Part 8: Directions for change

8.1
In this Part, we set out:

• our overall findings, from the detailed analysis set out in the previous Parts of this report;
• a brief description of relevant international and domestic trends and pressures; and
• the changes that we recommend be made to improve the Ministerial Services system.

Our overall findings

8.2
We have assessed as a whole the system for managing Ministerial spending that has the potential for personal benefit. Our assessment included considering four layers of that system:

• how the three systems fit together, and in particular how the Ministerial Services system interfaces with those administered by the Parliamentary Service and the Remuneration Authority;
• whether the rules in the Executive Determination are workable and fit for purpose;
• whether the financial management processes supporting the rules are effective and provide suitable control and accountability; and
• how well the Ministerial Services system works in practice.

8.3
In summary, we found that the institutional and legal context in which Ministerial Services must operate is unhelpful:

• The overall support arrangements made up of the Ministerial Services, Parliamentary Service, and Remuneration Authority systems create some overlap and complexity.
• The legal status and purpose of the rules in the Executive Determination are confused and create ambiguity, the rules have a number of technical deficiencies, and the rule on travel expenses is unworkable in practice.

8.4
At an operational level, we found that:

• The basic design of the financial management processes is sound, and staff are regarded as responsive and helpful.
• Ministerial Services provides useful training and guidance for ministerial office staff, but there is scope to do more and target it better.
• There is considerable scope to improve the guidance and information provided to staff through the Handbook and other mechanisms, and to streamline and simplify the content. In particular, we are concerned that the status of policies, requirements and guidance is not always clear, and at times the guidance leaves too much to individual judgement, and contains conflicting advice.
• The documentation and explanations accompanying transactions were often poor, or the relevant information was not included in or referred to in the main financial records. Although the spending might have been appropriate, the audit trail to demonstrate that was too often inadequate.
• Procedural requirements were not always followed, or there was no evidence of them having been followed, and it was not clear from the guidance which requirements were important.
• There is a risk that internal controls are not fully effective because staff can have different understandings of the various roles in the certification and approval processes.
• Senior private secretaries who are not applying spending rules or procedures properly can remain unaware that there is anything wrong with their practices because Ministerial Services may not systematically draw the problems to their attention.

8.5
Our conclusion at the operational level is that the basic design of the financial procedures is reasonable, but that they need further development. The weaknesses we have identified in the financial controls expose Ministerial Services and Ministers to greater risk of inappropriate spending and criticism.

8.6
Putting more effort into the development of clearer and stronger administrative policies, procedures and guidance, and into systematically enforcing the key requirements, would reduce those risks and enable the system to provide better protection for Ministers. In particular, more effort needs to be put into ensuring that transactions are properly documented. As we explained in Part 3, this does not have to be onerous. The information in the financial record simply has to be enough to enable others to see that the spending was within the rules and reasonable.

8.7
Our testing of transactions did not show any pattern of major spending irregularities. We found only occasional examples of transactions that we thought were outside the rules or were close to a line.

8.8
Overall, we have concluded that the Ministerial Services system as it stands is an unsatisfactory basis for providing support to Ministers. In our view, the system needs improvements at all four of the layers set out in paragraph 8.2. The operational matters can be directly addressed by the Department, as can some of the problems with the Executive Determination. The problems that relate to the relationship with other parts of the overall support arrangements, and the Civil List Act 1979, will need to involve several administering and policy agencies.

International trend towards greater scrutiny

8.9
In the last few years, there has been an international trend towards greater scrutiny of parliamentary and ministerial spending. Several countries are developing, or have developed, new systems for setting salaries and entitlements and organising support services, as well as mechanisms for greater oversight and public disclosure of spending.

8.10
Different countries have different models for how that support is provided. For example, Australia provides both parliamentary and ministerial support through a single organisation, which is part of the Department of Finance and Deregulation. Towards the end of 2009, Australia decided to develop a complete reporting regime for all Department of Finance and Deregulation spending on entitlements for, or connected with, MPs, including Ministers. The first comprehensive report of this kind, and all the supporting documentation, was released in June 2010.⁹

8.11
Ministerial office support in Canada is funded through the relevant department, and all spending is expected to be subject to the normal departmental financial management processes, including separation between the person spending and the person approving payment, and internal audit. All spending is regularly and publicly released.

8.12
In the United Kingdom, recent changes to the payment and support systems for MPs have been well publicised. They result from the release of large amounts of information under the Freedom of Information Act, which disclosed significant failings in the system. The new systems incorporate a strong focus on independence and scrutiny.

8.13
The move to greater disclosure of spending in New Zealand is part of this international trend. It was introduced by the Speaker and the Prime Minister in direct response to public disquiet about parliamentary spending in the United Kingdom. Here too, the wholesale and regular disclosure of this type of information for the first time is revealing inadequacies in the underlying rules and processes.

8.14
In our view, a significant change is taking place. The notion that spending by MPs or Ministers is in some way different from other parts of the public sector, and should be any less controlled or accountable, is no longer tenable. It is clear that the public expects to be able to scrutinise this use of taxpayer funds as much as – if not more than – any other. Individual Ministers and MPs are being held to account for their spending.

8.15
It is important that the supporting systems adapt to meet the challenges of regular scrutiny. In New Zealand, as elsewhere, they need to become transparent and rigorous, so that the public can be assured that appropriate financial controls are in place and operating.

The changes that we recommend

8.16
It is not our role to redesign the system for the Department, but we can indicate the direction that we consider needs to be taken and identify specific points that we consider need to be addressed. The remainder of this Part sets out the changes we are recommending, under five main headings:

• the Department's responsibility for the system and spending under it needs to be put beyond doubt;
• the system needs a clear and coherent legal basis;
• the Executive Determination should set out clear and workable rules;
• administrative policies and procedures should help people to get it right; and
• financial records should show compliance with requirements.

The Department's responsibility for the system and spending under it needs to be put beyond doubt

8.17
In our view, one of the most important steps that needs to be taken is to clarify the role of the administering department. Everybody working in the system needs to understand that the Department is accountable for these funds in the same way as it is for other public funds, and that at times this role will require officials to question or challenge the spending decisions that Ministers make. It also requires the Department to give ongoing consideration to whether the system is operating properly and whether changes are needed to operational or legislative requirements.

8.18
We would like to see the Department strengthen its strategic and policy development capability for its Ministerial Services responsibilities. As with any part of the public sector, the Department needs to be able to keep the arrangements it administers under constant review, so that it is ready to provide advice on how to improve it over time and ensure that it is ready to meet new challenges.

8.19
In our view, there is a risk that in such a busy environment, the role of the Department will largely be to administer a system in which the rules and entitlements have been developed over the years by others (mainly politicians). In this situation, changes tend to be made in response to specific problems rather than as a result of ongoing self-review and development work. In our view, the Department can and should be able to take a more strategic approach, and be prepared to recommend changes, to help modernise the arrangements. For example, it should be able to identify when a rule cannot be given administrative effect and to provide advice on how to address the problem.

8.20
We would also like to see the Department take a stronger role in developing simple and clear administrative requirements, and enforcing them consistently and openly. Any procedural rules must be tied into the basic requirements for financial accountability and should not be onerous. But when the requirements are important, the Department should enforce them and Ministers should support it in that role.

8.21
In our discussions, we have heard cynicism about whether Ministers would endorse departmental officials having such a prominent role in advising on such matters and in determining levels of support and scrutinising spending. We doubt that this cynicism is justified. Most Ministers are more likely to welcome than resent clear advice and checks that will detect and resolve problems promptly. No Minister wants financial housekeeping matters to become a matter of political embarrassment. We do not expect that Ministers will object to the Department carrying out its strategic, policy, and financial management responsibilities for this area of spending in the same way as it does in others.

8.22
In our view, the simplest and most effective way of confirming that the Department should have this role in the system is for the Minister responsible for Ministerial Services to formally confirm the role and communicate it to all Ministers. This could be done in a foreword to the Handbook, for example, by including statements on the administrative process in the Executive Determination, or other means.

The system needs a clear and coherent legal basis

8.23
In our view, it is unsatisfactory that the Ministerial Services system operates in such a legally ambiguous environment. There are three main uncertainties in the basic construction of the Ministerial Services system that need to be clarified.

8.24
First, the legal basis for the system, and the legal capacity and constraints on the Department, need to be reviewed and clarified. Some basic principles need to be established that anchor the system properly, and the rules need to be developed from there. This work needs to happen alongside any changes that result from the Law Commission's review of the Civil List Act 1979. That is the appropriate context for clarifying the legal status and effect of the Executive Determination.

8.25
In our view, it is important to clarify:

• What is the purpose of the Executive Determination and its legal or administrative role?
• Which rules, if any, create a personal entitlement?
• Which rules, if any, create legal limits on what can be funded?
• Which matters belong in the Executive Determination and which can be left to departmental policy and administrative discretion?

8.26
Secondly, the Department needs to clarify the relationship between the permanent legislative authorities contained in the Civil List Act 1979 and the appropriations in Vote Ministerial Services. It should also be clear how both sets of authorities relate to the expenses and services covered in the Executive Determination.

8.27
Thirdly, the Department needs to work with the Remuneration Authority and the Parliamentary Service to resolve the interface issues that we have identified and to provide a better public explanation of the way in which the three systems interact.

8.28
In particular, we consider that:

• the public information on salaries and entitlements should make it clear how parliamentary and ministerial salaries are reduced to take account of the level of personal benefit inherent in some of the current entitlements;
• the Department needs to review the Executive Determination and associated guidance, in consultation with the Remuneration Authority, to ensure that there is no overlap between what can be claimed as operational resources and items that the allowance paid by the Remuneration Authority is intended to cover; and
• the Department needs to continue to work with the Parliamentary Service to simplify the relationship between the ministerial and parliamentary systems.

The Executive Determination should set out clear and workable rules

8.29
The current Executive Determination is a collection of rules, entitlements, and exhortation that have been inherited from other systems, or developed and adapted as particular problems have arisen. Writing a fresh set of rules from scratch would enable the rules to be properly grounded in principles and to be written simply and with a clear purpose. That type of approach provides much greater guidance for people when they come across new situations, because they are able to apply explicit principles and purposes to develop coherent responses.

8.30
A review of the Executive Determination should also consider the more detailed issues we identified in Part 5, including:

• whether it is appropriate to refer to Cabinet decisions in a document of this kind, so that the Cabinet minute effectively provides the boundaries of an entitlement; and
• whether there is a better way to manage the relationship between the Executive Determination and the appropriations.

8.31
We explained in Part 5 that we found the principles in the current Executive Determination confusing and unhelpful. Given that their content is largely drawn from the Parliamentary Determination, we recommend that Ministerial Services and the Parliamentary Service review them together, to prepare a set of principles that provide more substantive guidance and are more closely related to the content of the rules.

8.32
The rules that set limits on a Minister's daily spending when travelling, and rules about when the costs of an accompanying spouse will be met, also need to be reviewed. The current rules are unworkable in practice:

• Given the way the financial and administration systems and invoicing practices work, Ministerial Services may need to consider setting separate rules on accommodation costs and other daily expenses.
• On the travel costs for spouses, if in practice there is no better approach than relying on the Minister's judgement for when it is appropriate for a spouse or partner to travel with them, then the rule should reflect that this is where the judgement rests.

8.33
We have queried whether the part of the Executive Determination that deals with operational resources is necessary. This question needs to be considered in the context of the work we have already recommended be done to clarify the legal status of the Executive Determination. It also needs to clarify the relationship between the Executive Determination and the Department's general capacity to provide support services.

8.34
Finally, we have suggested that the Department consider whether there would be benefit in including a section in the Executive Determination on the administrative and financial processes that accompany spending. The Parliamentary Determination includes a section on the approval processes administered by the Parliamentary Service. Our impression is that this has been useful in making clear that officials have overall responsibility for the spending, and has removed much of the argument that sometimes accompanies this role.

8.35
In our view, the review needs to produce a clear and coherent legal framework to support the provision of services to Ministers that:

• integrates the legislation, Executive Determination, and appropriations;
• minimises overlap between the three support systems; and
• creates rules and processes that are practical and capable of being effectively managed and monitored.

8.36
If comprehensive reform of the overall support arrangements results from the Law Commission's review of the Civil List Act 1979, the review we are recommending should be done in conjunction with that work. If major reform is not initiated, the Department will still need to work with other administering and policy agencies to address the legal problems that can be fixed within the current overall arrangements.

Administrative policies and procedures should help people to get it right

8.37
The finance team in Ministerial Services is helpful and available, and the administrative systems are flexible and responsive to ensure that ministerial business is effectively supported.

8.38
However, we consider that it is possible for this level of support to be provided in a way that provides greater protection for Ministers and staff. The general and low-key nature of the guidance and requirements in the Handbook gives a great deal of flexibility, as does the pragmatic approach to procedural requirements. But it also carries risk, because the result is that it is not clear which checks and requirements are important and when failure to comply should be seen as significant. Senior private secretaries are often working out for themselves what to do because the documented guidance is not specific enough, and they do not always get any reaction or feedback if they have made the wrong choice.

8.39
There are many changes that Ministerial Services could implement to make financial management seamless and easy for ministerial offices. Senior private secretaries told us that financial management of the office is a small part of their role, and that when they are dealing with pressing issues they want this to be a straightforward housekeeping matter.

8.40
When Ministerial Services reviews the Executive Determination and the policies and procedures set out in the Handbook, it needs to focus on the users of the financial management processes and what will make this simple for those users. We encourage Ministerial Services to consult with senior private secretaries to identify where it is important that they have scope to make their own choices and where a simple rule or some clear benchmark would be better.

8.41
We also encourage Ministerial Services to develop the Handbook and associated guidance so that the status of the different requirements is clear, along with the level at which decisions can be made to approve exceptions, and how failures to comply will be treated. Being much clearer on how important the different requirements are will help senior private secretaries understand what they need to do and what flexibility there is, and will also help focus external accountability on the important requirements.

8.42
In particular, we emphasise that the Department must now strengthen the Ministerial Services financial management processes to help people appropriately and sensibly manage spending that could give personal benefit to a Minister.

8.43
For example, we are aware that many people are now reluctant to use office credit cards, even though credit cards are often a sensible, transparent, and efficient way of spending. Some people are now using their personal cards for business expenses and then seeking reimbursement, because they see the office credit card as too risky. Some people may be avoiding the risk altogether, by paying personally for what are legitimate business expenses.

8.44
We would be disappointed if this kind of attitude was left to take hold. As we have said before, credit cards are convenient and appropriate. In our view, the current rule in the Handbook is probably too strict to be practical and is not consistent with the state sector norm. The Department needs to reconsider it.

8.45
We also encourage the Department to review how it resources the financial checking and approval function, to ensure that it is able to properly scrutinise transactions from ministerial offices.

8.46
There is scope to improve the training that Ministerial Services provides to senior private secretaries, and the general level of communication and systematic guidance. Senior private secretaries gave us a range of practical suggestions, such as giving them regular information on how their office spending compares with others, staggering the training when a new government takes office so that the initial focus is simply on how to establish an office properly, and many other ideas. We encourage Ministerial Services to talk openly with senior private secretaries about what they would find helpful.

8.47
Ministerial Services should also consider whether to institute a more formal and transparent process for recording and communicating new information or changes to the policies and advice. This process could feed into more regular and systematic updates of the Handbook, so that significant information and precedents are systematically captured and shared.

Financial records should show compliance with requirements

8.48
The financial records do not provide an audit trail that enables the Department to easily demonstrate that all spending is within the rules and reasonable. Documentation practices are patchy, and sometimes the explanations of transactions are missing or poor.

8.49
We have been given evidence that spending is scrutinised, and that Ministerial Services regularly asks questions before approving transactions. However, the documentation of these checks, and the information that results, is not always well documented. Much of it sits in emails or other files that are not cross-referenced in the financial records. It is also not clear from the Handbook or the records which requirements are regarded as important and must be followed, and which are seen more as guidance than can be waived when necessary.

8.50
Although this open approach enables the support to be flexible and responsive, it also creates risk. The basics of financial accountability are not always in place, in the form of simple and clear requirements and records to demonstrate compliance with those requirements.

8.51
In our view, the basic financial review and approval functions need to be reviewed to ensure that they operate more effectively. That should include considering how the function is organised and resourced, and which procedural and substantive requirements are important and need rigorous enforcement, and which are better regarded as guidance.

8.52
We have identified the need to clarify and confirm that the Department should carry out this review and approval role for Ministers, because the Department must be able to account to Parliament for all spending in the Vote. It needs to become a matter of routine for Ministerial Services to question and turn back claims that are not accompanied by proper documentation or explanation. We accept that gaps in documentation are often addressed informally, through discussions and emails, but the results need to be documented in the financial system.

8.53
We have noted that the Department maintains an internal audit function that is capable of looking at Ministerial Services but has not done so in recent years. We understand that it has not been identified as a risk for the Department. That may be so from a financial perspective, because the budget for Ministerial Services is a small part of the Department's overall budget. But it is obviously a high political risk.

8.54
The Parliamentary Service has recently introduced an internal audit element into its management of spending by parliamentary offices. We recommend that Ministerial Services does the same. It would be useful for Ministerial Services to arrange for regular checks by internal audit, to help it identify problems early, and more generally to help it maintain and improve the quality of its processes.

9: See Australian Government, Department of Finance and Deregulation, Parliamentarians' Expenditure On Entitlements Paid By The Department Of Finance And Deregulation: July to December 2009, available at www.finance.gov.au/publications.