ELEVENTH REPORT
The Committee of Public Accounts has agreed to
the following Report:—
THE HOUSING CORPORATION: OVERSEEING FOCUS
HOUSING ASSOCIATION
INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS
1. In April 2000, two former employees of Focus Housing
Association ("Focus"),[1]
John Hartshorn and Keith Hinson, and a property dealer, Darshan
Ram, were sentenced at Birmingham Crown Court to prison terms
for corruption relating to the purchase by Focus of homes from
Ram. Between 1991 and 1995 Focus had bought at least 47 houses
from Ram for £1.8 million, in many cases at prices above
market value. Some of these homes also required substantial repair
despite having been certified as "satisfactory" prior
to purchase by an architect engaged by Focus. Hartshorn and Hinson
received at least £5,450 and £16,300 respectively from
Ram for the favourable treatment shown to him. Ram was sentenced
to 18 months imprisonment, Hartshorn to 12 months and Hinson to
9 months.[2]
2. Focus is the largest registered social landlord
(hereafter referred to as "housing associations") in
the West Midlands. In 1995, when the corruption came to light,
Focus owned over 11,000 properties in Birmingham, Coventry and
the surrounding districts. Like all housing associations Focus
is regulated by the Housing Corporation ("the Corporation"),
a non-departmental public body sponsored by the Department of
the Environment, Transport and the Regions ("the Department").
The Corporation also distributes Government grants to housing
associations, which by 1999 had received a total of some £22 billion
in such grants from the Corporation and local authorities.[3]
3. On the basis of a report by the Comptroller and
Auditor General, we examined the corruption at Focus, the Housing
Corporation's oversight and regulatory regime during and after
the period in which the corruption took place, and the wider implications
of the Focus case. Three main points emerge from our examination.
- The Housing Corporation should have shown
greater urgency in improving its regulation of housing associations.
The Corporation acknowledged inadequacies in its regulation of
housing associations in the early 1990s, particularly in assessing
their internal controls. These weaknesses may have made it easier
for the corruption at Focus to occur. The Corporation began to
improve its regulation following a report by our predecessors
in 1994.[4]
But progress has been slow, even after the discovery of the corruption
at Focus at the end of 1995, and the improvements were not completed
until 1998. To protect public funds and the interests of tenants
the Corporation should have monitored more closely the standards
of corporate governance within Focus.
- Suspected impropriety or irregularity should
be investigated promptly and thoroughly to protect public funds.
This corruption was discovered as a result of an investigation
prompted by allegations received by Focus, but only after Focus
and the Housing Corporation had between them received no fewer
than six earlier indications of possible impropriety. The corruption
might have been discovered earlier, and the losses arising reduced,
if Focus and the Corporation had investigated allegations properly.
- The Corporation's action in delaying the National
Audit Office enquiry is unacceptable.
The Corporation took six months before agreeing that the National
Audit Office should have access to Focus, thus impeding Parliamentary
scrutiny of corruption involving public funds. Currently the National
Audit Office does not have a right of access to housing associations
although access may be agreed on a case by case basis with the
Corporation. The Focus case underlines the need for a statutory
right of access to allow the National Audit Office to report to
Parliament on the proper use of public funds.
4. Our more specific conclusions and recommendations
are as follows.
The corruption and overpayments at Focus
(i) The corruption at Focus, which came
to light in 1995, led to losses of some £1.5 million. Although
Focus has recovered £250,000 from its insurers, most of these
losses have been borne by tenants. These losses might have been
lower, or avoided altogether, had Focus management responded more
thoroughly to indications of impropriety raised with Focus on
four earlier occasions in the period 1992-94, and if the current
Chief Executive had been made aware of these earlier incidents
on his appointment in 1994. All housing associations should ensure
that allegations of impropriety are properly investigated, and
the outcome reported promptly to the Housing Corporation (paragraph
14).
(ii) The corruption was made possible by
weak internal controls at Focus, poor supervision of Focus's officers
by its Management Committee, a general disregard in parts of Focus
for proper standards of conduct and control, and an ethos which
emphasised speed and expansion over the need for sound internal
controls. Thus during a period in which Focus received grants
from the Housing Corporation totalling £104 million, basic
standards of corporate governance were not in place at the Association
(paragraph 15).
(iii) It was not possible to establish whether
corruption had occurred at a predecessor association of which
Hartshorn had been an employee, because key property records could
not be located. Housing associations should keep records and documents
in safe custody at all times, and the Housing Corporation should
confirm that they are doing so, particularly when associations
are being wound up or merged (paragraph 16).
(iv) Weaknesses in the internal control
framework at Focus contributed to the failure of Focus's legal
action against its solicitors, thus further emphasising the importance
of housing associations operating sound internal control systems.
The Association did not pursue legal action against its other
advisors such as valuers and architects on the basis that it was
unlikely to recover any monies. Whilst recognising the need to
assess the costs of legal action against the likely recompense,
recipients of public money should seek recovery from negligent
contractors wherever there is a reasonable prospect of success
(paragraph 17).
The Corporation's oversight
(v) Acknowledged weaknesses in the Housing
Corporation's oversight of Focus in the period from 1991 to 1995
allowed the corruption to go undetected. Regulatory procedures
failed to recognise the lax management culture and poor standards
of internal control at Focus, nor did the Corporation ascertain
whether corrective action had been taken by Focus to address the
procedural weaknesses which regulatory supervision had identified.
The Corporation took appropriate action to supervise Focus closely
once the corruption was discovered, but too late, leaving Focus's
tenants to bear the losses (paragraph 28).
(vi) The Corporation's actions fell below
the standards expected of a regulator in other respects. It handled
allegations of impropriety received in 1993 and 1994 in an unsystematic
and informal way; nor did it inform Focus that Hartshorn had left
a previous association under suspicion of similar impropriety.
The Corporation should provide its staff with clear guidance on
the action to be taken when allegations of impropriety are received,
and ensure that all allegations are properly investigated (paragraph
29).
(vii) The Corporation has revised its regulatory
arrangements to improve its review of the standards of management
and governance within housing associations. The Corporation should
monitor closely trends in these standards and in levels of reported
impropriety at housing associations, and review its arrangements
periodically in the light of this monitoring (paragraph 30).
The wider implications of the Focus case
(viii) Following the discovery of the corruption
at Focus, the Corporation sought to establish whether similar
improprieties had occurred at other housing associations in the
West Midlands. The Inland Revenue's Valuation Office Agency refused
the Corporation's request for access to information about similar
property transactions on grounds of taxpayer confidentiality.
Maintaining such confidentiality is important, but so is the need
to protect public funds. The Cabinet Office's Performance and
Innovation Unit's current study of privacy and data sharing should
consider whether there are cases like Focus where carefully controlled
disclosure would be in the overall public interest (paragraph
43).
(ix) As a result, the Corporation relied
largely on information provided by housing associations' solicitors,
in spite of the possibility that solicitors might themselves have
been involved in improprieties. In investigating such cases, the
Corporation should seek to draw on as a wide range of information
as possible, including inspecting records directly at housing
associations (paragraph 44).
(x) The current position whereby the National
Audit Office must negotiate access to housing associations in
receipt of public monies on a case by case basis with the Corporation
is unsatisfactory. It places an unwarranted restriction on the
ability of the National Audit Office to report to Parliament on
the proper use of the substantial public funds that have been
received by housing associations (paragraph 45).
(xi) We do not accept the Corporation's
view that National Audit Office access to housing associations
would overlap with the regulatory role of the Corporation. The
Corporation has executive authority to direct the behaviour and
actions of associations. The National Audit Office has no regulatory
authority: its role is to report to Parliament on the proper use
of public funds. A statutory right of access to associations is
essential to enable the National Audit Office to report to Parliament
independently of the Corporation's executive responsibilities
(paragraph 46).
(xii) Through an apparent oversight, the
Corporation is not designated currently under the Public Interest
Disclosure Act 1998 which protects people making disclosures in
the public interest to bodies designated under the Act. We note
that the Department has now asked the Department of Trade and
Industry to designate the Corporation so that employees and board
members concerned about possible improprieties at housing associations
can report them to the Corporation with the protection of the
Act (paragraph 47).
(xiii) Although the Corporation intends
to provide details of the lessons learned from the Focus case
to other housing associations, and the names of people who have
been the subject of legal or disciplinary action, it has no plans
to pass on the names of former employees or professional advisors
of Focus suspected of negligence or impropriety but against whom
no action was taken. We understand the Corporation's concern to
be fair to those who have not been found guilty of any wrongdoing.
Poor or negligent service by employees or professional advisors
can and should be pursued, however, through reporting such matters
to advisors' professional bodies (paragraph 48).
1 Now known as Prime Focus Housing Association Back
2 C&AG's
Report (HC 714, 1999-2000), para 1 Back
3 ibid,
paras 1.2, 1.8, 1.10 and 1.14 Back
4 20th
Report from the Committee of Public Accounts, 1993-94 (HC 204
(93-94)) Back
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