The Auditor General has turned down Labour's request to investigate the appointment of Ian Fletcher as head of the Government Communications Security Bureau, saying the Prime Minister was entitled to have "considerable discretion" over how the appointment was made.
Labour had asked the Auditor General to investigate it after Mr Key confirmed he had sounded out Ian Fletcher - a childhood family friend - for the post himself before directing him to speak to the head of the Department of Prime Minister and Cabinet.
However, the Auditor General said that the Prime Minister had responsibility for the appointment and, unlike chief executives of other government departments, there was no specific process set out in making that appointment.
"The person appointed serves at the Prime Minister's pleasure. As with many other ministerial appointments, the responsible Minister therefore has considerable discretion about how appointments are made. He or she is accountable to Parliament and the public in the usual way for those decisions."
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Last week State Services Commissioner Iain Rennie said Mr Key had done nothing wrong, but admitted he was surprised Mr Key had rung Mr Fletcher himself and said he would have advised him to leave it to Rennie.
The Auditor General said that although it appeared the process envisaged by the State Services Commission did not eventuate, she did not believe that necessarily warranted investigation. "It is relatively common for recruitment processes to adapt as they progress, depending on the applications received."
She said the questions raised about this appointment process could be adequately addressed through the normal processes of public and parliamentary accountability.