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Allegations of Impropriety at Transend Worldwide

Report of the

Controller and Auditor-General

Tumuaki o te Mana Arotake

Certain Matters Arising from
Allegations of Impropriety at
Transend Worldwide Limited

December 2002

Overview by the Controller and Auditor-General

This report concerns Transend Worldwide Limited (Transend), a wholly-owned subsidiary of New Zealand Post Limited (New Zealand Post).

Transend is a company that is responsible for marketing to overseas postal agencies the expertise in postal reform and operating a modern postal system that has been built up within New Zealand Post. Until September 2001, Transend was also responsible for New Zealand Post’s international mail services, by far the major business of the company. The Board of New Zealand Post (the Board) governs Transend.

Following its 2000-01 financial review of New Zealand Post, the Finance and Expenditure Committee recommended that I provide assurance that Transend has made improvements to its policies and procedures, following allegations about its operations. The Committee’s concerns related mainly to the adequacy of the process that the Board had followed to investigate the allegations and whether any problems identified had been fixed.

This report is about:

the governance arrangements that the Board has for Transend;

the investigation process instituted by the Board in March 2001, following the receipt by a Board member of two anonymous letters alleging wrongdoing within Transend;

the Board’s response to the results of the investigation; and

the extent to which the problems identified have been addressed.

In carrying out our inquiry, we examined:

the adequacy of governance and accountability arrangements for Transend;

the investigation process that the Board undertook; and

Transend’s policies and procedures for letting tenders, compliance with financial delegations, and controls over travel, accommodation and business expenses.

The allegations about Transend’s operations have played out in the public domain over the past two years. In preparing this report, we felt that it was important to clearly outline the sequence of events and provide assurance that the necessary improvements have been made to Transend’s policies, procedures, and operations.


Governance and Oversight of Transend

The current arrangements for New Zealand Post to exercise governance and oversight of Transend, and for Transend to be accountable for its actions to New Zealand Post, are appropriate.

During the period of events described in this report, the accountability arrangements did not always work as intended. The Board did not always receive reports providing realistic assessments of issues facing Transend. Several enhancements were made later to improve the arrangements.

During the period November 2000 to June 2001, six new members were appointed to the eight-member Board to replace those members whose term had expired. Having six new Board members over a period of eight months disrupted the continuity of the Board’s consideration of very major issues. For the future, we believe it desirable that expiry of the term of appointment of members of the Board of a State-owned enterprise be spaced at longer intervals.

The Process to Identify and Investigate the Allegations

The process that the Board adopted in early 2001 to identify and investigate the anonymous allegations about Transend’s operations was complex and involved a high degree of confidentiality. We are in no doubt that the Board took the anonymous allegations very seriously.

The Board took legal advice on how to communicate with the anonymous employees and gather information from them on a confidential basis. The process used to identify the allegations generally followed this legal advice. The process led to staff nominating other staff whom they felt could be approached confidentially for information, which resulted in a climate of mistrust within Transend.

The Board completed the process of identifying the allegations and undertook further enquiries itself and through PricewaterhouseCoopers (PwC). After reviewing the PwC report, the Board concluded that there were no problems of impropriety but that improvements in compliance with procedures were required. The Board decided that it had satisfactorily investigated the allegations and that further enquiry was not necessary.

However, in our view, a significant deficiency in the Board’s approach was that it did not consider or seek legal advice on how the principles of natural justice would be accorded to the Transend staff who were the subject of the allegations. Those staff were never given any opportunity to respond.

New Zealand Post took appropriate steps to address the issues arising from the investigation of the allegations. The Board sought a number of reports from the Chief Executive and the Chief Financial Officer including the steps taken to strengthen policy compliance, financial management governance and reporting to the Board.

Reasonableness of Transend Travel Expenditure

The substantive changes to Transend’s policies and procedures were made only after the appointment of the current Acting Managing Director on 12 March 2002. In our review of Transend expenditure, we found that in the period before his appointment, there had been a failure by the management of Transend to consider whether the expenditure that was being incurred by some staff was reasonable.

The Transend travel policy at this time differed from New Zealand Post policy in some key respects. The Board approved some but not all exceptions to the New Zealand Post policy in September 2000. Some parts of the Transend policy were not appropriate. The policies allowed a small number of Transend staff to incur expenditure that was wasteful and excessive.

Since late-2001, Transend staff numbers have been considerably reduced as it ensures that its expenditure is aligned with revenue. The senior management of Transend has been mostly replaced. Under the new management, there is a clear focus on consultancy services. Transend’s travel policy has been aligned with that of New Zealand Post and expenditure is closely monitored.

Our review of travel, accommodation, and business expenditure since the changes showed adherence to the latest Transend policy. The latest Transend policy needs to provide further guidance on what is acceptable hotel accommodation, and meal and entertainment expenditure.

Lessons to be Learned

We think there are important lessons for all public entities arising from our report, including:

The governance structures for subsidiaries must be closely monitored to ensure that they work effectively. In the case of subsidiaries where the parent board has ultimate responsibility, there must be comprehensive and realistic reporting to the parent board about the subsidiary’s activities.

Subsidiaries operating overseas pose particular risks that must be carefully managed.

In general, the same policies and procedures should apply to the group (parent and subsidiaries). Any exceptions should be approved at an appropriate level. The need for the exceptions should be monitored carefully.

Entities must ensure that they have adequate procedures in place to regularly examine compliance with policies and delegations and whether they remain appropriate.

Credit card spending continues to be an area of risk and must be closely scrutinised.

Public entities should encourage their employees to use the procedures set out in the Protected Disclosures Act 2000 (including their own internal procedures established under the Act) for making disclosures of serious wrongdoing, unless there is a sound reason for using alternative procedures. They should ensure that the procedures are adequately communicated to staff.

These are matters that New Zealand Post has addressed in its policy and practice.

An inquiry of this nature can be difficult for all parties involved. I acknowledge the assistance received from New Zealand Post in carrying out our inquiry. Access was provided to all the information we needed. Everyone we spoke to was at all times helpful and co-operative.

K B Brady
Controller and Auditor-General

16 December 2002



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