Part 3: Our expectations

3.1
In this Part, we discuss our expectations of, and the guidance that has been available to, Crown entities. We then summarise our specific expectations relating to:

• decision-making practices;
• identifying and managing conflicts of interest; and
• dealing with senior managers’ expenses.

3.2
These 3 issues were recurring themes in our inquiry.

Crown entities

3.3
The Education Act 1989 guarantees tertiary education institutions academic freedom and autonomy.¹⁵ Nevertheless, they must also meet high ethical standards, be accountable, and properly use the resources given to them.¹⁶

3.4
We have reviewed TWOA against what we consider are accepted expectations of good practice in the public sector.

3.5
When TWOA was established, there may have been a lack of useful guidance for Crown entities about public sector expectations. This is not the case now, and has not been for some time.

3.6
Many sources of guidance are now available. Appendix 2 contains a list of sources of guidance that are relevant to the issues discussed in this report. These provide more detail on the expectations that we summarise in this Part.

Decision-making practices for significant expenditure

3.7
Public entities spend public funds, so they should take care to spend them wisely. They should use their resources lawfully, effectively and efficiently. They should avoid waste, and act with probity and financial prudence. In other words, they should seek to ensure that they get value for money, and that they do so in a fair and justifiable manner.

3.8
Decisions to enter into significant transactions and new ventures should not be taken impulsively, but only after careful planning and assessment. They should be based on thorough analysis or advice and involve competent personnel. The assessment at the start is often called the “business case” for a decision.

3.9
For example, in procurement¹⁷ a business case should ideally:

• identify the objectives of the proposed procurement;
• assess the costs, benefits, and risks involved;
• examine the feasibility of the initiative;
• identify a preferred strategy and method;
• identify and assess options; and
• show that the preferred option will meet the procurement objective.

3.10
We expect public entities to consider what method is most suitable, given the nature and size of the procurement. For significant transactions, the best way to ensure value for money is usually a competitive approach. This may mean closed or open tendering, or seeking several quotes. Sometimes it may mean entering into a sole-source or preferred supplier relationship. Public entities should also bear in mind the need to act in a fair, open, and unbiased manner, because other potential suppliers may reasonably expect to be given opportunities to bid for work.

3.11
Sometimes the decision-making itself will need to be the subject of a plan, although public entities will often have established standard policies and procedures to guide them when making particular types of decisions. Several stages of evaluation may occur during the selection, and there may be negotiations between the parties.

3.12
Good planning in the early stages of a project should ensure that:

• the objectives are clear;
• the steps for achieving them are sensible and well thought out;
• costs and benefits have been carefully weighed;
• foreseeable risks or difficulties are identified and provided for; and
• the project meets its objectives.

3.13
Further project planning may be needed to provide for the details of how the project is to be carried out. The contract should be promptly and adequately documented, and should be carefully managed and checked as it is carried out.

3.14
A public entity may be called on to justify its decisions after the event, so it must record in writing its analysis, advice, and decisions.

Identifying and managing conflicts of interest

3.15
A conflict of interest arises where 2 different interests intersect.¹⁸ In the public sector, a conflict of interest exists where a person’s duties or responsibilities to a public entity could be affected by some other separate (and usually private) interest or duty that they may have. Conflicts of interest can have both legal and ethical dimensions.

3.16
One way of considering whether a conflict of interest may exist is to ask:

Does the issue create an incentive for the person to act in a way that may not be in the best interests of the public entity?

3.17
Proper management of conflicts of interest is important in the public sector. Where activities are paid for by public funds, or are undertaken in the public interest, taxpayers will have strong expectations of probity. Media and the public take a strong interest when they think taxes are being spent irresponsibly or misused for private gain.

3.18
Public perceptions are important. It is not enough that public officials are honest and fair; they should also be clearly seen to be so.

3.19
Labelling a situation as a “conflict of interest” does not mean that corruption or some other abuse of public office has actually occurred. Usually, there is no suggestion that the person concerned has taken advantage of the situation for their personal benefit, or that the person has been influenced by improper personal motives. But a perception of the possibility for improper conduct – no matter how unfair to the individual – can be just as significant. Impartiality and transparency in administration are essential to the integrity of the public sector. The criterion is whether an outside observer would consider there to be a reasonable risk that the situation could undermine public trust and confidence in the official or the public entity.

3.20
The issue is not confined to considering the possibility of financial loss to the public entity concerned. It can relate to the potential for public funds, resources, or time being used by someone to advance their own private interests.

3.21
There are 2 aspects to dealing with a conflict of interest:

• Identification. A conflict of interest needs to be identified and declared to the necessary people in a timely and effective manner.
• Management. Decisions need to be made about what, if anything, needs to be done to avoid or mitigate the conflict of interest.

3.22
In the public sector, simply declaring a conflict of interest may not be enough. Once a conflict of interest has been identified and declared, the entity may need to take further steps to remove any possibility – or perception – of public funds being used for private gain.

Senior management expenses

3.23
Public entities need to take particular care over the expenditure of public funds relating specifically to, or incurred by, senior personnel of an organisation. This is because such expenses often involve an element of personal benefit, and carry an increased potential for abuse.¹⁹

3.24
This expenditure can include things like travel, accommodation, entertainment and hospitality, car use, communications devices, gifts, fees paid to the person, expenses paid on credit card, and reimbursement of expenses paid personally. Some of this expenditure is called “sensitive expenditure” or “discretionary expenditure”.

3.25
In this inquiry, we looked at travel and credit card expenses incurred by TWOA personnel.

3.26
We expect a public entity to have clear policies and practices governing travel, including such matters as:

• the need for a documented business case setting out the purpose and outcomes being sought and containing a budget or indicative cost, before the trip is undertaken;
• the need for formal approval of the travel (given by a more senior person);
• the appropriateness of the use of business class or first class flights;
• the quality of accommodation that is permissible;
• the need to keep enough documentation to explain and corroborate expenses;
• how the traveller will account for the costs incurred; and
• other reporting requirements (such as trip reports).

3.27
Policies governing the use of credit cards should deal with such matters as:

• the appropriateness of making cash withdrawals;
• whether the card can be used for private expenditure;
• the need to keep enough documentation to explain and corroborate transactions;
• how credit card transactions are reviewed and approved by a person senior to, and independent of, the card holder; and
• how the card holder will account for the costs incurred.

3.28
Our inquiry also looked at fees paid to board members. We expect fees to comply with public sector standards or rules.²⁰

15: Sections 160 and 161(1), Education Act 1989.

16: Section 161(3), Education Act 1989.

17: See our report Procurement: A Statement of Good Practice (June 2001); and Ministry of Economic Development, Government Procurement in New Zealand: Policy Guide for Purchasers (latest edition July 2002).

18: This section is a summarised version of the discussion of conflicts of interest in our report Christchurch Polytechnic Institute of Technology’s management of conflicts of interest regarding the Computing Offered On-Line (COOL) programme (2004). See especially Part 2 of that report.

19: See our report Central Government: Results of the 2003-04 Audits, Part 6 (2005), and The Institute of Internal Auditors NZ Inc., A Management Guide to Discretionary Expenditure (1996).

20: Such as Cabinet Office, Cabinet Office Circular CO (03) 4: Fees Framework for Members of Statutory and Other Bodies Appointed by the Crown (latest edition July 2003).