of prescribed or recommended hotels (if applicable).

Entertainment and hospitality

6.22
Entertainment is a contentious area of expenditure. For that reason, entertainment expenditure (such as hosted dinners and other forms of hospitality) must accord with approved policies, represent value for money, meet standards of probity, and have a legitimate business purpose. Claims for reimbursement of entertainment expenses should be accompanied by receipts and documentary evidence of business purpose. As a general rule, the most senior person at the function (dinner, etc.) should pay.

Other expenditure

Communications and telephones

6.23
Communications and telephone policies should include the use of mobile phones, claiming for business use of a personal phone, and private calls when away on business.

6.24
If board members use their private phones or other personal communication equipment for business use, claims for reimbursement should be supported by evidence of business use.

Vehicle use (including company vehicles, taxis, rental cars and private vehicles)

6.25
Different methods of transport can be used for business purposes, but they should be appropriate to the circumstances.

6.26
We expected entities to have policies specifying the circumstances and conditions under which private or corporate vehicles, taxis and rental cars, may be used, including cost/benefit, convenience, and whether feasible alternatives were available.

6.27
Private vehicles should be used only where travel by other means is impractical. Taxis or corporate vehicles should not be used for private purposes. The class of rental car used should be appropriate to its intended use and not be unnecessary or extravagant.

6.28
Claims for the use of taxis, corporate and personal vehicles should be supported by evidence of business use. Private vehicle expenditure claims should be reimbursed at approved rates in line with those paid in the public sector (by reference to Cabinet Office guidance) or at the rate set by the individual entity. Claims should be matched against supporting documentation (such as taxi chits, petrol purchase receipts, or evidence of distances travelled).

Other benefits

6.29
We expected policies to make it clear that that all gifts, gratuities, prizes, credits (such as frequent-flyer points), or other tangible benefits received by the chairperson, or their spouses or partners, or members of their households, in the exercise of their business roles, are the property of the entity.

Generally applicable expectations

Prior authorisation of significant expenditure

6.30
We expected all significant expenditure to be authorised in advance of any expenses incurred.

Credit card expenditure

6.31
While credit cards are a convenient means of paying for business expenses, they must be subject to appropriate controls and limits. We expected entities to have a policy governing the use of credit cards.

6.32
All expenditure charged to a credit card should be for a clear business purpose and be reconciled against receipts and the supplier’s invoice, or other appropriate external supporting documentation. Authorisation of credit card expenditure should include the purchase receipt, as well as credit card and EFTPOS record slips. If the business purpose of the expenditure is not clear, a written reason for it should be attached to the credit card statement or attached receipts.

6.33
Credit cards should not be used for personal expenditure, or for obtaining cash advances.

The audit work we undertook

6.34
Our auditors examined the expenses of chairpersons for the 2003-04 year to assess whether their expenditure was appropriate, reasonable, and incurred in accordance with the entity’s policies and procedures. Auditors reviewed chairpersons’ expenses in all State-owned enterprises and Crown companies (including Crown Research Institutes), and certain Crown entities – 98 entities in total. The entities are listed in the Appendix on pages 70-73.

6.35
In the 2003-04 year, the total expenditure incurred by the chairpersons of those 98 entities was $1.37 million, of which our auditors specifically examined expenses totalling $875,000.

6.36
Our audit covered only the expenses of chairpersons, and not fees paid to them for their services.

Our findings

6.37
Expenditure incurred by chairpersons for 2003-04 is shown in the table below.

Total Chairperson Expenditure 2003-04	Number of Chairpersons
Greater than $50,000	4
Between $20,000 and $50,000	18
Between $10,000 and $20,000	22
Less than $10,000	58
Total	102*

* Because there was a change of chairperson for 4 entities during the year, the table includes 4 more chairpersons than the number of entities examined.

6.38
In 43 of the 98 of the entities reviewed (i.e. just under half), our auditors identified no exceptions or concerns about controls over the expenditure incurred by the chairperson.

6.39
In the remaining 55 entities, our auditors identified one or more exceptions where practice diverged from our expectations relating to the control of chairpersons’ expenditure. These exceptions involved control weaknesses or breakdowns, or non-compliance with the entities’ policies and procedures.

6.40
Most exceptions identified by our auditors involved minor amounts in relation to the total expenditure examined, and arose from a relatively small number of transactions proportionate to the total number examined.

Exceptions identified

Lack of appropriate authorisation

6.41
We identified 46 exceptions where some of the chairperson’s expenditure had not been appropriately authorised. Most of those exceptions related to expenditure authorised by the chief executive officer or chief executive officer’s personal assistant.

6.42
We believe that it is inappropriate for the chief executive officer to approve the chairperson’s expenditure, as this would be likely to create a situation where each one is signing off the other’s expenditure claims. It is also unacceptable for a personal assistant, or any other employee in a subordinate role to the chief executive officer, to approve the chairperson’s expenditure claims.

6.43
As noted in paragraph 6.6 on page 60, we expected the chairperson’s expenses to be authorised by the chair of the audit committee or a director of similar standing, or by 2 other members of the board. The CCMAU guidelines also have the same best-practice expectation.

6.44
An example of expenditure not properly authorised was identified in a Crown entity, where a personal assistant used a travel agent to arrange travel for all members of the board. While the travel was booked in advance, the arrangements were not subject to further scrutiny within the organisation to ensure that the expenditure was appropriate and complied with its travel policies.

6.45
A second example of expenditure not appropriately authorised was identified in a Crown Research Institute. In this example, our auditor noted that the chairperson’s entertainment and hospitality expenditure was generally booked directly by the personal assistant to the chief executive officer. In this situation, the chairperson’s expenses should have been authorised by the chair of the audit committee or a director of similar standing, or by 2 other board members.

Supporting documentation not showing clear business purpose

6.46
We identified 34 exceptions where supporting documentation for some expenditure was inadequate. Most of these involved insufficient explanation of the business purpose of the expenditure incurred.

6.47
A Crown entity provided one example of such expenditure. In this case, supporting documentation consisted of the proper GST invoices, but there were no further details on the business purpose. As a result, the auditor was unable to assess the reasonableness of the expenditure in terms of business need.

6.48
A State-owned enterprise provided a second example of the problem. In this case, no documentation was attached to an expense claim to explain the business purpose of 2 nights’ accommodation in Melbourne. Our auditors requested this information, but the entity was unable to provide any supporting documentation or explanation.

6.49
The exceptions have been raised in the auditor’s management letter to the entity concerned, so that appropriate corrective action can be taken.

Lack of, or non-compliance with, relevant policies and procedures

6.50
We identified 15 exceptions where the entity’s policies and procedures relating to the chairperson’s expenditure failed to provide adequate guidance for proper control over that expenditure. Most of the exceptions involved entities whose policies and procedures did not specify the authorisation process, or provide guidance on the level of expenditure considered reasonable.

6.51
We also identified 12 exceptions where the entity did not comply with its own policies and procedures relating to the chairperson’s expenditure.

6.52
These exceptions have been raised in the auditor’s management letter to the entities concerned.

6.53
A Crown entity provided one example of policies and procedures that had failed to properly control its chairperson’s expenditure. In this case, the chairperson was leasing a laptop computer and a cellphone from the entity. The entity did not have a specific policy covering such a situation.

6.54
A second example came from a Crown company, where the chairperson was accruing for personal use frequent-flyer points earned on business trips. Although this was in line with the company’s policies and procedures, it did not meet our expectation that frequent-flyer points accrued on business trips should be retained and used for the entity’s benefit (notwithstanding that these points can be accrued only by individuals, not by entities).

6.55
A third example concerned a State-owned enterprise that did not follow its own policies and procedures. In this case, the chairperson was paid an accommodation allowance on a daily basis, which was approved by the board and the chair of its audit committee. However, the entity’s policy at that time was that on no occasion would daily accommodation allowances be paid to directors, even if they were staying in private accommodation. The entity has since updated its policies and procedures.

Our conclusions

6.56
Our audit found that controls over chairpersons’ expenditure were satisfactory for just under half the entities examined. No exceptions were noted in these entities.

6.57
Most of the exceptions identified by our auditors involved inappropriate authorisation and inadequate supporting documentation. In a number of cases, the entity’s policies provided insufficient guidance for the proper control of the chairperson’s expenditure.

6.58
In many cases, the exceptions involved minor amounts, which made up a small proportion of the total expenditure examined. However, they concern us, particularly because of the key position the chairperson holds in a public entity.

6.59
It is important that public entities ensure that all expenditure incurred by chairpersons (and all persons) is appropriately authorised. Many of the exceptions identified by our auditors occurred in entities whose policies and procedures had not been updated to incorporate best practice.

6.60
Although the CCMAU guidelines were issued only part-way through the year under review, the best practice they advocate should already have been reflected in the entities’ policies and procedures. Best practice is constantly evolving, and public entities need to ensure that their policies and procedures are updated to reflect current expectations.

6.61
Our expectation (based in part on the CCMAU guidelines) is that all expenditure incurred by a chairperson should be authorised by the chair of the entity’s audit committee or a director of similar standing, or by 2 other members of the board. We often found that the chief executive officer or a personal assistant had authorised the chairperson’s expenditure. These arrangements are inappropriate.

6.62
Adequate supporting documentation should accompany all expense claims. This documentation is critical in linking the expenditure incurred to the business purpose for which it was incurred. Often the supporting documentation provided little or no explanation of the business purpose of the expenditure.

6.63
Where our auditors identified exceptions, they formally advised the entities concerned of the issues involved. Many of those entities were already updating their policies and procedures to meet our expectations and/or the CCMAU guidelines, or had undertaken to do so. Our auditors will follow up these issues in the 2004-05 audit, to ensure that the necessary corrective action has been taken and that the practice of these entities has improved.

6.64
We intend to continue to enhance the level of work done in annual audits in the areas of waste, probity, and governance. As board expenditure is an area of sensitive expenditure, it will continue to be scrutinised as part of our annual audits, and we will pay close attention to the areas for improvement.

Appendix – Entities whose chairperson’s expenses were examined

Companies monitored by CCMAU

State-owned Enterprises

AgriQuality New Zealand Limited
Airways Corporation of New Zealand Limited
ASURE New Zealand Limited
Electricity Corporation of New Zealand Limited
Genesis Power Limited
Landcorp Farming Limited
Meridian Energy Limited
Meteorological Service of New Zealand Limited
Mighty River Power Limited
New Zealand Post Limited
New Zealand Railways Corporation
Solid Energy New Zealand Limited
Timberlands West Coast Forestry Limited
Transmission Holdings Limited
Transpower New Zealand Limited

Crown Research Institutes

AgResearch Limited
Industrial Research Limited
Institute of Environmental Science and Research Limited
Institute of Geological and Nuclear Sciences Limited
Landcare Research New Zealand Limited
National Institute of Water and Atmospheric Research Limited
New Zealand Forest Research Institute Limited
New Zealand Institute for Crop and Food Research Limited
The Horticulture and Food Research Institute of New Zealand Limited

Crown Companies

Animal Control Products
Limited Learning Media Limited New Zealand
Venture Investment Fund Limited
Quotable Value Limited
Radio New Zealand Limited
Television New Zealand Limited

Crown Entities

New Zealand Lotteries Commission
Public Trust

Other entities (not monitored by CCMAU)

Crown Entities

Accident Compensation Corporation
Alcohol Advisory Council
Arts Council of New Zealand Toi Aotearoa
Auckland District Health Board
Bay of Plenty District Health Board
Building Industry Authority
Canterbury District Health Board
Capital and Coast District Health Board
Career Services
Civil Aviation Authority
Commerce Commission
Counties Manukau District Health Board
Earthquake Commission
Electricity Commission
Energy Efficiency and Conservation Authority
Environmental Risk Management Authority
Foundation for Research, Science and Technology
Government Superannuation Fund Authority
Guardians of New Zealand Superannuation
Hawke’s Bay District Health Board
Health Research Council of New Zealand
Housing New Zealand Corporation
Human Rights Commission
Hutt Valley District Health Board
Lakes District Health Board
Land Transport Safety Authority of New Zealand
Legal Services Agency
Maritime Safety Authority of New Zealand
MidCentral District Health Board
Museum of New Zealand – Te Papa Tongarewa
Nelson Marlborough District Health Board
New Zealand Antarctic Institute
New Zealand Artificial Limb Board
New Zealand Blood Service
New Zealand Film Commission
New Zealand Fire Service Commission
New Zealand On Air
New Zealand Qualifications Authority
New Zealand Symphony Orchestra Limited
New Zealand Teachers Council
New Zealand Tourism Board
New Zealand Trade and Enterprise
Northland District Health Board
Otago District Health Board
Pacific Islands Business Development Trust
Pharmaceutical Management Agency (Pharmac)
Residual Health Management Unit
Securities Commission
South Canterbury District Health Board
Southland District Health Board
Sport and Recreation New Zealand
Standards Council of New Zealand
Tairawhiti District Health Board
Takeovers Panel
Taranaki District Health Board
Te Mangai Paho (Mäori Broadcasting Commission)
Te Taura Whiri I Te Reo Mäori (Mäori Language Commission)
Tertiary Education Commission
Testing Laboratory Registration Council of New Zealand
Transfund New Zealand
Transit New Zealand
Waikato District Health Board
Wairarapa District Health Board
Waitemata District Health Board
West Coast District Health Board
Whanganui District Health Board

1: Inquiry into Expenses Incurred by Dr Ross Armstrong as Chairperson of Three Public Entities, ISBN 0-478-18113-2, December 2003.

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