As at 4 February 2022, MSD has conducted 3,074 pre-payment checks of applications involving more than 80 employees, 4,026 pre-payment checks on integrity exceptions, 3,789 random post-payment checks, and 3,906 targeted post payment checks.

COMMENT: Compare with 750,000 recipients and about 1.2m applications.

Auditor-General’s report on management of the wage subsidy.   May 2021

Audits of applications, carried out after payments were made, consisted mainly of verbal confirmation of information from employers and, in some cases, employees. These reviews focused on checking compliance with eligibility criteria and confirming that applicants understood associated obligations.

Although the Ministry of Social Development has publicly described these reviews as audits, in my view they are not audits. In most cases, they did not involve substantiating the facts using independent, or at least documented, information I am not persuaded that the reviews provide enough confidence that all applications that merit further investigation have been identified. As at 5 March 2021, 1017 cases had been referred for investigation.  I have recommended that the Ministry of Social Development test a sample of these reviews against documentary evidence held by applicants.

4.14 Although there was some discussion of the risk associated with the high-trust approach to the Scheme in Cabinet papers and the official documentation available to us, we did not see any information that suggested the risk appetite and thresholds for the Scheme had been clearly defined. Additional clarity might have further informed the design of, and decisions about, the post-payment assurance checks critical to the integrity of the Scheme. We accept that in these circumstances this would have been challenging, and the early advice to Ministers about different delivery options, in effect, explored different levels of risk.

4.5 Most of the post-payment reviews involved phone conversations with people who received the subsidy payment. How accurately those conversations reflect the recipient’s actual situation – for example, as recorded in their business accounts – is unknown. In our view, the reliability of those reviews should be tested against additional evidence. 4.6 Some post-payment review and investigation work has identified instances of abuse of the Scheme. At the time of our audit, the Ministry of Social Development anticipated a number of prosecutions, but none had yet entered the court system.

4.63 We use the terms “reviews” and “review work” to describe the post-payment work. We do not consider that the post-payment work carried out provides the level of assurance we expect of an audit. 4.64 This is because the work that was carried out did not routinely involve substantiation of information against a secondary source, such as requesting and reviewing documents to verify information provided verbally. 4.65 In our view, it is possible that the post-payment work is less than what Cabinet would have expected when it noted the possibility of the Ministry of Social Development doing post-payment audit work. Similarly, the Ministry’s use of the term “audit” to describe its review work could be misleading. As we were completing this report, the Ministry confirmed that it has changed its terminology and now refers to the work as integrity checks or reviews.

4.70 The reviews did not involve substantive review of documentary evidence, such as financial accounts. Most organisations prepare some form of financial statements. These, or similar supporting information, could have been asked for when an application for the subsidy payment was made (we understand that this was done by the Australian Government for its JobKeeper wage subsidy) or as part of the post-payment review activity.

4.71 Not requesting this type of information before or after payment means that there has been no objective validation of an applicant’s compliance with the revenue reduction requirement. In our view, an audit should, as a minimum, include verifying the main eligibility criteria against relevant documentary evidence. This should have been done for a sample of applications. Given the significant amount of public money paid and the fact that audit work could be carried out after payment, this is an appropriate step to take.

4.82 Post-payment reviews have led to 1017 cases being referred for investigation as at 5 March 2021. At the time of our audit, the Ministry of Social Development expected that its investigation work was likely to continue for another 12 to 18 months.

4.85 We understand that public organisations’ ongoing integrity and prosecution work continues to divert resources from other work. However, in our view, it is important for abuse of the Scheme to be identified and appropriate action taken, including prosecution if necessary.

2.49 In the Ministry of Social Development’s case, resources will continue to be diverted from investigating benefit fraud for many months. We understand that the public organisations involved in administering the Scheme want to get back to their core services as quickly as possible. However, we are concerned that this will disincentivise continued efforts on post-payment integrity work. This work is important to provide assurance to Parliament and the public that reasonable steps are being taken to ensure that the significant public money associated with the Scheme has been spent appropriately. The Ministry has confirmed that it intends to use resources from Inland Revenue to assist with its integrity work on applications for subsidy payments, and Inland Revenue has agreed in principle to this.

3.12 There has been considerable media coverage of, and public interest in, some private organisations that received a subsidy payment. This is particularly so for those that, despite experiencing or projecting a reduction in revenue, have nevertheless paid a dividend to shareholders or otherwise shown financial robustness.

3.13 This does not necessarily prevent private organisations from being eligible for the subsidy. We do not audit private organisations, and we have not assessed the eligibility of any private organisation that received a subsidy payment.

(MSD OIA RESPONSE 26 February 2021)

“Wage Subsidy audits are not considered to be full technical or financial audits. Rather, the Ministry’s audit programmes involve desk-based reviews of open source public information and contacting the applicants to discuss their applications.”

The audits are really only checks and conversations by unqualified staff. Two requests to find out how many staff are working on wage subsidy fraud and how many on Benefit fraud have not been answered.

The checks are only as good as what it has been decided to check. There have been no checks to determine whether a drop in revenue was genuine or whether a business was operating normally during any weeks for which the wage subsidy was paid.

“As per the above declarations, we can advise that there was no requirement that employees abstain from work during the period their employer was in receipt of the Wage Subsidy. Furthermore, we can advise that as part of the Ministry’s audit programme, auditors were required to ask employers to confirm that their employees had given them permission to apply for the Wage Subsidy on their behalf.”

NOTE: Treasury advice in March 2020 was based on businesses being shut and having to remain connected to employees. The specified loss of revenue had to be “attributable to the Covid-19 outbreak” so the vast majority of businesses would only be adversely affected during a lockdown if their staff were at home and unable to do any work for the business.

The following is stated in the Declaration signed by applicants:

“before making your application for the subsidy, you have taken active steps to mitigate the impact of COVID-19 on your business activities  Some steps are listed including using cash reserves, getting assistance from your bank etc.”

There is a long list of obligations under the heading “Your obligations to use the subsidy to retain and pay your employees”  These conditions in the Declaration make it very clear that to get and retain the wage subsidy a business must be adversely affected by Covid-19 and has no other way of retaining its employees   The big surge in business revenue after the lockdown for most businesses is the opposite of this and subsidy payments would never normally be made under these circumstances.

Recipients should have been asked whether employees had given their consent in writing to a list of conditions, as required.  If employees had done this, they would not have been happy about having to work very hard to catch up in the weeks for which their employer had received a wage subsidy.

“However, it is worth noting that a business’s failure to meet their obligations under the Wage Subsidy scheme does not always mean that they sought to intentionally mislead the Ministry. From the audits conducted so far, the Ministry has found that in the vast majority of cases, employers are doing the right thing. In many cases where entitlements have been wrongly claimed, it is due to uncertainty about the eligibility criteria, rather than deliberate attempts at deception.”

NOTE: Since the first OIA reply in June 2020, the policy seems to have been to explain away and excuse fraud but in some bad cases to ask for a repayment and to not recommend prosecution. The Declaration did say that civil proceedings could be taken.

The Ministry has not instructed auditors that the ‘changes’ which affect eligibility include the return to normal or above normal work and revenue after 5 or 7 weeks of the 12 week period for which the Wage Subsidy paid, as this was not a requirement to receive the Wage Subsidy.”

COMMENT:  The wage subsidy was paid for 12 weeks in advance and was not connected to eligibility for the subsidy.  An honest recipient would have regarded the return to normal or above normal work and revenue after 5 or 7 weeks of the 12 week period for which the Wage Subsidy was paid as a major change and would have notified the MSD and would have repaid part or all of the wage subsidy. The specified loss of revenue had to be “attributable to the Covid-19 outbreak’ so the vast majority of businesses would only be adversely affected during a lockdown.  The lockdown turned out to be shorter than expected.  See also earlier notes above.

It was not necessary to state that any overpayment must be repaid because the clause about changes covered this.

“We can further advise that auditors were not instructed that ‘changes’ which affect eligibility include a rise in revenue above 70% (for the original Wage Subsidy) and 60% (for the Wage Subsidy Extension) during a 12-or 8-week period, respectively. As indicated earlier, reductions in revenue for the purposes of assessing Wage Subsidy and Wage Subsidy Extension eligibility were assessed over the period of a month.”

NOTE:  Requiring revenue to be down over 4 weeks but paying in advance for 12 or 8 weeks was a deliberate mistake.  From the resurgence wage subsidy payments are only being made two weeks in advance so overpayments will not occur.

It is clear from the documents provided by MSD that audit staff concentrate on relatively minor matters and during a conversation only ask a few general questions about compliance with major requirements and do not ask the employer to verify anything.

A MSD Report on audit processes dated 15 July 2020 contained the following statements:

“Prepayment checks

10.5 where an employer has 80+ employees, employee ’data is reconciled with Inland Revenue and a conversation is required with the employer prior to  payment to  make sure employers are aware of the eligibility criteria and their obligations.

Post payment audits  

12. Insights from audits completed to date indicate that-the- vast majority of applicants have applied correctly. In a small number of cases MSD have requested applicants refund subsidy payments where the audit has determined they do not qualify.

21. MSD has developed an investigation approach for the scheme, which differs from that used to investigate benefit fraud.

26.  “Criminal prosecution will be considered in the most serious cases. Any prosecutions relating to the payment of the subsidies will be led by MSD or other agencies. ”

COMMENT:   An audit normally involves making random checks within an organisation to ensure that accounting and other procedures have been correctly followed.   Having a desk check and a conversation with 0.001% of recipients from different organisations is not an audit. At the date when the report was written only a few post payment checks had been done. The claim that the vast majority had applied correctly was only wishful thinking.

The investigation approach for the scheme which differs from that used to investigate benefit fraud involves ignoring overpayments and reported abuse and not checking on the main compliance clauses.

(MSD OIA  response 9 March 2021)

“Unlike Wage Subsidy recipients, beneficiaries are not randomly selected by the Ministry for integrity checks. However, benefit recipients are obliged to advise the Ministry of any change in circumstances that might affect their entitlement to a benefit. Also, a case manager may review a benefit at any time to ensure the client still qualifies and is receiving the correct rate of payment. When, for example, it is bought to the Ministry’s attention that a client has received an overpayment of his or her benefit, usually a debt will be established, and we will discuss repayment with a client.”

COMMENT:    Wage subsidy recipients were also required to notify any change in circumstances. The original wage subsidy was overpaid but it was not a case of establishing a debt and requesting repayment as usually happens with a Benefit.

The MSD has advised that it has carried out over 10,500 wage subsidy audits but these are not thorough or accounting audits in the conventional sense  of the word  because they are just desk checks of information on hand. These checks include pre payment checks and dealing with over 4700 complaints. Questions about the number of MSD staff carrying out Benefit audits and the number carrying out wage subsidy audits have not been answered.

The MSD distinguishes between wage subsidy audits, investigations and allegations. It does seem that audit checks or allegations can lead to investigations.

THE MSD KNOWS THAT OVERPAYMENTS WERE MADE AND THERE WAS WIDESPREAD ABUSE OF THE WAGE SUBSIDY BUT IT HAS CHOSEN TO DO ALMOST NOTHING ABOUT THIS.

MSD OIA reply 17 December

AUDITS

The following quotes show that what is called an audit is really only a check.  If a recipient claims that they did not understand or know what was required, they are not investigated. Less than 10% of audit checks result in an investigation and no prosecution action has been taken.

“The audit process considers all aspects of an applicant’s entitlement. These are deskbased audits which can involve reviewing open source information, contacting the applicant to discuss their eligibility and contacting other agencies to confirm information.

Responses to audits are on a case-by-case basis, depending on:

Does the applicant understand their obligations?

Does the applicant meet the qualification criteria?

Does the applicant know they must pass the wage subsidy on to employees?

Has there been a payment in excess of entitlement?

If so, an assessment would be completed, and the employer would be advised of the amount of any refund required.

What is the nature of how any overpayment may have occurred?

Is there evidence of fraud, i.e. providing false information or deliberately withholding information?

If so, the matter would be referred for investigation.

The following quote and later data shows that most of the claimed audits were really only quick pre-payment checks.

“There have been 10,540 audits completed as at 20 November 2020; this includes prepayment audits, as well as random and targeted audits”

“Our wage subsidy audit programme has indicated that the vast majority of applicants for wage subsidies did the right thing and were paid correctly.

The Ministry informed applicants that they would be required to repay subsidy if they were not or stopped being eligible. Most refunds have been made voluntarily.

This may be because they have found that, they did not in fact qualify for the subsidy or, in some cases they decided that they did not require the subsidy despite qualifying for it. There is a range of reasons why a business may make a refund. For example, this may have been where an employer did not fully understand the criteria for payment, they did not suffer the expected loss of revenue or where employees for whom subsidy was paid, subsequently left their employment”

( MSD OIA reply 15 February 2021 )

“There are no written instructions given to staff regarding what complaints to investigate and what investigations should be referred for prosecution.’

“As at 11 December 2020, from across audits, investigations and allegations, $44.6m had been requested and $21.3m has been received. A total of $536.4m of wage subsidy had been refunded.’

As at 26 January 2021, 992 cases have been referred for investigation. Of these, 405 cases were initiated following an allegation of Wage Subsidy misuse.

The remaining cases referred for investigation were identified through targeted risk analysis or joint analysis with other agencies. Although the Ministry has carried out some random audits, none of these audits resulted in an investigation but some did result in requests for repayment.

As at 11 December 2020, 398 investigations had been resolved and a further 354 were underway. 148 investigations resulted in a request for repayment, totalling $2.9m. To date, $89,352 has been received.

As a result of the whole process, at 11 December $44.6m in repayments had been requested and $21.3m had been received.  A total of $536 million had been repaid so $515 million of this was voluntary. These repayments are just the tip of the iceberg and indicate that over $5,000 million could be repaid if the Government wrote to recipients.

(MSD OIA  response 9 March 2021 Media)

“As at 5 February 2021, the Ministry has completed 3,751 random Wage Subsidy ‘audits’ (i.e. since the Wage Subsidy schemes were established on 27 March 2020.

As at 5 February 2021, 4,717 complaints concerning recipients of the Wage Subsidy have been received by the Ministry (i.e. since the Wage Subsidy schemes were established on 27 March 2020). Of these, 3,273 were referred for further integrity checks. As at 5 February 2021, 6010 public allegations of benefit or social housing fraud have been received by the Ministry since 1 April 2020.”

COMMENT:  About 30% of wage subsidy complaints were not dealt with. It was not a case of establishing a debt and requesting repayment as usually happens with a Benefit.

The following quote is from a submission to the Finance and Expenditure Committee of Parliament and claims that the post payment checks were pragmatic and reasonable. The checks were called audits for most of the time prior to the submission being made in mid 2021 and not just initially as claimed.

“We accept the point being made by the Auditor-General that MSD’s reviews of wage subsidy applications are not audits, and that calling them audits could be misleading.

We have already changed our approach. Although initially MSD used the term ‘audit’, we only carried out reviews, and now use the terms ‘integrity check’ or ‘review’. The work we carried out was a pragmatic and reasonable way to provide assurance on the scheme.”

In the third quarter of 2021 MSD and IRD staff checked a sample of 339 claimants using employee data. They found that 8% did not have the required revenue drop for a month and 6% did not retain some of the employees they claimed for. They did not look at whether businesses had had a drop in revenue for the 12 weeks they received payments for.

(OIA response 6 April 2022)

Decisions about prosecutions are made only after a thorough investigation process.

From our integrity programme, we have found that in the majority of cases employers did the right thing. In many cases where entitlements have been wrongly claimed, it is due to uncertainty about the eligibility criteria, rather than deliberate attempts at deception.

As of Friday 18 March, the Ministry has referred 1,218 cases for investigation of which 518 have been resolved and 700 are underway.

COMMENT:  If a recipient claims uncertainty, they can avoid an investigation and possible prosecution.