Part 8: Licensing trusts and sensitive expenditure

Local government: Results of the 2007/08 audits.

8.1
In February 2007, we published Controlling sensitive expenditure: Guidelines for public entities (the guidelines). The guidelines set out our view of good practice that the public sector should use to control sensitive expenditure. The purpose of the guidelines is to help public entities improve their organisational approach to, and control of, sensitive expenditure. We have circulated the guidelines widely in the public sector.

8.2
This Part reflects the first phase of our assessment of the effect of the guidelines in the public sector and focuses on the licensing trust sector. We have identified this sector because of the additional, inherent challenges in managing sensitive expenditure that arise for entities operating within the hospitality industry. Typically, such expenditure is a small part of any public sector entity's operations. However an entity's approach to expenditure of this nature is potentially sensitive in the eyes of the public, and needs careful decision-making around what expenditure is acceptable. This is no less the case in the licensing trust sector.

Summary

8.3
Overall, we are pleased with the positive response from entities in the licensing trust sector to the guidelines. Many of these entities had policies in place before the guidelines were issued, and others have developed or enhanced their policies in the past year. On the whole, we are satisfied that the licensing trust sector is in a good position to manage the risks associated with sensitive expenditure as a result of the adoption and application of appropriate policies.

8.4
However, our detailed review has identified that there is scope for improvement, particularly on the completeness and appropriateness of policies for the control of sensitive expenditure. In our view, further work by some entities would provide better safeguards for both the sector and the entity itself against the risks associated with sensitive expenditure in the hospitality industry.

Background

8.5
Sensitive expenditure is defined in our guidelines as expenditure by a public entity that could be seen as giving some private benefit to an individual staff member that is additional to the business benefit to the entity. Travel, accommodation, and hospitality spending are examples of areas where problems often arise. It also includes expenditure by a public entity that could be considered to be unusual for the entity's purpose or functions.

8.6
Based on our observations over a number of years, we noted in the guidelines that problems most frequently arise when expenditure is:

  • of a nature that is, or could be regarded as, extravagant or immoderate for the public sector;
  • incurred without a justifiable and adequately documented business purpose;
  • not adequately substantiated by invoices, receipts, or other relevant documentation to support claims or payments;
  • committed before appropriate authority has been obtained; and
  • made without proper scrutiny to ensure compliance with an entity's policies and procedures.

8.7
The guidelines provide a principles-based approach, rather than prescriptive or exact rules. They advocate that those holding positions of leadership in the public sector should establish good controls, apply those controls, and exercise good judgement.

Focus on the licensing trust sector

8.8
We selected the licensing trust sector as the first sector to assess against the guidelines. We did so because of the inherent risks for sensitive expenditure that are faced by all entities operating in the hospitality industry and the careful management that is required by public sector entities in particular.

8.9
Licensing trusts can be exposed to much greater pressures in relation to sensitive expenditure transactions than most other public sector entities because of the nature of the hospitality industry. However, as licensing trusts are public entities within the mandate of the Auditor-General, we expect them to operate in the same manner and in accordance with the same standards required of all other public sector entities.

8.10
The licensing trust sector is made up of 19 licensing trusts, one community trust, and 24 related entities. Of the related entities, seven are companies established mainly to hold property or to provide administrative services. These entities are generally small. The remaining related entities are charitable trusts set up to administer the proceeds from gaming machines operated at the premises of licensing trusts. The Trust Charitable Foundation Incorporated is the main operator of machines in the licensing trust sector. Some licensing trusts operate machines through their own charitable trust. For the purposes of our review, we focused on the licensing trusts and the significant charitable trusts operated within the sector.

8.11
As a result of competition and other changes since licensing trusts were established, the licensing trust sector is made up of entities that do not all carry out the same functions. In a number of cases, licensing trusts now operate only as landlords owning property, or may only administer the operating licenses for premises under contract to a third party. We took account of these differences during our review.

What we did

8.12
In conjunction with the annual audit for the year ended 31 March 2008, we asked our appointed auditors to assess the application of the guidelines by the licensing trust sector. Specifically, we asked our appointed auditors to:

  • identify whether entities in the sector had adopted policies to address sensitive expenditure issues;
  • identify whether those policies were based on the principles set out in the guidelines; and
  • test the application of each entity's sensitive expenditure policies for the period 1 October 2007 to 31 March 2008.

What we found

8.13
The findings detailed below are based on information and analysis completed by auditors for the individual licensing trusts for which they are the appointed auditor.

No policy established

8.14
We found that four licensing trusts had not established any policy to address sensitive expenditure issues.

8.15
In one of the four, the trust relied for guidance on the Management Guide to Discretionary Expenditure issued by the Institute of Internal Auditors in 1996. Although this is a reasonable source of guidance, we consider it important that every entity establishes its own policy. It is also important for entities in the public sector to ensure that they are drawing guidance from sources that include an adequate consideration of the particular needs of public sector entities.

8.16
Of the remaining three licensing trusts that had not established any policy, two were very small trusts that had contracted their operations to another party for a number of years and the third operates on a very small scale. We are sympathetic to the view that a significant number of the policy areas outlined in our guidance may not be relevant to these trusts given their very limited operations. However, we consider that even these entities should assess the guidelines and evaluate the areas that could be relevant to them, particularly the role and actions of the trustees, in relation to travel, accommodation, entertainment and hospitality, farewells and retirements, and gifts.

Policy does not address all areas of the guidelines

8.17
Our review found that many licensing trusts had policies in place to address some areas of sensitive expenditure but that the policy was often not as comprehensive as that advocated by the guidelines. There were two different situations where this occurred.

8.18
The first situation was where the nature of the operations of the licensing trust made extending its sensitive expenditure policy into other areas unnecessary. One example was where a licensing trust with limited operations did not operate any corporate vehicles, so a policy about use of corporate vehicles was not relevant. In another case, a licensing trust that contracted with another party to manage its premises did not need a policy on financing staff social club activities as it did not employ any staff. In such cases, we accept that it is appropriate that the trust's policy does not cover those matters.

8.19
The second situation was where licensing trusts had not developed certain areas of sensitive expenditure policy on the basis that they did not incur that type of expenditure, or did so infrequently. It is our view that, for the high risk and higher profile areas of sensitive expenditure (air travel, meals and accommodation, entertainment and hospitality, farewells and retirements, and gifts), lack of a clear policy could expose a trust to unnecessary risk of inappropriate practice occurring, even if infrequently.

8.20
A significant number of trusts would benefit from reconsidering their current policy, particularly concerning the areas noted in paragraph 8.19. We encourage licensing trusts to take a conservative approach in these areas, as they could attract strong public reaction should any inappropriate practice be identified.

Policy in place is inadequate or inappropriate for the public sector environment

8.21
We identified a small number of licensing trusts that had developed sensitive expenditure policies to address the areas that were relevant to their operations, but where, in our view, the content and detail of the policies was inadequate or inappropriate. These policies included examples where important elements of the policy had not been covered and also cases where, in our view, the policy was too liberal or not sufficiently specific to act as a safeguard for the organisation.

8.22
For example, we found some policies that allowed for the personal use of air points generated as a result of business-related travel, along with other policies that did not contain any guidance on the use of air points or protocols for other loyalty programmes. We acknowledge that this is a difficult area, and that the approach recommended in the guidelines is conservative. For these reasons, it is all the more important that each public sector entity develops and adopts a clear policy on air points and loyalty programmes, and that the policy rationale is supported by a business case that links to the circumstances of the entity.

8.23
As another example, we found policies that did not contain any clear limits on the type and cost of meals, accommodation, entertainment and hospitality. We particularly noted a number of policies about allowable expenditure for alcohol that we did not consider were prudent.

8.24
Part 3 of the guidelines clearly sets out the important features of good quality policy. This includes the need to:

  • make clear what types of expenditure are and are not permitted;
  • outline clear approval processes that are specific about who approves what, including arrangements for when the usual approver is unavailable;
  • set spending limits or boundaries, including explaining what is meant by "actual and reasonable" when these terms are used, and specifying dollar limits and defined boundaries, where practicable, of what is "reasonable";
  • allow a manager discretion to grant an exception to a policy or procedure ("management override") only in exceptional circumstances;
  • specify the monitoring and reporting regime and, where applicable, any internal audit checks that may be applied; and
  • specify the process for amending the policies and procedures.

8.25
There are a small number of licensing trusts that need to address these issues. In these cases, their appointed auditor has made this point clearly to the governing body in the management report issued for the 2007/08 annual audit.

Application of adopted policy

8.26
As a result of our auditors reviewing a sample of sensitive expenditure transactions, we identified one entity that had not consistently applied its adopted policies during the period sampled, and where there was evidence of transactions that could, on the face of the transaction, be considered as inappropriate in the public sector. Our sample of transactions did not identify any other issues of concern in the sector.

8.27
For the entity referred to in paragraph 8.26, the issue has been brought to the attention of the governing body and management through the management report issued for the 2007/08 annual audit. We have previously been concerned about similar transactions by the entity. We are satisfied that the entity now understands the need to carefully consider the rationale and business case associated with such transactions should the same situation arise in the future. In future audits, we will continue to closely review sensitive expenditure transactions by this entity.

8.28
Other than the transactions referred to in paragraph 8.27, we have observed sound policy across the sector as a whole, that has been appropriately applied in the period under review. These results were positive, given the challenges faced by licensing trusts as public entities operating in the hospitality industry. We commend the sector for taking action to ensure sound policy and appropriate practice in this area.

8.29
We still have some concerns that a small number of entities may have established their policies primarily for the purposes of our review rather than to provide clear and appropriate policies for the future.

Conclusion

8.30
It is clear that our guidelines on sensitive expenditure have been accepted as a useful resource within the licensing trust sector. A significant portion of the sector has used the guidelines to establish or to refresh sensitive expenditure policies. However, some entities need to re-evaluate the completeness and appropriateness of their sensitive expenditure policies. Overall, most of the sector is following appropriate policies for sensitive expenditure and this has significantly diminished the associated risks.

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