Part 2: Principles applicable to sensitive expenditure

Controlling sensitive expenditure: Guidelines for public entities.

Taking a principles-based approach

2.1
Entities are responsible for taking a principles-based approach to sensitive expenditure. This approach provides more flexibility and is more enduring than prescriptive rules. Public entities may also find it more practical to administer principles than rules. In this Part, we set out our summary of the principles that are likely to be relevant.

2.2
We recognise that, for valid reasons, individual entities may make differing decisions as to what is appropriate sensitive expenditure. For example, a state-owned enterprise may make quite different judgements from a central government department, or a local authority. However, all public entities need to take into account the same principles when determining their organisational approach (or attitude) to sensitive expenditure decisions.

2.3
The most fundamental fact applicable to all expenditure by a public entity is that the entity is spending public money – it is not the property of staff (including members, office holders, managers, and employees) of the entity to do with as they please. Consequently, the expenditure should be:

  • subject to the standards of probity and financial prudence that are to be expected of a public entity; and
  • able to withstand Parliamentary and public scrutiny.

2.4
Those standards apply the principles that expenditure decisions:

  • have a justifiable business purpose;
  • preserve impartiality;
  • are made with integrity;
  • are moderate and conservative, having regard to the circumstances;
  • are made transparently; and
  • are appropriate in all respects.

2.5
In practice, a properly authorised individual will make the decision on each item of sensitive expenditure. Each individual making such decisions will need to exercise careful judgement in accordance with these principles. The question will always be about the balance in the particular context.

2.6
These principles are to be applied as a set. None should be applied alone, and none should be treated as more important than another.

2.7
For example, an employee may ask permission to take personal leave in conjunction with business travel. The proposal may raise issues of dominant purpose, impartiality, and transparency. The entity, if it were to permit the leave, would need to be satisfied that the primary purpose of the trip was a business one, that there would be no additional cost to the entity, and that the arrangement did not give rise to any perception of inappropriateness.

Deciding when sensitive expenditure is appropriate

2.8
The quantity of money spent on an item of sensitive expenditure may be small in the context of an organisation’s total expenditure. However, each sensitive expenditure decision is important, because improper expenditure could harm the reputation of, and trust in, the entity as well as the public sector generally.

2.9
The decisions that public entities make to determine “appropriate” types and amounts of sensitive expenditure are likely to differ, to some degree, from entity to entity because of the wide range of public entities and the varying nature of their functions and activities. For example, Crown entities that are involved in national or international commercial activities may make different decisions to those made by a small local authority.

2.10
However, we expect all public entities to behave in such a way as to support the public’s trust in government generally and in public entities in particular.

2.11
For all public entities, deciding what appropriate sensitive expenditure is needs to take account of both individual transactions and the total amount of sensitive expenditure.

2.12
Even when sensitive expenditure decisions can be justified at the item level, the combined amount spent on a category of expenditure may be such that, when viewed in total, the entity could be criticised for extravagance and waste. Or, put another way, the entity has failed to ensure the proper and prudent expenditure of public money.

Responsibilities of leaders and senior managers

Setting the tone at the top

2.13
To be most effective, sensitive expenditure policies, procedures, and other controls should be embedded in the entity’s philosophy, practices, and business processes, rather than be viewed or practised as a separate activity. When they are embedded, everyone in the organisation becomes involved in the proper and prudent management of sensitive expenditure.

2.14
In our view, responsibility rests with those “at the top” of the entity – the leaders and senior managers – to make it clear to staff what is and is not acceptable sensitive expenditure for that entity, and to model that behaviour to the highest standard.

2.15
Leaders and senior managers, from the perspectives of both corporate governance and management, need to ensure that their public entities encourage public trust and respect in the integrity of government.

2.16
For the New Zealand Public Service, the sorts of behaviours that should support public trust and respect in the integrity of government are outlined in the New Zealand Public Service Code of Conduct (2005) produced by the State Services Commission.

Good controls and judgement

2.17
The responsibilities of those holding positions as leaders and senior managers of public entities include being accountable for properly and prudently spending the public money under their control, including sensitive expenditure, and for the internal controls to support this.

2.18
While having good controls will assist good sensitive expenditure decisions, good judgement will also be required. This is because it is not possible or desirable to set rules for every possible situation that may arise. In the absence of specific rules for a given situation, we expect the entity to exercise good judgement by taking the principles in these guidelines into account in the context of the given situation.

2.19
Leaders and senior managers have a particular responsibility to ensure that sensitive expenditure is appropriate for the environment in which their entity functions.

2.20
We expect leaders and senior managers to ensure transparency in both sensitive expenditure and remuneration systems, and to avoid any trade-off between the two. Items of expenditure that may not be justifiable under the principles for sensitive expenditure should not be included as part of an employee’s remuneration for the purpose of avoiding scrutiny against the sensitive expenditure principles.

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