Part 1: Introduction

1.1
In this Part, we explain

• why we did the audit;
• the scope of our audit;
• how we carried out our audit; and
• the nature of conflicts of interest.

Why we did the audit

1.2
On 20 March 2007, the High Court set aside a contract for laboratory services in the Auckland region between the three Auckland District Health Boards (the Auckland DHB, the Counties Manukau DHB, and the Waitemata DHB) and Lab Tests Auckland Limited: Diagnostic Medlab v Auckland District Health Board (the Diagnostic Medlab case).¹

1.3
The Court found that one of the members of the Auckland DHB had a conflict of interest and that the DHBs did not do enough to protect the process of awarding the contract from that conflict of interest.

1.4
As a result, the Minister of Health asked the Auditor-General to carry out a performance audit under section 16 of the Public Audit Act 2001 to examine how conflicts of interest are dealt with in each of the three Auckland DHBs.

1.5
The Auditor-General agreed to this request.

Scope of our audit

1.6
Our audit examined whether:

• each of the three Auckland DHBs has and is operating adequate systems and processes for identifying and disclosing conflicts of interest, having regard to legal and other public sector standards;
• each of the DHBs has and is operating adequate systems and processes for managing conflicts of interest, having regard to legal and other public sector standards; and
• the governance and management structures and arrangements of each of the DHBs adequately support the prudent management of conflicts of interest.

1.7
In other words, the audit considered how well the three Auckland DHBs were equipped to deal with conflicts of interest overall. It did not focus on inquiring into specific incidents. In particular, the audit did not consider:

• the factual situation that was the subject of the decision in the Diagnostic Medlab case; or
• whether the contract the DHBs entered into with Lab Tests Auckland Limited should have been set aside.

1.8
As our audit focused on only the three Auckland DHBs, our findings are necessarily limited to them. Nevertheless, we consider that some of the issues and lessons that we discuss may be relevant to other DHBs and other public entities (see in particular Parts 2 and 6).

How we carried out our audit

1.9
We examined a significant amount of documentation from the DHBs, including policies, procedures, other guidance material, minutes, registers, and file excerpts. We also considered other relevant guidance material aimed at the health system or parts of it.

1.10
We interviewed a wide range of people at each of the DHBs, including board members, the chief executive, other senior staff, other administrative staff, and clinicians.

The nature of conflicts of interest

1.11
Managing conflicts of interest requires careful judgment, and involves a balance. An approach that is too relaxed will lead to legal and reputational risks, and undermine public confidence in the entity. Equally, an approach that is too cautious and restrictive could frustrate the entity and its members and staff from operating effectively.

1.12
In 2007, we published general guidance for the public sector called Managing conflicts of interest: Guidance for public entities.²

1.13
Our approach to assessing the management of conflicts of interest is derived from a wide range of New Zealand and overseas sources of guidance (listed in that publication), and from our own inquiry reports in recent years.³

1.14
Our 2007 general guidance publication explains how to understand conflicts of interest in a public sector context, and how to identify, disclose, and manage them. It presents our view on what constitutes good practice in the public sector. It does not set rules, but aims to provide a coherent source of advice to help public entities develop their own policies and to understand how to make sensible and prudent decisions when trying to manage conflicts of interest.

1.15
We consider that, in the public sector, there is a conflict of interest when a member’s or official’s duties or responsibilities to a public entity could be affected by some other interest or duty that the member or official may have.

1.16
The other interest or duty might exist because of:

• the member's or official's own financial affairs;
• a relationship or other role that the member or official has; or
• something the member or official has said or done.

1.17
Interested readers should refer to our general guidance publication for more detail. However, some main points from that publication are worth restating.

1.18
Impartiality and transparency in administration are essential to maintaining the integrity of the public sector. Where activities are paid for by public funds or are carried out in the public interest, members of Parliament, the media, and the public will have high expectations. They expect people who work in the public sector to act impartially, without any possibility that they could be influenced by favouritism or improper personal motives, or that public resources could be misused for private benefit.

1.19
However, in a small country like ours, conflicts of interest in our working lives are natural and unavoidable. The existence of a conflict of interest does not necessarily mean that someone has done something wrong, and it need not cause problems. It just needs to be identified and managed carefully.

1.20
Just because a member or official has an interest outside their work, it does not necessarily follow that they have a conflict of interest. A conflict of interest occurs only if something arises at work that overlaps with the other interest. A conflict of interest is about the overlap, intersection, or coincidence of two different interests or duties, where one could affect the other.

1.21
The public entity needs to consider whether there is a reasonable risk that the situation could undermine public trust and confidence in the member, official, or public entity. Public perceptions are important. It is not enough that public sector members or officials are honest and fair; they should also be clearly seen to be so.

1.22
Managing conflicts of interest well is not only good practice but also protects the public entity and the member or official involved. A conflict of interest that is hidden, or that is poorly managed, creates a risk of allegations or perceptions of misconduct, or of other adverse consequences such as litigation.

1.23
Rules and expectations about conflicts of interest have a variety of sources. People managing conflicts of interest need to consider both the ethical and legal dimensions of conflicts of interest. (In Part 2, we discuss some particular rules that apply to DHBs.)

1.24
Policies and procedures can provide clear rules for simple and predictable situations, and set out a process for dealing with the more difficult ones. It is for each public entity to decide what policies and procedures it should have in place to help it manage conflicts of interest. The policies and procedures will depend on the entity’s structure, functions, and activities, and any applicable statutory requirements. The entity should consider what its operations are, what fields it operates in, and what sorts of problems or risks might typically arise. Our published guidance discusses the sorts of matters that policies and procedures could cover.

1.25
However, policies and procedures are not enough. They cannot anticipate every situation, since a conflict of interest can arise in a wide range of circumstances. Moreover, the seriousness of some situations will be a question of degree, and not easily managed by a rule. Accordingly, judgement will be required in some situations.

1.26
There are two aspects to dealing with particular situations:

• identifying and disclosing the conflict of interest (primarily the responsibility of the member or official concerned); and
• deciding what action (if any) is necessary to best avoid or mitigate any effects of the conflict of interest (primarily the responsibility of the public entity).

1.27
In these cases, the public entity needs to assess carefully:

• the seriousness of the conflict of interest; and
• the range of possible mitigation options.

1.28
The focus of the assessment is not primarily the risk that misconduct will occur. It is about the seriousness of the connection between the interests, the risk that the public entity’s capacity to make decisions lawfully and fairly may be compromised, and the risk that the entity’s reputation may be damaged. In making this assessment, the entity needs to consider how the situation may reasonably appear to an outside observer.

1.29
Usually, mitigation means that the member or official withdraws from, or is excluded from being involved in, the public entity’s work on the particular matter.

1: High Court, Auckland, CIV-2006-404-4724, 20 March 2007, Asher J. (The judgment is partially reported at [2007] 2 NZLR 832, but most of the discussion of the conflict of interest issue is omitted.) At the time of writing our report, the Court’s decision was the subject of an appeal to the Court of Appeal.

2: This is available on our website at www.oag.govt.nz.

3: See, for example, our 2004 report Christchurch Polytechnic Institute of Technology’s management of conflicts of interest regarding the Computing Offered On-Line (COOL) programme.