Auditor-General’s overview

Inquiry into the University of Auckland’s decision to purchase a house in Parnell.

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

In November 2019, the University of Auckland (the University) purchased a house in Parnell in Auckland. The University said the house would be used for accommodation, business-related operations, and functions.

The house cost about $5 million, and the University entered into a tenancy agreement with the incoming Vice-Chancellor from the start of her five-year term of employment. The rent was set at about 50% of the market rent assessed by a valuer.

When the purchase of the house was publicly reported in January 2020, my Office was interested because it seemed an unusual purchase for the University to make. It raised questions about the University’s use of public resources and how it manages sensitive expenditure. The focus of our work was on the University’s actions and decision-making processes.

Although universities have their own role and level of independence, they are subject to the same expectations about how they spend public money as all public organisations. This includes how they manage sensitive expenditure.

Sensitive expenditure is spending by a public organisation that could be seen to give a private benefit to an individual employee in addition to the business benefit gained by the public organisation or a benefit that is disproportionate to the business purpose.

To maintain trust and confidence in public organisations, it is important that sensitive expenditure decisions can withstand parliamentary and public scrutiny. Public organisations need to be able to show that their sensitive expenditure decisions are based on appropriate standards of probity and that those decisions are financially prudent and appropriate in all respects.

It is clear that this situation involved sensitive expenditure. The University has not been able to show that this sensitive expenditure was appropriate in all respects. This is because the University has not been able to demonstrate it has met key principles of managing sensitive expenditure well.

In my view, the University has not been able to show a justifiable business purpose for purchasing the house. It is hard to accept that purchasing a house to provide accommodation for the incoming Vice-Chancellor, and to host an anticipated 14 events in two years, justifies the $5 million expenditure. Nor does that level of hosting, in my view, justify an almost 50% reduction in the property’s rent.

One of the principles of managing sensitive expenditure well is preserving impartiality, which means making decisions based on objective criteria. The University did not do this when it made the decision to purchase the house

The University actively sought and took into account the Vice-Chancellor’s preferences to the point where this informed which suburb the house would be in and which house the University would purchase. When weighed against the less than clear business purposes for the purchase, this makes it more difficult for the University to show that it has made its decision objectively and impartially.

In my view, the University could also have been more transparent about the arrangement. If the University is of the view that it has acquired an asset for business purposes, and agreed an appropriate rental agreement that accurately reflects the asset’s use, it should be prepared to disclose and justify that. In my view, providing the house at a reduced rent could well be regarded as part of the overall remuneration and benefits package for the Vice-Chancellor.

The University has also been unable to show that the expenditure was moderate and conservative. Although the University paid a market rate for the house, it did not assess whether it needed to spend $5 million on a house nor whether the house needed to be in an expensive part of Auckland. It also did not consider whether it could have effectively achieved the purposes it says it bought the house for – accommodation and hosting – for less cost.

The University also did not follow its policy on sensitive expenditure nor its processes for approving capital expenditure. Its sensitive expenditure policy requires a person at a more senior level to approve this kind of spending (the “one-up” principle). The policy also requires the expenditure to have a justifiable business purpose and not provide a private benefit to an individual. We did not see evidence that these requirements were met. The capital expenditure approval process requires significant purchases (more than $100,000) to be supported by a robust business case, which we have not seen for this purchase.

Overall, it is not clear that the University recognised, at any stage of the process, that the purchase involved sensitive expenditure or gave proper consideration to this when making decisions. As such, the University did not consider the business need to purchase the house with appropriate rigour, nor did it document any identified risks and how it would mitigate them.

It is important that all public organisations pay close attention to their sensitive expenditure and manage it carefully. Trust and confidence in a public organisation is driven by competence, reliability, and integrity. Where there is any question about those things, real or perceived, trust and confidence can be quickly eroded.

Sensitive expenditure is one area where there can be a real risk that individuals are receiving a private benefit paid for out of public funds that is additional to the business benefit to the public organisation.

Where sensitive expenditure is concerned, I expect the University (and all public organisations) to consider each situation more carefully to ensure that it can justify the expenditure and is reasonably able to do so. To do that, I encourage the University and every public organisation to consider our good practice guide Controlling sensitive expenditure: Guide for public organisations.

This guide sets out principles for all public organisations to consider when making sensitive expenditure decisions. This will help them to make good decisions that can withstand public scrutiny

I encourage anyone who is involved in making expenditure decisions on behalf of their public organisation to read the guide and consider what changes can be made to their own decision-making processes to improve public trust and confidence in the public sector.

Subsequent events

After we provided the University with a copy of my draft report, the Vice- Chancellor told us that the University is taking steps to review this situation and address issues raised in the report, including a review of its sensitive expenditure policy and processes. The Vice-Chancellor also told us that she has recommended to the University Council that the Parnell house be sold to assist with the University’s overall financial position.

I thank the University and those who contributed to our work for their co-operation during our inquiry.

Nāku noa, nā

Signature - JR

John Ryan
Controller and Auditor-General

26 November 2020