Posted by: John Brace | 13th February 2019

What did a Government Internal Audit Agency draft report reveal about Wirral Council procurement processes and how a contractor spent public money?

What did a Government Internal Audit Agency draft report reveal about Wirral Council procurement processes and how a contractor spent public money?

                                         

Chris Whittingham (Grant Thornton) 29th January 2018 Audit and Risk Management Committee (Wirral Council)

Chris Whittingham (Grant Thornton) 29th January 2018 Audit and Risk Management Committee (Wirral Council)

“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.” – George Bernard Shaw

Below is a GIAA (Government Internal Audit Agency) draft report. It involves a civil servant recommending clawback of a large amount of grant from Wirral Metropolitan Borough Council. It also comments on other council’s procurement processes and how the money was spent with a particular supplier. This is just the text extracted from the documents below.


Official Sensitive

To: Julia Sweeney Director of European Programmes

From: Jim Phillips
Senior Audit Manager
GIAA
Location: Horse Guards
Tel: 0207 270 1497
Fax:
Ref: (Paper)
Date: 11 December 2014
Copies: David Rossington
Mike Reed

GIAA Investigation

The Government Internal Audit Agency (GIAA) has concluded an investigation into the allegations received in relation to the Business Start Ups 2 Project (BSU2). The Project Applicant was the North West Regional Development Agency and on closure responsibility for the project was transferred to the Department for Business Innovation & Skills. The Project provides business support throughout the North West Region and has a complicated delivery structure made up of 14 Delivery Partners (all Local Authorities) and approximately 22 Suppliers (all contracted to Delivery Partners). The Project Applicant also contracted a Managing Agent (A4E) to oversee delivery of the Project.

The investigation was initiated as a result of GIAA receiving an allegation (Allegation 1), from an external source. which alleged that expenditure had been claimed by a supplier to the project despite the supplier not having undertaken the relevant activity to claim the expenditure. However, as part of our initial work into this allegation a number of further allegations came to our attention in relation to this project which are detailed in the attached report. However, for brevity these are summarised below.


  • Allegation 2 relates to a number of allegations made by an ex-employee (of a supplier) which include conflicts of interest, falsification of documentation and claiming expenditure for work not carried out as well as a number of other allegations which do not relate to ERDF.

  • Allegation 3 was from a supplier to the project who has alleged that Delivery Partners had shown favouritism, towards suppliers, where they had existing contractual interests, during the procurement processes undertaken to call off contracts from the BSU 2 Framework Agreement. They also alleged that they had to be ‘warned off’ bidding for certain contracts.

We have been liaising throughout this investigation with the three particular interested parties, the applicant (now BIS), a project partner (Wirral Council) and the whistleblower. All three are likely to request details of the outcome of our investigation.

Executive Summary

Allegation 1

As a result of our investigation we consider this allegation to be unfounded as we found evidence to show it was dealt with at the time of occurrence by the Managing Agency (A4E). We visited the supplier concerned and audited a number of client files and as a result no concerns were identified. The supplier was also able to provide us with documents that showed an investigation was carried out, in conjunction with A4E, the result of which showed that the supplier had no acted inappropriately.

Allegation 2

This has proved to be the most difficult to deal with as it relates to a number allegations made by an ex-employee, most of which did not relate to the BSU2 Project. In addition to this, not all of the allegations that did relate to the BSU2 Project affected ERDF expenditure, as they related to activity funded under the Single Pot element which was not matched against ERDF.

We identified a number of anomalies with the client files held by the supplier. These ranged from signatures which did not appear authentic, dates which appear to have been altered or were not correspond to the narrative on the forms and narrative which appears to have been photocopied on to forms and some client reviews which do not appear accurate. However due to the lack of detail on the invoices used to claim ERDF expenditure, we were unable to identify if the above anomalies contributed to the supplier receiving expenditure from ERDF.

The majority of the anomalies appear to relate to the Post Start Support (PPS) which is not part of the ERDF expenditure but is paid for by Single Pot funding and therefore is an issue for BIS. However, the lack of detail in the invoices used to claim Project expenditure means it has not been possible to tie back PPS to a particular client back to a payment made to the Supplier.

We also identified a number of clients where the supplier had received an ERDF payment for assisting the client as a Start-up. However, some of the evidence provided to prove a client had started trading (needed to claim this payment) suggests that the client was trading prior to receiving support from the supplier.

We have identified a desk instruction which suggests clients should not be trading before receiving support in order to be eligible for a payment. However, contracting documents do not provide a clear direction in relation to this issue. In discussions with the applicant, they are also unsure of the requirements in order for Start-up payments to be eligible.

Allegation 3

We selected 4 procurement exercises to review and found a number of issues which, in our opinion, would constitute a breach in EC Procurement Directives. These include evaluation of bids not in line with the set evaluation criteria, questions within the evaluation criteria which discriminate against bidders as well as questions which are not considered relevant at award stage of a contract.

We identified one instance were the contract was split between 2 suppliers who finished 1st and 3rd during the process. However, the supplier who finished 2nd (the supplier making the allegations) was not awarded part of this contract. We also identify one Delivery Partner was not able to provide us with any documentation relating to their procurement exercise.

Of the 3 exercises we reviewed the final contracts were eventually awarded to suppliers who appear to have had a history of delivery services for the Delivery Partner responsible for conducting the exercise. One of these contracts relates to the supplier at the centre of the allegations in Allegation 2, therefore we undertook our own evaluation of this contract which has raised considerable doubt on the original evaluation which led to the contract award.

Conclusion

In conclusion, we have identified a number of anomalies with the Client files reviewed in relation to Allegation 2. However, in our opinion there is not enough evidence to confirm the existence of fraud in relation to ERDF as we cannot tied back the anomalies to actual payments made to the supplier not can we identify a definitive description of the eligibility of start-up payments.

As a result of our procurement testing we did not find any evidence that confirms fraudulent activity has taken place. However, given the allegations from S2 and the technical breaches identified within the procurement processes tested, there is a risk that processes may have been manipulated by Delivery Partners in order to contract with their preferred suppliers.

In our view given the anomalies in client files and breaches identified in procurement both would result in a significant financial correction being applied to the BSU2 Project if identified during an EC audit. It is also likely that some of the procurement breaches would be considered systemic as they are borne from procurement templates provided for Delivery Partners by the Project Applicant.

Recommendations

In relation to Allegation 2, we have identified a number of clients which we consider to be high risk and advise that DCLG, in conjunction with BIS, should seriously consider treating any expenditure paid, in respect of these clients, as an irregularity and claw this expenditure back from the Project.

In relation to Allegation 3, we advise that DCLG considers applying a flat rate correction to the BSU2 project in relation to the procurement breaches identified with the call offs from the BSU2 Framework Agreement.

We are of the opinion that both these measures are necessary to avoid a potential future liability to the Department should the BSU2 Project be selected for audit by the EC.

Jim Phillips

NORTH WEST GROWTH DELIVERY TEAM 2007-13 ERDF PROGRAMME

REVIEW OF BUSINESS START UP PHASE 2

Business Support Project Operating in the North West Region

Government Internal Audit Agency

December 2014

The report and management letter (Annex 1) contains the results of the Department’s review into alleged irregularities. The Department accepts no liability in relation to the use of the information within this report if used for any purpose other than its original intention.

Official – Investigation – DRAFT

1. INTRODUCTION 2
2. BACKGROUND 2
3. METHODOLOGY 4
4. DETAILED FINDINGS 5
4.1 Allegation 1 5
4.2 Allegation 2 6
Background 6
Conflicts of Interest 7
Business Starts 8
Anomalies in S3 Records 9
4.3 Allegation 3 – Procurement 12
DP1 Call Off 13
DP2 Call Off 14
DP3 Call Off 15
DP4 Call Off 16

1. INTRODUCTION

1.1 Government Internal Audit Agency (GIAA) received an allegation from an external source relating to the Business Start Ups 2 Project. The Project is funded under the North West Growth Delivery Team’s (GDT) European Regional Development Fund (ERDF) Programme and the Applicant is currently the Department for Business Innovation & Skills (BIS).

1.2 The allegation related to concerns raised, by a supplier to the Project, who considered that assistance given to an SME had been claimed as an output, by a different supplier, despite that supplier not having provided the assistance to the SME in question.

2. BACKGROUND

2.1 The Business Start Ups 2 Project (BSU2) is a regional project which operates throughout the North West Region. The Project was devised as a result of a gap in business support due to the demise of the Business Link organisations. The original Applicant of the Project was the North West Regional Development Agency (NWDA) with this responsibility being transferred to BIS on closure of the RDA network. Due to the complexities in terms of geography and management structure of the Project it is necessary to provide more detailed background information in relation to the Project.

2.2 The wider BSU2 Project includes both eligible an non-eligible ERDF activity with the total project expenditure being approximately £32 million at initial contracting. The amount of activity considered as being eligible for ERDF is approximately £16.8 million which is made up of £8.4 ERDF grant and £8.4 match funding (Single Pot). The remaining £16.8 is there to pay for management costs and to provide extra support for the worst performing areas; this is not claimed from ERDF. It should be noted that this Project finished earlier than contracted (December 2011) and, as a result, did not incur the full amount of expenditure assigned.

2.3 The Project provides business support with the aim of assisting individuals to start their own businesses as well as providing assistance to businesses or traders which have been trading for up to three years (all participants will be referred to as Clients). It followed on from a successful pilot project known as Intensive Start Ups Assistance (ISUS). BSU2 is still seen by many organisations and individuals we spoke to as an extension of this. This resulted in a high number of people having no idea that BSU2 existed, instead presuming the support was provide as an extension of ISUS. This created a lot of confusion when discussing the Project therefore any reference to ISUS within this report should be taken as meaning BSU2 unless explicitly stated as referring to the pilot ISUS Project.

2.4 BSU2 has a complicated delivery structure which consists of an Applicant, a Project Management (PM) function, 14 Delivery Partners and approximately 24 Suppliers. The Applicant procured the services of A4E to carry out the PM function. This involves authorisation and validation of claims (but not payment), audit and monitoring of outputs and compilation of management information, reporting back to the Applicant.

2.5 The Delivery Partners (DPs) are made up of a number of Local Authorities throughout the region with each one contracted to deliver project activity within their own area. The value and activity within the contract for each DP is unique to the DP which allows them to focus on interventions and issues specific to their area. However, this adds further complications to managing the Project as in effect it creates 14 different ways of delivering activity within BSU2.

2.6 In order to deliver activity DPs contract with suppliers by using a Framework Agreement established by the NWDA. DPs could contract with any number of suppliers to work in their area as long as they adhere to the budget agreed in their contract with the Applicant and selected Suppliers by means of a ‘call off’ from the Framework. The contract between the DP and supplier is unique, allowing different vales and types of activity for each supplier. Not only do you have 14 different ways of delivering BSU2 activity between the Applicant and DPs but also differences between each DP and their selected Suppliers.

2.7 The Suppliers are responsible for providing the business advice and support to Clients in line with their agreed contract. The DP manages their Suppliers in terms of delivery and record management but they are not allowed to pay suppliers until they have received authorisation by A4E as they manage the process on behalf of the Applicant ensuring that claims are eligible and assistance is not being double counted.

2.8 To aid this Suppliers have to complete a record of the support provided to Clients on a Central Records Management (CRM) database. Each element of support would trigger a pre agreed contract payment and failure, by the Supplier, to update CRM by the required deadline would lead to payments not being made within the required timescale. A4E would then check the CRM each month and provide the DP and Supplier, in the form of an invoice, with a record of the payments to be made and the DP would then pay the Supplier and claim this from the Applicant. However, the majority of these invoices are in summary form, only containing the number of Clients supported against each contractual ‘trigger’ payment (see Para 4.2.4 for further details).

2.10 We received an allegation from a Supplier (S1) to the BSU2 Project which raised concerns about the potential double counting of outputs by another supplier (S2). A Client (C1) had approached S1 wanting to register for support. C1 told S1 that she had previously registered with another Supplier (S2) but had had no significant advice from them. S1 offered to provide assistance to C1 but when they came to register they were told that C1 had already been registered by S2. C1 denied receiving any assistance from S2 so the case was referred to A4E as the Project Manager.

2.11 A decision was made to deal with this allegation as part of an upcoming A16 audit of the project, with GIAA taking the lead on both the A16 audit and the investigation. During our planning to undertake the A16 work we were informed by the NW GDT of another allegation relating to the BSU2 Project. This Allegation stems from an ex-employee (W1) of a Supplier (S3) who was contracted by Delivery Partner (DP1). It relates to a number of issues including alteration of paperwork and false Client claims some of which relate to the BSU2 project and some which relate to other funding administered by DP1.

2.12 As a result of these allegations DP1 independently (of the Applicant) commissioned Grant Thornton (GT) to undertake an investigation into the allegations made by W1. GT completed their investigation and issued a report in March 2013 concluding that the case should be reported to the police. Wirral Council referred the case to the police who have recently decided that there is insufficient evidence to make a case for the prosecution of S3.

2.13 There was no suggestion that these two allegations were linked, apart from both involving Suppliers working on BSU2, and there had not been a decision made, by the police, whether to begin a prosecution of S3. Therefore we decided to review those allegations (made by W1) which related specifically to the BSU2 project, using the report issued by GT as a basis for our work.

3. METHODOLOGY

3.1 As the BSU2 project had been selected for audit in the 2012/13 A16 Audit sample it was agreed that XDIAS would lead this audit whilst at the same time investigating the allegations received in relation to the ERDF element of this project. As part of the investigation we carried out interviews with both complainants and met with DP1, along with their investigators, in order to gain a greater understanding of their work.

3.2 We have reviewed a copy of the DP1 investigation report which covered a number of allegations made by W1, most of which relate to other funding streams administered by DP1 and the non ERDF activity of the BSU2 Project. Our main focus has been on the allegations specifically relate to ERDF grant as that is where we have authority to investigate. However, we have also considered the allegations relating to Single Pot on behalf of BIS. We visited the relevant Suppliers and carried out detailed testing of a sample of the Client files. We then contacted a number of Clients in order to try and ascertain the accuracy of these files.

3.3 It should be noted that the original Applicant of BSU2 was the North West Regional Development Agency and the financial completion date was 30th June 2013. However, due to the closure of the RDA network the completion date was brought forward to 31st December 2011 and the project was subsequently novated to the Department for Business Innovation & Skills after this date. As a result of this the current Applicant had no working knowledge of either development or delivery of the Project which in turn limited the scope of the audit and our investigation. In addition to this the Project documentation has been archived and retrieval of this documentation provided complicated and time consuming which caused delays to the investigation and audit.

4 DETAILED FINDINGS

4.1 Allegation 1

4.1.1 In July 2012 we received an allegation from S1 in relation to potential double counting of outputs. In November 2010 C1 approached S1 wanting to register for support. C1 told S1 that they had previously registered with S2 who, in their opinion, may have given incorrect advice around applying for a grant.

4.1.2 S1 confirmed that C1 had been given incorrect advice and offered to assist C1 to apply for the grant at which point C1 agreed to register with S1. As part of the agreed process S1 then had to check C1’s details with A4E who came back and said that C1 would not be eligible for support as they had already been claimed as a Business Start Up output by S2.

4.1.3 S1 informed C1 of this and they were concerned because they had had very little contact with S2. For this reason C1 contacted A4E in order to get a copy of the file held by S2. After reviewing the file C1 believed some of the information to be incorrect as there were various appointments recorded which C1 says they never attended. There was also an insurance certificate purporting to have been submitted as evidence by C1 which they have confirmed was not.

4.1.4 S1 raised these issues with A4E and accompanied C1 during a meeting with them as a result of which A4E and they said they would investigate. At the time C1 was a little concerned about making too much fuss as they thought that it may have a negative impact on any further support they would be able to receive.

4.1.5 S1 continued to provide support to C1 and sometime later C1 started to receive phone calls from S2 in relation to completing a state aid declaration. C1 initially ignored these calls because of the allegation made to A4E but eventually received a letter from Liverpool City Council (who replaced A4E) asking her to complete a State Aid form for the support they had received from S2. This concerned C1 so they informed S1 who has now approached XDIAS. Both S1 and C1 are concerned that A4E have not investigated the issue even though they had given an undertaking to do so.

4.1.6 We visited S1 in order to discuss the allegation in more detail and to review a copy of C1’s file which they had obtained from A4E. We then visited S2 and reviewed a sample of Client files including C1’s original file. As a result of this we did not identify any emerging patterns or links which would give us cause for concern.

4.1.7 As a result of this we took the opportunity to confront S2 with the allegation we had received. S2 were aware of the original issue (but not the allegation made to us) and were able to provide us with documentation, dating back to the original issue, which shows it was investigated at the time, both externally by A4E and internally by S2.

4.1.8 The A4E internal investigation could find no evidence of similar issues or emerging patterns with the Advisor’s other files and this, along with a denial of any wrongdoing by the Business Advisor and a previously unblemished record led A4E and S2 to conclude that no action could be taken. These findings were similar to our findings and on this basis we would have to conclude that the allegation is unfounded. Due to the relatively low value of the intervention we have not followed this up with C1 and we consider the issue cleared.

4.2 Allegation 2

Background

4.2.1 During our preparatory work the NW GDT made us aware of a number of allegations made by W1, against their former employer S3 who was contracted, by DP1, to deliver business support on the BSU2 Project as well as a number of other non ERDF funds on behalf of DP1. The allegations, in summary, relate mainly to the alteration of documentation, eligibility of Clients, conflicts of interest and a lack of suitably qualified Business Advisors.

4.2.2 As a result of these allegations DP1 engaged GT to carry out an investigation into the activities of S3 and this culminated in a report being issued in March 2013. The report raised a number of concerns around S3’s management and delivery of funding schemes on behalf of DP1. In relation to the BSU2 Project, the report highlighted inconsistencies with the paperwork held by S3 (to support the assistance given to Clients) and potential conflicts of interest within the organisation.

4.2.3 The report also commented on the difficulties posed to GT in accessing both electronic and hard copy documents, in particular not having access to the CRM database. This in turn reduced the scope of the work undertaken by GT and has led to them not being able to distinguish ERDF from other funding, as a result of which they have been unable to conclude their work. This has also become a real issue for us during our work as, on closure of BSU2 Project, the CRM database was also closed down with only the raw data remaining so we are unable to run reports to link beneficiaries back to payments received by S3.

4.2.4 We have conducted a review of the invoices produced at the time of claiming ERDF expenditure (see Para 2.8) which summarise the different types of assistance that trigger payments. For example, the invoice for October 2009 contains an attached table which shows the following breakdown 6 Starts @ £1,144 each; 6 Intensive Support (IS) @ £220 each; 10 Conversions @ £176 each and 0 PSS-YR 1, 2 and 3 @ £220 each. The above triggers are also split between Regional and Local priorities.

4.2.5 Some invoices have an attached breakdown of the beneficiaries for which the payments are being claimed, however in all cases these only relate to the number of ‘Starts’ claimed under the ‘Regional’ priority. There is no narrative to confirm this but the number of Clients on these sheets matches the number of ‘Starts’ under the regional priority on the summary table. Therefore we cannot with any certainty trace back the different trigger payments to the Clients being assisted.

4.2.6 It should also be noted that during our visit to S3, they were unable to provide us with any detailed records which would assist with this as they were only able to provide us with boxes of beneficiary files. They were also unable to provide us with a list of the payments claimed against each Client nor provide evidence that they carried out any checks on the accuracy of the information provided to them by A4E. As a result of this S3 was also unable to identify which trigger payments related to a particular beneficiary.

4.2.7 Whilst we have considered the findings of the GT report we have not undertaken any detailed testings of the Clients already covered by GT. Rather we have tested our our random sample of Client files whilst taking into consideration the findings of the report. The reason for this is twofold, firstly, because the GT sample is a targeted sample made up of Clients identified by W1, and secondly, by selecting a random sample we have widened the total number of Clients tested. Therefore, we have considered the finding of GT’s testing and tested our own sample of Clients in order to present a wider and more balanced view of the activities of S3.

4.2.8 As part of our work we have met with GT and DP1 in order to discuss their findings, carried out an interview with W1 to further understand the allegations and visited S3 in order to review Client files and speak with the Directors. We have contacted a number of Clients where we considered the funding to be a risk as a result of our review of S3 files. We have not spoken to any of the staff employed at the time of the allegation as a number of them are no longer employed by S3. We have summarised the main findings from our work below.

Conflicts of interest

4.2.9. There were two allegations made by W1 in relation to conflicts of interest. Firstly, that S3 provided business advice to other companies owned by the Director(s) of S3, subsequently claiming the related expenditure from DP1 and that Clients being assisted through BSU2 were being encouraged to buy additional services from S3. We have considered the former allegation as apart of our work on eligibility and the latter is dealt with below.

4.2.10 The latter allegation relates to the £500 grant given to Clients entering the BSU2 Project and S3 encouraging them to spend this grant on other services provided by S3. The Grant is not matched with ERDF or the wider Single Pot funding of BSU2 and all risks associated with it remain with DP1. Therefore this grant does not affect the ERDF or Single Pot funding.

4.2.11 The £500 grant was provided to complement the services provided under the BSU2 project and, in order to do this, it had to be administered by the Supplier who successfully bid to provide the BSU2 services for DP1. Therefore, it is not unreasonable to assume that if a different Supplier had been successful then they would also have been given responsibility for administering the £500 grants. The successful bid submitted by S3 to provide services clearly mentions the additional business facilities S3 would provide for Clients at a reduced rate should they require them.

4.2.12 This was not expressly forbidden as part of the BSU2 contract (which is not surprising as there were no grants issued as part of this) and we have not been able to find any contractual documents which suggest it was expressly forbidden as part of the additional services contracted by DP1. Therefore whilst we would agree in principle with the conclusion made by GT, we also consider it unlikely any action could be taken against S3 in relation to ERDF activity for the above reasons.

Business Starts

4.2.13 Business Starts (Starts on invoices) attract the highest value payments within the contract. In order to trigger a payment S3 were required to upload, into the CRM database, evidence to show that the Client had started trading as a sole trader or business. On uploading suitable evidence, S3 were entitled to a payment of £1,144. The GT review of beneficiary files identified some instances where this ‘evidence of trading’ preceded the date the beneficiary joined the programme. This effectively meant that S3 were claiming expenditure for Business Starts even though the Client was already trading before receiving any support from S3, in some case this could be 2-3 months prior to receiving support from S3.

4.2.14 GT have assumed that for S3 to claim expenditure for a Business Start then they should have provided some form of assistance to the beneficiary before they commenced trading. The reason GT have only ‘assumed’ this is because they have not had access to the full range of contracting documents at the time of writing their report. Where GT have identified cases where evidence of trading predates the assistance given by S3, they have concluded that it is likely that S3 may have committed an offence as this is likely to have caused a loss to the contract holders (DP1 and NWDA).

4.2.15 Whilst we would agree with assumptions made by GT, as they appear sensible, consideration needs to be given to the definition of trading within ERDF. We have located a copt of the contract between NWDA and S3 and this have proved inconclusive as it does not give any detailed guidance on the eligibility of Start-ups in order to trigger payments on the contract. NWDA guidance on the eligibility of outputs allows companies and individuals who are incorporated or registered (as sole traders) to be considered eligible for pre-start support as long as they are not actually trading. However, we also need to consider that the output guidance does not necessarily relate to the payments on the Project as not all of the payments will result in an output.

4.2.16 As part of managing the BSU2 Project A4E developed desk instructions to aid Suppliers in the use of the CRM database. Page 20 of these instructions gives a list of the business stage options which are Pre-Start, Start-Up, Established and Leaver. It further defines each business stage with a Pre-start being a Client who has not yet started trading and a Start-up as a Client who is trading and less than three years old and these appear to match the definitions as given in the NWDA output guidance.

4.2.17 Page 32 of the instructions give details on when a Supplier can claim a payment (Declarations) and gives three types, Intensive Support, Start-Up and Post Start Aftercare and these all match the payment descriptions on the invoices. This page goes on to say that Intensive Support and Start-ups can only be claimed for clients joining as a pre start companies and this suggests to us that a Supplier cannot claim the payment for Start-up (in this case £1,144) if the client was trading before joining the BSU2 Project.

4.2.18 However, we are also conscious that the CRM guidance is a desk instruction and is not contractually binding as it does not form part of the guidance documents, issued by the DCLG MA, which are referenced in the Offer Letter. At the same time, it would seem strange to issue a desk instruction which included guidance more restrictive than the contract documents and it does seem to compliment the NWDA guidance on outputs.

4.2.19 We have discussed the desk instruction with the Applicant (BIS) and they were unaware of any restrictions on Suppliers claiming expenditure for the Start-ups element of the Project. They were of the opinion that as long as the supplier had completed the required assistance with the Client then they would be eligible to claim the expenditure regardless of whether the Client was already trading (subject to suitable evidence of trading being uploaded into the CRM database). The Applicant will however carry out a review of documentation relating to this issue in order to provide a definitive answer.

4.2.20 Until we receive absolute clarity in this area we are of the opinion that it would not be appropriate to consider any action against S3 in relation to this issue. However, we also cannot rule out the possibility of a large amount of irregular expenditure remaining with the Project claims submitted by DP1. Therefore DCLG needs to give consideration to the possibility of applying corrections to the expenditure, claimed by DP1, in order to protect the Department from future irregularities being identified should the EC Auditors select this Project for audit.

Anomalies in S3 Records

4.2.21 W1 has made a number of allegations in relation to the completeness and accuracy of the Client records maintained by S3, in summary these are:


  • S3 corrected errors within the files which were due to be audited by A4E, after they had been completed and therefore with no benefit to the ISUS Client, and before making them available for audit.

  • An S3 employee (W2) was instructed by Senior Managers at S3 to re-date Client records so they did not refer to the date when the review actually took place.

  • Some Clients, a sample of 47 records had 8 such instances, who were not eligible for support because they had been in business for 18 months or more at the time of the application.

  • Records “evidencing” that Client reviews had taken place appear to falsely represent the reviews or that they had not taken place on the date stated.

  • Records to support S3 invoices to DP1 referred to activities which had not taken place, eg legal advice provided to a Client and Client reviews which were not undertaken.

4.2.22 GT made contact with S3 in order to carry out a review of Client files, GT experienced difficulties in accessing these files, due to the lack of cooperation by S3, and were only able to review 12 Client files before their visit was terminated by S3. GT identified a number of, what they considered as, anomalies with the records such as signatures which appeared to have been overwritten on pencil, signatures from the same person which appeared to differ from one form to the next and dates which appeared to have been altered. In addition to this GT highlighted concerns with the quality of some information contained within the Client review forms.

4.2.23 Of these 12 Clients’ files GT managed to make contact with six in order to discuss their experiences with the support provided by S3 and to validate the accuracy of the information. These discussions produced a mixed response from disappointment to satisfaction with the support they had received and some were concerned with some of the figures contained in the Client review forms. Overall, GT did not identify conclusive evidence that the files were completely falsified although they did conclude that it was likely that some documents contained anomalies which have been used to support payments made to S3.

4.2.24 However there was one Client (C2) who has gone on record as saying that they did not undertake any of the activity documented in their file as they only contacted S3 for advice which turned out to be incorrect. C2 has told us that, after seeking advice from S3, they were later contacted by them and told they would receive a £500 if they were willing to sign a few forms and the process wouldn’t take longer than a few minutes. C2 said that they went back to S3 and spent about ten minutes signing a number of blank documents in order to receive a £500 grant.

4.2.25 As a result of our testing of Client files we have found very similar issues to those identified by GT. We have found instances of files where client signatures appear to differ on the different forms, dates that appear to have been amended and narrative which appears to have been photocopied into the comments boxes. We have also identified some concerns with the quality of some of the post start review which were required to be undertaken at pre-determined intervals of 3, 6, 9, 12, 18, 24 and 36 months from the Client receiving the initial assistance.

4.2.26 In one particular case the Client’s 9 month review said that business was good whereas the 12 month review stated that business was slow and the Client was undertaking voluntary work (and had been for a number of months) in order to raise their profile. The 18 month review, which requires a more in depth review including a financial analysis, stated that the last 12 months turnover was £30,000 and business was going well which does not really tie in with the comments on the 12 month review. It should also be noted that the signatures on these forms do not appear similar.

4.2.27 During our discussions with Clients we did not identify any who said that they did not receive assistance from S3 as the majority could recollect attendance at workshops or some other form of advice, provided by S3, to enable them to start their business. None of the Clients was able to confirm the specific number of hours support received from S3 which were recorded in their respective files. However, considering most of the Start-up support would have been delivered between 2009 and early 2011 we do not consider this to be unusual.

4.2.28 In relation to the post start reviews, we found a mixed response from the clients we contacted. These ranged from some who could not remember any reviews taking place, some who could remember maybe one or two telephone calls (even though they may have had a number of reviews recorded on their file) and some who could recall a number of reviews taking place. Whilst we accept that, due to the timescales involved, Clients may be unable to recall the detail or length of a review, we would expect them to remember the number and method of how the review was carried out by S3.

4.2.29 This raises concerns for us as as the majority of the anomalies we identified, during the review of Client files, related to the post start review documentation. If we add this to the fact that most Clients only had a vague recollection of these reviews and the allegation, made by W1, that S3 had manipulated paperwork to show reviews had been completed when in fact they had not, then there is a risk that S3 may have claimed expenditure for work not carried out and in doing so may also have committed an offence under the 2006 Fraud Act.

4.2.30 We are unable to be more specific in this area due to the poor quality of the invoices submitted by DPs. As a result of this we cannot identify which of the post start reviews actually resulted in a payment being made to S3 (see Para 4.2.5). Whilst we can identify the total number of post start support payments made to S3 we cannot trace these back to the individual Client reviews. We have reviewed the data from the CRM database but again this only identifies if a Client has undergone a review and it does not confirm if the review resulted in a payment to S3.

Allegation 3 – Procurement

4.3.1 During our work on the BSU2 Project we received a number of allegations from S2 in relation to the practices undertaken by Delivery Partners (DP) during the procurement processes to appoint Suppliers from the BSU2 Framework Agreement. The allegations ranged from verbal threats, from DPs or organisations linked to them, in an attempt to ‘scare them off’ from bidding for contracts called off from the Framework and ‘favouritism in the bidding process’ shown towards Suppliers where DPs had pre-existing business interests with those Suppliers.

4.3.2 S2 informed us that they have no evidence to support either of the allegations as, in the case of the former allegation, these threats were made during telephone calls or during private meetings with certain DPs. In relation to the latter, this allegation is borne from frustration with, in the view of S2, a lack of fairness in the bidding processes for a number of call offs where the subsequent winner had been an organisation which had a history of sub-contracting from the relevant DP. S2 told us that they had complained to the relevant DPs, where this had occurred but had received unsatisfactory explanations in most cases.

4.3.3 S2 also told us that they had not reported these issues at the time because they did not know who to report to outside of the BSU2 Project. They were also concerned that they would face reprisals from DPs within the BSU2 Project should they report these issues. It should be noted that S2 reported these issues to us before they were made aware of the allegations against (see section 4.2) therefore we do not consider these allegations to be ‘tit-for-tat’. Also, as a result of our previous work with S2, we found they cooperated fully with all our requests and they gave us no reason to doubt their credibility.

4.3.4 The former allegation relates to verbal comments without witnesses therefore we are unable to undertake any work in relation to this. However, in relation to the latter, we have reviewed documents relating to the procurement processes undertaken by the DPs concerned. As mentioned in Section 2 of this report, DPs were able to contract with Suppliers as long as this was done through a mini-competition (call off) involving the Suppliers appointed to the BSU2 Framework Agreement (FA) established by NWDA. S2 have indicated the contracts called off by DP1, DP2, DP3 and DP4 as being unfairly conducted.

4.3.5 We have already raised concerns (during the A16 Audit) around the creation of this FA as there was no minimum quality score required for bidders to be appointed. As a result of this every compliant bid that was submitted to the NWDA was appointed to the FA. In total 59 Suppliers were appointed to the FA with quality scores ranging from 22% to 88% (with S2 finishing in first position). This makes it very difficult for us to understand the purpose of the FA as it appears everyone who submitted a bid was subsequently appointed to the FA without any consideration being given to the quality of their bids. This means the FA appears to serve no purpose apart from acting as a preferred supplier list for DPs.

DP1 Call Off

4.3.6 The reference to DP1 was of particular interest to us considering our work on the allegations made against their Supplier (S3) and it is here where we had access to more documentation. DP1 advertised the call off using the standard Request for Quotation (RFQ) (which was issued as part of the BSU2 suite of documents) to members of the FA who had expressed an interest in working in the DP1 area (the Wirral). The evaluation criteria was based on Delivery Model (50%), Staffing (25%) and Pricing (25%) with each of these criteria having sub-criterion which are weighted to ensure the maximum percentage for each criteria is not exceeded.

4.3.7 DP1 also required a minimum quality score of 60% to be achieved; there was no mention of an interview stage within the evaluation process. DP1 received 12 bids with 4 of these exceeding the minimum requirements, finishing in the following order: S3 – 72.92%, S2 – 67.08%, S4 – 62.08% and S1 – 61.67%. As a result of these scores a decision was made to appoint S3 as the sole Supplier to DP1. As we stated earlier, during the creation of the FA S2 were appointed in first place with a score of 88%, with the nearest bidder scoring 64%. S1 finished in 13th place with 59%, S4 in 15th place with 54% and S3 in 43rd place with 36%.

4.3.8 We consider it unusual that a Supplier should manage such a reversal in performance, beating 3 organisations that were considered superior during creation of the FA. Based on our extensive experience of auditing EC procurement, the only scenarios where we have experienced such a reversal in performance are, a) where the appointment was based on quality (or a combination of quality and price) whereas the call off was based only on price, or b) where the appointment covers multiple services but the call off relates to a single service.

4.3.9 Based on the documentation we have seen, none of these scenarios appear to be the case as the specification for appointment to the FA and the specification of the RFQ appear very similar. The only differences appear to be emphasis on knowledge of the area where the services will be delivered (the Wirral) and the people involved in evaluating the RFQs. Some of the questions within the RFQ were almost identical to those asked at appointment stage yet the scores were reversed. As a result of this we decided to carry out our own evaluation of the RFQs for S3 and S2.

4.3.10 Whilst we had access to the original scoring sheets, showing the scores for each bid against each question in the sub criterion, the comments boxes were not populated so we could not see the reasons for the scores given. We undertook two separate evaluations, by different people, based on the evaluation criteria within the RFQ, comparing the original scores given with our scores. Both of these evaluations concluded that the S2 bid scored more highly than the S3 bid.

4.3.11 During the evaluation we also identified that two of the questions in the evaluation criteria would be considered ineligible during the call off stage of a procurement process and would result in a financial correction if audited by A16 or the EC. One question asks bidders to detail their experience of delivering similar contracts, within the last 12 months, in the Wirral area and the other asks bidders to provide details of other contracts being delivered which may impact on the delivery of the BSU2 contract. The former is considered an ineligible question as it has the potential to favour a bidder and the latter is not considered relevant at this stage in the procurement process.

4.3.12 Our evaluation in itself does not prove conclusive but we must also consider the positions of the Suppliers on appointment to the FA and the allegations made by S2. In addition we should also consider the previous contractual relationship between S3 and DP1 as, at the time of the procurement process, S3 were coming to the end of delivering a similar service contract on behalf of DP1. If we consider all of these circumstances then this suggests there is a high risk that the call off process may have been manipulated in order for DP1 to select S3 as their Supplier in order to continue the contractual relationship.

DP2 Call Off

4.3.13 We have received limited documentation in relation to the call off undertaken by DP2 therefore we are unable to undertake any detailed work in this area. We have access to a hard copy of a spreadsheet which shows the scoring of bidders against the questions asked in the evaluation and a copy of the bid submitted by the winning bidder. However there is no narrative to explain why each score was awarded.

4.3.14 As we stated earlier, during the creation of the FA S2 were appointed in first place with a score of 88%, the eventual winner of the DP2 call off (S4) was appointed in 14th place scoring 58%. S4 is located within the DP2 Local Authority boundary. The scoring sheet for the DP2 call off shows S4 as the winning bidder with 51% and S2 came second with 36% and, as per our comments at paragraphs 4.6.7 & 4.6.8, we consider this unusual as the only differences in the questions used during the evaluation criteria appear to be the references to the local (Salford) area.

4.3.15 We also identified that two of the questions in the evaluation criteria which we would consider ineligible during the call off stage of a procurement process and may result in a financial correction if audited by A16 or the EC. One question relates to demonstrating experience and track record in the Salford area and the other asks bidders to provide details of other contracts being delivered which may impact on delivery of the BSU2 contract. The former is considered an ineligible question as it has the potential to favour a bidder and the latter is not considered relevant at this stage in the procurement process.

DP3 Call Off

4.3.16 DP3 approached the call off slightly differently than the others as they split it into 3 Lots, Women, Social (enterprises) and Other. Organisations were allowed to submit for any combination of the above lots. S2 submitted a bid for the lot titled ‘Other’ so it is here we have focussed our testing. The eventual winner of the ‘Other’ Lot was S5. As we stated earlier, during the creation of the FA S2 were appointed in first place with a score of 88%. However, S4 appear to have finished in 5th, 6th, 7th, 8th and 9th place with scores of 62%. The reason for this is that S4 appear to have submitted a number of bids as part of consortiums or for specific areas only. S5 is located within the DP3 Local Authority boundary.

4.3.17 In total DP3 received 11 responses for the ‘other’ Lot and a minimum quality score of 60% was set. There was no mention of an interview process within the evaluation criteria and the criteria were scored on a similar basis to DP1 and DP2. A summary report dated 15th July 2009 shows that S2 finished in 1st place with a score of 78.87% and S4 finished in 3rd scoring 75.42%. However, a further summary report dated 6th July shows the same information but also refers to an interview process and contains a process showing amended scores.

4.3.18 Although not mentioned in the evaluation criteria, it appears that DP3 undertook an evaluation of the bids and then invited the highest place bidders to an interview. The scores from both evaluations were added together and divided by 2 in order to get an average score. The result of this was that S4 finished 1st scoring 71.80% and S2 2nd with 71.38% a shift of 3.33% as a result of the interview.

4.3.19 We also identified that two of the questions in the evaluation criteria which we would consider ineligible during the call off stage of a procurement process and may result in a financial correction if audited by A16 or the EC. One question relates to demonstrating experience and track record in the Knowsley area and the other asks bidders to provide details of other contracts being delivered which may impact on delivery of the BSU2 contract. The former is considered an ineligible question as it has the potential to favour a local bidder and the latter is not considered relevant at this stage in the procurement process.

DP4 Call Off

4.3.20 We have not been able to access any procurement documentation relating to the call off undertaken by DP4 therefore we are unable to comment. However, this failure to provide us with the necessary documents would result in a financial correction if audited by A16 or the EC.

4.3.21 As a result of our procurement activity we did not find any evidence that confirms fraudulent activity has taken place, although we are also minded that procurement is a notoriously difficult area to detect fraud due to the risk of collusion, which would conceal illicit practices. However, the allegations from S2 and the technical breaches identified within the procurement processes tested give rise to concerns that processes may have been manipulated by DPs in order to contract with their preferred suppliers.

4.3.22 A number of the breaches we identified would result in a financial correction being applied to the BSU2 Project if these were identified during an A16 or EC audit. Therefore, we would recommend that DCLG considers applying a flat rate correction in accordance with appropriate regulations, to the BSU2 project, as a result of the procurement breaches we have identified. Not only will this reduce future liabilities to the Department, it will also bring project expenditure back in line with EC regulations.

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Responses

  1. More time and money waster! When you think of all the different people, suppliers and deptments going in to things like this it just becomes a paper chain and no one will ever find the case of fraud, they cover themself so well.
    And when tenders are put out firms put in not one bidder but a number of them in the hope they get the bid, the whole proccess just stinks!

    • It’s very difficult to prove anything without a lot of evidence when people see how whistleblowers are treated as they see how someone is victimised and keep their mouth shut for the sake of their careers!

      There isn’t supposed to be collusion between bidders in a procurement process.


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