The Government's wage subsidy scheme may have incorrectly paid out billions of dollars to ineligible businesses, and this is not being audited.
That's the conclusion to be taken from the Auditor General's report, released yesterday. It is highly critical about the lack of checks and balances on a scheme that has doled out $14bn to businesses.
Although some reports see it as simply an issue of bureaucratic management, it has huge financial consequences for the state, and for public trust in government. Auditor General John Ryan says the money being paid out in what critics warned was "corporate welfare" has not actually been audited, and the public cannot have confidence that the Government is on top of this.
The issue goes back to the launch of the wage subsidy scheme, when questions were raised about whether the scheme would be vulnerable to fraud and corruption, and cost much more than was required to keep the economy going. In response to these concerns, the Government promised audits would take place. Since then, whenever critics have again questioned the probity of the scheme, politicians have deflected this by claiming that the necessary audits were being carried out. It turns out that audits have not taken place, and various assurances about the integrity of the system amount to political spin.
The report by the Auditor General says that what the Government and Ministry of Social Development (MSD) have claimed are "audits" are, in fact, loose phone calls to the recipients of the billions of dollars, checking they still believe they qualify. The report can be found here: Management of the Wage Subsidy Scheme.
Reporting on the Auditor General's investigation, the Herald's Hamish Rutherford highlights this report's conclusion that MSD has been being entirely lax in its approach to checking businesses were actually entitled to receive the wage subsidy. Rutherford says the Auditor General "did not believe MSD had determined the scale of the problem", and he criticised the department for labelling their low-level checks as "audits" when they were clearly nothing of the sort – see: Auditor-General says 'audits' of wage subsidy applicants simply sought verbal response.
According to the report, the so-called audits "mainly consisted of a verbal confirmation of information by employers". Instead of vague telephone calls, the Auditor General recommends MSD actually "seek written confirmation from applicants of their compliance with the eligibility criteria and the obligations of receiving the subsidy". Independent and documentary evidence is also recommended.
Public confidence and trust in the scheme is vulnerable, according to the report. Therefore, it is recommended that MSD toughen up its approach, including prosecuting businesses who incorrectly claimed the wage subsidy, and recovering this money.
In a follow-up article, Rutherford reveals: "The Ministry of Social Development is yet to begin any prosecutions for abuse of the $14 billion wage subsidy scheme, as it comes under fire for its work to establish the extent of misuse" – see: MSD under pressure to announce prosecutions under wage subsidy scheme amid criticism of 'audits' (paywalled). Rutherford says "The Auditor-General also urged MSD to prioritise its enforcement work, including prosecutions, not only to recover money, but also hold businesses to account 'for potentially unlawful behaviour'."
BusinessDesk journalist Brent Melville highlights the Auditor General's lack of confidence that MSD is identifying cases where prosecution is required and money should be returned – see: Auditor-general: Covid wage scheme admin was lax (paywalled).
MSD comes under further fire in RNZ's coverage, with a focus on the government department diverting staff from beneficiary fraud investigations to this issue, rather than employing additional staff – see: MSD told to further investigate wage subsidy scheme payments.
According to RNZ: "How those resources will be deployed over the coming months remains a concern, as efforts to recoup wage subsidies continue. The report stated it was likely between 40 and 50 MSD staff who usually worked on benefit fraud would be working on subsidy investigations for another 12 to 18 months."
The report warns this may encourage corner-cutting: "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."
RNZ has also reported the views of inequality researcher Max Rashbrooke who highlights that MSD are inconsistent in taking a "softly-softly" approach with businesses when they are much tougher on beneficiaries: "If MSD thinks you might be a benefit fraudster they pursue you to the ends of the earth, and with this scheme, MSD just rang people up and said, you know, 'did you do everything correctly?' and if people did then that was it."
Wage subsidy critic and tax researcher Michael Gousmett is cited as saying the Government should have insisted businesses also have their applications audited at the start of the process, saying "There was no requirement to demonstrate your financial ability to sustain yourself for a period."
Thomas Coughlan's Stuff article highlights the Auditor General's criticisms of the design of the wage subsidy scheme in regard to the criteria for eligibility, which includes the very vague requirement that businesses have first taken "active steps to reduce Covid-19's impact on their business". This is criticised as "open to interpretation", making verification of legitimate applications difficult.
Previous questions about wage subsidy auditing
The Government and MSD have been claiming for a long time that "auditing" was taking place into recipients of the wage subsidy. For example, back in October MSD asserted that the audits were happening on an apparently large scale – see Nita Blake-Persen's Wage subsidy questions raised after more than 10,000 audits.
It turns out that even this figure of 10,000 was relatively low, with Victoria University of Wellington tax professor Lisa Marriott telling RNZ, "I think that does need to be much higher, particularly because there are around eight per cent of those cases that are being referred onwards for some level of investigation." Marriott is reported as saying "there are grounds to look for more" abuses of the scheme hoping "the same rigour will be applied to the companies as is applied to benefit fraud".
In January, Christchurch philanthropist Grant Nelson warned of the lack of auditing taking place, and called for much tougher measures to ensure the subsidy payments had only been given to businesses truly in need – see Nita Blake-Persen's Estimated $5b in wage subsidies paid out unnecessarily – philanthropist.
Drawing attention to the small number of applications being checked, Nelson argued "any audits they do really are only reaching a very, very few of those who received the wage subsidy. And that is why I think everyone who receives the wage subsidy should be contacted. If they can prove that they are entitled to it well, they can retain it. Otherwise, they should be repaying it."
Another critic of the scheme, Jilnaught Wong, an accounting professor at the University of Auckland, suggests that rigorous auditing of payments is required because large private companies make use of "opportunistic accounting gymnastics" like "delaying revenue recognition" so that they would qualify for Covid payments while generally making large profits overall in 2020 – see Kate MacNamara's Was the $14b wage subsidy well-spent? (paywalled).
Finally, the Auditor Generally has recommended a bigger review of the successes and failures of the wage subsidy scheme. In a piece in March, Bernard Hickey wrote that the wage subsidy was successful in its purpose, but also a tragedy in the wealth inequality that it has caused, and he raised questions about whether alternatives to employee subsidies could be used.