A report into management of the wage subsidy scheme has recommended that the organisations managing it conduct a review to 'properly evaluate it' for potential future purposes

An Auditor-General's report into the management of the wage subsidy scheme has concluded that some ineligible businesses may have got the subsidy - and they might not all have been identified.

John Ryan, the Auditor-General says there was "much to commend" about how the scheme was managed. 

But he has made several recommendations, including that the agencies involved in the scheme conduct a review to "properly evaluate its development, operation, and impact".

"There are important lessons that need to be captured and appropriate action taken to ensure that we are even better prepared next time."

The Ministry of Social Development was responsible for administering the scheme, but it also received assistance from Inland Revenue, the Ministry of Business, Innovation and Employment and Treasury.

Between March and December 2020, the Government paid businesses more than $13 billion through the scheme as part of its response to Covid-19. That amount is about the same as the Government’s total annual spending on education, and nearly three times its total annual spending on law and order.

The Wage Subsidy Scheme is the Government’s largest single area of spending in response to Covid-19. The Government has estimated that the Wage Subsidy Scheme has indirectly supported about 1.8 million employees.

"Not only was the overall amount of subsidy payments significant, but the Wage Subsidy Scheme was set up and implemented on a large scale and with speed," Ryan says.

"During the first two weeks, the Ministry of Social Development, which was responsible for administering the Wage Subsidy Scheme, received large numbers of applications, including more than 70,000 in one day. It also made payments of nearly $1.8 billion on one particular day."

The Ministry of Social Development compared the information that applicants provided against the Inland Revenue Department’s records before making payments.

But Ryan says it was still possible that ineligible businesses received payments. And they might not all have been identified subsequently.

"One important eligibility requirement – that an employer has 'taken active steps to mitigate the impact of Covid-19' on their business before applying – was open to interpretation.

"It would have been difficult for applicants to determine what was required and for the Ministry of Social Development to verify compliance."

Other steps the Ministry of Social Development (with assistance from the IRD and MBIE) took to mitigate or manage risks were:

• ensuring that a process was in place to receive complaints and follow those up;
• publishing the names of some businesses that received the subsidy; and
• reviewing and investigating applications (with assistance from the Inland Revenue Department).

"In my view, it is likely that these steps have encouraged several businesses to repay subsidies they should not have received.

Paid back

"As at 5 March 2021, payments totalling $703 million have been voluntarily paid back and $23 million compulsorily recovered."

Ryan says that reviews 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 (however, if a review resulted in an investigation, documentation would be requested).

"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. In my view, the use of a high-trust approach at the outset needs to be balanced with adequate verification after the payment has been made to properly protect the use of public money."

Ryan has also recommended that the Ministry of Social Development seek written confirmation from applicants of their compliance with the eligibility criteria and the obligations of receiving the subsidy.

'Acted unlawfully'

"This could be targeted at larger or higher-risk applications.

"The public organisations managing the Wage Subsidy Scheme have identified a number of applicants they consider might have acted unlawfully.

"In my view, it is important to pursue prosecutions of these applicants. This is because it is important to maintain public trust and confidence in government schemes."

Ryan notes that the frequency and significance of "crisis events" is increasing.

"New Zealand might need another subsidy or similar scheme at any moment – as recent events have demonstrated. Therefore, I have also recommended that the public organisations managing the Wage Subsidy Scheme properly evaluate its development, operation, and impact. There are important lessons that need to be captured and appropriate action taken to ensure that we are even better prepared next time."

His report included the following recommendations.

Recommendations:

We recommend that, when public organisations are developing and implementing crisis-support initiatives that approve payments based on “high-trust”, they:

1. ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified; and

2. put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.

In relation to the Wage Subsidy Scheme, we recommend that the Ministry of Social Development:

3. test the reliability of a sample of the post-payment assurance work it carried out against documentary evidence held by applicants; and

4. prioritise remaining enforcement work, including:

•  seeking written confirmation from applicants (which could be targeted towards larger or risk-indicated applicants) of compliance with the eligibility criteria and the obligations of receiving the subsidy; and
•  pursuing prosecutions to recover funds and/or to hold businesses to account for potentially unlawful behaviour.

We recommend that the Ministry of Social Development, the Inland Revenue Department, the Ministry of Business, Innovation and Employment, and the Treasury:

5. carry out timely evaluation of the development, operation, and impact of the Wage Subsidy Scheme and use the findings to inform preparation for future crisis-support schemes.