Report on NI Water’s Response to a Suspected Fraud & DRD: Review of an Investigation of a Whistleblower Complaint

report_NI_Water_Response.pdf (10.19 mb)

Executive Summary

1. In December 2009, internal auditors identified a case of ‘invoice slicing’ in NI Water. They found that an NI Water manager had instructed the firm (Company E) contracted to install water meters to limit the value of invoices submitted for payment to below £20,000. Limiting the value of invoices in this way is regarded as an indicator of fraud. Following an internal fraud investigation, Internal Audit found no evidence of fraud but did find significant weakness in NI Water’s control over the metering contract. A disciplinary hearing in August 2010 considered the actions of two managers responsible for the contract with Company E and found that they had no case to answer.

How the investigation was established and the contract between NI Water and Company E

2. The Committee considers that the disciplinary process established by NI Water showed no regard for employees’ rights or for due process. The manager who gave the instruction to invoice slice was interviewed by telephone while he was on holiday. He was given no written warning that a disciplinary process had started and had no opportunity to have a trade union representative or a colleague present. The defects in this process should have been obvious to senior management in NI Water.

3. The disciplinary letters setting out the case against two managers had not been quality assured internally and, as a result, the letters contained a significant error of fact. The Committee was initially told that responsibility for the error lay with the legal firm which prepared draft letters. The Committee considers that the responsibility for this lapse lies squarely with the senior NI Water officials involved and we take a very dim view of the attempt to shift the blame on to others.

4. The fraud investigation identified a number of serious control weaknesses in management of the contract with Company E, in addition to the issue of invoice slicing. For example, Company E was paid £111,000 for 12,000 abortive visits to install meters, due to errors in NI Water’s instructions. The Department for Regional Development (the Department) takes the view that the control weaknesses “pointed to some significant shortcomings in contract management practice, as opposed to fraud”. The Committee considers that all of the weaknesses identified by Internal Audit were indicators of fraud and should have been treated as such.

The scope of the investigation and the quality of the investigative process

5. The Committee considers that allegations of serious wrongdoing and suspected fraud must be investigated vigorously and promptly by skilled and experienced fraud investigators. Having the right team in place is key to ensuring investigations are conducted to professional investigation standards.

6. The fraud investigation team members were qualified accountants but they had limited experience of fraud investigations and no specialist fraud investigation training. Specifically, they had not been trained to gather evidence in accordance with the requirements of the Police and Criminal Evidence (Northern Ireland) Order 1989 (PACE). Given this lack of expertise, the Committee is concerned that PSNI was not consulted in this case, particularly when this was best practice set out in DFP guidance and in NI Water’s own Fraud Response Plan.

7. The fraud investigation team did not conduct its own interviews but relied entirely on the earlier interviews carried out by the disciplinary investigation led by the Director of Customer Services. This approach was flawed because:

suspects were alerted before relevant evidence had been secured; and

the disciplinary interviews were not conducted under PACE conditions and, as a result, their value in any subsequent fraud prosecution was seriously undermined.

8. The Director of Customer Services had a role in both the disciplinary and the fraud investigations. The Committee considers that a fair and impartial disciplinary process required that decisions about disciplinary action should have been made by a director with no involvement, of any kind, in the fraud investigation. The Committee is also of the view that the Director of Customer Services should not have had any role in a fraud investigation within the business unit for which he was responsible.

9. The Committee considers that the fraud investigation’s terms of reference were not fit for purpose, the scope was too restrictive and there was no reference to relevant legislation or the evidence to be collected to prove a breach. The Committee’s view is that the investigation simply did not dig deep enough and a number of relevant matters were never properly explored.

10. The departmental Accounting Officer told the Committee that he did not believe a fraud had occurred and, while the investigative process was “slightly flawed”, there was not a “flawed outcome” and the investigation had arrived at the right conclusion. The Committee finds these assurances to be wholly unconvincing given the weak investigative process, the serious contract management weaknesses, and the extent of the contract irregularities. The notion that a flawed investigation can somehow arrive at the right conclusion is perverse.

Governance and oversight of the investigation

11. The Committee was concerned that witnesses introduced new information at our evidence session which had not been disclosed to the Comptroller and Auditor General (C&AG) during the preparation of his report. The Department also wrote to the Committee after our evidence session pointing out an error in the report it had agreed with the C&AG in March 2013. The Audit Office engages with departments in agreeing the facts of the case before its reports are published. Therefore, the Committee finds it completely unacceptable for witnesses to provide us with new material which was not brought to the C&AG’s attention and which he did not have the opportunity to critically assess.

12. The fraud investigation’s terms of reference were agreed by the Department, the Chair of the NI Water Audit Committee, the former Chief Executive and other senior NI Water officials. All failed to identify or address the clear weaknesses in the planned scope and methodology. The Committee also considers that, given the limited investigation work undertaken, NI Water senior management should have considered further analysis and testing; they were simply too quick to close down the investigation on the basis of inadequate and incomplete evidence.

13. The Department failed to inform the C&AG of the suspected fraud in accordance with DFP guidance. This contravenes a long established and key accountability control. The Committee finds this breach to be unacceptable. We welcome the Accounting Officer’s apology both to the Committee and to the C&AG for this lapse.

The framework for investigating fraud in the Northern Ireland public sector

14. The Treasury Officer of Accounts acknowledged that DFP’s guiding principles for investigating fraud were “not followed particularly well”. The Committee considers this is something of an understatement; the principles simply were not followed. Shortcomings included:

the investigation team were not trained in, and had no experience of, gathering evidence in accordance with PACE provisions;

the investigation was not led by an experienced counter fraud specialist;

advice was not sought from the PSNI or other public sector counter fraud specialists;

all aspects of the suspected managers’ work were not investigated; and

control weaknesses discovered during the investigation were not strengthened immediately.

15. The Committee also found that there was no documentary evidence explaining why the guiding principles for investigating fraud were not applied. The Committee considers that departments and other public bodies should always document the rationale for any departures from their own fraud response plan or from DFP’s guiding principles for investigating fraud and that the principle of ‘comply or explain’ should be built into all DFP guidance.

16. The Committee considers that the poor quality of this investigation supports the case for establishing a Northern Ireland public sector fraud investigation service. The Committee was extremely concerned to learn that even the limited proposal to include a fraud investigation unit within a centralised internal audit service was not taken forward by the NICS Permanent Secretaries Group. The Committee strongly recommends that DFP reconsiders the options for strengthening the investigative capacity within the public sector, including the establishment of a centralised service, and reports back to the Committee on the outcome of this review.

Summary of Recommendations

Recommendation 1

The Committee considers that fraud investigations can only be effective where investigators have an appropriate level of expertise and understanding of relevant law. Public bodies must understand that internal auditors will not necessarily have these skills. The Committee recommends that DFP issues guidance clarifying the distinction between these separate and distinct roles and requiring public bodies to ensure that only suitably qualified and experienced staff lead fraud investigations.

Recommendation 2

The Committee strongly recommends that departments and their arms length bodies properly and thoroughly check the facts contained in the C&AG’s draft reports. The Committee should not be placed in the position of having to remind Accounting Officers of such a basic requirement.

Recommendation 3

The Committee recommends that DFP makes clear to the departments and their arms length bodies that significant matters, which are relevant to an Audit Committee’s work, must be brought to its attention regardless of the source, that is, whether a conventional audit, or an ad hoc internal or external investigation.

Recommendation 4

The Committee recommends that DFP reviews its guidance on fraud investigations to identify any gaps and to provide greater clarity, where needed, on which actions it considers mandatory and which are discretionary.

Recommendation 5

The Committee recommends that departments and other public bodies should always document the rationale for any departures from their own fraud response plan or from DFP’s guiding principles for investigating fraud and that the principle of “comply or explain” should be built into all DFP guidance.

Recommendation 6

The Committee finds it concerning that no progress has been made in establishing a centralised fraud investigation service, despite the clear advantages of this approach. The Committee strongly recommends that DFP reconsiders the options for strengthening the investigative capacity in the public sector, including the establishment of a centralised service, and reports back to the Committee on the outcome of this review.

Download the full report here