Examination of Witnesses (Questions 1
- 19)
MONDAY 13 NOVEMBER 2000
SIR JOHN
BOURN, DR
NORMAN PERRY,
MR BILL
HENNESSY AND
MR RICHARD
CLARK
Chairman
1. This afternoon we are discussing the Comptroller
& Auditor General's Report on Overseeing Focus Housing Association.
With us today are Dr Norman Perry, the Chief Executive of the
Housing Corporation, and Mr Richard Clark, Chief Executive of
the Prime Focus Housing Association. Would you like to introduce
anybody else, Dr Perry?
(Dr Perry) Thank you, Chairman, if I
could introduce, on my right, Mr Bill Hennessy, who is the Assistant
Director (Supervision) at the Housing Corporation.
2. I do not think any of you have appeared before
us before, so welcome. It is not as terrible as people make out.
What I try to do as I go through the questions is I start off
by giving you the paragraph in the report it refers to. I am going
to start with paragraphs 2.1 and 2.2 of the Comptroller &
Auditor General's report. That makes clear that there were serious
and long-standing weaknesses in Focus's entire approach to controlling
development activity in its property services department. Dr Perry,
why did your regular reviews of Focus not bring this lax management
to light?
(Dr Perry) Chairman, at the time in the early 1990s
there had been relatively recently a new Housing Act and a new
system of finances for housing associations and the regulatory
system was adjusting to that at the time. Also, Focus itself was
a new organisation which had been formed from the work of the
three previous housing associations, so there was a certain amount
of bedding in going on. However, I think we have conceded and
worked with the NAO to say that there were deficiencies in the
regulatory system at the time. In particular, it was still based
very much on a system of box ticking and detailed checking and
sometimes the opportunity was not taken to stand back and look
at the whole picture of what the culture inside an organisation
was.
3. Thank you. I certainly would not hope that
we would expect this every time there is an organisational or
regulatory change otherwise we would need 200 meetings a year
and not 50. Others no doubt will want to come back to that subject.
I will press on to paragraph 2.8 which shows that in June 1994
the Corporation received information suggesting that Hartshorn
was involved with corruption, but these allegations were not fully
investigated, or fully reported to Focus. Why were these allegations
not followed up properly? Even if you were just ticking boxes
I would have thought someone would have noticed that.
(Dr Perry) The allegations came in an informal way
to an officer of the Corporation who reported them to the Director
of Regulation and Supervision at the Corporation's headquarters
where, again, we have agreed with the NAO that they were not followed
up properly at headquarters. The allegations were reported informally
to the Chief Executive of Focus, to Mr Clark, but they should
have been put in writing and they were not put in writing. Again,
there, it is clear that procedures which could have been followed
at the time were not correctly followed.
4. Can you be clear for the Committee what you
mean by "informally"? After all, if the National Audit
Office gets a telephone call from a whistle blower saying "there
is a fraud going on", it makes a note of it and investigates
it. Why did that not happen with your Director of Regulation and
Supervision?
(Dr Perry) The allegations concerned Hartshorn and
a couple of contractors and it turned out that those particular
allegations were untrue. It was the case that a much more rigorous
and vigorous examination of those allegations should have been
made at the time and was not.
5. Again, others will come back to that I am
quite sure. Let us move to paragraph 1.13 and Appendix 3. They
both remind us that in 1994 this Committee emphasised the importance
of giving close attention to the risks of fraud and irregularities
in registered social landlords, housing associations as they were
at the time. But at the very time that the Treasury Minute was
assuring our predecessors that you were on top of this issue,
corruption in Focus was ongoing and allegations, as you have just
told us, were being ignored. How do you explain this?
(Dr Perry) I think it was a coincidence of timing.
Certainly in the response to the previous PAC report the Corporation
had taken very seriously the need to tighten up very much on the
system of internal controls and, looking back on this particular
episode, had there been much greater targeting on the internal
controls within Focus there might have been a greater chance of
discovering the fraud. However, following the PAC and the new
guidelines, a lot of work took place in the months and years following
that incident, and as you say, Chairman, at that moment there
was a fraud going on in Focus which had not yet been discovered.
6. I should tell you that it is normally every
Permanent Secretary's nightmare that he comes to this Committee
and tells us "honestly, this will never happen again",
when in fact he has to come back the next year or the year after,
or in this case six years later, to explain precisely why it has
happened again. However, we will move on, I am sure others will
want to ask you about that. I want to move on to paragraph 1.14
which tells us that registered social landlords have received
some £22 billion in public funds. Especially in the light
of this case, does the Corporation now agree that landlords handling
money provided by Parliament should be accountable to this Committee?
(Dr Perry) In a very real sense, Chairman, that is
not a question for the Corporation. In addition to the £22
billion worth of public money, there is £17 billion worth
of private finance that has been raised since the 1988 Act. Housing
associations as they then were, as you say, registered social
landlords now, are not technically public bodies, they are voluntary
organisations, some of whom are regulated by the Charities Commission,
others by the Registrar of Friendly Societies, and the regulator
and the body to whom they are accountable is the Housing Corporation.
7. I am afraid you will find a large number
of elements of Government these days have private finance involved,
after all it was a major strategy of the Government, and quite
rightly. You will also find that even private organisations like
Camelot now have written into the Lottery Act that they have to
give information and be accountable via the NAO to Parliament
for certain aspects of what they do. £22 billion is a lot
of public money. I am afraid that argument does not stand up.
(Dr Perry) Clearly, Chairman, that is your view. From
our perspective we do believe that the Corporation has been tasked
by Parliament to be the regulator of the social housing sector.
The 1996 Act gave us greater powers to seek out information and
provide it to the NAO because the Corporation, of course, is accountable
to Parliament and to this Committee. But whether or not individual
RSLs should be directly accountable is clearly a matter on which
our sponsoring department, the DETR, would give us our instructions.
8. You should not confuse the NAO oversight
with regulators. The NAO investigates a number of regulators on
behalf of Parliament and it makes no difference that they are
accountable to you and through you to the Minister. Every department
of Government is in that position and almost every department
in Government comes under NAO scrutiny. However, I will allow
others to come back on that if they wish. I want to give you a
small rest, Dr Perry, while I turn to Mr Clark, if I may. I want
to go back to 2.1 and 2.2 again, Mr Clark. That identified long-standing
weaknesses in the procedures of your Association's property services
department. How would you characterise the quality of management
and Board at the Association before you arrived in 1994?
(Mr Clark) The dominant issue, I think, was that the
organisation was heavily committed to growth. It was not alone
in that, in the period between 1988 and 1995 there was a dominant
ethos of growing at all costs and perhaps the end justifying the
means. The result of that was that speed of development, speed
of acquisition, and general fleetness of foot were valued over
internal controls. To a degree the relationship between the Board
of Management, which is the governing body obviously, and the
staff was more arm's length than was healthy and quite a lot of
activities, including some of the ones we have before us today,
were kept away from the Board of Management who were satisfied
with the arm's length assurances they were given.
9. A rather long answer. The norm, as I understand
it, in the private sector is that high growth companies are not
all corrupt or do not all have fraudulent cases within them. Could
I ask you again, just tell me what do you think the quality of
the management was at the time? Was it poor quality or lax?
(Mr Clark) I think some of the controls were lax.
I would not describe the overall quality of management altogether
as poor.
10. Figure 5 shows four occasions on which the
Association received indications of problems before the corruption
was discovered in 1995. Why did it not act earlier on that information?
You cannot put that down to growth, surely?
(Mr Clark) No. Ignoring the warnings was indicative
of the commitment of the senior staff of the organisation prior
to my arrival of pursuing its development objectives and not being
interested in turning over stones in order to check whether or
not things were happening which were not acceptable.
11. Again, I suspect others will come back on
that. Let me turn to figure 3 on page eight which shows that Focus
has lost some £1.5 million by overpaying for properties and
from spending on repairs that should not have been required. Have
you sought to recover any of this money from those responsible—from
Ram, from your corrupt employees, from architects, valuers and
other dealers? If not, why not?
(Mr Clark) We carried out a series of assessments
as to which parties were, if you like, worth suing and we had
a special legal sub-committee set up to look at these issues.
In the event, the only major party that the Board and I considered
merited legal action was our solicitors. For various reasons we
did not pursue recovery action against the other parties. The
legal action against the solicitors was not successful, partly
because the plea was that the culture of the organisation was
contributory negligence and, therefore, what was quite a large
claim for recovery costs from the solicitors was not successful.
12. Contributory negligence sounds like an answer
to my previous question. Can I ask you what criteria you applied
in making judgments as to what should be pursued? There is a difference
between an organisation that has a large component of public money
and private money. If it is private money understandably you may
make a judgment that it is not worth it, you will not win or some
such judgment like that, but when it is public money it is actually
very important to make the point to make sure that people do not
walk away with public money without any risk of loss.
(Mr Clark) We carried out assessments as to whether
or not we believed that we would recover significant sums from
individuals. It was not a lack of resolve on the part of the Association,
we would have been prepared to take legal action, but we were
obviously concerned as a charity that we did not incur very, very
large legal bills without succeeding in the actions. There were
a significant number of parties whose assets were in serious doubt.
There were other reasons for not pursuing other individuals. We
were not afraid of pursuing a point, and we certainly pursued
the hardest target which was our solicitors.
13. Again, I will move on. It seems remarkable
to me that no-one in authority in the Association noticed that
there was anything wrong until the allegations were made in late
1995. What action was taken in respect of those senior managers
responsible for supervising Hartshorn and Hinson in the early
1990s?
(Mr Clark) After I began in the Association?
14. At any point.
(Mr Clark) Over the period from 1994-97 the entire
senior management structure of our development department was
removed and there were, in fact, something like 13 departures,
mostly at senior level.
15. Can we be clear: were they sacked or did
they just move on?
(Mr Clark) There were four dismissals, a series of
other disciplinaries and resignations.
16. Good, thank you, that is helpful. I come
back to you, Dr Perry, having given you a rest. This is the question,
as I say, that Permanent Secretaries hate coming back after. What
assurance can you give the Committee that corruption of the type
described in the report will not happen again? Not just with Focus
but with your other clients as well.
(Dr Perry) It is always very difficult, Chairman,
to give a guarantee that (a) there will not ever be collusive
criminal conspiracies within organisations in receipt of public
money, or (b) that the regulator can discover them. The prime
responsibility for detecting and preventing fraud lies with the
management and the board of the particular organisation, so the
existence of internal controls within the registered social landlord
is the best assurance that there will not be repetitions of criminal
fraud. Certainly since the early 1990s, since the point you referred
to after the last PAC hearing, there have been a whole series
of advances in the regulatory framework which have stressed, firstly,
an increasing targeting of risk so that regulation is now based
much more on the risks that are perceived by the regulatory authority
in a particular RSL and, secondly, on assurances about the nature
of internal controls. In this particular Focus episode it was
not apparent until afterwards, for example, that internal audit
reports which might have revealed concerns amongst the internal
audit staff had not actually reached the Board, had been kept
away from the Board. We are much keener now and much more rigorous
in ensuring that the internal audit function is strong and that
it has a direct line to the Board and that we are in touch with
its findings.
Chairman: Thank you. I will widen it out now,
let us move to Nigel Griffiths.
Mr Griffiths
17. Good afternoon, gentlemen. Does this not
appear to you to be a classic scam of somebody with considerable
responsibility over funding receiving corrupt inducements from
the property developer at the same time as the valuer was overvaluing
the properties and an incompetent architect was certifying the
level of repairs?
(Dr Perry) I do not know, Mr Griffiths, whether it
was a classic scam but it certainly was a scam and essentially
two employees in a position of trust betrayed that trust. They
falsified documents, as I understand it, and Mr Clark could elaborate.
What made it very difficult was that the process was collusive.
Indeed, when the prosecution took place the police took some time
to actually put the case together, it was not easy to find out.
18. Do you not think that you and your predecessors
had a duty to look out for that sort of collusion and fraud?
(Dr Perry) I think I and my predecessors certainly
have an obligation to try to create a regulatory system that diminishes
the opportunity, tries to minimise the probability of these things
happening but, as I said in reply to the Chairman a moment ago,
at the end of the day the Housing Corporation is not a shadow
director of a registered social landlord and the primary responsibility
must lie with the management and the board of the individual housing
association.
19. Do you have a duty to do diligent spot checks
and adopt other methods?
(Dr Perry) Yes, we do, and this is done. Whereas up
to about the mid-1990s, if you like, regulation was relatively
predictable, you knew roughly when the Housing Corporation was
going to come and what questions they were going to ask and what
boxes would need to be ticked, now we have moved on to a system
of what we call lead regulation where there are specialist people
within the Corporation who have a knowledge of the entire spectrum
of work of the larger RSLs, the 350 or so that control 82 per
cent of all the housing, and there is a much closer regulatory
relationship than there ever used to be before.
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