Friday, 10 June 2016

Improving Financial Accountability for Government Investment in Indigenous Affairs


This week’s Four Corners program provided a telling reminder of vulnerability of remote Indigenous communities to the predations of unscrupulous individuals who have been engaged to assist them in managing their financial affairs either as employees, advisers, or office bearers.

Tellingly, at the end of the program, the presenter Sarah Ferguson noted that this was not the first time that Four Corners had covered issues of fraud and financial mismanagement in remote communities, and asked rhetorically, ‘Is it a vain hope that we will not be returning to tell this story again?

Accountability challenges in relation to funding for Indigenous development have a long and dishonourable history, and for better or worse, have contributed to the widespread public perception that much of the funding allocated to Indigenous affairs is wasted or misdirected. Whether this perception is fair or correct is irrelevant; the reality is that fraud and financial mismanagement within Indigenous organisations exists and any level of poor financial management should be deemed unacceptable.

Nevertheless, closer examination of the issues surrounding Indigenous funding arrangements, and the extent of funding mismanagement, reveals a more complex reality which is worth setting out in greater detail.

Waste

The first point to make is that there is a clear distinction to be drawn between the effectiveness of Government programs and inappropriate financial management. Clearly, the latter undermines the former. However, effectiveness shortfalls (which in everyday parlance we can term ‘waste’) can occur for a range of reasons, beginning with poor program design, poor program management, and poor program implementation and delivery.

It is only at the implementation and delivery end of this spectrum that Indigenous organisations are closely involved, and increasingly in Indigenous affairs, even those stages are being outsourced via competitive tender to a range of providers, indigenous and non-indigenous. It follows that Government – not Indigenous organisations – must bear primary responsibility for any ‘waste’ in Indigenous programs.

A second related point to note is that in public policy terms ineffective program investment (‘waste’) is a much more important issue than fraud. It has larger consequences for taxpayers, and more importantly, larger and adverse consequences for Indigenous citizens insofar as the purported benefits of the program investment are not realised or only partially realised.

In other words, program effectiveness is a much more salient and significant issue for taxpayers than financial mismanagement, and the responsibility for ensuring programs are effective falls overwhelmingly to government and not Indigenous organisations and citizens.

Arguably, the effectiveness of government programs (particularly grant programs) gets too little attention by the media and informed commentators. Governments habitually make it difficult for the public to be informed of the investment and grant decisions which have been taken, and the processes by which those decisions are taken. Evaluations are rarely totally independent and methodologically sound, and their terms of reference are often deliberately constrained so as to minimise the likelihood of adverse findings. Once completed, they are often not published or not published immediately.

In relation to grant funding, while there are processes for accessing information on grant funding such as Freedom of Information requests or Annual Reports, the transaction costs for individual citizens in doing so in any meaningful way are generally insurmountable, and once obtained, the information is often presented in ways which occlude the nature of what is being funded.

To provide an example, the recent Senate Committee Report into PMC’s Indigenous Advancement Strategy (IAS) struggled to receive a coherent account of the extent and nature of the funding processes under that program. Notwithstanding the extensive information on the public record relating to the IAS through that committee process and recent Senate Estimates questions, an interested citizen still has no way of assessing the effectiveness of the grants to individual organisations, nor the effectiveness of grants overall in particular sectors (such as the Community Development Program). And this Inquiry is a one off, and the information provided on the public record will quickly be out of date.

As an aside it is clear, as this recent post to the ANU’s Development Policy Blog demonstrates, that these issues extend beyond Indigenous affairs.

There is a strong case for improving the information on grant investment by government which is made publicly available, and in particular, for establishing a publicly accessible data base of both previous and current grant funding for all Government programs incorporating a capability for interrogation and sorting of the data by citizens and the media. The technical capacity exists.

In our much more complex digital age, the notion of ‘open government’ needs to be expanded if citizens are to be in a position to exercise their democratic rights to understand and effectively express their views in relation to government activities. This is particularly relevant in areas such as Indigenous policy where the challenges are huge and government’s role is crucial. Greater transparency of government investment decision-making will assist in improving program effectiveness and thus reduce ‘waste’.

In summary, the capacity of citizens external to government to assess program and grant effectiveness in a timely fashion is at the moment extremely limited. This is not an argument for greater transparency as ‘citizen voyeurism’, but for establishing mechanisms which incentivise government to invest more internal resources in ensuring programs are effective.

Under current arrangements, and notwithstanding the rhetoric on ‘open government’, it is only much later (if ever) – when problems emerge – that ineffective program results become apparent. By then it is too late for any accountability mechanism to have an impact.

Fraud

Turning to issues of financial mismanagement and fraud in Indigenous organisations, we need to disentangle a number of threads. While arguably an extremely small proportion of overall funding and thus of lesser significance (at least in objective terms), fraud has the potential to gain substantial political and public attention.

Moreover, for Indigenous interests, being subjected to fraud can be catastrophic for the legitimate operations of community organisations, and can undermine community and organisational cohesion.

Community members can be severely disadvantaged and office bearers shamed and humiliated. The Four Corners program made this point very effectively, demonstrating the trauma and shame which community members felt at being ripped off by individuals they had trusted.

While fraudulent activities and financial mismanagement can occur anywhere, and is not by any means limited to the Indigenous sector, there appear to be strong intuitive grounds for concluding that Indigenous organisations are particularly vulnerable. Their office bearers are often appointed for their community based links, and not for their financial or organisational skills; organisational membership is often drawn from groups with low levels of educational attainment and low levels of financial literacy; and importantly, Indigenous cultural mores which emphasise and prioritise kin based relationships over externally imposed rules can lead to poor governance and oversight in the absence of governance training and development.

The structural tension public policy-makers face is to maximise Indigenous ownership and involvement in managing their own affairs including in the delivery of programs to the Indigenous community while minimising the adverse consequences of poor governance, defective program implementation or poor financial oversight and management.

A key point in considering the policy significance of these issues is to note that Indigenous organisations increasingly have access to their own sources of revenue, through business activities or from various land and native title related financial agreements. It is not just taxpayers’ funds which are at risk from poor financial management. The capacity for Indigenous commercial and economic development is also placed at risk from deficient financial management practise within Indigenous organisations.

Governments have been aware of these issues for decades, and from time to time have focussed on one or another of the elements underpinning the effective financial management of Indigenous organisations.

For example, in recent decades there have been from time to time efforts to improve governance in Indigenous organisations, to strengthen the original purpose of the CATSI legislation, to roll out financial literacy programs, to strengthen remote community access to banking services, and to strengthen government’s capacity to audit and evaluate Indigenous programs through the now defunct Office of Evaluation and Audit. Each of these initiatives has faded in profile and priority, and there appears to be no overall strategy focussed on managing the risk of fraud or misappropriation within Indigenous organisations.

Under the new IAS, the present Government has strengthened the requirement for funded organisations to be incorporated under CATSI or the Corporations Act (rather than under state based Associations Acts designed for tennis clubs and the like). The Government has also encouraged greater use of independent directors on the boards of organisations with complex or substantial financial responsibilities. I support both of these initiatives.

Following the Four Corners program, the ABC reported that the Registrar of Aboriginal Corporations issued a statement to the ABC:

The Registrar of Indigenous Corporations, Anthony Beven, declined to be interviewed but provided the ABC with a statement.

"The registrar takes allegations of wrongdoing seriously and has a strong track record of taking action where there is evidence of wrongdoing," the statement said.

"In the last six years the registrar has taken action in the courts against more than 140 corporations and individuals.

"If you or any person has any evidence of any wrongdoing by any person or corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 please refer it to the registrar's office (ORIC)."

ORIC has launched more than 140 criminal prosecutions since 2011 and supported hundreds of Indigenous organisations to improve their governance.

Full details of the prosecution outcomes from the registrar's action are available on the website.

This led the Chair of the National Congress of Australia’s First Peoples, Dr Jackie Huggins, to comment there was still an endemic problem with misuse of Indigenous funds:

"It's still not getting any better, in fact it's getting worse," Dr Huggins said.

"We are sick and tired of all the money that gets ripped out of Aboriginal and Torres Strait Islander organisations."

The Minister responded:

Federal Indigenous Affairs Minister Nigel Scullion on Tuesday backed the regulator and said he was aware that it was operating under budgetary constraints.

Senator Scullion said a review of the ORIC and the CATSI Act was currently underway.

"Some elements of the CATSI Act may have to be amended to ensure we can ... get further transparency for organisations," Senator Scullion said.

"Of course everyone will be able to make a submission and that review will be public."

But Senator Scullion said the investigations that were taking place into compliance at 44 Indigenous organisations would not be made public.

In the light of the recent revelations on Four Corners, and the considerable quantum of the grant funding currently being allocated to Indigenous affairs, there appear to be grounds for concluding that Government should do more. A first step would be to acknowledge that Governments, not regulators, are responsible for the policy and program frameworks which determine how fraud with Indigenous organisations is dealt with.

The response of the Minister, apparently on the run, ‘announcing’ a pre-existing review of the CATSI Act will not get the root of the issues. His focus on the regulator neatly sidestepped his own broader responsibility for the current policy frameworks which are clearly facing considerable challenge.

As a corporate regulator, the Registrar can investigate the compliance of Corporations with the legislation, and under the current Registrar ORIC has an admirable record of pursuing financial mismanagement within CATSI Act corporations. But his remit is only partial, and he has limited capacity to pursue individuals outside CATSI corporations who engage in illegal behaviour. This appears to be the case at the Warmun community covered in the Four Corners program.

A Broader Review

To respond to the plea of the National Congress Chair, the Government should in my view commit to establishing a comprehensive policy framework addressing the risk of financial mismanagement in Indigenous organisations. Such a policy framework should not involve more punitive and intrusive grant oversight and management, but should focus on a stronger and more streamlined approach to investigation and prosecution of offences.

In this context, it is worth noting that the current Commonwealth grant management processes in Indigenous affairs are arguably over-engineered, and reducing their complexity would be consistent with the Government’s red tape reduction strategy. The notion of ‘earned autonomy’ under the current IAS Grant Guidelines (refer section 12) meaning that funded organisations which can demonstrate lower risk profiles can ‘earn’ more streamlined grant management processes sounds plausible, but would be better framed in terms of a minimalist default, which is ramped up as risks increase.

A first step in developing the policy framework suggested here would be to initiate a broader review of financial management issues affecting Indigenous organisations, with a positive remit focussed on identifying structural opportunities and developing an ongoing policy response.

Such a Review needs to extend to the capabilities and operations of all Indigenous organisations, not just those incorporated under the CATSI Act, and should encompass the need for new policy measures and responses, and the effectiveness of current policies and programs related to Indigenous corporate governance, financial literacy, management training, and the like.

While there are legitimate constraints in making the outcomes of the 44 reviews currently underway public, the broader review I am proposing here should also assess the effectiveness of Government responses to defective grant management and in particular, the extent to which past internal reviews have led to prosecutions and remedial action. There is a strong case for greater transparency in relation to the results of internal reviews undertaken (while protecting the legitimate privacy concerns of organisations and individuals). Without it, the risk is that reviews take the easy course, avoid prosecutions, and send a signal that accountability is optional.

Finally, the proposed Review should examine the record of state and federal police in pursuing cases of fraud within or in relation to Indigenous organisations. My experience over three decades has been that in most cases of fraud, the quantum of funds misappropriated does not exceed the risk based thresholds used by police in allocating serious investigatory resources. There is a strong argument in my view for a smarter approach to risk based assessments by police and law enforcement bodies, where they allocate a small proportion of their resources to investigation frauds and thefts which fall below their normal thresholds. This would send a clear signal to potential perpetrators that they are not immune from investigation and potential prosecution.

I am not holding my breath on the establishment of such a broader Review, nor of a new policy framework on financial management for Indigenous organisations. However, in the absence of a coherent and comprehensive effort by Government to bring greater rigour to financial management within Indigenous organisations, theft, fraud and misappropriation will continue to be problems in Indigenous Affairs. Unfortunately, if this is the case, Indigenous interests will continue to wear an undeserved level of public opprobrium, and the deep-seated public perception that Indigenous affairs is characterised by wholesale waste and inefficiency will – unfairly in my view - continue to permeate the Indigenous domain.