Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 9 July 2001