The New Zealand Defence Force's awarding of a contract to a company owned by serving personnel broke conflict of interest rules, the Auditor-General has found.
However, there was no evidence of illegal activity in the $114,000 deal with Miltech Limited to maintain the Royal New Zealand Air Force's lifejackets, Auditor-General Lyn Provost said in a report released today.
Former Defence Minister Jonathan Coleman asked the Auditor-General to look into the matter in June 2014 after it emerged that the Auckland-based company was owned and run at the time by senior air force non-commissioned officer Graham Berry.
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Mr Berry's job at NZDF was to oversee the maintenance division, which meant he was tasked with servicing lifejackets and other equipment.
In a summary of her report, Ms Provost said her office found no evidence of illegal activity in the temporary deal with Miltech.
But the arrangement between NZDF and the company "did not comply with NZDF rules about secondary employment because of Person A's close involvement with Miltech at that time".
Person A is understood to be Mr Berry.
"The situation continued until June 2014, when Person A relinquished his interest in Miltech after concerns were raised in Parliament."
The Auditor-General was critical of Air Force bosses, saying that if their rules around secondary employment had been properly applied the arrangement with the company would not have gone ahead.
"It is not clear to us that Person A or Air Force command properly considered or applied the rules about secondary employment at relevant times".
The arrangement also broke public sector procurement requirements and good practice principles, because the process was rushed, informal, undocumented, and failed to take into account alternative providers.
In addition, the approving officer for the contract was not aware that serving officers were linked with Miltech.
"In our view, the procurement process was inadequate, not enough attention was given to the range of risks, and because of the involvement of NZDF personnel in the vendor company, the decision was inappropriate," Ms Provost said.
She said the Defence Force had accepted that the deal with Miltech was "defective", and that the way it handled matters with its personnel was neither timely nor thorough.
Her office made a series of recommendations, among which was a requirement to make sure there were no other unapproved contracts with NZDF personnel.
Defence Force chief Lieutenant General Tim Keating said he was disappointed at how the NZDF handled the issue.
"I am also disappointed that the organisation did not initially recognise that the contract was a clear conflict of interest, as well as being contrary to Defence Force rules," he said.
The interim contract was approved at a time when there was an urgent need to certify the safety of lifejackets needed for a ship's deployment.
Nonetheless, Mr Keating said officials appeared to have been too focused on putting a contract in place quickly, at the expense of robust decision-making and proper scrutiny.
In response, the NZDF had made changes to its conflict of interest rules and training.