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PUBLIC ACCOUNTS COMMITTEE Report on TOGETHER WITH THE PROCEEDINGS OF THE COMMITTEE Ordered by the Public Accounts Committee to be printed 26th
June 2002
ELEVENTH REPORT FROM PUBLIC ACCOUNTS COMMITTEE Standing Orders under Section 60(3) of the Northern Ireland Act 1998 have provided for the establishment of the Public Accounts Committee. It is the statutory function of the Public Accounts Committee to consider the accounts and reports of the Comptroller and Auditor General laid before the Assembly. The Public Accounts Committee is appointed under Standing Order No. 55. It has the power to send for persons, papers and records and to report from time to time. Neither the Chairperson nor Deputy Chairperson of the Committee shall be a member of the same political party as the Minister of Finance and Personnel or of any junior minister appointed to the Department of Finance and Personnel. The Committee Members were appointed by the Assembly on Monday 24 January 2000. They will continue to be Members of the Committee for the remainder of the Assembly, unless it orders otherwise. The Chairperson Billy Bell and Vice-Chairperson Sue Ramsey were previously appointed on 15 December 1999. The full membership of the Committee is as follows:-
All publications of the Committee (including press notices) are on the internet at archive.niassembly.gov.uk/accounts.htm All correspondence should be addressed to The Clerk of the Public Accounts Committee, Room 242, Parliament Buildings, Stormont, BELFAST, BT4 3XX. The telephone number for general inquiries is: 028-9052-1532. The Committee's e-mail address is: michael.rickard@niassembly.gov.uk TABLE OF CONTENTS Introduction Our Principal Recommendations and Conclusions General Findings Determining the Full Extent of Fraudulent Activity Failure to Properly Address the Underlying Control Weaknesses Failure to Comply with Established Procedures and Best Practice Failure to Handle the Investigation Properly Failure to Spot the Warning Signals Holding those Responsible to Account Departmental Oversight and Corporate Governance Proceedings of The Committee Relating to the Report Minutes of Evidence (Wednesday 30 January 2002) Witnesses Mr Bruce Robinson, Accounting Officer, Department of Enterprise, Trade and Investment Mr Wilfie Hamilton, Principal Finance Officer of the Department of Enterprise, Trade and Investment Mr Alan Neville, Acting Chief Executive and Acting Accounting Officer, LEDU. Mr John Dowdall, Comptroller and Auditor General (C&AG) Mr Leo O'Reilly, Treasury Officer of Accounts, Department of Finance and Personnel. 2. Correspondence of 24.04.02, from Mr Leo O'Reilly, Treasury Officer of Accounts. THE PUBLIC ACCOUNTS COMMITTEE INTERNAL FRAUD IN THE LOCAL ENTERPRISE DEVELOPMENT UNIT INTRODUCTION 1. The Public Accounts Committee met on 30 January 2002 to consider major internal frauds in the Local Enterprise Development Unit (LEDU). These were reported on by the Comptroller and Auditor General in the Northern Ireland Appropriation Accounts Volume 2000 - 2001 (NIA 34/01). Our witnesses were:
2. The C&AG's report deals with the circumstances surrounding a series of internal frauds between 1995 and 1998. The total amount of actual and attempted fraud was almost £220,000. The first fraud was perpetrated by an employee named Atwell who diverted £118,000 of public money into her personal bank account. The fraud was discovered in December 1996 by Mr Gribben, LEDU's Assistant Accountant. In 1997 Mr Gribben was involved in fraudulent activity himself. His frauds, actual and attempted, were estimated at over £101,000 and were uncovered in 1998 after he had used LEDU funds to purchase private travel for himself and his associates. 3. LEDU was extremly slow to notify these frauds to the Department which also meant that the C&AG received late notification. LEDU was also very slow at involving the police and undertaking a wide-ranging investigation to determine the extent of the fraud. In the event some sixteen months passed between the detection of the first Gribben fraud and several other frauds coming to light. LEDU's actions did not follow the good procedures laid down by the Department. Following legal proceedings Atwell was sentenced to two years in prison and Gribben was sentenced to twelve months in prison. 4. In taking evidence the Committee focused on a number of issues raised by the C&AG's report. These were:
OUR PRINCIPAL CONCLUSIONS AND RECOMMENDATIONS ARE AS FOLLOWS: 5.1. There are many important and valuable lessons to be drawn from this case and we look to DFP to ensure that these lessons are disseminated widely across the public sector so that we can be confident that any public body that has to deal with serious fraud will do so in the light of the experience of this case. Main Report, Paragraph 6. 5.2. We believe that where specific mistakes are made, this Committee has the right to ask who was actually responsible for those mistakes and be given a direct answer. Main Report, Paragraph 7. 5.3. We expect the Department to have a zero tolerance when client companies commit fraud. However, it is vital that departments are just as tough in their response to internal fraud. Main Report, Paragraph 8. 5.4. Despite knowing that Gribben was a fraudster, LEDU not only ignored the Department's procedures for a vigorous and prompt investigation, but also rejected the sound advice from Internal Audit. We found this astonishing, to the point of negligence. Main Report, Paragraph 9. 5.5. We found it disturbing that some sixteen months elapsed between the discovery of Gribben's first fraud and the launch of a proper fraud investigation. Main Report, Paragraph 10. 5.6. We expect the Department to undertake a review of those areas of Gribben's responsibilities which were not subject to proper fraud investigation; agree the terms of reference with the C&AG and furnish the C&AG with an assurance that it is satisfied that there were no frauds in the earlier period. Main Report, Paragraph 12. 5.7. Given that LEDU was dealing with one of the largest frauds in the Northern Ireland public sector it is difficult to avoid the impression that it did not act vigorously or with proper regard to good practice and that the Department did not exercise proper control when LEDU failed to take immediate and decisive action. In our view, once fraud has been confirmed it is imperative that an immediate wide-ranging and thorough investigation is undertaken to determine the full extent of fraudulent activity. Main report, Paragraph 14. 5.8. We would like the Department to provide to the C&AG a list of all projects administered by LEDU which have separate accounting or banking arrangements. Main Report, Paragraph 15. 5.9. There are clearly additional risks where projects are managed and controlled at arms length from LEDU's main accounting systems. It is quite simply unacceptable that high risk accounts such as Acumen and Intellec were subject to a much more relaxed control regime than transactions which were processed through LEDU's main accounting system. Main Report, Paragraph 16. 5.10. In our view, a more comprehensive management response to the points raised by LEDU's external auditors in 1995, would have reduced the Agency's exposure to the types of fraud perpetrated by Atwell and Gribben. We expect Departments to draw lessons from this. Main Report, Paragraph 18. 5.11. We agree with the C&AG that regular bank reconciliations are one of the most important financial controls in any organisation. It is essential that they are done on a monthly basis and not left for auditors to complete many months after the end of the financial year. Main Report, Paragraph 19. 5.12. Where projects are administered by departments, their agencies or NDPBs with separate bank accounts, we expect DFP to ensure, through the issue of clear instructions, that proper financial records are maintained and accounts prepared. It seems to us that the need for a tight control environment is particularly important where departments, their agencies or NDPBs administer projects in partnership with other funding bodies. Main Report, Paragraph 20. 5.13. It is quite clear to us that we are dealing with a failure to adhere to the most elementary principles of financial control. There appears to be a culture of weak financial management and it is astonishing to find that a Government agency, whose remit included advising small firms on financial control systems, was incapable of keeping its own house in order. In the light of this case, it is essential that new public bodies such as Invest Northern Ireland (which has now responsibility for functions previously carried out by LEDU), establish robust financial controls at the outset. Main Report, Paragraph 21. 5.14. We found it surprising that the advice of a local company of solicitors on how to handle fraud was preferred to the wealth of guidance and good practice material which was readily available within the public sector. We are not convinced that LEDU needed to commission its own legal advice on this matter given the extensive good practice guidance that was readily available to it. We accept that in certain circumstances departments, their agencies and NDPBs may need to seek legal advice on the handling of fraud. However, where they do so, it is important that the legal advisors are made fully aware of the broad framework within which departments, their agencies and NDPBs operate and any advice given must be consistent with the advice and guidance issued by DFP. Main Report, Paragraph 26. 5.15. We ask DFP to review, and where necessary tighten, its guidance on the role and responsibilities of departmental representatives on Boards of NDPBs. Main Report, Paragraph 27. 5.16. In the light of this case, all departments and NDPBs should now ensure that their policies and procedures for dealing with fraud fully conform to the guidance issued by DFP. Main Report, Paragraph 28. 5.17. We do not agree that it was acceptable for LEDU to have separate fraud policies and procedures which were less rigorous than those operated by its parent department. We were astonished the Departmental Accounting Officer did not support the recommendation from his own Internal Audit for early police involvement. In our view, the Accounting Officer should have been much more proactive at this juncture. He should have ensured that the police were notified and that a proper fraud investigation was underway. In our view, this was an abrogation of the responsibilities set out for the Accounting Officer in his letter of appointment. Main Report, Paragraph 30. 5.18. Let us be quite clear about notification. We regard the failure to report fraud promptly as a very serious breach of procedure and one that we will not tolerate. Main Report, Paragraph 33. 5.19. We appreciate that poor handling of these frauds is only one aspect of LEDU's relationship with its Department. Nevertheless the recurrent failure by LEDU to notify frauds showed a blatant disregard for Departmental procedures and leaves us with the impression that this important NDPB has not been fully under the Department's control and appeared negligent in its failure to keep its sponsoring Department fully informed of discovered and suspected fraud. If it can behave in the manner revealed in the C&AG's report in these high profile and sensitive frauds, the largest in the system in recent years, then we must ask whether there is a similar laxness in other activities under departmental control. At this stage we can only say that we found the Department's assurances unconvincing. Main Report, Paragraph 36. 5.20. We repeat the message from our Report on the National Agriculture Support Fraud - "The Committee wants to make it absolutely clear that it regards it essential that when the C&AG is certifying accounts that he has made a judgement that there is no material fraud and that his judgement is informed by knowledge of all fraud cases, proven or suspected, of which the Department is aware." We do not expect to have to make this point again. Main Report, Paragraph 37. 5.21. In our view, it is an overriding principle that when someone is suspected of fraud, they should be suspended immediately as suspension does not imply guilt. It is very worrying to find that Gribben, who was working in a sensitive financial post, was not suspended immediately he was suspected of fraud. Main Report, Paragraph 39. 5.22. In our experience, as a Committee, it is inconceivable that any private company would have handled a fraud in the manner LEDU approached these cases. A suspected fraudster would have been immediately removed from the premises. We must emphasise, on the taxpayer's behalf, that we expect departments to respond to suspected fraud by taking immediate and comprehensive action wherever it occurs. Main Report, Paragraph 40. 5.23. We are concerned at the lack of urgency, indeed complacency, in the follow up to both the Atwell and Gribben frauds. We expect departments to accord the highest priority to the investigation of fraud and to the implementation of lessons arising from the fraud. Main Report, Paragraph 41. 5.24. We noted that Gribben was a prominent citizen and the otherwise inexplicable delays in taking effective and timely action, create an impression that LEDU's management were either incompetent or following an agenda of concealment. It is absolutely vital that departments avoid any perception that rank or position may lead to different treatment. LEDU failed to do this. Main Report, Paragraph 44. 5.25. It is very important that all officials who handle public money understand the rationale for and operation of a tight control environment and are properly trained in how to identify and deal with fraud risks. Departments must ensure that staff who work in areas such as accounts branches, where there is a higher risk of fraud, have a thorough understanding of the HM Treasury's 1997 guide on 'Managing The Risk Of Fraud'. Additionally, DFP should consider whether the dissemination of a more comprehensive list of the common methods and types of fraud and possible indicators of fraud would be of benefit to managers and staff. Main Report, Paragraph 48. 5.26. We must make it absolutely clear that restitution and prosecution are not alternative policies and should be pursued in tandem. We repeat the message from our previous report on National Agriculture Support Fraud that the prosecution of fraudsters through the criminal and/or the civil process sends a strong deterrent signal to those who might be tempted to commit fraud. Main Report, Paragraph 50. 5.27. Restitution is, in our view, a process that does not stop and the message needs to be conveyed to fraudsters that long after the crime has been committed the Department will continue to seek restitution by whatever means are at its disposal. Main Report, Paragraph 51. 5.28. Fraud investigations should address whether supervisory negligence is a contributory factor and the terms of reference of such investigations should not be determined by the management of the business unit where the fraud occurs but by completely independent officers. We think non-executive members of the Audit Committee could play a useful role in shaping the terms of reference. Main Report, Paragraph 56. 5.29. No-one in a supervisory or management position had any action taken against them, not even the mildest reprimand, indeed, we understand that some may have moved on to positions of greater responsibility. That does not send the right signal to the system and wider public and is symptomatic of an organisation where there is a culture of weak management. Clearly the Department has a lot to do to turn this around. Main Report, Paragraph 57. 5.30. Clearly the Department has much to do with regard to the development of good financial management and sound corporate governance within Invest Northern Ireland (which is now responsible for functions previously carried out by LEDU). The evidence suggests that financial management and corporate governance was not as embedded in LEDU as the Department would have us believe. We also note the programme of work concentrating on risk management and would like to be kept informed about the outcome of these risk management exercises and their timetable for completion. Main Report, Paragraph 62. MAIN REPORT GENERAL FINDINGS 6. This case highlights a number of serious shortcomings in LEDU's ability to handle fraud and in the Department's ability to keep control of this NDPB. To have one of the largest frauds in the Northern Ireland public sector is unfortunate, but to have it followed within months by another major fraud in the same unit smacks of incompetence and complacency. There are many important and valuable lessons to be drawn from this case and we look to DFP to ensure that these lessons are disseminated widely across the public sector so that we can be confident that any public body that has to deal with serious fraud will do so in the light of the experience of this case. C&AG's report (NIA 34/01) paragraphs 41 & 42 and Minutes of Evidence paras 4-5. 7. One aspect of the evidence session on this topic which we found disturbing and unacceptable was the extent to which officials attempted to 'stonewall' our questions, particularly in relation to the identification of those responsible for providing the LEDU Board and Audit Committee with defective advice on fraud policy and procedures. Despite persistent questioning we were not given the information that we requested at the evidence session. In our view the answers given, such as, "the Senior Management" and "Board of LEDU" were evasive. Eventually, we were told in a written submission that the individual responsible was the Director of Corporate Services. Of course we accept that in broad accountability terms, responsibility lies with the Accounting Officer of the Department and the Subsidiary Accounting Officer of LEDU but we believe that where specific mistakes are made, this Committee has the right to ask who was actually responsible for those mistakes and be given a direct answer. Minutes of Evidence paras 154-177 and Appendix 1, paragraph 3. 8. Another of our concerns is that the Department was too lenient in dealing with LEDU's failure to address adequately the weaknesses in the control environment after the first fraud; its failure in the handling of the second fraud and its failure to hold those responsible to account. When we asked the Accounting Officer how his Department deals with private sector companies when fraud is discovered we were told that the Department would not do business with a company that defrauds the Department or its agencies. In our view this is absolutely the correct approach as we expect the Department to have a zero tolerance when client companies commit fraud . However, it is vital that departments are just as tough in their response to internal fraud. Minutes of Evidence paras 14-18 and 238. DETERMINING THE FULL EXTENT OF FRAUDULENT ACTIVITY 9. The Department's guidance clearly stipulates that fraud investigations should be conducted vigorously and promptly. LEDU ignored this guidance. After the travel fraud was discovered, LEDU asked for, received and subsequently ignored advice from Internal Audit, that it should undertake a wide-ranging investigation covering all areas of Gribben's responsibilities to determine the full extent of fraudulent activity. Despite knowing that Gribben was a fraudster, LEDU not only ignored the Department's procedures for a vigorous and prompt investigation, but also rejected the sound advice from Internal Audit. We found this astonishing. to the point of negligence. C&AG's report (NIA 34/01) paragraphs 9,13,14, 16 & 27. 10. The Accounting Officer accepted that LEDU should have initiated a more comprehensive investigation but contended that LEDU's investigations were enhanced with a combination of internal and external work and the assistance of a secondee from Deloitte & Touche. We were also told that Deloitte & Touche were engaged for up to nine months working on the Acumen account and LEDU's main account. In our view, this work fell far short of what was required. We found it disturbing that some sixteen months elapsed between the discovery of Gribben's first fraud and the launch of a proper fraud investigation. Minutes of Evidence paras 6-9,76 and 316-317. 11. Gribben's frauds, actual and attempted, were estimated at £101,000 and perpetrated over a four-year period. The first fraud took place in September 1997. When we pressed the Department to provide assurance that the £101,000 figure was the complete picture, the department explained that the Acumen and Intellec accounts were examined from the period of their commencement, LEDU's main account was subject to annual audit and it was satisfied that all Gribben's activities had been thoroughly investigated. C&AG's report (NIA 34/01) Figure 1 and Minutes of Evidence paras 319-327. 12. We are not fully convinced. Gribben had been employed in LEDU's Finance Department for about ten years but the fraud investigation only covered selected areas of his work and did not cover the full tenure of his employment. We detected a distinct lack of enthusiasm on the part of LEDU to want to get to the bottom of these frauds quickly by failing to follow established procedures, act on the sound advice of Internal Audit and extend the investigation to cover Gribben's tenure of employment. Much of the work carried out, such as the preparation of accounts and audit work, did not constitute proper fraud investigation work. Accordingly, we expect the Department to undertake a review of those areas of Gribben's responsibilities which were not subject to proper fraud investigation; agree the terms of reference with the C&AG and furnish the C&AG with an assurance that it is satisfied that there were no frauds in the earlier period. C&AG's report (NIA 34/01) paragraph 27 and Minutes of Evidence paras 319-327. 13. To help put these frauds into perspective, we asked the Treasury Officer of Accounts for details of the number of internal frauds greater than £100,000 in the Northern Ireland public sector in the last ten years. The Treasury Officer of Accounts told us that the size of these frauds puts them at the top end of the scale and that in the past ten years there has been only three other internal frauds of this magnitude. Details of the three frauds are set out below: Figure 1 : Public Sector Internal Frauds Exceeding £100,000
Minutes of Evidence paras 331-332 and Appendix 2. 14. Given that LEDU was dealing with one of the largest frauds in the Northern Ireland public sector it is difficult to avoid the impression that it did not act vigorously or with proper regard to good practice and that the Department did not exercise proper control when LEDU failed to take immediate and decisive action. In our view, once fraud has been confirmed it is imperative that an immediate wide- ranging and thorough investigation is undertaken to determine the full extent of fraudulent activity. 15. The C&AG's report makes it clear that Gribben's major frauds occurred in the Acumen and Intellec projects and states that these projects were administered by LEDU but the transactions did not form part of LEDU's general ledger. When we asked whether LEDU had any other similar type projects where it is responsible for administering funds on behalf of others and whether they were similarly susceptible, we were told that all LEDU's accounts are now subject to the full financial procedures that were put in force after the Atwell and Gribben frauds. We would like the Department to provide to the C&AG a list of all projects administered by LEDU which have separate accounting or banking arrangements. C&AG's report (NIA 34/01) paragraph 16 and Figure 1 and Minutes of Evidence paras 333-334. FAILURE TO PROPERLY ADDRESS THE UNDERLYING CONTROL WEAKNESSES 16. The C&AG's report makes it clear that there were a number of control weaknesses common to the Atwell and Gribben frauds. Inadequate separation of duties was a basic weakness that was present in the Atwell fraud, but despite improvements, this weakness was still present in the Acumen and Intellec projects which Gribben defrauded. Poor supervision was another fundamental weakness. Atwell was able to bypass controls, open accounts without authority and create invoices without detection. Gribben, on the other hand, had full control over cheque books and accounting records such as bank statements and reconciliations relating to the Acumen and Intellec projects. Yet another weakness related to the control of purchase orders. Atwell reused original purchase orders to show new suppliers and new values and these were accepted for payment without appropriate checks being undertaken. Despite attempts by LEDU to improve controls, Gribben was able to develop a variant of the same fraud by quoting to suppliers purchase order numbers that had already been used for other purposes. C&AG's report (NIA 34/01) paragraphs 6 29, 31, 33, 34, 42. 17. We pressed the Accounting Officer as to why the fundamental control weaknesses which were identified after the Atwell fraud were not fully and properly addressed at that time. The Department acknowledged that improvements were introduced too slowly and not comprehensively enough and did not extend to the Acumen and Intellec accounts administered by LEDU. The Accounting Officer assured us that lessons have been learnt and that his Department is determined and totally committed to achieving high standards in the control of public funds and that fraud is not tolerated. While we welcome these assurances, there are clearly additional risks where projects are managed and controlled at arms length from LEDU's main accounting systems. It is quite simply unacceptable that high risk accounts such as Acumen and Intellec were subject to a much more relaxed control regime than transactions which were processed through LEDU's main accounting system. Minutes of Evidence paras 14-19,52 and 273-281. 18. In view of the elementary nature of the control weaknesses which were common to both frauds, we would have expected them to have been picked up at a much earlier stage as part of the normal audit process and this indeed turned out to be the case. The Accounting Officer confirmed that, in 1995, the external auditors had raised concerns about segregation of duties and the lack of proper bank reconciliations. In our view, a more comprehensive management response to the points raised by LEDU's external auditors in 1995 would have reduced the Agency's exposure to the types of fraud perpetrated by Atwell and Gribben. We expect Departments to draw lessons from this. Minutes of Evidence paras 339-343 and Appendix 1, Annex F. 19. The standard of supervision on the Acumen and Intellec accounts fell far short of good practice. We noted that bank reconciliations were not prepared by LEDU but would have been prepared as part of the audit process. We agree with the C&AG that regular bank reconciliations are one of the most important financial controls in any organisation. It is essential that they are done on a monthly basis and not left for auditors to complete many months after the end of the financial year. C&AG's report (NIA 34/01) para 31 and Minutes of Evidence para, 279. 20. LEDU told us that there was no requirement on it to produce separate accounts for Acumen and Intellec and yet it was only when accounts were prepared further frauds were identified (para16, 31 P17). When we pressed the Department on this, it told us that proper financial controls were not in place for Acumen and Intellec. The Department accepted that there was some substance to our view that the frauds may have been discovered much earlier or might even have been prevented, if those supervising these accounts had insisted on seeing regular bank reconciliations. The Accounting Officer assured us that proper financial controls are now in place for all accounts. Where projects are administered by departments, their agencies or NDPBs with separate bank accounts, we expect DFP to ensure, through the issue of clear instructions, that proper financial records are maintained and accounts prepared. It seems to us that the need for a tight control environment is particularly important where departments, their agencies or NDPBs administer projects in partnership with other funding bodies. C&AG's report (NIA 34/01) para 16 and Minutes of Evidence paras, 17-19,78,276-286 and 307-308. 21. It is quite clear to us that we are dealing with a failure to adhere to the most elementary principles of financial control. There appears to be a culture of weak financial management and it is astonishing to find that a Government agency, whose remit included advising small firms on financial control systems, was incapable of keeping its own house in order. In the light of this case, it is essential that new public bodies such as Invest Northern Ireland (which has now responsibility for functions previously carried out by LEDU), establish robust financial controls at the outset. Minutes of Evidence, paras 51 and 86. FAILURE TO COMPLY WITH ESTABLISHED PROCEDURES AND BEST PRACTICE Departmental Guidance Ignored by LEDU 22. One of the most disturbing aspects of this case is that although the Department's procedures emphasise the need for fraud investigations to be conducted vigorously and promptly and with early involvement of the police there was a flagrant disregard of these procedures once the initial travel fraud was confirmed. There was a delay of twelve months before the police were involved. This was despite the fact that the Department's Internal Audit reminded LEDU that early involvement of the police was necessary. C&AG's report (NIA 34/01) paras 13,14 and 16. 23. We were told that the decision not to inform the police was taken on foot of advice from LEDU's solicitors. At that stage LEDU was following legal advice with regard to securing Gribben's dismissal and seeking restitution and was urged by its legal advisors to proceed with caution as Gribben was disputing the dismissal charges and there was a risk of an unfair dismissal claim. The Accounting Officer told us that LEDU's actions were consistent with its own policies and procedures for handling fraud but that these procedures were deficient and out of line with Departmental procedures. He assured us that early police involvement is now explicit in LEDU's procedures. C&AG's report (NIA 34/01) para 15 and Minutes of Evidence, paras 20, 58-61, 79-80, 317-318 and 346 -352. 24. We pressed the Accounting Officer as to why his Department allowed LEDU to design policies and procedures for dealing with fraud which were defective and inconsistent with the Department's own guidance. We were told that LEDU operated under a framework drawn up by his Department, part of which included a requirement by LEDU to have a fraud policy. The policy was different in some ways because it was the product of a process whereby LEDU agreed the policy with its own Board. When we pressed the Accounting Officer further about LEDU's policy we told that this policy required it to take the advice of its solicitors on handling fraud. Minutes of Evidence, paras 149-152 and 346-352. 25. We asked the Treasury Officer of Accounts about the good practice guidance that he issues to Departments on fraud prevention, detection and investigation and were pleased to hear that the guidance draws upon the guidance of the HM Treasury, is comprehensive and draws on years of experience. The Treasury Officer of Accounts added that the guidance in Northern Ireland goes further than the guidance in Great Britain in the range of bodies that are covered and on the information to be reported on by departments and public bodies. Minutes of Evidence, paras 143-148. 26. We asked the Accounting Officer if the firm of solicitors advising LEDU were apprised of these Treasury and DFP guidelines and ground rules for handling fraud. We were told that this had not been done. We found it surprising that the advice of a local company of solicitors on how to handle fraud was preferred to the wealth of guidance and good practice material which was readily available within the public sector. We are not convinced that LEDU needed to commission its own legal advice on this matter given the extensive good practice guidance that was readily available to it. We accept that in certain circumstances departments, their agencies and NDPBs may need to seek legal advice on the handling of fraud. However, where they do so, it is important that the legal advisors are made fully aware of the broad framework within which departments, their agencies and NDPBs operate and any advice given must be consistent with the advice and guidance issued by DFP. Minutes of Evidence, paras 192-199. 27. We asked if a proposal had been put to LEDU's Board to ignore Departmental guidance on handling fraud. We were told that LEDU's Board adopted a policy which was presented to them by the Director of Corporate Services. The Accounting Officer acknowledged that LEDU's Board included a Departmental representative whose role should have included drawing the Board's attention to the Department's guidance on matters such as fraud policy and fraud handling procedures, good corporate governance arrangements and the regularity and propriety of expenditure. We were surprised, therefore, that the Departmental representative failed to draw the Board's attention to the Department's policy and procedures for handling fraud. This was a mistake and one that we would not like to see repeated. In our view, when departments send representatives to Boards, those representatives need to be very clear about their role and responsibilities. Accordingly, we ask DFP to review, and where necessary tighten, its guidance on the role and responsibilities of departmental representatives on Boards of NDPBs. Minutes of Evidence, paras 149-151 and 174-188 and Appendix 1, Annex D. 28. The Department should not have allowed LEDU, which was handling £30 million of public money, to follow procedures that fell far short of its own requirements, those of DFP and best practice generally. The Department now recognises that it was a mistake for LEDU not to apply its fraud policy and in the light of the lessons learned, particularly in relation to the investigation of frauds, the Department has now insisted that all its NDPBs adopt the Department's policy on fraud, reporting and oversight. In the light of this case, all departments and NDPBs should now ensure that their policies and procedures for dealing with fraud fully conform to the guidance issued by DFP. Minutes of Evidence, paras 56, 152-153, 176-191 and 218 and Appendix 1, Annex A. 29. We pressed the Departmental Accounting Officer as to whether he had been told that LEDU had rejected the advice of his Internal Audit unit on the need for early police involvement and a wide-ranging investigation to determine the full extent of Gribben's fraudulent activity. The Accounting Officer intimated that he was aware that Internal Audit advice had been set aside. However, the Department's view at that time was that it was acceptable for an NDPB to have a separate fraud policy. His Department examined the steps that LEDU was taking and took the view that it was following an acceptable course of action. Minutes of Evidence, paras 56-69 and 149-151. 30. We do not agree that it was acceptable for LEDU to have separate fraud policies and procedures which were less rigorous than those operated by its parent department. We were astonished the Departmental Accounting Officer did not support the recommendation from his own Internal Audit for early police involvement. In our view, the Accounting Officer should have been much more proactive at this juncture. He should have ensured that the police were notified and that a proper fraud investigation was underway. In our view, this was an abrogation of the responsibilities set out for the Accounting Officer in his letter of appointment which states that "the Departmental Accounting Officer must be satisfied that the financial and other management controls applied by the Department are appropriate and sufficient to safeguard public funds and, more generally, that those being applied by the Non-Departmental Public Body conform with the requirements both of propriety and of good financial management". We have serious reservations as to whether LEDU was under proper departmental control at this juncture. Minutes of Evidence, paras 65-69. Notification 31. Under Department of Finance and Personnel (DFP) procedures, all departments are required to notify immediately DFP and the C&AG of all frauds, whether proven or suspected, committed within the department, their NDPBs or voluntary bodies funded by them. Early notification is important to prevent further loss of public funds through effective communication of the facts and the resultant implications. C&AG's report (NIA 34/01) Appendix 1, para 2. 32. We were disturbed to find that the C&AG first became aware of the Atwell and Gribben frauds, which were two of the largest frauds in the Northern Ireland public sector, through press articles. We noted that, prior to the Gribben frauds, the Department gave the C&AG an undertaking to keep him fully informed of all future suspected frauds. However, it is very worrying that the Department failed to deliver on this commitment. C&AG's report (NIA 34/01) Appendix 1, paras 4-5 and Minutes of Evidence, paras 244-251. 33. We were astounded to find that, not only was there a failure to notify the C&AG, but LEDU also failed to keep its own sponsoring Department properly informed of the Gribben frauds. When we questioned the Accounting Officer about this he told us that while notification was important "notification, per se, is not at the kernel of the fraud". This left us with the very clear impression that the failure to notify was not a major issue to him. Let us be quite clear about notification. We regard the failure to report fraud promptly as a very serious breach of procedure and one that we will not tolerate. C&AG's report (NIA 34/01) Appendix 1, para 4 and Minutes of Evidence, para 373. 34. Reporting procedures were, in our view, unbelievably lax. When we asked the Accounting Officer if this was due to incompetence or did someone take a calculated decision to ignore the rules, the Accounting Officer accepted that LEDU had made a mistake by not notifying his Department of the frauds and he assured us that it would not happen again. When we pressed him further, the Accounting Officer also acknowledged that involving the Department at an early stage of the fraud investigation would have brought more objectivity to the work and might well have speeded up the actions to reduce the risk of anything further emerging. The Department told us that, as it was frustrated at the incremental disclosure of events over the previous two or three years, the Accounting Officer's predecessor commissioned a review to ensure that LEDU's investigation had been thorough and all proper action had been taken. The Accounting Officer assured us that appropriate lessons have been learned. Minutes of Evidence, paras 15-19, 207-211, 250-253 and 368-369. 35. In view of the seriousness with which we view the failure to notify fraud, we asked the Treasury Officer of Accounts what action he has taken to tighten the rules following these and other similar cases of failure to notify. The Treasury Officer of Accounts told us that as a result of the Committee's concerns about the National Agricultural Support Fraud, his predecessor wrote to all Departments and Accounting Officers to set out the Committee's views on the reporting of fraud. He stressed the seriousness with which the Committee regarded the rules in the reporting of frauds by Departments and NDPBs. Minutes of Evidence, paras 23-26. 36. We appreciate that poor handling of these frauds is only one aspect of LEDU's relationship with its Department. Nevertheless the recurrent failure by LEDU to notify frauds showed a blatant disregard for Departmental procedures and leaves us with the impression that this important NDPB has not been fully under the Department's control and appeared negligent in its failure to keep its sponsoring Department fully informed of discovered and suspected fraud. If it can behave in the manner revealed in the C&AG's report in these high profile and sensitive frauds, the largest in the system in recent years, then we must ask whether there is a similar laxness in other activities under departmental control. At this stage we can only say that we found the Department's assurances unconvincing. C&AG's report (NIA 34/01) Appendix 1, paras 4-5 and Minutes of Evidence, paras 23, 216, 250-257. 37. This is the second occasion where we have examined Accounting Officers about the failure to notify fraud to the C&AG. We repeat the message from our Report on the National Agriculture Support Fraud - "The Committee wants to make it absolutely clear that it regards it essential that when the C&AG is certifying accounts that he has made a judgement that there is no material fraud and that his judgement is informed by knowledge of all fraud cases, proven or suspected, of which the Department is aware." We do not expect to have to make this point again. NIA Public Accounts Committee Report 4/00/R, Session 2000/01, para 32. FAILURE TO HANDLE THE INVESTIGATION PROPERLY 38. The Department's guidance on the handling of suspected fraud cases outlines the circumstances where it would be appropriate to suspend an officer (on full pay) pending the outcome of a fraud investigation. In this case LEDU suspected fraudulent activity in June / July 1998 but failed to suspend Gribben until 16 November 1998, some four to five months later. During this period Gribben had unrestricted access to cheque books and accounting records and as it turned out, some of these key financial records disappeared and had to be reconstructed from incomplete records. C&AG's report (NIA 34/01) paras 9 and 11-13. 39. In our view, it is an overriding principle that when someone is suspected of fraud they should be suspended immediately as suspension does not imply guilt. It is very worrying to find that Gribben, who was working in a sensitive financial post was not suspended immediately he was suspected of fraud. When we pressed the Accounting Officer about this, he accepted that it was a worrying breach of trust for an Assistant Accountant to charge private travel to the public purse. He also accepted unreservedly that suspension was the optimum solution at that stage and agreed with us that it is very important that when a fraud is suspected, suspension takes place immediately. He confirmed that early suspension is now the policy throughout the Department. Minutes of Evidence, paras 94-108. 40. In our experience, as a Committee, it is inconceivable that any private company would have handled a fraud in the manner LEDU approached these cases. A suspected fraudster would have been immediately removed from the premises. We must emphasise, on the taxpayer's behalf, that we expect departments to respond to suspected fraud by taking immediate and comprehensive action wherever it occurs. Minutes of Evidence, paras 115-120. 41. We are concerned at the lack of urgency, indeed complacency, in the follow up to both the Atwell and Gribben frauds. We expect departments to accord the highest priority to the investigation of fraud and to the implementation of lessons arising from the fraud. We are quite clear that LEDU did not do this in the Atwell and Gribben frauds. Minutes of Evidence, paras 55-56 and 303. 42. Throughout this case it is difficult to avoid the impression that LEDU was trying at every opportunity to conceal Gribben's frauds and keep them under wraps. When LEDU first discovered that Gribben had used public money to fund private travel, it didn't immediately suspend him, nor report the incident as a fraudulent act but instructed Gribben to make restitution. Additionally, there was a failure to notify the Department, the C&AG and the police about the frauds and there was a lengthy delay in launching a wide-ranging investigation to determine the full extent of Gribben's fraudulent activity. C&AG's report (NIA 34/01) Appendix 1, paras 9, 11, 15, 16, 22 and Appendix 1, para 4 and Minutes of Evidence, para 62. 43. We were baffled by LEDU's failure to take effective and timely action in this case and queried whether Gribben's social standing in the community had a bearing on this. The Accounting Officer told us that he did not accept the proposition that LEDU was trying to keep Gribben's frauds under wraps and assured us that Departmental policy does not countenance any difference in how suspected perpetrators are treated. Minutes of Evidence, paras 55-56, 62 and 110-113. 44. Nevertheless, we noted that Gribben was a prominent citizen and the otherwise inexplicable delays in taking effective and timely action, create an impression that LEDU's management were either incompetent or following an agenda of concealment. It is absolutely vital that departments avoid any perception that rank or position may lead to different treatment. LEDU failed to do this. Minutes of Evidence, paras 112, 372 and 377. FAILURE TO SPOT THE WARNING SIGNALS 45. The C&AG expressed surprise that a wide-ranging investigation was not immediately undertaken once the initial travel fraud was confirmed because there were already warning signals that Gribben's fraudulent activities were unlikely to be confined to the use of LEDU funds to finance private travel. C&AG's report (NIA 34/01) para 16. 46. First, Gribben had sole responsibility for the administration and preparation of the Acumen and Intellec projects. This included sole responsibility for bank statements, reconciliations and sole access to cheque books. Second, there were backlogs of work, particularly in relation to the preparation and presentation of any accounts for both of these projects. Third, Gribben stalled the auditors from auditing these projects. Lastly, Gribben told LEDU that his car, which contained his briefcase and computer, had been stolen from outside his house and that the police had been informed. Documentation in his briefcase included papers relating to the Acumen project. LEDU contacted the police and were informed that they had no record in their central computer of the stolen car. A member of staff reported to LEDU that Mr Gribben was spotted in his car. This happened one day after the alleged theft and prior to the time that Mr Gribben claimed that his car had been recovered. The missing Acumen papers and the computer were never recovered. C&AG's report (NIA 34/01) para 16. 47. It is very disquieting when, not one, but a number of warning signals went unnoticed within months of the Atwell fraud, which happened in the same unit and was one of the largest internal frauds in the Northern Ireland public sector. It is also disquieting to note that, when presented with the evidence, the Department tried to argue that backlogs of work and stalling the auditors were not indicators of fraud but rather pointers of inefficiency. This left us with the impression of a Department that has not yet faced up to the full extent of the weaknesses in its handling of this case. C&AG's report (NIA 34/01) para 16. 48. It is very important that all officials who handle public money understand the rationale for and operation of a tight control environment and are properly trained in how to identify and deal with fraud risks. Departments must ensure that staff who work in areas such as accounts branches, where there is a higher risk of fraud, have a thorough understanding of the HM Treasury's 1997 guide on 'Managing The Risk Of Fraud'. Additionally, DFP should consider whether the dissemination of a more comprehensive list of the common methods and types of fraud and possible indicators of fraud would be of benefit to managers and staff. HOLDING THOSE RESPONSIBLE TO ACCOUNT Prosecution 49. We welcome the action taken by the Department to ensure that both Atwell and Gribben were prosecuted and served custodial sentences. C&AG's report (NIA 34/01) para 4 and 37. 50. We formed an impression from the C&AG's report that LEDU would not have pursued a prosecution of Gribben if there had been successful restitution of the first travel fraud of £2,333 and this explains the delay of sixteen months by LEDU between the discovery of the first fraud and the involvement of the police. We must make it absolutely clear that restitution and prosecution are not alternative policies and should be pursued in tandem. We repeat the message from our previous report on National Agriculture Support Fraud that the prosecution of fraudsters through the criminal and/or the civil process sends a strong deterrent signal to those who might be tempted to commit fraud. C&AG's report (NIA 34/01) paras 9, 15 and 22 and NIA Public Accounts Committee Report (4/00/R) - Session 2000/01, para 21. Restitution - Atwell 51. It was disappointing to learn that the police have been unable to trace the £118,000 stolen by Atwell and that neither they nor LEDU are pursuing restitution further, in the absence of assets. This does not strike us as a acceptable result and we would like to receive from the Department full details of the actions that were taken to recover the money and the basis of the judgement that there was an absence of assets. Restitution is, in our view, a process that does not stop and the message needs to be conveyed to fraudsters that long after the crime has been committed the Department will continue to seek restitution by whatever means are at its disposal. C&AG's report (NIA 34/01) para 40 and Minutes of Evidence, paras 353-359. 52. Gribben's actual frauds were estimated at £40,090. In the absence of restitution, LEDU tried to seek recovery from his accrued pension fund of £52,000 but after investigation discovered that it could only recover £1,300 from the fund. C&AG's report (NIA 34/01), Figure 1 and Minutes of Evidence, paras 43-45. 53. When we asked about restitution we were told that LEDU's bank, in the days immediately prior to our evidence session, had agreed to pay £37,000 for honouring cheques that had forged signatures. We welcome this. We were also told that the discussions began in 1999 but were put in abeyance pending the outcome of the court process and were resumed in September 2001 after Gribben's conviction. It is clear to us that there was a lack of urgency by LEDU in seeking to recover money from the bank and negotiations were fortuitously concluded just prior to our evidence session. Minutes of Evidence, paras 43-51. Accountability of Supervisors 54. The department's guidance on the handling of frauds makes it clear that investigations should consider, as a matter of course, whether there has been a failure of supervision and appropriate disciplinary action should be taken where supervisory failures have occurred. In this case there was a serious failure of supervision but LEDU failed to conduct an investigation into whether supervisory negligence may have contributed to the circumstances that allowed both the Atwell and Gribben frauds to be perpetrated. C&AG's report (NIA 34/01), paras 13 and 32 and Minutes of Evidence, paras 258-259. 55. When we asked the Accounting Officer for an explanation he told us that the question of supervisory negligence came to the fore after the Atwell fraud and LEDU initiated work to rectify the causes. The Accounting Officer added that the improvements in supervision led to the identification of the Gribben fraud but the process moved too slowly. The Accounting Officer's explanation failed to impress us and we find it unacceptable that LEDU failed to conduct an investigation into whether supervisory negligence may have contributed to the circumstances that allowed the Gribben frauds to be perpetrated. Minutes of Evidence, paras 258-259. 56. We were told that the senior official who was responsible for the work of accounts branch was involved in setting the terms of reference for the investigation of the Gribben travel fraud. In our view, it was entirely inappropriate that the terms of reference of the investigation into Gribben's fraudulent activity was set by Gribben's line management. Fraud investigations should address whether supervisory negligence is a contributory factor and the terms of reference of such investigations should not be determined by the management of the business unit but by completely independent officers. We think non-executive members of the Audit Committee could play a useful role in shaping the terms of reference. Minutes of Evidence, paras 262-269. 57. In both the Atwell and Gribben cases, there was inadequate supervision of staff; a lack of separation of duties; controls were being bypassed and there was inadequate management information. Despite all of this, no-one in a supervisory or management position had any action taken against them, not even the mildest reprimand, indeed, we understand that some may have moved on to positions of greater responsibility. That does not send the right signal to the system and wider public and is symptomatic of an organisation where there is a culture of weak management. Clearly the Department has a lot to do to turn this around. C&AG's report (NIA 34/01) paras 6 and 28 and Minutes of Evidence, paras 50-51 and 212-214. DEPARTMENTAL OVERSIGHT AND CORPORATE GOVERNANCE 58. The Accounting Officer of the Department has a duty to ensure that the financial and other management controls being applied by LEDU conform with the requirements both of propriety and good financial management. 59. In view of the recurrent nature of the serious control weaknesses, we asked the Departmental Accounting Officer how he keeps control over LEDU. He assured us that proper systems are in place and the Department has reviewed its accounting and auditing procedures. A Departmental representative sits on LEDU's Board. He told us that the Department has undertaken a programme of work which covers the entire corporate governance of his Department and his NDPBs. He explained that at a strategic level, a framework exists within which the Department exercises control over its NDPBs. In particular, he told us that the subsidiary Accounting Officer has a memorandum that sets out his responsibilities and a financial memorandum which sets out the relationship between his Department and the NDPB. In addition to this, each year the Department approves LEDU's operating plan. Minutes of Evidence, paras 6-11, 52, 70-75, 184 and 191. 60. At an operational level, he told us that supervision and high standards are high on his Department's agenda and that managers in his NDPBs as well as his Department, have been reminded that their prime responsibility is to ensure that proper control systems are in place and, additionally, a programme of work concentrating on risk management is well under way across all bodies under his control. Minutes of Evidence, para 52. 61. In organisations with good corporate governance we would expect to find a strong audit committee dominated by independent non-executives. Yet we know from the C&AG's report that LEDU's Audit Committee was not consulted about the Agency's response to the Gribben fraud. Its minutes are silent about the fraud and both the Chairman of the Board and the Audit Committee were only verbally advised of the background to the fraud and the reasons for Gribben's dismissal. We find it surprising that the Audit Committee which is supposed to have oversight of standards of financial management in LEDU was so detached from what was going on. C&AG's report (NIA 34/01) para 17. 62. Clearly the Department has much to do with regard to the development of good financial management and sound corporate governance within Invest Northern Ireland (which is now responsible for functions previously carried out by LEDU). This NDPB and the evidence suggests that financial management and corporate governance was not as embedded as the Department would have us believe. We also note the programme of work concentrating on risk management and would like to be kept informed about the outcome of these risk management exercises and their timetable for completion. Minutes of Evidence, para 52. PROCEEDINGS OF THE COMMITTEE SESSION 2001-2002 Members Present: Mr B Bell (Chairperson) Witnesses: Mr B Robinson, Permanent Secretary, DETI Mr John Dowdall, Comptroller and Auditor General (C&AG) was examined Mr Leo O'Reilly, Treasury Officer of Accounts was examined. The Comptroller and Auditor General's report on major internal frauds in the Local Enterprise Development Unit (LEDU), which was reported on by the Comptroller and Auditor General in the Northern Ireland Appropriation Accounts Volume 2000 - 2001 (NIA 34/01), was considered. Mr Bruce Robinson, Accounting Officer, Department of Enterprise, Trade and Investment, Mr Wilfie Hamilton, Principal Finance Officer of the Department of Enterprise, Trade and Investment and Mr Alan Neville, Acting Chief Executive and Acting Accounting Officer, of the Local Enterprise Development Unit (LEDU) were examined [Adjourned until Wednesday 20th February 2002 at 10:30am] * * * * PROCEEDINGS OF THE COMMITTEE SESSION 2001-2002 Members Present: Mr B Bell (Chairperson) Mr John Dowdall, Comptroller and Auditor General (C&AG) was further examined Draft Report (Internal Frauds in the Local Enterprise Development Unit) proposed by the Chairman, brought up and read. Ordered, that the draft Report be read, paragraph by paragraph. Paras 1 to 2 read and agreed to Para 3 read and agreed subject to amendment Para 4 read and agreed to Paras 5.1 to 5.30 postponed Paras 6 to 8 read and agreed to Para 9 read and agreed subject to amendment Paras 10 to 11 read and agreed to Para 12 read and agreed subject to amendment Paras 13 to 23 read and agreed to Para 24 read and agreed subject to amendment Paras 25 to 27 read and agreed to Para 28 read and agreed subject to amendment Paras 29 to 38 read and agreed to Para 39 read and agreed subject to amendment Paras 40 to 55 read and agreed to Paras 56 and 57 read and agreed subject to amendment Paras 58 to 61 read and agreed to Para 62 read and agreed subject to amendment. Paras 5.1 to 5.30 read and agreed subject to changes to reflect amendments in paras 6 to 62 [Adjourned until Thursday 4th July 2002 at 1:30pm] * * * * Wednesday 30 January 2002 Members present: Mr W Bell (Chairperson) Ms Armitage Mr Beggs Mr Carrick Mr Close Mr Dallat Mr Hilditch Ms Morrice Witnesses: Mr B Robinson ) Permanent Secretary, DETI Dr A Neville ) Acting Chief Executive Mr W Hamilton ) Principal Finance Officer, DETI Mr L O'Reilly ) Treasury Officer of Accounts Mr J Dowdall ) Comptroller and Auditor General 1. The Chairperson: I should like to welcome Mr Bruce Robinson and his team to the Committee. Would you like to introduce your team to us, Mr Robinson? 2. Mr Robinson: Thank you, Mr Chairman. I am the accounting officer for the Department. To my right is Dr Alan Neville, the designated accounting officer for LEDU; on my left is Mr Wilfie Hamilton, the principal finance officer in the Department. 3. The Chairperson: I should also like to welcome Mr John Dowdall and his team from the Northern Ireland Audit Office, and Mr Leo O'Reilly, the Treasury Officer of Accounts. 4. This meeting provides the Committee with an opportunity to examine the circumstances of internal frauds in the Local Enterprise Development Unit (LEDU), which were perpetrated separately by two employees, Atwell and Gribben. The Comptroller and Auditor General for Northern Ireland recorded in his appropriation accounts for 2000-01 that the two frauds were perpetrated within a year of each other, and both seem to have been possible because of weaknesses in the controls designed to protect LEDU against fraud. The report suggests that the established procedures for investigating fraud were not followed, and warning signals showing the possibility of further fraud were not picked up. Some of our questions will be about these matters, but the meeting also gives us an opportunity to ask you more general questions about fraud and fraud-related matters. 5. The most surprising feature of this report is in paragraph 2; it tells us that less than one year after the Atwell fraud, Mr Gribben was able to perpetrate a second series of frauds. One major fraud could be described as unfortunate - for a further set of frauds to occur in such a short time smacks of incompetence. How was this possible? 6. Mr Robinson: Let me state categorically that neither fraud should have happened, particularly the fraud perpetrated by Gribben, and the Department has learnt some important lessons from that. After the Atwell fraud, improvements were identified in a report that LEDU commissioned from Deloitte & Touche. It is clear that the improvements suggested by that report were introduced too slowly and not comprehensively enough. The improvements in the system did identify the Gribben frauds; however, too much time had elapsed. Also, the work done after the Atwell fraud concentrated on the main accounts and on improvements in the internal controls in the main accounts. These were not comprehensive and did not extend to the Acumen and Intellec accounts. 7. As a result of further investigation and as a result of the Gribben fraud, I can assure the Committee that lessons have been learnt, especially on fraud policy, internal controls and notification. There is no question whatsoever that we are determined and totally committed to achieving high standards in the control of public funds and that fraud is not tolerated. That was also evident in that both Atwell and Gribben were prosecuted for fraud. 8. The Chairperson: You said that the recommendations were put in place too slowly. Why? How do you account for that? 9. Mr Robinson: The recommendations should have been put in place quickly and in their entirety. There is no question of that. The amount of work associated with the recommendations meant that it took some time to implement them. There were 16 recommendations in all, which were introduced over time. In addition, LEDU undertook a fundamental review of all its financial reporting and accounting systems throughout 1998, when the frauds occurred. The extensive programme of work was a contributory factor, but as I said, it should not have happened. 10. The Chairperson: Should further recommendations be implemented more quickly from now on? 11. Mr Robinson: Lessons from the Gribben fraud have been learnt quickly. As I said, the main lessons were on fraud policy. We are now implementing a single fraud policy for the Department and for non-departmental public bodies. In his report, the Comptroller and Auditor General noted that the departmental fraud policy is good practice. That has since been extended. We have also made it clear that lessons on separation and rotation of duties are being applied through the Department, as are the lessons learnt on notification. 12. The Chairperson: May we have a copy of those. 13. Mr Robinson: Yes, of course. 14. The Chairperson: Paragraph 28 states that several control weaknesses were common to both the Atwell and the Gribben frauds: " inadequate separation of duties; inadequate supervision; and inadequate control of purchase orders". 15. Why were those weaknesses not fully addressed after the first fraud, which was committed by Ms Atwell? You said that procedures were put in place after both frauds, but why were they not established immediately after the Atwell fraud? 16. Mr Robinson: Changes were introduced over time after the broad overview, and that accounts for the delay. Dr Neville will outline the detail of the changes that occurred in LEDU and also specific points on segregation of duties, inadequate supervision and control of purchase orders. 17. Dr Neville: The lessons of Atwell should certainly have been applied to the Acumen and Intellec accounts. It is very regrettable that they were not, but there are now proper financial controls on all LEDU accounts. The focus then was on live accounts; other accounts were overlooked. 18. There are now controls and system improvements for duties. Staff duties are now clearly established under our ISO 9001 approved procedures. A new accounting system has been introduced, and a system administrator assigned. Finance staff have been trained in several areas to ensure the maintenance of division of duties during holidays. The new finance manager is a qualified accountant with extensive audit and staff supervisory experience. Two supervisors have been appointed and procedures are in place to monitor all transactions. 19. A complete stock of purchase orders is kept in locked rooms, and a full stocklist is kept. We have endeavoured to continue to improve our systems and procedures since the Gribben fraud. 20. The Chairperson: According to the Comptroller and Auditor General's report, your Department's rules and procedures for handling fraud were ignored - not just once, but over and over again. Procedures for reporting fraud to the Comptroller and Auditor General and to the Department of Finance and Personnel appear to have been ignored. I am struck by the long delay before the Gribben case was reported to the police. Can you give an explanation for that? 21. Mr Robinson: Your question stems from the difference between the Department's fraud policy and that of LEDU. The Department's fraud policy is absolutely clear that there must be immediate notification and involvement of the police. We have learnt from that, and now the fraud policies of LEDU and of the Department are identical. That is also the case in the non-departmental public bodies that are involved with the Department of Enterprise, Trade and Investment. LEDU's fraud policy at the time was that it should take legal advice. I shall ask Dr Neville to elaborate. 22. Dr Neville: At the time, the emphasis was on securing a dismissal. After the dismissal, LEDU continued to follow its policy of taking legal advice. That advice was to proceed cautiously, which is what we did. There was a period when we were advised to be cautious because of risks of unfair dismissal claims; we therefore took legal advice at every step. 23. The Chairperson: Mr O'Reilly, I am sure you will agree that failure to report suspected fraud promptly is a serious matter. We have already expressed concern as a result of our investigation into fraud in the Department of Agriculture and Rural Development last January. However, this is another case in which the reporting procedures have been almost unbelievably lax. What action have you taken to tighten the rules and to ensure that this will not occur again? 24. Mr O'Reilly: As a result of the Committee's point about the national agricultural support fraud, my predecessor as Treasury Officer of Accounts wrote to all Departments and accounting officers to set out the Committee's views on the reporting of fraud. He stressed the seriousness with which the Committee regarded the rules concerning Departments' and accounting officers' responsibilities to report fraud to Departments in the case of non-departmental public bodies as well as to the Department of Finance and Personnel and to the Comptroller and Auditor General. 25. As a result of these concerns, my predecessor wrote to all Departments on 31 May 2001. He drew their attention to the fraud guidance and asked them to bring the letter to the attention of all staff, including their sponsored bodies. He also asked them to reply and to confirm that they had received and understood the letter and that they would comply with the procedures. All accounting officers replied that they understood the procedures and that they would ensure that the procedures complied with fraud guidance. 26. We are revising the fraud guidance, which is based on 'Government Accounting Northern Ireland', and we have sent draft material to Departments for comment in order to bring fraud guidance up to date. 27. The Chairperson: Dr Neville, were your legal advisors shown the rules about reporting to the Comptroller and Auditor General and to the Department of Finance and Personnel? 28. Dr Neville: LEDU was operating through its fraud policy, which required us to take legal advice at any point in a process like this. Obviously, with the passage of time and with the new procedures, we are adopting the Department's fraud policy and fraud response plan. 29. The Chairperson: It had not, however, been adopted at that time. 30. Dr Neville: We were following our procedures. 31. Mr Dallat: Fortunately, this fraud happened when the Assembly was not functioning. I am sure that you are glad that you were not the accounting officer. A weakness of the Public Accounts Committee is that it does not have the opportunity to speak to the people who were in place at that time. How many non-departmental public bodies is the Department responsible for? 32. Mr Robinson: The Department is responsible for four non-departmental public bodies: LEDU, the Northern Ireland Tourist Board, the Health and Safety Executive and the General Consumer Council for Northern Ireland. 33. Mr Dallat: Do you agree that it is not having much success with them at present? 34. Mr Robinson: I am afraid that I do not know what you mean. 35. Mr Dallat: If you have been following the work of the Public Accounts Committee, you will know that the Tourist Board and others have come under the microscope. 36. Mr Robinson: I accept the Comptroller and Auditor General's queries, and we recognise that the Tourist Board's purchasing procedures were defective. 37. Mr Dallat: The public is seriously concerned, and there is a great deal of media interest. I want assurance that you are au fait with that. 38. Mr Robinson: Of course I am - as the accounting officer I must be. 39. Mr Dallat: Northern Ireland depends on a small business culture. From your professional experience, you will know that many small businesses struggle to survive. They must cope with numerous Government regulations such as VAT, health and safety requirements and income tax. Do you agree that they must feel undermined when they discover that the Government Department with responsibility for encouraging small businesses does not have the most basic controls, such as a bank reconciliation statement, in place? 40. Mr Robinson: There is no question that everyone, not just small businesses, is concerned about fraud in the public sector. 41. Mr Dallat: Many people ask whether the money is recovered. A bank was definitely involved because chequebooks were flying all over the place. It seems as though it was Christmas everyday at LEDU. Are the banks in any way responsible for passing on cheques with forged signatures? Have they recognised their responsibility in dispensing public money to fraudsters? 42. Mr Robinson: LEDU has pursued the Gribben frauds with the bank, and it has agreed to make restitution for the cheques that were passed with forged signatures. That accounts for most of the money involved. It does not cover the travel fraud, but LEDU is seeking restitution from its pension funds, and we estimate a contribution of about £1,300 to that. 43. Mr Dallat: How much will the bank repay to LEDU as a result of the cheques being passed fraudulently? 44. Mr Robinson: The bank will make full restitution of all three amounts of the cheques. 45. Dr Neville: It amounts to just over £37,000. 46. Mr Dallat: I am sure that many small businesses will be relieved that that, at least, has been recovered. When was that decision made? 47. Dr Neville: It was made recently. From the outset, LEDU has pursued restitution through many avenues. It was not possible to conclude some of those avenues until the due process of the courts was completed. That was completed only in the summer of 2001, and the conviction orders were received on 8 November. However, we have been discussing it with the banks for some time. 48. Mr Dallat: When, precisely, did the banks decide to accept their responsibility? 49. Dr Neville: They decided to accept responsibility within the past few days. 50. Mr Dallat: Is it not interesting that the banks made that decision? I am sure that that has something to do with the fact that, for the first time, Northern Ireland has a Public Accounts Committee that is prepared to scrutinise what happens in Departments and between Departments and banks. I hope that the message goes out that the time for fraud and woeful mistakes is over. 51. It is putting it mildly to say that supervision in LEDU was inadequate. Duties were not separated, controls were bypassed, and management information was at a minimum. Together, those failings show a culture of weak management. In light of that, how have you made managers more accountable? 52. Mr Robinson: The Department of Enterprise, Trade and Investment has undertaken a review of the Atwell and Gribben frauds and has identified the lessons to be learnt. The prime responsibility of management is to ensure that proper control systems are in place. That has been drawn to the attention of management in the Department and in the non-departmental public bodies. At the departmental board in May 2001 we reviewed our governance arrangements, including accounting and audit procedures to support this concept. We have also undertaken a programme of work that concentrates on risk management but which also covers the entire corporate governance of the Department and the non- departmental public bodies. The work on risk management is well under way, and we shall move on to corporate governance. Supervision and high standards are high on the Department's agenda. 53. Mr Dallat: Government Departments seem to think that holding a review will solve a crisis, and that is not peculiar to your Department. However, this fraud occurred in 1998, and it is now 2002, yet you say that the review started only last year. Surely that highlights a serious lack of urgency in investigating what happened? 54. Mr Robinson: Perhaps I did not give a full enough description of the work that we did in the aftermath of the Gribben fraud. LEDU undertook a review of its procedures, and in June 2000 the internal audit service looked at that work and reported to the Department in August 2000. That work is associated with the lessons to be learnt from Gribben. It is very important to reassure you that we do not spend all our time reacting to crises, and I can understand why you raised that point. In May 2001, the departmental board initiated a review that was prompted not by a crisis but by a desire to have the highest standards. That review was also a response to changes emerging at the national level. 55. Mr Dallat: In the past, people from certain socio- economic groups have gone to jail for stealing a Mars Bar from a supermarket. This man Gribben seems to have been something special. LEDU's internal audit did not take the advice of your Department's audit, and there was even discussion of restitution. Why did that person get such preferential treatment in a serious fraud case? The police were not involved from the first, although they should have been. 56. Mr Robinson: The Department of Enterprise, Trade and Investment recognised that it was a mistake for LEDU not to apply the Department's fraud policy. We are clear that that is the policy throughout the Department, and that means involving the police at the beginning and also informing the Audit Office and the Department of Finance and Personnel. I shall ask Dr Neville to say why they dealt with the case as they did. 57. Dr Neville: The cases were quite distinctive. In the Atwell case there was clear evidence of transfers to her bank account; she confessed when confronted with the evidence. In the Gribben case, the charges were not clear and were disputed by the party concerned. After legal advice and in accordance with our policy, we sought an independent appraisal. Irrespective of his position, Mr Gribben was suspended and ultimately prosecuted. 58. Mr Dallat: Did internal audit inform you, as departmental accounting officer, that LEDU had ignored advice on the need for a wide-ranging investigation and the early involvement of the police? If not, why not? 59. Mr Robinson: The internal audit's review showed that LEDU was following its own policy and had not informed the police at that stage. 60. Mr Dallat: Mr Robinson, it must have worried your Department that LEDU seemed almost to have made a unilateral declaration of independence and gone off on its own, even though it is nothing more than a non-departmental body. 61. Mr Robinson: The Department examined the steps that LEDU was taking and looked at the process. At the time, the desire prevailed to ascertain that a fraud had indeed been committed. I should like to reassure you that the Department was not passive in the matter, but with hindsight we recognise that it would have been better to proceed in line with the Department's fraud policy rather than to have followed LEDU's line. 62. Mr Dallat: I should have thought so. Indeed, it is astonishing that, although your Department's procedures emphasise the need to conduct fraud investigations "vigorously and promptly" - according to paragraph 13 - LEDU failed to carry out a wide-ranging investigation of all Gribben's responsibilities once the initial travel fraud had been confirmed. Even though paragraph 16 tells us that "there were already warning signals that Gribben's fraudulent activities were unlikely to be confined to the use of LEDU funds to finance private travel". 63. This happened even though your own internal audit reminded LEDU that a wide-ranging investigation covering all aspects of Gribben's activities was essential. 64. Mr Robinson: I entirely accept the point. 65. Mr Dallat: Do you accept that this creates an impression that LEDU was not under proper departmental control? 66. Mr Robinson: I can understand how that perception arises, but the Department examined what LEDU was doing. It was following its policy, and other factors in the case suggested that the process was being properly and actively managed. However, I repeat: it would not be dealt with in such a manner now. 67. Mr Dallat: It was out of control, Mr Robinson. Are you telling me that non-departmental public bodies normally reject the advice of your Department and do their own thing? 68. Mr Robinson: I would draw a distinction between being "out of control" and this situation. 69. Mr Dallat: I believe that anyone reading about the case - and there has been widespread publicity - would feel that matters were totally out of control. Chequebooks were flying all over the place, and not even the most basic controls were in place to protect public money. 70. Mr Hamilton: LEDU was acting in accordance with a management framework document. In 1997, it had its own audit committee and fraud policy, which it had approved through its normal procedures. Although its approach did not absolutely mirror that of the Department in every respect, LEDU had an acceptable fraud policy. We worked extensively with LEDU in many aspects of its operation. 71. There were clear deficiencies in certain areas, and we should have liked things to be done differently. However, we took the view that LEDU was pursuing an acceptable course. At the time, the review might have been more wide-ranging. It was already extensive, but it should have included other matters. However, there was certainly no question of its being out of control or of our presiding over an agency that was out of control. Although the case says something about the nature of such bodies and how they operate, control was not in any way set aside. 72. Clearly, mistakes were made, and that is why we carried out a review. As a result, we deemed it inappropriate that a body should have a different approach from the Department; therefore we shall have a common policy across the board on fraud, reporting and oversight. 73. Mr Dallat: I have read the report and have listened to the evidence, and it is hard to avoid the impression that LEDU tried at every opportunity to keep Gribben's frauds under wraps. According to paragraph 9, when LEDU first discovered in June or July 1998 that Gribben had been using public money for private travel for himself, his wife, his associates and just about anyone else, LEDU did not report it as a fraudulent act but instructed him to make restitution. Paragraphs 15 and 22 tell us that you failed to involve the police till a year had elapsed. In paragraph 4 to appendix 1 LEDU failed to notify your Department about the two frauds discovered in October 1999. Gribben was a prominent citizen; was that why you tried to keep this under wraps? Was his public profile a factor? 74. Mr Robinson: There is a framework within which the Department exercises control over the non-departmental public bodies. The framework consists of different elements, for example, the accounting officer has a memorandum that sets out his responsibilities, and a financial memorandum sets out the relationship between the Department and the non-departmental public body. Each year the non-departmental public bodies are required to clear their operating plan with the Department, and they report against that plan. That is how the Department controls at an operational level. 75. The other issues that we touched upon such as the fraud policy also underpin this. They are also copied into the 'Dear Accounting Officer' letters that are circulated from DFP, and they are subject to internal audit as an assurance that systems and processes are working. In addition, the designated accounting officer must sign annual accounts and produce an audit. There is an extensive network of interacting ways in which the Department exercises control. That is why I reject the view that LEDU was out of control because all those systems were working. Dr Neville will respond to the question about the Gribben case and why LEDU dealt with it in that way. 76. Dr Neville: In July we dealt with a breach of operating principles. Gribben was asked to pay for the travel arranged, but that was not done. The accountant made sure that he was aware of that. Then a review of the account was undertaken. That led to suspicion of fraud, which led in turn to LEDU's taking legal advice, following the procedure at that time, which was to seek an independent review. He was suspended as a result of that review. We accept the Comptroller and Auditor General's point that the investigation was not wide enough. However, after the Gribben case our investigations were enhanced with a combination of external and internal work. Deloitte & Touche was engaged for up to nine months working on the Acumen account and the LEDU main accounts. We had a secondment from our auditors to assist in this work and in work in the Department after the Gribben case. Their in-depth knowledge of the frauds meant that they were requested to be particularly vigilant in their review of our systems and procedures. This approach ultimately uncovered the Acumen fraud. 77. Mr Dallat: Deloitte & Touche worked from incomplete records - was there a reason for that? 78. Dr Neville: There was no requirement from the funder to have full accounts prepared on the Acumen programme; therefore the records were incomplete in accounting terms. However, working from records in the offices of Acumen and LEDU, the accountants were able to produce accounts for the years 1996 to 1998 and 1998 to 1999. That exercise discovered the second fraud. 79. Mr Robinson: I should like to make it clear that the Department has accepted that LEDU acted as it did to ensure a successful prosecution of Gribben. When an allegation was made that there seemed to have been a breach of procedures in July, Gribben claimed to have paid one and to be about to pay the other. We followed that up a few weeks later through the accountant and the travel agents to ascertain whether he had done so. When that was found not to be the case, we started pursuing the matter. 80. We took legal advice, for there was a danger that we might say or do something to prejudice a possible suspension or dismissal. We therefore sought independent affirmation of the circumstances of the case. We were dealing with a situation wholly unlike the Atwell case. It was important to ensure that any action that we took for suspension or ultimate dismissal would stand without the danger of our being taken to a tribunal for unfair dismissal. We wanted to do nothing that might allow Gribben to wriggle free. There was no question of special treatment; we pursued him rigorously, and he was dismissed. LEDU pursued the prosecution rigorously through the police. 81. Mr Dallat: Are you suggesting that if the travel money had been paid back, the other frauds would never have been discovered? It was a little like the way the cow killed the hare. 82. Dr Neville: The work on the travel account would have discovered the fraud, because the accountant was in the process of reconciling that account. 83. Mr Robinson: It was connected with the improvements implemented after the Atwell fraud. 84. Mr Dallat: Improvements were brought in? 85. Mr Robinson: Those were the processes and procedures. As I acknowledged, they came too slowly, but they were the basis on which the Gribben fraud was first identified. 86. Mr Carrick: We should remind ourselves of the context this morning. LEDU was the recognised advisor and guidance provider for many small businesses across Northern Ireland. I have listened to the explanations, the action that LEDU has taken to date and the lessons learnt. By your own admission, improvements were introduced too slowly. I have heard reference to "risk management" and "corporate governance", which are attractive terms. Mr Robinson, I put it to you that we are dealing with a failure to adhere to the fundamental principles of accounting, even though LEDU's raison d'être was to guide small firms in establishing themselves and in setting up accounting records. 87. Paragraph 10 deals with the inadequate control of purchase orders. Was the reuse of purchase order numbers expressly forbidden before the Atwell case? If not, was it expressly forbidden afterwards? Is it expressly forbidden now? 88. Paragraph 10 of the report tells us of Gribben "using purchase order numbers that had previously been used for other suppliers for legitimate purposes." 89. Why were all possible avenues for exploiting purchase orders not explored after the Atwell fraud? Has action been taken to prevent this error from occurring again? 90. Mr Robinson: Perhaps Dr Neville will answer that question. 91. Dr Neville: The use of used purchase orders was never allowed. As a result of the Atwell case, several improvements were made to systems and procedures. Those improvements trapped the travel fraud. As he worked in the finance department, Gribben knew a sequence of purchase orders. He seems to have plucked a sequence out of the air. When the invoices came in they did not match any purchase orders, and the system showed that this was not compliant with procedure; it then became apparent that there was a problem. The improvements that were put in place after the Atwell case resulted in this activity's being identified. The process of matching invoices with purchase orders showed that there were no purchase orders for the invoices. 92. Mr Carrick: Before the Atwell case, the reuse of purchase orders was expressly forbidden. Despite the unfortunate experience of the Atwell case, Gribben could still exploit the reuse of purchase order numbers. 93. Dr Neville: If anyone were to pick up the phone and use a purchase order number or a sequence of numbers, this might be taken to be a purchase order. That is what Gribben did. However, because the system required a purchase order to be matched with the invoice, it caught his use of purchase order numbers for the travel account. 94. Mr Carrick: Paragraphs 9 and 12 of the report made it clear that, although there were warning signs in June and July 1998 that Gribben was involved in fraudulent activity, he was not suspended until 16 November 1998. Dr Neville spoke of the procedures that had to be followed. However, some four or five months elapsed between the time that suspicions were aroused and his suspension. There were unpaid private travel invoices for Mr Gribben, his spouse and his associates. I emphasise that the invoices were unpaid at that stage. Where were they travelling at the taxpayers' expense? What was the value of invoices, which LEDU subsequently paid, despite suspicions? Do you agree that it is a worrying breach of trust for an assistant accountant in the accounts branch who knows accounting procedures to charge private travel to the public purse? 95. Mr Robinson: I agree entirely that it is worrying, and it is wrong that that happened. Dr Neville can detail the sequence of events. 96. Dr Neville: As I explained earlier, in July, the system identified that a breach of operating procedures had occurred. Gribben was asked about that breach, and he said that one invoice had been paid, and that he was in the process of paying another. When that did not happen, the accountant began to reconcile the account and to work with the travel suppliers to identify whether the invoices had been paid correctly. That review and reconciliation of the account identified that Gribben had offset a balance in the account to pay for some of the travel. 97. LEDU paid for the travel after Gribben's dismissal because the Deloitte & Touche report advised LEDU that it was liable for the debt. We had to pay. Later, we started the restitution process. 98. Mr Carrick: Therefore you were contractually bound, based on legal advice? 99. Dr Neville: Yes, because of the process. 100. Mr Carrick: Will that restitution recoup the money? 101. Dr Neville: Yes. 102. Mr Carrick: Paragraph 10 states that more problems with travel accounts were discovered in September 1998, but Mr Gribben still worked in LEDU's accounts branch with access to chequebooks, and, most importantly at this stage, accounting records. Paragraph 10 tells us that "Mr Gribben was a prominent local citizen in the Banbridge area and LEDU considered that it needed to take every precaution and build a sufficient case before arriving at a judgement". 103. Is LEDU influenced by a person's standing in the community? 104. Do you now accept the Comptroller and Auditor General's judgement that by not suspending him sooner, LEDU exposed its financial records to the risk of being lost or destroyed? 105. In the event, we know that financial records did disappear: Deloitte & Touche had incomplete records. Surely, when fraud is suspected, suspension immediately follows. I have listened to LEDU say that there were procedures at that stage. Is it not an overriding principle that when one suspects fraud one suspends immediately? If Mr Gribben had not been a prominent local citizen would the Department or LEDU have suspended him sooner? Do you vary the quality of your investigation and evidence depending on the social standing of your suspect, and, if so, how do you justify that? 106. Mr Robinson: I entirely accept the Comptroller and Auditor General's judgement that Gribben should have been suspended earlier. I agree that it is very important that when fraud is suspected suspension takes place. That is now the fraud policy throughout the Department. 107. Dr Neville has already explained the various factors that led to LEDU's decisions. However, it is important to add that from July to October, when Mr Gribben was not suspended, LEDU limited his responsibilities and so anticipated some of the difficulties. 108. I accept unreservedly that suspension was the optimum solution at that stage. However, steps were taken to curb his responsibilities. Dr Neville can give you details. 109. Dr Neville: After the interview with Gribben in early August, the accountant started to control his work, limiting it to specific areas that he and the accountant had been involved in and to the production of management accounts. The accountant also worked with administrative staff on reviewing accounts in dispute that Gribben had been dealing with. The accountant also took on the role in the batch processing that Gribben had. Thus, all Gribben's work areas at that time were covered; his work was controlled and supervised and limited to non-processing areas away from purchasing supplies or payments. 110. Mr Carrick: Had his social standing a bearing on LEDU's decision? 111. Mr B Robinson: I do not believe that it had any bearing, Mr Carrick. LEDU did not take a unilateral decision; it worked through a structured approach and was taking legal advice. All these points were disputed by Gribben. I agree that he should have been suspended earlier. 112. Mr Hamilton: Departmental policy does not countenance any difference in how suspected perpetrators are treated. 113. Mr Carrick: I am pleased that you have confirmed that. Did LEDU use the departmental legal advice or did you have your own? 114. Mr Robinson: The departmental advice was suspension, and that was the policy. LEDU's policy was slightly different to the Department's at that time. That is no longer the case. LEDU followed its own fraud policy at that time, which involved legal advice. It was not departmental advice; LEDU's own solicitors provided the advice. 115. Mr Close: As I listen to this discussion and to the replies, my impression is that we are not hearing explanations, but excuses. There is a massive difference between the private sector and the great big bad world and the public sector, and how taxpayers' money is guarded and cared for. I find that extremely worrying. 116. In an ordinary business in the private sector, this would not be accepted; action would have been taken. Otherwise, people would not be looking to the bottom line of a profit; they would be complimenting one another on reducing the loss that would build up year on year and would lead to the organisation's going bust. 117. I am also worried about the involvement of the bank. We have heard wonderful news this morning that some of the money is coming by way of the bank. Was the bank involved in prosecuting the fraud? 118. Mr Robinson: Let me make it absolutely clear that the Department does not tolerate fraud. I do not draw the distinction that you draw between the Department's position and that of the private sector. 119. Mr Close: I must interrupt, Mr Chairman. If a private sector employee submitted claims for personal travel for his spouse and associates, no private firm would pay the invoices. The employee's feet would not touch the ground - he would be out through the gate. That is what happens in the real world. 120. Mr Robinson: Let me be absolutely clear: LEDU did not pay the invoices. It investigated the fraud and suspended and subsequently dismissed the person involved. Prosecution was pursued. The settlement of the invoices was on legal advice and was quite independent of the actions. LEDU's actions in this matter were identical with those of the private sector. 121. Mr Close: Did the bank prosecute the fraud? 122. Mr Robinson: LEDU prosecuted the fraud and pursued it with the police. 123. Mr Close: The bank was not involved? 124. Mr Robinson: No. 125. Mr Close: Therefore we are led to believe that in the past few days, the bank, for reasons best known to itself, decided to write a couple of cheques? 126. Mr Robinson: The bank has accepted responsibility for honouring cheques that had forged signatures. 127. Mr Close: It came to that decision in the past few days? 128. Mr Robinson: It wished LEDU to go through a proper process, which involved the prosecution of Gribben and the documentation to that effect. That was completed only in November 2001. LEDU had put the bank on notice of these issues. It had also taken legal advice, and the bank responded in the past few days. The process was initiated some time ago. The key step was completed only in November of last year. 129. Mr Close: When was the bank put on notice? 130. Dr Neville: We had discussions with the bank at an early stage. 131. Mr Close: That was not the question. You said that the bank was put on notice; when did that take place? 132. Mr Robinson: Let me correct that. Discussion took place with the bank. To say that it was put on notice is to put it too strongly. 133. Mr Close: That was not my phrase; it was yours. 134. Mr Robinson: I accept that. I am correcting the phrase that I used. 135. Mr Close: When did the discussions with the bank commence? 136. Dr Neville: Shortly after the Gribben fraud. 137. Mr Close: Can you be more precise? 138. Dr Neville: November 1999. 139. Mr Close: Therefore discussions began with the bank sometime in 1999. Have those discussions continued? How frequently have the discussions that led to the news of the past few days been taking place? 140. Dr Neville: The process awaited the conclusion of the court process. Discussions were reopened in September after the conviction. 141. Mr Close: Therefore there was a hiatus of one and a half years or more before it was resurrected? 142. Dr Neville: No, the legal process had to be completed. It had to go through the courts. All the restitution activity has been picked up again. 143. Mr Close: I want to put a question to the Treasury Officer of Accounts about the good practice guidance that he issues to Departments on fraud prevention, detection and investigation. Can he explain to the Committee - and in explaining it to the Committee he is explaining it to the taxpayers that we represent - the process by which good practice guidance is developed? Will he confirm that through his links with the Treasury, good practice covers public sector fraud throughout Great Britain? Will he confirm that this is issued to all Departments? 144. Mr O'Reilly: The guidance in Northern Ireland on the prevention, detection and monitoring of fraud in the public sector or on public expenditure draws upon the guidance of the Treasury in London. However, the guidance in Northern Ireland goes further than the guidance in Great Britain in the scope of bodies that are covered and in the information to be reported on by Departments and by public bodies. For example, the Northern Ireland coverage includes all external frauds as well as internal frauds; it also includes public funds dispersed to voluntary bodies. 145. Treasury guidance on all matters relating to accounts, including fraud, is received as a matter of course by my Department and by me. The Northern Ireland context is considered, and the guidance is circulated to all Departments and accounting officers in Northern Ireland. That is because of the need to tailor guidance to take account of Northern Ireland's circumstances. 146. Therefore there is a framework to deal with fraud and to emphasise the importance that is attached to the prevention and detection of fraud. As in Great Britain, we also have a system of annual monitoring of fraud cases. The Departments are required to report to the internal audit development unit in my Department all cases of suspected or detected fraud. Every year that leads to an annual report on instances of fraud in the public sector. 147. The annual report serves several purposes. It illustrates specific cases of fraud, the size of fraud and particularly the circumstances in which the fraud arose so that Departments can draw lessons and can review and revise their procedures in light of the experiences of other Departments in detecting fraud. That material is of particular use to the internal audit committees and audit committees in Departments. 148. There is a proactive framework in place. It is not a passive document issued simply to be ignored. All fraud cases are monitored, and the documentation requires that all Departments report fraud to the Comptroller and Auditor General and to my Department. 149. Mr Close: Thank you, that is extremely enlightening. I am particularly struck by phrases such as "It is proactive" and "It is not passive". That is a fairly comprehensive guide, which is obviously based on years of experience. It has been built up over time and has changed constantly; it is reviewed and renewed in light of information. However, when I read paragraph 14 of the report, it struck me that LEDU - an organisation that controls approximately £20 million per annum - did not buy into that process. Instead I am led to believe - and I am sorry if I am picking it up wrongly - that LEDU thought it knew better and decided, "Let us not get fussed about this; we are LEDU, and we know better. We will do our own thing". Why did you ignore the Department's advice? You have touched on it before, but in light of what you have heard, what makes LEDU different? Why did LEDU decide to follow different procedures? 150. Mr Robinson: I shall answer part of that question and then hand over to Dr Neville. LEDU is operating within a framework that was established by the Department. That framework manages the relationship with non-departmental public bodies, and it required LEDU to have a fraud policy - which it has. That policy is different from others in some ways, because it was the product of a process whereby LEDU agreed the policy with its own board. An audit committee ensured that the policy was not developed independently of LEDU's board or independently of contributions from board members. Therefore an appropriate process was followed. 151. It is clear now that the policy was deficient, but it is now being brought totally in line with the Department's policy. Together with the Department of Finance and Personnel, the Department is building a framework for fraud protection by developing the policies. We subscribe to that and circulate the information that we have gathered from the process as we seek to learn best practice and to learn from what has happened elsewhere. It is a very active and dynamic process. Perhaps Dr Neville wishes to add to that. 152. Dr Neville: In response to the Atwell fraud, including the commissioning of the Deloitte & Touche report, LEDU also developed a fraud policy that was approved by its audit committee and by its board. LEDU followed that process and sought legal advice on the stages of the Gribben case. That has since changed. Police involvement is now explicit in LEDU procedures, and we are adopting the Department's fraud policy and fraud response plan. 153. With hindsight, LEDU should have suspended Gribben earlier, and it should have instigated a more comprehensive investigation, which it did after Gribben was dismissed. However, at that stage LEDU was following legal advice. 154. Mr Close: Can you be more explicit about LEDU's decision not to follow procedures that were laid down by the Department? What was the decision- making process in LEDU? Who decided? 155. Dr Neville: We were following legal advice; that was laid down in our fraud policy. 156. Mr Close: Yes, but who in LEDU decided? 157. Dr Neville: Management decided. 158. Mr Close: Who? At what level? 159. Dr Neville: At senior management level. 160. Mr Close: The chief executive? 161. Dr Neville: I cannot recall. 162. Mr Close: Therefore we do not know who makes the decisions? 163. Dr Neville: That was the legal advice that was - 164. Mr Close: No, no. My question is simple. A decision was taken by LEDU not to follow departmental procedures. I quote from paragraph 14 of the report, "The Agency explained that it decided." 165. "That it decided". Who decided? 166. Dr Neville: The fraud policy was developed by LEDU and approved by the audit committee and the LEDU board. 167. Mr Close: The LEDU board decided? 168. Dr Neville: It approved the fraud policy. 169. Mr Close: Who decided not to follow procedures? 170. Dr Neville: We were following the procedures laid out in the LEDU fraud policy. 171. Mr Close: Who decided not to follow departmental procedures? 172. Dr Neville: Departmental procedures were slightly different from LEDU fraud policy. 173. Mr Close: I know that. I am trying to extract vital information here. Obviously, a decision was taken, and all I have been able to elicit is that it was taken by the agency. Was every Tom, Dick and Harry in the agency brought together to reach that decision? I put it to you that several individuals at senior level took the decision. They decided that they knew better than the Department, and in the taxpayers' interests I am trying to ascertain who these individuals were. 174. Dr Neville: The LEDU board took the decision to approve LEDU fraud policy. 175. Mr Hamilton: The senior management team in LEDU would put a proposition to the board for board approval. The board would take a decision on whether or not that recommendation was to be followed, which is the normal way that such decisions are taken. If Dr Neville is saying that the LEDU board took the decision, then that is the process that would have been followed. 176. Part of this stems from the fact that non- departmental public bodies are expressly different from Departments - they are set up in a different way for precise reasons. Non-departmental public bodies must consider how best to discharge their responsibilities. They cannot set aside basic tenets of accountability; no one could defend that. However, in discharging its responsibility, and in line with its management framework, the LEDU board adopted a fraud policy that varied, in certain respects, from the Department's policy. It was not something that the Department wished; it was LEDU's decision. 177. Mr Close: I accept that, but it obviously failed. It cost the taxpayer money, and it has been changed because it was a failure. If something works it does not need fixed. However, all the evidence today admits that what was done was wrong - it did not work. With hindsight, it would have been better if this or that had been done. It would have been better if departmental policy had been followed instead of LEDU's "know better" attitude. That is why it has been changed. I am trying to ascertain who took these wrong decisions? Who is accountable? I do not accept that the whole of LEDU was at fault. I was told earlier that an observant member of staff referred this to an accountant because Mr Gribben was not there. Obviously, that person was not responsible for this decision. 178. The Chairperson: Was a proposal put to the board that departmental procedures should be ignored? 179. Dr Neville: No. As a result of the Atwell case, the proposal put to the board was to adopt a fraud policy developed by LEDU. 180. Mr Hamilton: It was never a question of "Do you want to ignore this?" It was more a need to update and specify our fraud policy. That was our proposal. 181. Mr Close: No one is accountable; no one will accept responsibility. A success would have been written up in lights. 182. Mr Hamilton: I have tried to illustrate how these things work. If papers were going to a board, there would be an author of the paper, depending on the policy areas. If, for example, the finance section submitted a paper, someone in the senior management team would put a paper to the board, and, depending on whether it was for a board decision, the board would decide it. That is the responsible line. 183. Mr Close: I am still seeking information on behalf of the taxpayer, and it strikes me that I am being denied it. 184. Ms Morrice: Was there a departmental representative on the board? 185. Mr Robinson: Yes. There is a departmental representative on the board. In that sense, the Department is accountable for whatever happens in LEDU; that accountability is in no doubt. The departmental accounting officer has responsibility, as I made very clear. 186. Mr Hamilton: That may well be the case, but I have tried to illustrate who is responsible for a paper that goes to a board. If there was a board decision, we shall have to examine it and write to you to inform you when that happened and who did what. 187. The Chairperson: We shall need that information. Was the board aware that its procedures were different from those of the Department? The departmental representative on the board should have alerted it. 188. Mr Robinson: We shall write to you with the process that was followed at the time. 189. The Chairperson: It is important that we get that information. 190. Mr Close: Why would LEDU wish to use a local firm of solicitors when guidance that distilled all the public sector experience of handling fraud was available? 191. Mr Robinson: There are two distinct issues. Guidance is available, but it is naturally concerned with policies and with providing an update on changes or lessons learnt. LEDU, as a separate corporate entity, requires legal advisers for matters connected with its personnel and its terms and conditions of service. Equally, LEDU needs solicitors to draft agreements with companies. There are many matters on which LEDU avails of legal advice. 192. Mr Close: Did you advise the firm of solicitors of the departmental guidelines and the Department's ground rules for handling fraud? 193. Dr Neville: LEDU drew up the fraud policy from records of best practice available to us at the time. 194. Mr Close: I did not ask that. I asked whether you told your solicitors of the departmental ground rules. 195. Dr Neville: The solicitors were not involved in drawing up the policy. 196. Mr Close: No, but LEDU brought in solicitors; it told them to proceed on a case. Did you advise them of the departmental ground rules on handling fraud? 197. Dr Neville: We were following the fraud policy when we engaged with our legal advisers to examine that. 198. Mr Close: Please answer the question. Did you advise the solicitors of the departmental ground rules? 199. Dr Neville: No. 200. Mr Hamilton: My understanding is that the legal advice centred on how to proceed with the suspension or dismissal of the employee, so it was more a matter of employment law than fraud policy. I offer that for clarification. If that is wrong, I hope that someone will correct me; but that is the essence. The important matter was to pursue the Gribben case rigorously and successfully; the legal advice was intended to facilitate that process. 201. Mr Close: I thank you for that. The legal advice not to involve the police at an early stage clearly conflicted with your Department's procedures. They were different from those of LEDU, but the overarching body is the Department. We arrived at that situation because someone up in the ether decided that he was not interested in departmental policy. Even at the late stage of this morning's sitting, the full extent of the weaknesses in handling the case do not seem to have hit home. 202. Even when you knew that you had a known fraudster working as an assistant accountant in the accounts branch, you failed to launch a wide-ranging investigation immediately. This individual had sole access to chequebooks, bank statements and all the financial information on Acumen and Intellec. According to paragraph 16 of the report "LEDU considers that, only with the advantage of hindsight could the backlog of accounts work and stalling the auditors be seen as pointers to fraud rather than pointers to inefficiency". 203. He was a known fraudster, yet you gave him the benefit of the doubt. It had nothing to do with fraudulent activity, mind you: it was inefficiency. Paragraph 16 also accepts that "I note that this was an accounting period of almost two years which does not conform to best practice". 204. In basic business practice one audits and one checks; one does not let matters slide for a year and a half to two years. Nevertheless, this was put down to inefficiency, not fraudulent practice. 205. Gribben spun you a web of lies about his car having been stolen, about losing a computer, about losing papers on the Acumen project. What did you do? Nothing. Paragraph 16 tells us that you responded with: "Only with the advantage of hindsight could the backlog of accounts in work in stalling the auditors be seen as pointers to fraud rather than pointers to inefficiency". 206. I may live in the Lagan Valley constituency, but I did not come down the Lagan in a bubble. It is beyond comprehension that you can dismiss such a catalogue of events as "inefficiency"; that it has nothing to do with fraud. What on earth prompted you to give him the benefit of the doubt? Please try to give me some sort of palatable explanation. How can you inspire the taxpayers with confidence that you know how to do the right thing? 207. Mr Robinson: I have made it very clear, Mr Close, that we accept that the right thing was not done. I have made that evident in my answers. However, I do not agree with you that nothing has been learnt. We have told the Committee that we have changed fraud policy throughout the Department. That was an important lesson that we learnt from the Gribben case. 208. We have admitted that notification was defective - but that will not happen again. We have clearly said that we have reviewed our systems. Mr Carrick mentioned "corporate governance". Let there be no mistake: this is about appropriate systems of internal control, and that is relevant to your point. Lessons have been learnt. We have tried to explain the factors that were in play at the time. These were not arbitrary; they were a result of thought and of active management. 209. Of course we now know that many of those decisions were flawed and probably erred on the side of caution. That is entirely clear. However, we have answered all your questions about what influences were being brought to bear and the reasons for the judgements that were made. I can only reaffirm that lessons have been learnt and that the benefits of those lessons are being put into effect. 210. Mr Hamilton: It was precisely such frustration at the incremental disclosure of events that had happened much earlier that prompted the then permanent secretary to launch this inquiry almost two years ago. Not all the information was available at the same time. 211. However, when the Department saw these things, it commissioned the review in order to understand matters fully, to ensure that everything had been investigated and that all proper action had been taken. The Department took that action two years ago because of its frustration at the incremental disclosure of what had happened over the past two or three years. As Mr Robinson said, the Department has undertaken several other initiatives over this period to resolve the problem and to ensure that all issues were fully addressed. 212. Mr Close: I shall try to sum up. This is probably difficult, because we cannot reach an acceptable level of accountability, but apart from the fraudster and those who have served time in jail, has anyone in the organisation been held responsible? Has anyone been demoted or suffered any other penalty for the flaws, errors, omissions, inefficiencies, bad management, laxity, blindness and complacency? Has any action been taken against any individual for that catalogue of incompetence? 213. Mr Robinson: No disciplinary action has been taken against anyone. Senior management reviewed what happened and expressed its concern at the control and at the speed with which the changes were implemented. However, no disciplinary action was taken against anyone. 214. Mr Close: Does that approach provide a lesson for other organisations that inefficiency will be dealt with seriously, or does such an attitude verge on "It doesn't matter, chaps. Let's motor on".? Does it not, in fact, reward inefficiency? 215. Mr Robinson: It is important to recognise that the perpetrators of the fraud were pursued. 216. Mr Close: Yes, but lax management made fraud possible. 217. Mr Robinson: The fact that those people were pursued is most important. There have been two investigations into how this occurred. Lessons have been learnt and disseminated. The management in the Department and LEDU have made it very clear that internal control must be exercised properly and that public funds must be safeguarded. 218. Ms Morrice: I wish to get back to basics. LEDU has been helping hundreds, if not thousands, of small businesses at a cost of some £30 million a year. The IDB, the agency for which you were formerly responsible, helps many hundreds of larger businesses. What would you do if such activity were uncovered in a LEDU or IDB-backed company? 219. Mr Robinson: If such activity occurred in a company, it would primarily be a matter for that company and its board of directors. If the fraud affected arrangements or agreements with the Department or with any of the Department's bodies, we would seek restitution. 220. Ms Morrice: What I am trying to get at is that this does not have implications only for the internal procedures of these bodies. These bodies give financial backing to companies to keep them on their feet. If this type of activity were uncovered in a LEDU or IDB-backed company, would you continue to back that company? Would you continue to provide financial support for such companies? 221. Mr Robinson: The key issue would be whether the fraud was perpetrated against the Department or any of its bodies. 222. Ms Morrice: These companies are backed by IDB. IDB and LEDU give money to these companies; therefore if fraud were committed, one could not tell whether a particular pound came from the public sector or the private sector. 223. Mr Robinson: Obviously, if fraud were discovered in a company that any of the agencies dealt with, we would be concerned about it and its wider impact. I thought that you were asking what would happen if a fraud had been perpetrated against the Department or against one of its agencies. There is no question that we would be concerned about it and keen to ensure that the company was not being influenced by that fraud in any dealings that we had with it. 224. Ms Morrice: This is important. I assume that you give out money every year depending on how these companies develop. If this were uncovered in a company, would you continue to hand out money to it? 225. Mr Robinson: It would certainly affect our confidence in the company. Whether or not we would continue to provide support would be judged on many issues, and this would be one. 226. Ms Morrice: For heavens sake, mobile phone muggers may get five years in jail, yet you tell us that even if a company proved to be involved in fraud you could continue to provide it with money. 227. Mr Robinson: There are other factors to consider. Fraud happens in many businesses; it is a fact of life. It should not happen, and we should have systems and processes to prevent it, and we work very hard at that. Nevertheless, it will still occur. 228. Mr Hamilton: If there were rampant, systematic fraud in a company by its owners and management against the Government or the agency, we could have no confidence in that company's ability to sustain economic development. 229. Ms Morrice: Would you have confidence in the senior management team if you discovered what you have seen in this report? 230. Mr Hamilton: It would depend on the circumstances and on whether its deficiencies had been addressed. 231. Ms Morrice: You are being very cautious. This is public money that is being handed out - it is not hypothetical money. 232. Mr Hamilton: One simply cannot say that one would withdraw all support from a company because one discovered an incidence of fraud. 233. Ms Morrice: Has either LEDU or IDB ever applied sanctions against companies that have been found to have this type of fraud or mismanagement? Have you ever stopped the money or cautioned them? 234. Mr Robinson: Of course, and the most extreme example is De Lorean. 235. Ms Morrice: Is that normal procedure? Has either LEDU or IDB told companies that it would stop giving them support because they did such and such? Surely those companies are watching these developments in LEDU with a wry smile. 236. Mr Robinson: We will not deal with a company that defrauds the Department or its agencies. 237. Ms Morrice: That is the point that I am trying to get at. 238. Mr Robinson: There is a distinction between fraud within a business, which is unrelated to the Department, and fraud that is related to its interactions with the Department. We have two very distinct views on that. If a company seeks to defraud the Department or its agencies, we stop dealing with it immediately and seek restitution. 239. Ms Morrice: Therefore you are tough on the private sector, but not so tough on your own organisations? 240. Mr Robinson: I really do not see the distinction. Gribben and Atwell were pursued and convicted. 241. Mr Hamilton: There is no tolerance of fraud in the Department. If individuals commit fraud, action will be taken against them. Steps were taken in this case to redress deficiencies, and it is clear that there were deficiencies. The same considerations and circumstances would be applied in a private sector company - what was the root of this, how did it happen, and was it systematic? 242. Ms Morrice: Would you stop dealing with them? 243. Mr Hamilton: If the company was systematically defrauding the Department. There is a difference between systematic fraud and an employee of a company committing a fraud against that company. 244. Ms Morrice: May I ask about reporting procedures. The Comptroller and Auditor General found out about one of the largest internal frauds in the Northern Ireland public sector through a press article. Why was the Audit Office not informed? 245. Dr Neville: Do you mean the Atwell fraud? 246. Ms Morrice: Yes, the £118,000. 247. Dr Neville: She was confronted with evidence on 19 December; she confessed, was dismissed and was handed over to the police. LEDU reported the fraud to the Department on 7 January, but in the intervening time the press got hold of the story. 248. Ms Morrice: Was it not highly likely that the press would get hold of the story? Why was it not reported to the Audit Office immediately? 249. Dr Neville: We were sitting at 19 December. A case and a report were put together and delivered on 7 January. 250. Ms Morrice: After the Atwell fraud, your Department gave an undertaking that in future all frauds would be notified to the Comptroller and Auditor General as soon as they were discovered. It is clear from the report that you failed to deliver on that in the Acumen and Intellec fraud cases. Again, he became aware of it through press articles. Was this second breakdown in reporting procedures due to incompetence, or did someone take a calculated decision to ignore the rules? 251. Dr Neville: With hindsight, LEDU should have reported to the Department when that new dimension of the previously reported suspected fraud became apparent at the time of the police's engagement. That fraud was discovered through the preparation of the second set of Acumen accounts and as soon as returned cheques were received, suspicions arose and the police were notified. From that time on, LEDU's prime focus was to work with the police to determine whether there had been further frauds and from that date we were acting on the instructions of the police. 252. Ms Morrice: Do you know why it is so important to us? We want to be assured that the Assembly's auditor has a complete and up-to-date overview of all fraud cases in the public sector. In the report it is clear that it was not just the auditor and the Department of Finance and Personnel who were being kept in the dark; your Department was not told about the unauthorised payments of IR£22,500 and £19,500. As principal accounting officer, are you satisfied that you have a sufficient grip on what was going on in LEDU at the time? 253. Mr Robinson: LEDU did not inform us, and that was a mistake. It was also a mistake for the Comptroller and Auditor General to be kept unaware. Involving the Department would have brought more objectivity to the work and might well have speeded up some of the actions to reduce the risk of anything further emerging. LEDU accepts that that is the situation. One of the lessons to come out of this is the importance of notification. 254. Ms Morrice: It is important that all fraud cases are brought forward. How confident are you now that you have been told about all the suspected or proven frauds? How can we be assured that you know about them all? 255. Mr Robinson: I have sought assurances from all the non-departmental public bodies and their accounting officers, and I am assured that we are aware of all those situations; the Comptroller and Auditor General is also aware of all suspected frauds in the Department at present. 256. Ms Morrice: Is anything likely to emerge that will bring you back here saying "We did not know; we were not told". ? 257. Mr Robinson: I have taken every step necessary to ensure that that will not happen. I am confident that there are no frauds at present in the Department. There are two suspected cases, of which the Comptroller and Auditor General is fully aware. 258. Ms Morrice: May I ask about supervisory negligence. In 1997 you issued guidance to LEDU, which paragraphs 13 and 32 deal with, which made it clear that fraud investigations should consider, as a matter of course, whether there has been a failure of supervision. Do you agree that this seems to have been ignored in the Gribben case? I should like to know why your fraud investigation did not deal with supervisory negligence? 259. Mr Robinson: The question of supervisory negligence came to the fore in the investigation of the Atwell fraud, and that was where it was identified. Work was initiated in LEDU to rectify that. That work was under way, and it ultimately led to the identification of the Gribben frauds. It did, however, move too slowly. 260. Ms Morrice: Was it because the scope of the fraud investigation was decided by the management of the business unit in which the fraud occurred? Is it unusual for the business unit in which a fraud occurs to decide the scope of the fraud investigation? 261. Mr Robinson: LEDU brought in Deloitte & Touche to get some outside thinking on the matter. LEDU sought Deloitte & Touche's recommendations on a review of the system after Atwell, and these were being introduced. The Department's internal audit service then reviewed that work, and by the early part of 1998 all that work was under way. Gribben was dismissed after the travel frauds had been identified. All the other work was under way, and by May of that year it seemed as if the entire spectrum was covered. Of course, the Acumen and Intellec frauds then emerged, so the work was not comprehensive enough. I accept that entirely. 262. Ms Morrice: Will you confirm that the senior official who was responsible for the work of the accounts branch was the same official who set the terms of reference for the investigation of the Gribben travel fraud by Deloitte & Touche? 263. Dr Neville: The corporate services director and I set the terms of reference. 264. Ms Morrice: Were you and the corporate services director responsible for the work of the accounts branch? 265. Dr Neville: That was one of my responsibilities. 266. Ms Morrice: Was there not a conflict of interest? 267. Mr Robinson: The accountant was a different person. Gribben was the assistant accountant, and he was reporting to the accountant, so the key activities were controlled by the accountant; the terms of reference for the further work were set by the director of corporate services, who was the accountant's boss. At that time it was Dr Neville. 268. Ms Morrice: Dr Neville's responsibilities included the accounts branch, but he was not sufficiently independent of the function to be directly involved in setting the terms of reference for the fraud investigation because there might have been a conflict of interest. 269. Dr Neville: I did not see it. The legal advice that we received at the time was that we should seek independent investigation, which we undertook through Deloitte & Touche. It was my role to engage Deloitte & Touche. 270. Ms Morrice: Would it not have been better to take setting the terms of reference for the investigation out of the hands of the unit? 271. Mr Robinson: Deloitte & Touche have since verified all the work; there was a crosscheck. It required detailed knowledge to check the travel fraud, but it was confirmed again with the benefit of the solicitors' advice. Deloitte & Touche verified that a fraud had been perpetrated. 272. Mr Hamilton: The investigation and reporting into whether a case involves suspected fraud or a possible indiscretion will no longer be left solely to an individual body - whether a non-departmental public body or another organisation. The Department will have a consistent policy, and there will be immediate notification to the Department. All necessary decisions will be made in light of the departmental policy. Therefore there will be no question of LEDU, or any other body, acting on its own guidance, policy or rules, apart from the Department. That policy complies with your suggestion because it involves wider scrutiny of action. 273. Ms Morrice: Paragraph 31 of the report is concerned with bank reconciliations. It states that LEDU told the Comptroller and Auditor General that "bank reconciliations would have been prepared and reviewed as part of the Acumen audit". 274. Is it not LEDU's responsibility to ensure that bank reconciliations were done? Surely, they should not have been left for auditors to complete many months after the end of the financial year. 275. Dr Neville: LEDU accepts that that is best practice, and it now includes monthly reconciliations in all its accounts. 276. Ms Morrice: Do you accept that the Acumen and Intellec frauds would have been discovered much earlier - or might have been prevented - if those supervising the accounts branch had insisted on seeing regular bank reconciliations? 277. Dr Neville: I can see how it might be perceived in that way. 278. Ms Morrice: It would have been a simple way to stop the fraud. 279. Dr Neville: Bank reconciliations were carried out, but not consistently. 280. Ms Morrice: Are they now being done consistently? 281. Dr Neville: Yes. 282. Ms Morrice: I presume that that has always been part of LEDU's advice to small businesses, yet it was not implemented in its own backyard. 283. Dr Neville: Full proper financial controls were not applied rigorously to the Acumen and Intellec accounts. 284. Mr Hamilton: Unfortunately, there was a distinction between those accounts and the LEDU main funds. 285. Ms Morrice: The standards of supervision for those accounts fell far short of good practice. Do you accept that regular bank reconciliation is possibly one of the most important financial controls for any organisation - from a small charity to a large public body - and that those controls can prevent fraud such as occurred with the Acumen and Intellec accounts? 286. Mr Robinson: They are important. However, it is worth remembering that the funds were defrauded through the use of forged signatures. It is unlikely that a bank reconciliation would have highlighted that. 287. The Chairperson: There was one instance of a forged signature. 288. Mr Robinson: In the Gribben case, yes. 289. Ms Morrice: Were there any in the Atwell case? 290. Mr Robinson: No, there were none in the Atwell case. 291. Ms Morrice: Therefore reconciliations would have highlighted that. 292. Mr Robinson: Yes. There are regular reconciliations. 293. Ms Morrice: Accountants who are experts in financial control could also, if they wished, be experts at covering up. Fraud might happen and we would not be told. I am not sufficiently convinced of the efficacy of the guarantees. 294. Mr Robinson: It is a question of the framework within which the internal control is set up and of the assurance that is derived from it. Those are important issues, and I have sought to reassure the Committee of the significant changes and improvements that have been made. 295. Ms Morrice: The whole system is changing with the creation of organisations such as Invest Northern Ireland (INI), and this is an opportunity to start with a clean sheet. 296. Mr Robinson: When LEDU implemented the new systems, following the Deloitte & Touche report in 1998, there was a system specification requirement that a qualified accountant be brought in to do the work. That upgrading also occurred in 1998. 297. Ms Morrice: They were not qualified accountants? 298. Mr Robinson: No. 299. Mr Hamilton: It is worth pointing out that the Gribben fraud constituted more than 99% of all the fraud in the Department since 1997. 300. Ms Morrice: Internal fraud that you know about. 301. Mr Hamilton: Yes. 302. Ms Morrice: That is important. 303. Mr Beggs: We should remind ourselves of the background because sometimes it can be lost in the detail. The Atwell fraud occurred in 1995-96; it was discovered in December 1996. Deloitte & Touche quickly produced a report in February 1997. However, the Department and LEDU have shown a lack of urgency in implementing the procedural review to deal with fraud. 304. Paragraph 6 states that among the main factors contributing to the breakdown of the control environment that allowed Atwell to perpetrate her fraud was "Inadequate Supervision of Staff". This was in 1996. Paragraph 28 states that those weaknesses were still present when Gribben committed his frauds between September 1997 and August 1998 - up to 18 months after Deloitte & Touche's report. Why were adequate steps not taken during that period to ensure that proper supervision of all staff was in place? Are you satisfied that there was sufficient supervision in Acumen and Intellec at that time? 305. Mr Robinson: The key steps that you have outlined are chronologically correct. The Department reviewed the work that LEDU commissioned from Deloitte & Touche to ensure that the recommendations were being implemented, and they were. Gribben's first fraud started in November 1997, and came to light in the following July. It showed that although procedures had been improved, they had not been improved quickly enough. Therefore the first case of Gribben's travel fraud was not identified until quite some time after the Deloitte & Touche work and its verification. 306. Mr Hamilton: Quite improperly, the emphasis was on the main funds. The Intellec account was not a live account; it was a small account with £278,000 relating to LEDU. Not enough emphasis was put on it from the start. The focus was on the main LEDU accounts. Therefore the same scrutiny was not applied either to that fund or to Acumen, and that is extremely regrettable. 307. Mr Beggs: One of the recommendations in February 1997 was the separation of duties. However, a study of the Gribben case shows that he had sole responsibility for administrating and preparing the Acumen and Intellec accounts. That included sole responsibility for bank statements and reconciliations and sole access to chequebooks. Therefore, Dr Neville, why was the advice of February 1999 blatantly ignored? 308. Dr Neville: The advice and recommendations from the Atwell report were primarily based on LEDU's main account systems, and that is where they were implemented. As the Acumen and Intellec accounts were small, the recommendations were not applied rigorously to them. Proper financial controls are now in place for all accounts. 309. Mr Beggs: You call them small accounts, but about £18,000 of public funds was fraudulently acquired. They may be small accounts for LEDU, but it was a significant case of public fraud. Do you agree? 310. Dr Neville: I agree. 311. Mr Beggs: The first signs of fraud in the Gribben case were detected in June or July 1998. Deloitte & Touche was commissioned to carry out a full investigation in October 1998. 312. Why was there a five-month delay before commissioning an investigation, when there was obviously a problem? 313. Dr Neville: In July, there was a breach of operating procedure in our system in order to purchase private travel. The accountant was determined to get to the bottom of that and began to work towards reconciling the account. In late September or early October, it became apparent that fraud had occurred. Deloitte & Touche was brought in in the middle of October. 314. Mr Beggs: If such things had happened in the Department, would you not have advised the Comptroller and Auditor General much earlier? Perhaps a wider review would have occurred earlier had LEDU followed departmental procedures? 315. Mr Robinson: You are correct. Under the terms of the fraud policy, we would have immediately suspended and undertaken an extensive investigation. 316. Mr Beggs: I hope that all non-departmental bodies have learnt lessons from this. 317. After the initial instruction to Deloitte & Touche, nothing further seems to have happened until October 1999, almost one year later, when, according to paragraph 20 of the report, LEDU requested the return of paid cheques from its bank. If you suspected fraud - you had dismissed Gribben in December 1998 - why did you wait until October 1999 before examining the account in detail and recovering such basic items as paid cheques to confirm whether there had been other incidences of fraud? Is it correct to say that it was only through this accountancy process that you spotted the fraudulent Acumen cheques? Given that those accounts were supervised solely by Gribben and that he was the only signatory for the bank account, why was there a delay of almost one year before a detailed investigation of those bank accounts was carried out? 318. Dr Neville: With regard to the dismissal of Gribben, several actions were under way: we were following legal advice on the process of restitution; we continued to work on the Acumen account and on our own main accounts; and we also seconded staff from Deloitte & Touche to help us with that work. We engaged in a combination of external and internal work, which focused in particular on areas in which Gribben had been working. The subsequent production of accounts in the Acumen case revealed the second fraud. 319. Mr Beggs: According to paragraph 21, it was not until October 1999 that LEDU initiated action that ascertained the full extent of Gribben's fraudulent activities. I detect a distinct lack of enthusiasm - a tardiness - on the part of LEDU in establishing the full extent of Gribben's fraud. How can we be confident that your estimate of over £100,000 for Gribben's actual and attempted fraud is the complete picture? 320. Dr Neville: After Gribben's dismissal, we embarked on a planned approach to investigating and reviewing all areas that he had been involved in. That approach determined that there had been wider fraudulent activity; that being the case, we proceeded to the next stage of review, which identified the further fraudulent activity. In May of the following year that activity was reviewed by the Department's internal audit service, which was satisfied that we had taken full account of all the issues. 321. Mr Hamilton: The Department has been assured by its internal audit service that in the work that we commissioned in June 2000 all the work was done, all necessary action was taken, and the fraud was fully identified. We have received that assurance. 322. Mr Beggs: I am pleased to hear that. However, paragraph 25, figure 1, shows that Gribben's first fraud was committed in September 1997. When did he start working for LEDU? 323. Dr Neville: I am not sure of the exact date, but at that time he had been working for LEDU for about 10 years. 324. Mr Beggs: How can we be assured that fraud was not committed earlier? Did you trace accounts that he had handled before 1997? 325. Dr Neville: His only activities over and above the main accounts, which were audited annually, were the Acumen and Intellec accounts and they were thoroughly investigated. 326. Mr Beggs: How far back were these accounts investigated? 327. Dr Neville: Intellec was a small programme, and it was investigated from its inception in 1993 until 1997. LEDU took over the treasury role of the Acumen account in 1996 and investigated it from that date onwards. 328. Mr Beggs: Have other internal or external frauds been suspected in LEDU over the past 10 years? Were they reported to the Department? 329. Dr Neville: No other internal frauds have been reported. Two external frauds were reported recently. 330. Mr Robinson: Since April 1997 the Department Enterprise, Trade and Investment has investigated 15 frauds, 12 of which were notified to the police; two involved disciplinary action and one has been placed in the hands of departmental solicitors for advice. Of those 15, seven were external; four were internal, and four involved missing cash where it was not clear whether the frauds were externally or internally perpetrated. 331. Mr Beggs: Will you give the Committee further details on fraud that will not be prejudicial to any court cases that may be pending? 332. Mr Robinson: I shall write to the Clerk of the Committee with the information. 333. Mr Beggs: The Acumen and Intellec projects were particularly susceptible to fraud. Does LEDU have other projects that may be similarly susceptible? 334. Dr Neville: All LEDU's accounts are now subject to the full financial procedures that were put into force after the Atwell and Gribben frauds. 335. Mr Beggs: In order to put these frauds into perspective perhaps Mr O'Reilly will let the Committee know how many internal frauds greater than £100,000 have been committed in the Northern Ireland public sector in the past 10 years. 336. Mr O'Reilly: We collect such information from Departments through our internal audit development unit, and I shall write to the Clerk of the Committee with the relevant information. 337. Mr Beggs: Am I right in saying that the LEDU case is one of the most serious frauds that you have come across? 338. Mr O'Reilly: The size of the fraud would put the case at the top end of the scale. 339. Mr Hilditch: Paragraph 5 of the Department's report stated that "LEDU subsequently invited its auditors, Deloitte & Touche, to undertake a full investigation of the circumstances surrounding the [Atwell] fraud." Paragraph 6 of Deloitte & Touche's report listed the main factors as: "Inadequate Supervision of Staff" "Lack of Separation of Duties" Bypassed Established Systems of Control" and "Inadequate Management of Information". 340. Surely such elementary weaknesses should have been picked up much earlier in the normal audit procedures. Did either the internal or external auditors report on any of these weaknesses to LEDU management at any stage before the Atwell fraud? 341. Mr Robinson: I shall ask Dr Neville to answer the detail of your question. The findings of the Deloitte & Touche work on the Atwell fraud were that because it was comparatively sophisticated it went on for some time before being discovered. Your question is an important and fundamental one and I shall ask Dr Neville to appraise you of the detail. 342. Dr Neville: The report identified various matters concerning the fraud. It was an elaborate fraud, involving the creation of invoices that were entered into the process at key points after approval and authorisation. This resulted in payments being made that were difficult to detect. 343. The payment system was theoretically sound, but there were weaknesses in the practical application of processes and transactions. Those were addressed in the Atwell fraud case, and in 1997-98 LEDU proceeded to implement the Deloitte & Touche recommendations. 344. Mr Hilditch: Will the accounting officer provide written detail of any points made by the auditors at an earlier stage? 345. Dr Neville: We shall check. 346. Mr Hilditch: Paragraph 15 states that LEDU acting on the advice of its solicitors considered that police involvement in early November/December 1998 would have been premature as the restitution process for the recovery of money had not been concluded. 347. Were you trying to get your money back before involving the police? 348. Dr Neville: No, as I said earlier, we were following our fraud policy, which required us to take legal advice. Our legal advice was to proceed with caution. 349. Mr Hilditch: Surely, going to the police would not have precluded you from recovering your money, yet you went to your solicitors for advice. Why would you do that? 350. Dr Neville: It was part of our policy at that time. 351. Mr Hilditch: Paragraph 14 makes it clear that internal audit's advice was for earlier involvement of the police. I get the clear impression from paragraph 15 that LEDU's actions were dictated by a different motive: to secure restitution and nothing else - no prosecution. Is that the case? 352. Dr Neville: No, we were following our fraud policy. In both cases the individuals were prosecuted and served sentences; that shows our attitude to fraud. 353. Mr Hilditch: Paragraph 40 states that "There has been no recovery of funds in the Atwell case". 354. What efforts have been made to recover money from the Atwell case? How much money has been recovered to date? What assets does she have? Do you charge interest on the amount outstanding? 355. Dr Neville: At the time of Atwell's conviction, the police advised us that they were unable to trace the money and that they were not pursuing the matter. We considered our own advice and came to the conclusion that there were no avenues available to pursue the money. 356. Mr Hilditch: Were there no assets or interest? 357. Dr Neville: No. 358. Mr Hilditch: Has enough been done in light of the Atwell case? Do you believe that you are sending the right message to other would-be fraudsters? 359. Mr Robinson: I agree that it would have been preferable to recover the money. However, we have been forced to conclude collectively that the advice from the police and from LEDU's legal advisors is correct that there are no avenues left for us to pursue in the Atwell case. What is important is that we have demonstrated that we will vigorously pursue those suspected of fraud, and the securing of convictions is an important signal to would-be fraudsters. 360. The Chairperson: We were informed this morning that the bank has repaid the cheques. In the Gribben case, was the fraud against the bank or against LEDU? Should we revise our guidance to take account of this? I realise that that is a technical point. 361. Mr Robinson: We shall have to come back to you on that because this happened just before we met, and we have not had the opportunity to give it in-depth consideration. If you are content, I shall write to the Committee Clerk on this point. 362. The Chairperson: Yes. It is a point that occurred to me as I listened to the evidence. Mr O'Reilly, what is your opinion? 363. Mr O'Reilly: Government accounting requires Departments to pursue recovery by every means available. There are limited means by which recovery can be effected through banks specifically. If a cheque has been signed fraudulently I understand that there is an avenue to recover the sums from the bank. However, it may not be open in other cases. 364. As the accounting officer said, we shall consider it; we shall take legal advice, and we shall write to the Committee. 365. The Chairperson: Mr Dowdall, do you wish to say anything? 366. Mr Dowdall: No. 367. Mr Close: I was trying to understand the decision- making process and who is responsible for taking decisions. I remind you that you have already used your three lives; you have "phoned a friend", taken your "fifty-fifty", and you will now "ask the audience" and return with the answer in writing, which I appreciate. 368. Ms Morrice was following a line of enquiry about the notification of fraud to the Department. I noted that Mr Robinson stated that "LEDU did not inform us, and that was a mistake". Who is responsible for notifying the Department of fraud? Please bear in mind when answering that question that this is a fraud, which, to quote Mr O'Reilly, "is at the top end of the scale". 369. Mr Robinson: I would look first to the designated accounting officer for LEDU to inform the Department. 370. Mr Close: The designated officer for LEDU did not involve the Department. Was any sanction taken? 371. Mr Robinson: No. 372. Mr Close: What message does that send out? We have a fraud at the top end of the scale; a known officer did not take the necessary and appropriate action, and no sanction is taken. 373. Mr Robinson: The action that you are referring to was the notification, and I accept that that is an important issue. However, pursuing prosecution and seeking restitution sends firm signals to potential fraudsters. The notification, per se, is not at the kernel of the fraud. 374. Mr Close: That is interesting, because the policy document on fraud refers to the need to consider disciplinary action in cases where there have been supervisory failures. Action should be taken over supervisory negligence or failure. However, there was absolute negligence and failure at a senior level, yet the Department decided not to impose sanctions. The view seems to be that the officer should have done better, but that there will be no sanctions. The taxpayers and I are expected to accept that that is a rigorous process and that there is no complacency. The attitude is, "Do not let it happen again". 375. If there was a reoccurrence - God forbid - would we say, "Well, it should have been corrected, but it was not."? The word "complacency" seems appropriate. 376. Mr Robinson: I do not accept that, Mr Close. 377. Mr Close: Forgive me, because it is my feeling that there was complacency, and I am trying to represent taxpayers. 378. Mr Robinson: That is not the impression that I am trying to convey. There is no direct link between supervisory negligence, which is a specific issue concerning supervision in the organisation, and notification. That is why I do not understate the importance of notification. I said that one of the benefits of early notification is that it reduces the risk of further fraud and of exposing the public purse to danger. 379. It also introduces objectivity, through the Department and the Comptroller and Auditor General. It is important, but I do not see that as supervisory negligence. 380. Mr Close: In my opinion, it is negligence, and no action has been taken on it. Over £100,000 has been lost to the public purse as a result of all this negligence. Your Department, like all other Departments, is under financial pressure. It will come as no surprise to you that £100,000 would pay for 50 hip replacements or 200 day-care surgeries in the Health Service. 381. We are under pressure, and the taxpayers of Northern Ireland want to see value for their money. They are certainly not seeing value for money; and your answers are unlikely to inspire them with confidence. That is disappointing. 382. Mr Robinson: Let me just repeat in conclusion - [Interruption]. 383. The Chairperson: A conclusion seems unlikely. We could go on indefinitely with questions and answers, but we must come to a conclusion. I shall give Mr Robinson the final say. 384. Mr Robinson: I have sought to convey clearly to the Committee that these losses are unacceptable to the Department, and that we have taken significant steps to prevent a reoccurrence. There is no complacency in my mind or in the mind of the senior people in the Department about that. 385. Mr Close: Actions speak louder than words. 386. The Chairperson: This has been a very sorry story, Mr Robinson. It is to your credit that both fraudsters were successfully prosecuted, and that is important. However, it is weakened by the fact that there is an inescapable impression that your failure to act effectively after the first fraud allowed the second to happen. 387. Moreover, the evidence causes us concern about complacency. You have assured us that there was none, but it smacks of complacency and of a failure to act promptly. Lessons have been learnt, which we shall address in our report. You should give very careful attention to your response to our report. It is crucial that the Committee has confidence in your Department's ability to handle fraud, and you have tried to reassure us of that. However, you must be aware that at this stage you still have some convincing to do. 388. Thank you for answering these very searching questions to the best of your ability. Correspondence of 28 February 2002, from Bruce Robinson, Accounting Officer of the Department of Enterprise, Trade and Investment.
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CORRESPONDENCE OF 24 APRIL 2002 FROM LEO O'REILLY TREASURY OFFICER OF ACCOUNTS PUBLIC ACCOUNTS COMMITTEE HEARING - INTERNAL FRAUD : LOCAL ENTERPRISE DEVELOPMENT UNIT During the above evidence session, I undertook to provide further information on two issues raised by the Committee. I am now writing to provide that information. Frauds greater than £100,000 Mr Beggs asked if I could let the Committee know how many internal frauds greater than £100,000 have been committed in the Northern Ireland public sector in the past 10 years. In addition to examining our internal records, we wrote to all Northern Ireland Departments to seek the relevant information which is summarised in the table below.
Cheque Fraud During the session the issue of frauds perpetrated by cheque was raised with both Mr Robinson and myself. Specifically the Chairperson asked if a certain fraud was perpetrated against a bank or LEDU. I am aware that Mr Robinson has written to the Committee on a number of issues of which this is one. I am in agreement with the advice he has put forward in his letter and have nothing further to add on the point. I trust that this additional information is useful to the Committee. Please do not hesitate to contact me if you require further clarification. |
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