Auditor-General's overview

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

Between March and December 2020, the Government paid businesses more than $13 billion through the Wage Subsidy Scheme as part of its response to Covid-19. That amount is about the same as the Government's total annual spending on education, and nearly three times its total annual spending on law and order.

The Wage Subsidy Scheme is the Government's largest single area of spending in response to Covid-19. The Government has estimated that the Wage Subsidy Scheme has indirectly supported about 1.8 million employees.

We carried out a performance audit to review how well the Government has managed the Wage Subsidy Scheme. It is one of several reviews that my Office is carrying out about the Government's response to Covid-19. This report is intended to provide an independent perspective to Parliament and the public and help the public sector prepare for and operate any similar schemes in the future.

Not only was the overall amount of subsidy payments significant, but the Wage Subsidy Scheme was set up and implemented on a large scale and with speed. During the first two weeks, the Ministry of Social Development, which was responsible for administering the Wage Subsidy Scheme, received large numbers of applications, including more than 70,000 in one day. It also made payments of nearly $1.8 billion on one particular day.

The focus was on getting funding to where it was needed quickly. On average, the Ministry of Social Development made payments to employers within three and a half days of receiving an application. This was possible because the Government decided to use a "high-trust" approach – this meant approving applications based on a declaration from applicants that they met the eligibility criteria.

A high-trust approach has greater risks of fraud and error. The main risks in this case included that subsidy payments could go to businesses that were not eligible and that businesses might not pass the payment on to employees. The Government appears to have understood these risks and, on balance, decided that a high-trust approach was appropriate.

Those decisions are rightly for the Government to make. My audit looked at what steps the Government took to mitigate or manage those risks and whether those steps were effective. For example, what were the steps taken to verify applicant eligibility after the initial approval and payments were made?

Managing the risks associated with a high-trust approach

The Ministry of Social Development compared the information that applicants provided against the Inland Revenue Department's records before making payments. It checked that each applicant was a genuine business operating in New Zealand and that the application was for bona fide employees.

This step reduced the risk of making subsidy payments to ineligible businesses. Tens of thousands of applications were declined because the information provided did not match the Inland Revenue Department's information about the applicant or their employees.

However, it is still possible that ineligible businesses received payments. One important eligibility requirement – that an employer has "taken active steps to mitigate the impact of COVID-19" on their business before applying – was open to interpretation. It would have been difficult for applicants to determine what was required and for the Ministry of Social Development to verify compliance.

Other steps the Ministry of Social Development (with assistance from the Inland Revenue Department and the Ministry of Business, Innovation and Employment) took to mitigate or manage risks were:

• ensuring that a process was in place to receive complaints and follow those up;
• publishing the names of some businesses that received the subsidy; and
• reviewing and investigating applications (with assistance from the Inland Revenue Department).

In my view, it is likely that these steps have encouraged several businesses to repay subsidies they should not have received. As at 5 March 2021, payments totalling $703 million have been voluntarily paid back and $23 million compulsorily recovered.

ADDENDUM: This information was supplied to us by the Ministry of Social Development at the time of our audit. The Ministry has since reported different information about the amount of voluntary repayments as at 5 March 2021.

Reviews of applications, carried out after payments were made, consisted mainly of verbal confirmation of information from employers and, in some cases, employees. These reviews focused on checking compliance with eligibility criteria and confirming that applicants understood associated obligations.

Although the Ministry of Social Development has publicly described these reviews as audits, in my view they are not audits. In most cases, they did not involve substantiating the facts using independent, or at least documented, information (however, if a review resulted in an investigation, documentation would be requested). I am not persuaded that the reviews provide enough confidence that all applications that merit further investigation have been identified. As at 5 March 2021, 1017 cases had been referred for investigation.

I have recommended that the Ministry of Social Development test a sample of these reviews against documentary evidence held by applicants. In my view, the use of a high-trust approach at the outset needs to be balanced with adequate verification after the payment has been made to properly protect the use of public money.

I have also recommended that the Ministry of Social Development seek written confirmation from applicants of their compliance with the eligibility criteria and the obligations of receiving the subsidy. This could be targeted at larger or higher-risk applications.

The public organisations managing the Wage Subsidy Scheme have identified a number of applicants they consider might have acted unlawfully. In my view, it is important to pursue prosecutions of these applicants. This is because it is important to maintain public trust and confidence in government schemes.

Lessons from managing the Wage Subsidy Scheme

The frequency and significance of crisis events is increasing. New Zealand might need another subsidy or similar scheme at any moment – as recent events have demonstrated. Therefore, I have also recommended that the public organisations managing the Wage Subsidy Scheme properly evaluate its development, operation, and impact. There are important lessons that need to be captured and appropriate action taken to ensure that we are even better prepared next time.

Acknowledgements

I acknowledge the extraordinary commitment of public servants in both designing and delivering the Wage Subsidy Scheme in a time of national crisis. Public servants' willingness and goodwill to work exceptional hours under exceptional circumstances to support the need for rapid decision-making and payment has been outstanding.

I thank staff in the Ministry of Social Development, the Inland Revenue Department, the Ministry of Business, Innovation and Employment, and the Treasury for their assistance as we carried out this audit. I also thank those people who contacted my Office during our work and the Auckland Business Chamber, BusinessNZ, Chartered Accountants Australia and New Zealand, and the Council of Trade Unions for their views.

Nāku noa, nā

John Ryan
Controller and Auditor-General