Part 3: Our expectations

3.1
All organisations have aspects of business spending that can be seen as providing some personal benefit. All organisations need financial management processes to manage the inherent risks in that type of spending.

3.2
In this Part, we summarise our general expectations about how public sector organisations will manage those risks. We discuss:

• our approach to spending that can provide personal benefit;
• our general expectations of public entities; and
• the principles we used to assess Ministerial Services' financial management processes.

Our approach to spending that can provide personal benefit

3.3
The public rightly expect all those who spend public money to recognise that it is public money. Any spending that provides or appears to provide personal benefit to an individual can be controversial. That has been amply demonstrated in the last year by the public debate that has followed from increased disclosure about spending by Ministers, mayors, and public sector chief executives.

3.4
Everyone who spends or administers public money needs to recognise this sensitivity: the questions asked by the public are legitimate.

3.5
That does not mean not spending the money, or not using a business credit card, just because there is some risk attached. It does mean taking extra care to ensure that the spending is reasonable and appropriate, and that the organisation's decisions and approval processes will stand up to public scrutiny.

3.6
It is important to consider carefully how an outside observer might regard the spending, and to be clear about why the spending is justified, both in terms of business purpose and amount. It is sensible to take a conservative approach in managing these boundaries. It is also useful to consider specifically how any risks are to be managed. Applying normal financial management and approval processes, and keeping good records, will usually be central to managing any risks.

3.7
Any suggestion of inappropriate spending of public money, no matter how small the amount, can undermine the public's trust in government and Parliament if it is not caught and corrected. It is important that public entities as organisations, and all individuals working in the public sector, guard carefully against this risk through their organisational policies and procedures and through their personal conduct.

Our general expectations of public entities

3.8
In February 2007, the then Auditor-General published a good practice guide, Controlling sensitive expenditure: Guidelines for public entities. That report includes guidance on the components of a strong management approach to spending that has the potential to give personal benefit. It outlines five basic elements:

• a principles-based approach;
• leading proper and prudent practice by example;
• approving and implementing suitable policies and procedures;
• procedures that consistently support all staff to follow proper and prudent practices; and
• appropriate training and monitoring of activities to ensure effective control.

3.9
To be effective, organisational policies and procedures need to:

• make clear what types of spending are and are not permitted;
• outline clear approval processes that are specific about who approves what;
• set spending limits or boundaries, including giving guidance or benchmarks, where possible, on what is "reasonable" when the limit is described as "actual and reasonable" costs;
• allow a manager to grant an exception in exceptional circumstances;
• specify the monitoring and reporting regime and, where applicable, any internal audit checks that may be applied; and
• specify the process for amending the policies and procedures.

3.10
Our general expectations about approval processes are that:

• A person senior to the person who will or might benefit will give the approval, wherever possible (the "one-up" principle). Where this is not possible, an alternative approach needs to be found that achieves some distance between the person benefiting and the person who gives final approval.
• The person approving the spending must satisfy themselves that the spending is within any relevant rules, has a justified business purpose, and that other principles are adequately met, including reasonableness.
• Policies will require expenditure to be approved before it is incurred, wherever practical.
• Approvals will be within the person's delegated authority and the budget.

3.11
The claim that goes forward for approval should be submitted promptly after the expenditure is incurred. It should include:

• a clear statement of the business purpose of the spending – if that is not clear from the supplier documentation, the person claiming the expense should provide a brief written statement of the purpose;
• adequate original documentation to support the spending, such as a tax invoice or other validating documentation – an EFTPOS receipt is not adequate, nor is a credit card statement; and
• some alternative documentation of the date, amount, description, and purpose of the spending, if receipts are not available (for example, for small amounts of cash).

3.12
The aim is to provide enough documentation or explanation for an independent person to be able to understand why the expense was incurred and to assess whether it was reasonable and appropriate. For example, a claim for a meal or entertainment function should state the number of people attending, who they were (at least in general terms), and the purpose of the event. This information lets someone assess at a glance whether the amount spent was reasonable. For example, in a list of transactions coded as "Business hospitality":

• Entry A could simply state "Hospitality: meal" and the cost is $500.
• Entry B could state "Hospitality: Dinner, visit from chief executive of [overseas counterpart], 6 people", and the cost is $500.

3.13
Entry A raises more questions than it answers about the purpose and reasonableness of the expense. Entry B is self-explanatory, and would be likely to proceed through an approval process smoothly if the invoice were attached.

3.14
Our 2007 good practice guide provides advice on several aspects of sensitive expenditure. In particular, it encourages public entities to have policies that give clear guidance on buying alcohol for business functions, the use of minibars when travelling, the organisation's approach to staff functions such as farewells and Christmas parties, and the giving of gifts. Clear rules or guidelines on appropriate amounts to spend in different situations help protect individual staff, because they require the organisation to have decided what it considers reasonable rather than leaving individuals to form their own judgements. The guide also encourages pre-approval for events such as major staff functions.

The principles we used to assess the Ministerial Services system

3.15
The Ministerial Services system has to meet the needs of three distinct groups:

• the users of the system, who need effective support in busy and complex roles (Ministers and senior private secretaries);
• those administering the financial management processes, who must account for the use of the funds (Ministerial Services); and
• the public, who are entitled to assurance that public funds are managed properly.

3.16
Financial management processes that support spending by Ministers will need to differ from normal processes in some respects. Ministers are not employees. They have a high degree of autonomy and take personal and political responsibility for their actions. Their role is broad and responsive, the pace and amount of work is high, and they will often have high travel and hospitality costs. The financial management processes supporting them need to be similarly responsive and flexible.

3.17
The funding context is also complex, because some types of normal business spending that could have personal benefit are governed by legal rules and expressed as entitlements under the Parliamentary and Executive Determinations made under the Civil List Act 1979 by the Speaker and the Prime Minister. Under the current Determinations, there is no formal need to check the reasonableness of some spending because Ministers have a comprehensive entitlement.

3.18
We are familiar with these issues from our ongoing work in the parliamentary and ministerial sector, through our regular annual audit work and through the various inquiries we have carried out in the last 10 years. Many of our discussions since 2006 with the Parliamentary Service and the Speaker have centred on the equivalent issues in the parliamentary context. As noted in Part 2, we provided advice to the Parliamentary Service Commission in 2007 specifically on how the new processes developed for Parliament balanced the need to achieve suitable control with the autonomy of MPs.

3.19
For our inquiry, we used the following principles to assess the Ministerial Services system:

• effective – the system has to meet the needs of Ministers and their staff for support;
• principled and justifiable – the type of support provided should be grounded in principle and have a clear rationale connected to business purpose;
• accountable – the financial management processes should include appropriate and clear approval requirements and checks, and maintain full financial records;
• clear – the rules and processes need to be easy to understand and apply;
• grounded in common sense – the system needs to work in practice, and be able to provide sensible and practical answers to new problems;
• transparent – clear information on the rules and the way they are administered, and the support that is provided, should all be publicly available and regularly reported;
• manifestly fair – the support that the system provides needs to be consistent and fair to all those who use it, and it needs to be seen to be fair by observers; and
• cost-effective – the way in which support is provided needs to be periodically assessed to ensure that value for money is being obtained.