Part 4: Conflicts of interest were not appropriately managed

Inquiry into management fees paid by South Auckland Middle School and Middle School West Auckland in 2018.

4.1
In this Part, we discuss:

the importance of managing conflicts of interest;
the conflicts of interest that arose;
whether the Establishment Board managed those conflicts appropriately; and
the consequence of not managing conflicts of interest.

It is important to manage conflicts of interest well

4.2
As well as being interested in how well the procurement was managed generally, we wanted to know how conflicts of interest were managed, because of the close relationship between the Establishment Board and Villa Education Trust.

4.3
As we say in our good practice guide about managing conflicts of interest,¹² having a conflict of interest does not necessarily mean you have done anything wrong. What is important is recognising that there is a conflict of interest and then putting in place appropriate mitigations.

4.4
Conflicts can arise in many situations. Some are serious, some are less so, and some are unavoidable. However, in any situation where activities are carried out in the public interest or paid for out of public funds, the public needs to be confident that decisions are:

made impartially and for the right reasons; and
not influenced by personal interests or ulterior motives.

4.5
Where transactions involve related parties, there is an increased risk those transactions might be perceived as unusual or inappropriate, because of the possibility they might be seen as benefiting an individual or a private organisation.

4.6
This increased risk makes it even more important to appropriately record decision-making processes and conflict of interest mitigations at the time to demonstrate awareness of the potential risks.

4.7
The Ministry's Financial Information for Schools Handbook identifies the types of situations that might give rise to conflicts of interest in a school context. Some examples include where:

the school contracts the spouse of a Board of Trustees member; or
a Board of Trustees member owns a company that is contracted by the school.

Conflicts of interest crystallised when the Establishment Board considered engaging Villa Education Trust

4.8
In this case, the Minister's decision to appoint the members of Villa Education Trust as trustees of the Establishment Board resulted in a potential conflict between the interests of Villa Education Trust and the Establishment Board (because the trustees were effectively wearing two hats).

4.9
That potential conflict of interest crystallised into an actual conflict of interest that needed to be carefully managed when the Establishment Board considered engaging Villa Education Trust to deliver the establishment services.

4.10
Examples of the conflicting interests some members of the Establishment Board needed to manage during and after the decision to engage Villa Education Trust include:

being a Villa Education Trust employee and performing termination activities while also being engaged by the Establishment Board to perform establishment activities;
invoicing the Establishment Board (as a Villa Education Trust employee);
approving invoices as an Establishment Board member for payment to Villa Education Trust (and as a Villa Education Trust employee delivering the services the invoices related to);
monitoring and reporting on the work being delivered (as an Establishment Board member); and
receiving payment for the work (as a Villa Education Trust employee).

4.11
The Establishment Board told us there was no conflict of interest because the Minister appointed the trustees to the Establishment Board knowing that they were also trustees of Villa Education Trust.

4.12
We disagree with the Establishment Board's position, which we discuss further in Part 5. In brief, the potential conflict of interest did not become an actual conflict of interest until the Establishment Board considered engaging Villa Education Trust. The Minister was not involved in that decision. The Minister also put the Establishment Board on notice, in the letters appointing each member of the Establishment Board, that "[i]t is important that the roles, functions, and responsibilities of Villa Education Trust and the [Establishment Board] remain separate".

Conflicts of interest were not managed appropriately

4.13
We asked Establishment Board members how they maintained separation between the performance of their different roles, as the letters of appointment and good practice required them to do. All those we spoke to repeated their view that there were no conflicts of interest. As a result, they could not point to any specific steps taken to mitigate or manage the conflicts.

4.14
In a situation like this, we expect a public organisation to recognise that there is a conflict that needs to be managed and put in place a process to do that. Where a decision is made that results in payments being made to the decision-makers (even if they are acting in a different legal capacity), there is the risk that it could be seen as a personal benefit. If this risk is not carefully managed, it could call into question the integrity of that decision and the purpose for paying the money in that way.

4.15
Options for managing a situation such as this could include:

agreeing a scope of works so that there are clear expectations about what services will be provided and when;
agreeing and recording the basis for the fees in advance;
clearly documenting the respective roles and responsibilities of those involved in receiving, evaluating, approving, and paying invoices;
having a clear process for receiving, evaluating, approving, and paying invoices and documenting that process so those involved in the process understand it; and
ensuring that someone who is not involved in performing the work (and, specifically, not the person who provides the invoice for payment) is responsible for approving the invoice or having a clear explanation of why this is not possible.

Consequence of the Establishment Board's failure to manage conflicts of interest

4.16
Because the Establishment Board took no steps to manage the conflicts of interest, it is unable to assure the public that the decision to engage Villa Education Trust and the amount of the management fees were not influenced by the personal interests of Establishment Board members.

4.17
There is also a risk that the Establishment Board could have paid Villa Education Trust (using establishment funding) for termination activities that Villa Education Trust was separately funded for by termination funding.

4.18
We asked the Establishment Board members how they differentiated between termination and establishment activities. We were told that the main way was through updates provided at Board meetings. For example, we were told that Villa Education Trust members were updated about the progress of termination activities at Villa Education Trust meetings and that updates on establishment activities were given at meetings of the Establishment Board.

4.19
However, we understand that the distinction between the two Boards might have become blurred on occasions. In particular, when the Establishment Board was first established, meetings for both the Establishment Board and Villa Education Trust Board were held on the same day and the original meeting minutes for the 6 September 2018 meeting where the decision to engage Villa Education Trust was made included items of business relating to Villa Education Trust.

4.20
The Board told us that practice changed after 6 September 2018, and the 6 September 2018 minutes were amended to remove references to Villa Education Trust business. However, the merging of Establishment Board and Villa Education Trust business in the original minutes illustrates the challenges when the same people are acting in multiple roles and why it is so important to have appropriate processes and controls to maintain a clear separation of responsibilities and accountability.

4.21
During interviews, some Establishment Board members told us that Ministry representatives and the governance facilitator advised them about the importance of keeping the two roles separate and making sure that there was a clear break between the two meetings.

4.22
We understand that, after the approval of an alternative constitution, parent and staff representatives now sit on the current Combined Board, along with the principal of each school, three trustees appointed by Villa Education Trust, and up to two co-opted members. These changes have reduced, but not eliminated, the risk that roles cross over or become confused.

12: Office of the Auditor-General (2020), Managing conflicts of interest: A guide for the public sector.