Part 7: How well does the Ministerial Services system work in practice?

How the Department of Internal Affairs manages spending that could give personal benefit to Ministers.

The previous three Parts have analysed the different layers of the Ministerial Services system: how it fits with the other systems in the overall support arrangements for MPs and Ministers, the rules in the Executive Determination, and the financial management processes.

This Part discusses what happens in practice. It draws on our examination of transactions from one Minister's office, our sampling and testing of 260 transactions in the last three years from other ministerial offices, and our review of the documentation that was publicly released on eight years of credit card transactions for all ministerial offices.

We have also interviewed several senior private secretaries and Ministerial Services staff, and drawn on our findings from our work on ministerial accommodation in 2009.

This Part discusses:

  • aspects of financial management that are done well;
  • the results of our testing of transactions;
  • the effectiveness of the guidance material;
  • our impressions of the culture of Ministerial Services; and
  • our overall assessment of what we saw happening in practice.

Aspects of financial management that are done well

We acknowledge, at the outset, that the financial management processes used by Ministerial Services deal with a large number of transactions in a demanding and complex environment. A few key individuals clearly hold a great deal of institutional knowledge and bring a substantial amount of practical experience to the task. This includes experience in finding solutions to difficult issues and in resolving disputes, as well as responsiveness when under pressure.

All those we spoke to appreciate the availability and helpfulness of the finance team within Ministerial Services. Users feel that they can ask questions and get help easily and quickly.

We also acknowledge that the financial management processes and guidance have been revised in recent years, to introduce greater discipline and clarity. There is now a more systematic approach to training and development for ministerial office staff, and especially for senior private secretaries. This includes induction processes, mentoring programmes, regular meetings, and periodic "off-site" development sessions.

We appreciate that there has been considerable effort in recent years to modernise and improve the financial management processes and procedures. However, our detailed scrutiny in this inquiry has identified some weaknesses and problems that still need to be addressed. We discuss these in this Part.

The results of our testing of transactions

In the first part of this inquiry, we examined all of the transactions in a Minister's office, to establish whether the spending was within the rules. In this second part of the inquiry, we tested a sample of 260 transactions across different Ministerial offices and different types of spending. We also reviewed the information on seven years of credit card spending that was publicly released.

Does inappropriate spending get approved?

We did not find any pattern of major spending irregularities. In about half of the transactions we tested in this second part of the inquiry, there was good evidence that the spending was appropriate and that processes had been properly followed.

In many others in our sample, we identified that, even though the spending was appropriate, procedural requirements in the Handbook may not have been properly followed. We discuss these procedural and documentation issues separately.

For the remainder of the transactions in our sample, the financial records did not contain enough information for us to be able to assess whether the spending was appropriate and reasonable.

In a small number of transactions, we identified spending that we considered was either outside the rules or marginal enough to require careful consideration and documentation of the reasons for approval:

  • In our report on the first part of this inquiry, we identified a small number of items of inappropriate spending that were approved, even when it was apparent from the documentation that they were outside the rules.
  • We found one example of spending on a health care item that we considered was more in the nature of personal spending. The documentation in the financial records did not suggest that the transaction had been queried. We saw a separate email exchange that showed that the Minister's office had asked if the item could be provided, and that Ministerial Services had confirmed that it could. We did not see any consideration in that exchange or in the financial records of whether the item could be appropriately paid for. When we raised the matter with Ministerial Services, it confirmed that the item had been approved and that it regarded that decision as "an exception".
  • We also saw that ministerial office funds had been used to pay for professional advice on a portfolio matter. In our view, this would usually be a departmental expense. When we raised this with Ministerial Services staff, they agreed that it was surprising but had not previously identified or considered the issue.

We leave to one side personal spending that is later reimbursed, because we discuss elsewhere that this has been a common practice, despite what the Handbook says about the use of credit cards.

We also saw and heard evidence of active checking and questioning of transactions by Ministerial Services staff when they were considering whether to approve the spending. Often this would be done by asking for more information in emails, or in direct conversations or telephone calls. This approach is appropriate for the close working relationships between the different groups of staff, and the fluid and responsive nature of the work. In most cases, the issue is likely to be that some information is missing, and it would not be necessary or helpful to raise these questions formally or in a confrontational way.

As we discuss shortly, the additional information gathered through these checking processes that enabled a transaction to be approved was not always recorded adequately or included or cross-referenced in the financial records. Although the transaction may have been properly approved in the end, there was not always an adequate audit trail.

Compliance with procedural requirements

In many other transactions in our sample, we identified that even though the spending was appropriate, procedural requirements in the Handbook may not have been properly followed. For example:

  • We saw many examples where there was no evidence on file that pre-approval requirements had been complied with.
  • There was poor compliance with certification requirements. That is, the right people were not signing the right expense claims, or nobody was certifying that the spending had been incurred. For example, the Handbook requires that spending on domestic travel is to be certified by the person claiming the expense (that is, the person who travelled) and the senior private secretary. We often found that the person who had travelled was not the person who signed for the spending, and sometimes there was no signature at all.
  • The procedures for spending on koha were also not always followed. The policy in the Handbook is that the Minister should sign the claim for koha that the Minister has presented, and the senior private secretary should ensure that the date and receiving organisation are included in the accompanying explanation. This did not happen consistently in practice.
  • We also saw instances where a senior private secretary had certified their own reimbursements.

When we raised the question of compliance with the Handbook's procedural requirements with Ministerial Services, it explained that it did not regard all of these requirements as significant, and did not see it as necessary to always document when requirements had been waived. For example, the requirement to seek pre-approval from the Assistant General Manager was not a requirement that was policed strictly. The Assistant General Manager could choose whether he would raise failure to seek pre-approval as a problem with a ministerial office, depending on the context. He would not do so when there was no real question about the transaction and he thought the insistence on process would be unreasonably pedantic or bureaucratic.

We have already commented in the previous Part on the status of the requirements in the Handbook. We understand the need for a practical approach to procedural requirements. However, we consider that Ministerial Services would be better served if the status of the various requirements that the Handbook sets out was clearer.

It would be better if the Handbook clearly stated what authority the different requirements have, who has set them, who has power to approve exemptions or waive particular requirements, and how the requirements are updated or amended. That approach would let Ministerial Services distinguish between requirements that are legal, ministerial, departmental, or internal to Ministerial Services. It would also help users know which rules and procedures were important.

For internal purposes, Ministerial Services may have a set of procedures and guidelines in place that enables the system to function. However, we encourage Ministerial Services to give more thought to the role that policies and procedures have for external accountability purposes, such as audits.

The quality of the documentation supporting spending

Adequate documentation is important because it enables the person who is approving the transaction, and any other observer (such as an auditor), to understand the spending and assess whether it was appropriate and reasonable. Good documentation provides strong protection for those spending public money because it makes clear that the spending was appropriate.

In this inquiry, we reviewed the documentation in the financial records to support transactions submitted for approval, to see whether that documentation was adequate. If it was not adequate, we did not attempt to investigate further to form a view on whether the transaction was appropriate. Our primary interest was in whether the financial management processes were functioning effectively and recording what they needed to.

There were a number of examples where the documentation in the financial records did not include enough information or explanation for us to assess whether the spending was properly approved or appropriate.

Two common problems were that:

  • We were not able to reconcile the amounts in statements with the documentation for individual transactions that were submitted with the statement.
  • Documentation was missing, inadequate, or illegible. In particular, it was clear that some people did not realise that an EFTPOS receipt is not an invoice and is not adequate evidence to support a transaction.

Descriptions accompanying the claim were also often poor and did not contain enough information to explain the transaction (such as explaining how many people attended a business meal or function). Practices varied widely, and appeared related to a person's length of time in the job. For example:

  • There was usually no explanation of the purpose of domestic travel expenses, even though the entitlement is linked to travel for ministerial or parliamentary business so the person approving it needs to understand the purpose of the travel.
  • There was usually little or no explanation of the purpose or nature of office functions.
  • Government hospitality spending was often poorly explained.
  • Koha payments did not usually include any description of who it was for or the event, even though this is required in the Handbook, and it was often unclear how many events and koha payments were involved in a single reimbursement claim.

We understand that Ministerial Services staff will often get the additional information they need from a ministerial office, if it is not supplied with the claim. However, this additional information is not always properly documented, or not referred to in the main financial records accompanying the spending approval.

As previously stated, the purpose of financial records is to ensure that a third party is able to easily check that the spending was appropriately approved. Current approval and documentation practices in Ministerial Services do not always achieve this goal.

Another practical problem we found was that transactions were sometimes recorded against the wrong cost code and the wrong office. These errors happened more often than we would normally expect.

Sometimes reimbursements were coded to the wrong place, so that it became difficult to reconcile the reimbursement with the right receipts. For example:

  • There are several examples of Ministers paying for minor personal items with their credit card, especially while travelling, with no record of later reimbursement. We cannot tell whether the item was reimbursed, and there is no record of that, or whether Ministerial Services met the cost of these items.
  • We identified a transaction where a staff member (a senior private secretary) had purchased a bottle of wine while staying at a hotel. The policy in the Handbook clearly states that alcohol should be regarded as a personal expense for staff who are travelling. As noted, credit cards are also not meant to be used for personal expenses. The invoice showed that the staff member had flagged the item as needing reimbursement, but the documentation we were given did not show whether this had occurred. We were later provided with evidence that it had been reimbursed. We saw no evidence that the staff member had been told that the item should not have been put on the credit card at all.

The effectiveness of the guidance material

Do people understand the rules?

The evidence that we gathered shows that some people do understand the rules well, and some people do not. Not surprisingly, longer-serving senior private secretaries are likely to have a better understanding than new senior private secretaries.

We found, in our earlier work for this inquiry, that a Minister and his senior private secretary had both misunderstood the rules about travel entitlements. We also stated, in our 2009 report on ministerial accommodation, that those rules were unclear.

These problems were confirmed in our interviews with other senior private secretaries. New people in particular stated that they were uncertain about some rules and relied heavily on the finance team within Ministerial Services and the Assistant General Manager to tell them if they made a mistake or did something wrong. If they did not get any feedback, then they assumed that what they had done was right. That practice then became their understanding of what the relevant "rule" was.

The problem with this approach is that the absence of feedback does not always mean that people are doing the right thing. The risk is that a misunderstanding of the rules becomes entrenched in practice. We found that this has happened. Several people asserted examples of "rules" that they thought they knew or practices that they thought were acceptable. Based on our reading of the legislation and appropriations, Executive Determination, and Handbook, some of these examples were wrong. People were, in good faith, applying a misunderstanding of the rules and later checks in the financial process were not correcting those misunderstandings. Given the nature of the spending and processes we were looking at, the individual examples were not particularly large or significant. But they did show a potential weakness in the system.

An obvious example is the amount of personal spending that was placed on ministerial or office credit cards, especially when overseas, which the individual would reimburse to Ministerial Services when they returned to Wellington and reconciled their expenses. The publicly released documentation shows that this has been a reasonably common and long-standing practice. There is only occasional evidence of Ministerial Services raising this issue as a problem, beyond the standard memorandum issued when the supporting documentation for credit card statements is late. We saw examples where this had been done and did not appear to have been questioned or corrected.

We have already noted that the credit card policy was stricter than the general policy for using the office imprest account, where reimbursement of personal hotel expenses was explicitly sanctioned. We infer that some senior private secretaries assumed that these credit card practices were acceptable, and so staff and Ministers continued with this practice for many years.

Ministerial Services staff provide guidance when requested by ministerial office staff. However, this relates to particular queries. If the office staff are not aware that their practice does not comply with the Handbook, they are unlikely to ask for advice. We identified a risk that such errors would not be identified or raised through later checks in the financial management processes. It was hard to tell whether a failure to comply would not be raised because Ministerial Services do not regard the requirement as important, or because checking had not identified the failure.

How do the responsibilities for checking work in practice?

We found that there were different understandings about who has primary responsibility for checking that spending is appropriate and reasonable.

Ministerial Services staff told us that the senior private secretaries are pivotal to the financial management process, because they are the only people who have all the information about the purpose of travel and the reasons for spending. Ministerial Services staff told us that they regard the certification by the senior private secretary as evidence that a transaction is appropriate and within the rules. They rely on this certification as showing that the spending has been incurred, that it has been reviewed for reasonableness and appropriateness, and that it was for ministerial business. Ministerial Services staff complete the final checking and approval on this basis.

As we explained in Part 2, the senior private secretary has a broad role. Responsibility for financial management is a small part of their work. When we met people we were struck by their commitment to acting properly and ensuring that the ministerial office operated properly. However, some senior private secretaries told us that they were sometimes uncertain about what was allowed or appropriate. They said they would certify the transaction and put it through to Ministerial Services, on the basis that Ministerial Services staff would check the spending before approving it. These people assumed that if this check showed that they were doing something wrong, they would be told.

We found a range of views on what the senior private secretary's certification means. Some understood that they were certifying that they had checked the appropriateness of the transaction in all respects. Others thought they just certified that the spending was incurred by the Minister, and sometimes also that it was for ministerial business. They all had a clear expectation that Ministerial Services staff were carrying out a substantive check, because those staff were the final and formal approval point.

Therefore, we identified a risk that in some cases a loop could operate so that nobody performed a full check of the spending. Ministerial Services could regard a transaction as appropriate if a senior private secretary had certified it, and the senior private secretary could have been uncertain as they certified it, but conclude it was appropriate because Ministerial Services had not raised a concern.

In our view, the person with the formal authority to approve the spending is the person who is ultimately accountable for that spending. They must use their own judgement about whether the spending is reasonable and appropriate. When the prior certification and other financial checks by staff have been done properly, all the documentation will be there and this final approval is straightforward. But if there are gaps in the information or errors in the certification process, it becomes more difficult.

It is reasonable for senior private secretaries to act on the basis that Ministerial Services will carry out a substantive check of all spending and tell them if there is a problem, but it does require them to provide proper descriptions and supporting information. The person exercising delegated authority from the chief executive (in this case, the Assistant General Manager) cannot rely on judgements made by others that have not been clearly documented.

We understand that Ministerial Services has now ensured that all senior private secretaries understand that they are expected to perform the initial check on whether spending is reasonable and appropriate as they certify the transaction, and to provide the supporting information for their judgement.

Given the weaknesses we were identifying, we raised with Ministerial Services whether it was reasonable to require one person to approve all the transactions arising from ministerial offices. The volume is very large, and we were concerned that it could be impracticable for a single person to give them all proper consideration. Ministerial Services tells us that most transactions are straightforward and appropriately documented, and can proceed through the process quickly. Only a few transactions require more time and attention. On this basis, it regards the current arrangements as reasonable, and notes that this is a simple way of ensuring consistency.

We understand that perspective. However, we have identified weaknesses in the way the process is working at present. In our view, Ministerial Services needs to consider the way in which the checking and approval function is resourced, as part of considering how it can improve the effectiveness and reliability of these processes.

We also noted one instance where the senior private secretary was a close family member of the Minister. From a financial management perspective, this situation weakens the major financial control in the system. Ministerial Services' ability to rely on the senior private secretary's assessment of appropriateness is reduced. Ministerial Services staff told us that they had sought advice before making the appointment, they had monitored the office more closely to mitigate the financial control weakness, and they had not identified any concerns in practice. Nonetheless, we regard this as an undesirable precedent.

Is the Handbook seen as useful?

Senior private secretaries told us that they did not often use the Handbook. It tends to sit on the top shelf. Many commented that it was too big and not well structured, so they could not find the guidance they needed in a hurry. Instead, they tend to use the table of specific spending authorities and the list of items that are and are not covered by operational resources. Senior private secretaries found simple and clear rules and check lists of this kind much more effective. Beyond those documents, they would use their judgement (and wait to see whether they got any feedback), talk to colleagues, or ask Ministerial Services.

How effective is the training?

Ministerial Services provides a certain amount of training and support for senior private secretaries. Several people confirmed to us that the training is more developed and systematic than it used to be. However, we consider there is scope to improve it further.

Ministerial Services described the initial meeting it has with each senior private secretary as an important initial training session. However, some senior private secretaries did not realise that this was more than an initial discussion; they did not recognise it as training.

Some people we interviewed were also dubious about the mentoring programme that is run for new senior private secretaries. They agreed that the concept was a good one but were uncertain that the current approach was particularly effective.

One suggestion from those we talked to was that the training could be staggered during the first year. They said they needed immediate and short-term training to get them through the first three or four months, when the main task was to get the office set up with staff and basic processes in place. There were many practical questions in those first few months where they thought it would be possible to give more guidance and training. Once these matters were in hand, people said it would be useful to move into deeper and more thorough training on day-to-day issues, such as overseas travel. They reflected the general theme that training is most effective when you can see its relevance and are encountering the issues in practice. Ministerial Services has confirmed that it will review the training it gives to senior private secretaries.

People thought that the various meetings and discussion opportunities were useful, but suggested that more could be done with these sessions. We also noted that in coalition and multi-party governments, Ministerial Services needs to make a particular effort to ensure that senior private secretaries in minor party offices are given appropriate support. It is inevitable that party dynamics may mean that these senior private secretaries will not necessarily be part of the informal support networks between the ministerial offices of the dominant party in government. Ministerial Services has told us that it is aware that the senior private secretaries in minor party offices can need additional assistance.

Our impressions of the culture of Ministerial Services

The culture in ministerial offices, and in Ministerial Services, is an important factor. We saw a very strong focus on the need to support Ministers effectively, to help make their workload manageable, and ensure that their time was used effectively. That is commendable.

Supporting Ministers well also means providing clear rules and guidance and letting the ministerial office know if it is doing something wrong. Most senior private secretaries that we spoke with agreed that they could and should tell a Minister if that Minister had spent money inappropriately or broken a rule. They saw doing so as their role, and said that the Minister would expect and welcome it. It was part and parcel of keeping their Minister safe and providing effective support. When we spoke with the Minister responsible for Vote Ministerial Services, he confirmed that he expected the Department, through Ministerial Services and senior private secretaries, to play this role.

We have found that Ministerial Services does scrutinise transactions, and ask questions or challenge judgements when it has concerns. This is an important responsibility. But it can be difficult to discharge if those being challenged do not understand or accept that the Department has this role and is ultimately accountable for the spending. There are anecdotes about Ministers who have, over the years, objected to this type of feedback or overruled the Department's staff. We are concerned that this type of environment makes it harder for the Department to carry out its responsibilities in a straightforward fashion, for example, because the checking and questioning process may be seen as creating risk rather than as protecting Ministers from risk.

We understand that there are times when a Minister will not welcome having their judgement questioned. However, in our view, this type of attitude is able to endure only when Ministers do not appreciate the Department's responsibility for ensuring that it can account for the proper use of public funds, and there is a lack of clarity about the rules. Effective checking and financial accountability processes will generally protect those spending money because they will mean that any errors are detected and corrected promptly, and as a matter of routine.

We note that the Parliamentary Service and the Parliamentary Service Commission worked through similar issues in 2007, when the new parliamentary rules and processes were prepared. There was some debate in that context about the balance of responsibility between MPs and officials for spending. For the parliamentary system, it is now accepted that the Parliamentary Service has to account for the funds and has an important role in checking transactions and ensuring that any errors or inappropriate judgements are identified and corrected at the outset.

We consider that the responsibility of the administering department also needs to be put beyond doubt in the ministerial system. Ministers need to understand that the Department is responsible for ensuring that spending is not only within the rules, but also reasonable. They and their staff are then more likely to help the Department to discharge this responsibility rather than object to it.

In our view, the role of Ministerial Services in checking spending, including questioning whether Ministers have certified spending correctly, needs to be made explicit in either the Executive Determination or the Handbook. In particular, we consider that the Minister responsible for Ministerial Services needs to formally endorse this role and record that he expects Ministerial Services to develop and enforce the procedural requirements needed to support proper financial accountability.

Our overall assessment of what happens in practice

As previously stated, the basic design of the financial approval system is sound. Many straightforward transactions are processed each week and each year so that Ministers can function effectively. The finance team is regarded as helpful and approachable.

Our testing did not show any pattern of major spending irregularities. We identified a small number of transactions that we considered were either outside the rules or marginal, but these were isolated examples.

Our more common concern was that the documentation and explanations accompanying transactions were often poor, or the relevant information was not included in or referred to in the main financial records. Although the spending might have been appropriate, the audit trail to demonstrate that was too often inadequate. We also found a number of transactions where the documentation was not sufficient for us to assess whether the spending was appropriate and reasonable at all.

We also identified that the procedural requirements were not always followed, or there was no evidence of them having been followed. Ministerial Services told us that it did not regard all of these requirements as significant, and in practice it would decide whether a failure to comply in any particular transaction warranted follow-up or any corrective action. We have already commented on the risks in this approach.

There is also a risk that internal controls are not fully effective because senior private secretaries and Ministerial Services have different understandings of their roles in the certification and approval processes. Senior private secretaries with problematic interpretations of rules or spending can remain unaware that there is anything wrong with their practices if Ministerial Services does not draw this to their attention. These weaknesses in the financial controls expose Ministerial Services and Ministers to greater risk of inappropriate spending.

The training and guidance that Ministerial Services provides is useful, and senior private secretaries appreciate it. They told us that there is scope to do more, and to target the training better so that people are given information when they need it.

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