ICAC’s first report aimed at senior New South Wales public officials warns that changes to the way government services are delivered have created opportunities for emerging corruption.
Blurring lines between government, private and not-for-profit sectors, badly-managed organisational change, and rules that unintentionally encourage corrupt conduct are some of the key new contributing factors to emerging corruption risks, according to the report released today by ICAC Chief Commissioner, the Hon Peter Hall QC.
Hall said that while the level of public sector corruption in NSW is low by global standards, there is no room for complacency and that public sector agencies should heed the tips and advice in the report.
“The nature of corruption is that it does not stagnate,” Hall (pictured) said. “As the report says, if systemic and operational weaknesses are not addressed, corruption can take hold and cause significant damage to an agency’s finances, productivity and reputation. And there are plenty of cases canvassed in this report that have been investigated by the ICAC and other agencies which demonstrate the dire consequences of being caught short by corruption.”
The vanishing line between public and private has consequences
As the private sector performs more and more tasks for and on behalf of government, the opportunities for corruption in procurement and contract management continues to grow warns the commission.
Beyond the growing value and volume of contracts, the individuals performing procurement activities for agencies are themselves increasingly likely to be contractors, or recently recruited from the private sector. Who is and isn’t allowed access to confidential information is no longer as clear cut as it once was as contractors often need access, but in doing so they become targets for cybercrime:
“As permanent employees and contractors mix and work together, it becomes administratively complex to determine who is entitled to access internal information. In addition, as contractors obtain greater access to government information, they become targets for cybercrimes that could harm the public sector.”
ICAC found senior officials were still “getting the basics wrong” to prevent misuse of the state’s nearly $24 billion spend on goods and services. With more than half of all ICAC investigations involve procurement and contract management, it has a wealth of examples to draw on when it came up with a list of common forms of fraud:
- buying goods and services that are not needed and unwarranted scope creep
- employees awarding work to suppliers they own or control, without disclosing a conflict of interest (or suppliers owned/controlled by a close friend or relative)
- allowing the supplier to design the scope of work or specifications
- engaging in direct negotiations contrary to agency policy
- paying for excessive hours, or excessive hourly rates, for labour hire services
- paying invoices without performing a three-way match (that is, the purchase order, invoice and documented receipt of goods and services all correspond) or raising purchase orders after invoices have been submitted
- splitting orders or payments to avoid scrutiny by a more senior officer or to remain below thresholds requiring competition
- failing to issue a tender or obtain three quotes as required by policy
- obtaining false/misleading tender responses or quotes
- failing to record the receipt of goods and services and not updating asset registers.
Increasing reliance on overseas supply chains, and insider reports of high turnover of procurement staff and insufficient training might also be contributing factors, the commission notes, but the obligation for setting is on senior leaders.
ICAC research has found that almost one-third of NSW government suppliers have not bid on a government contract because of corruption concerns.
Agencies losing capacity to manage their own controls
Poor executed organisation change is a risk in itself, warns the commission as agencies find themselves under pressure to find efficiencies and prioritise the delivery of frontline services, but in doing so may give up the ability to manage their own controls. Frontline staff have increased in the thousands (roughly 8000 over the last 5 years), but at the same time non-frontline staff have fallen by an even greater number (roughly 12,000).
Staff in governance, risk management and corruption prevention roles are being asked to maintain high standards in an environment of constraining resources. This in turn creates an over-reliance on trusted individuals, which the commission notes have the greatest opportunities to engage in corrupt conduct.
The commission listed examples of poorly executed organisational change:
- Transformations that are not completed before the next period of organisational change begins. This can occur if a restructure leads to the appointment of new management, who proceed to embark on yet another restructure. This can have an adverse effect on staff morale and the control environment.
- Restructures that involve redundancies or internal competition for roles are associated with complaints about corrupt favouritism.
- Restructures often focus on obtaining lean processes or cost savings. This can result in important controls being removed or weakened, which inadvertently increases the overall exposure to the risk of corruption.
- The staff deployed to work on the change project are not properly backfilled. This can mean important corruption prevention controls are not performed for extended periods of time.
- Lengthy change projects can result in an unhealthy proportion of staff working in acting roles or in two roles simultaneously. This diminishes the rigour of managerial supervision, which is a key corruption prevention control. Accountability may be fragmented, where:
- staff are reporting to more than one supervisor, or managers are performing dual roles, resulting in conflicting priorities
- there is difficulty in keeping track of all the work undertaken by a member of staff
- changes of responsibility are made without adequate arrangements to ensure capability
- duplicate or shadow functions exist (which can arise, for example, following a failed attempt to centralise a function)
- staff are overworked
- roles are blurred resulting in lack of clarity about who is responsible for exercising particular controls.
- The turmoil of change can make it difficult to keep up with routine controls such as reporting lines, approved holders of financial delegations and information and communication technology access. This can breed a variety of workarounds, including password sharing.
- Policies and procedures may lag the change process and become out-of-date, making them impossible to follow. Alternatively, if agencies are being merged or subsumed into a cluster, there may be multiple policies and procedures, or even no policies and procedures at all.
- Planned corruption prevention initiatives, such as training, audits, risk assessments and data analytics, may be delayed because it is impractical to conduct them during a period of intense change.
- An adverse effect on morale and the willingness to speak up about misconduct
Well-intentioned KPIs can also create a moral hazard for non-frontline employees, such as centralised staff in a corporate services centre. The commission says spotting red flags that might be associated with corruption requires a degree of nous but becomes difficult when they are focused on processing tasks.
KPIs and rules can have unintended consequences
Not all cases of corruption are individuals with a premeditated plan to enrich themselves. Others may be a influenced by the environment they work in, including factors that subtle ways that are not readily observable or under policies that where the formal expectations and informal behaviours encourage different behaviours.
The commission provides an example: a policy or rule that unspent recurrent appropriations must be returned to Treasury, meant to encourage fiscal responsibility and accountability, could actually encourage breaches in procurement policy at year’s-end and paying for good services not delivered or not required.
Counter-productive incentives do not necessarily need to be financial, the commission notes, as Victorian police officers reportedly faked at least 258,000 breath tests in order to meet their targets.
Policy or rule says
Intended to encourage
But might actually encourage
|Unspent recurrent appropriations must be returned to NSW Treasury at year end||Fiscal responsibility and accountability||Breaches in procurement policy at the end of the year; paying for goods and services not delivered or not required|
|Purchases must be accompanied by three quotes||Competition and value for money||Quotes that are fake or clearly not intended to be competitive|
|“Buy local” procurement policy||Economic development in a local area||Suppliers masquerading as local companies or collusion between local and non-local suppliers|
|Agency employee headcount should be capped||Savings in payroll costs||Overspending on contractors and consultants that do not fall under the headcount, and hiding the cost of specialist contractors within capital expenditure|
|Reduce number of complaints (about misconduct or bullying, poor customer service, unsafe work practices and so on)||Management action to reduce the incidence of undesirable events||Cover-ups, misclassification and under-reporting of complaints|
|Approval for a transaction requires three signatures||High degree of senior oversight, thereby reducing the chance of fraud or error||Diffusion of accountability, where each signatory assumes the other two will have given the matter their full attention and therefore does not check the paperwork|
|Requiring all purchasing card transactions to be approved by a senior executive||Having a high level of scrutiny over expenditure||Senior executive approving without properly checking or delegating the task to an assistant (possibly by providing a login and password)|
|Repair all serious damage to buildings and facilities within three days||Timely resolution and improved amenity and safety||Serious damage is defined as non-serious and/or quality is compromised; abuse of emergency procurement procedures|
|Academics should maximise the number of publications in recognised journals||The good reputation of the university and its staff||Falsifying or exaggerating research findings, publishing in poor-quality journals, splitting findings across multiple papers and plagiarism|
|Calls to the customer complaint line to be answered within 10 seconds||Good customer service||Customer service operators ending calls prematurely or without actually solving the customer’s problem|
|Procurement staff must achieve fixed-dollar cost-savings||Procurement staff must achieve fixed-dollar cost-savings||The engagement of lowest cost suppliers rather than best overall value for money|
|All relevant documents should be provided in response to a relevant request under the Government Information (Public Access) Act 2009||Open access to information about the affairs of government||Public officials failing to create records, and using unauthorised email or document management systems|
|All invoices should be paid within 30 days||Timely payment and fair treatment for suppliers||Paying an invoice without performing due diligence/assurance checks on the supplier or the goods and services supplied|