Select Committee on Public Accounts Eleventh Report


The Committee of Public Accounts has agreed to the following Report:—



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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