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food scandal!
The Compass Group is guilty of serious irregularities in the way it won food supply contracts from the United Nations, it has admitted, following an internally triggered probe undertaken by leading international law firm Freshfields, with support from Ernst & Young.
Freshfields’ investigation examined the relationships between Compass subsidiary, Eurest Support Services (ESS), the United Nations and another contractor, IHC Services (IHC). The investigation was overseen by Steve Lucas, chairman of Compass Group’s Audit Committee, and lasted three months.
It concluded that there were serious irregularities in connection with contracts awarded to ESS by the UN. It raised questions over the behaviour of some ESS staff. But the investigation also found that the problems within ESS were isolated to that subsidiary and did not extend to other parts of the Compass Group. Nor did Compass ever own any shares in IHC.
The matter is of great significance, not least because Compass is the world’s largest catering supplier and has many UK public sector contracts, including contracts as part of PFI deals. Allegations over ESS’ contracts with the UN - relating to food supplies for peacekeeping troops - have led to investigations in the United States by Congress and by the US Attorney for the Southern District Court of New York, and also an inquiry by the UN. There has also been an investigation by the UK’s Serious Fraud Office.
Two chief executives have been dismissed - those running the ESS division and the UK region - as has a less senior official with responsibility for UN contracts. Compass said that, as well as dismissing staff, it had restructured the senior management of ESS, who now report to the Group’s finance director. The Group has also, working with E&Y, reviewed its internal systems and controls, leading to a reduction of autonomy within subsidiary companies.
Lucas said: “This has been a highly regrettable episode for Compass Group. However, we have now concluded a very thorough investigation and taken appropriate and decisive action. We have no reason to believe that the issues identified extend to any other part of the Group. The board is determined that Compass Group should meet the highest ethical and governance standards, and is taking all necessary steps to ensure that this is the case.”
The probes into Compass coincide with several high profile instances of allegations of corrupt relationships with the UN and governments. The managing director of AWB, an Australian wheat supplier, has resigned following accusations that his company paid bribes to win contracts for food supplies to Iraq as part of the UN Oil for Food programme. An inquiry into the allegations, which AWB denies, has been established by Australian Prime Minister John Howard.
And in the US, an audit released by the Special Inspector-General for Iraq Reconstruction has concluded there was fraud, incompetence and confusion as the US-led Coalition Provisional Authority mis-spent money on training and rebuilding programmes in Iraq in 2003 and 2004. The report concluded that millions of dollars were kept by US officials in various insecure places, including half a million dollars in an unlocked locker and $2m in a bathroom safe. Much of the cash was spent without receipts of proof of expenditure. One US soldier gambled away the cash of which he was in charge, which belonged to the Iraqi nation.
who stole me?
Coinciding with moves to obtain Parliamentary approval for identity cards,
the UK Government has launched a
campaign to combat identity fraud.
According to figures released by the UK’s Home Office, identity fraud is increasing rapidly and now costs the UK economy nearly £2bn a year. The Home Office is to work with HM Revenue & Customs and banks to identify suspect payments and accounts, which will generate investigations by the National Criminal Intelligence Service.
Home Office Minister, Andy Burnham, said that the scale of the problem justified the Government’s attempts to implement identity cards and adopt other measures, such as increasing criminal punishments for offenders. He warned: “The nation’s reliance on using easily faked documents such as birth certificates, utility bills and bank statements to prove identity leaves the door open to identity thieves.”
Fraud against financial institutions increased 10-fold between 2004 and 2005 - rising from £37m to £360m - according to the latest analysis by KPMG Forensic. Much of the increase came from mis-use of credit and debit cards and cheques through identity theft. But KPMG also identified greater sophistication amongst corporate fraud. In one case which went to court, the metals trading company RBG Resources Plc fraudulently obtained loans of £260m.
Although professional gangs carried out almost half of frauds, an even larger proportion was the responsibility of managers and employees of companies.
Other commercial frauds noted recently have included the impersonation of companies by using the name of a legitimate company, but a false delivery address - aided by a forged notification to Companies House of changes of address. There are even suggestions that criminal gangs may purchase legitimate businesses to use their sound credit records to order large quantities of goods fraudulently, without any intention of paying for them.
There has also been an increasing use of counterfeit e-mails and websites. One scam netted £200,000 from 160 people, through criminals creating a fake lookalike eBay website.
Jeremy Outen, a partner at KPMG Forensic, said: “There has been a worrying boom in fraud in recent months, although the good news is that we know this because the fraudsters are being successfully brought to book. Criminal gangs appear to be very active with aggressive stings, while in the private sphere internal frauds to fund excessive lifestyles or to pay off burgeoning debts show no sign of abating. With both the number and the average value of frauds increasing, companies and individuals need to be more watchful than ever.
“All too often, insider frauds are conducted over a period of months or even years without anybody noticing. It is often the most unassuming or trusted person that is perpetrating a fraud. Indeed, it is getting into a position of trust that can create the opportunity and temptation to steal in the first place. Companies need to review their internal controls processes where appropriate and make more use of some of the extremely sophisticated fraud detection software packages that have been developed - these can help identify anomalies in a company’s data flow and e-mail traffic that could be the possible indicators of fraud.”
KPMG confirmed the Home Office’s warnings about the growth of identity fraud. Some ID frauds have been bizarre, such as the ex-horseshoe fitter who posed as a pioneering biochemist with a new process for making soap, who successfully swindled businesses and local authorities out of £60,000 in grants and loans, and nearly succeeded with attempted frauds of a further £140,000.
KPMG warned employers that addictions could induce staff to become dishonest. The Government has also found the hard way that weak IT security can lead to major losses. Some 13,000 civil service personnel records were stolen through hacking into websites by organised criminals, and the staff’s details used to make fraudulent tax credit claims. It is thought that the UK Government lost at least £15m as a result of the fraud.
Home Office condemned by auditors
The UK’s Home Office has suffered one of the strongest censures ever of a government department from its auditors. This is not just embarrassing for the Government, but also humiliating for its then permanent secretary - Sir John Gieve, the new deputy governor of the Bank of England.
The Home Office did not maintain proper accounts and records for the 2004-05 financial year, the National Audit Office has reported. As a result, the auditors could not reach an opinion on the truth and fairness of the Home Office’s accounts.
Problems for the department stemmed, to a large extent, from difficulties with a new accounting system, which led to the late completion of the accounts. In particular, the Home Office had problems with the transfer and cleansing of data. In addition, staff were not trained in time to use the new system and there was a widespread lack of understanding of it.
As a result, the Home Office could not use data from its new accounting system to produce full accounts in line with the shorter timetable now used by government departments. Further, there were “significant control weaknesses within key IT applications”, said the NAO.
Its inability to implement its new accounting system meant that the department was unable to reconcile its cash position during 2004-05. A £3m discrepancy was fully investigated by the Home Office - causing it to make adjustments of £946m to reconcile its cash position. Despite concerns that the department could not prove that it had not fallen victim to fraud, the Home Office found no evidence of fraudulent activity.
The NAO concluded that the poor quality of the financial statements and the delay to their production reflected a lack of skills within the accounts branch of the Home Office, compounded by late recognition by its management of the serious problems encountered. Management procedures to ensure the quality of the financial information produced were inadequate.
As a result of the NAO’s criticisms, the Home Office has recognised the need to strengthen its financial control framework and improve its preparation processes for financial statements. It has now redesigned and restructured its financial accounting function, and has continued working on its 2004-05 accounts to provide a more robust basis for preparing the 2005-06 accounts. The Home Office has now commissioned its own review to increase its understanding of what went wrong and to improve its processes for future years’ accounts.
A Home Office spokesman said: “A great deal of work has been done over recent months to put right the problems highlighted by the NAO which arose from the introduction of a new accounting system in 2004-05. We have strengthened our system controls and financial accounting, we have more than doubled the number of qualified and experienced accountants, and we are relocating the
financial accounting function to our London headquarters.
“The new permanent secretary and new director of finance are giving high priority to addressing these issues, and Home Office senior management are fully committed to continuing to strengthen and improve its financial control framework and processes. In addition, we will appoint a firm of accountants to undertake an urgent review to establish whether any additional steps need to be taken.”
Sir John Bourn, comptroller and auditor-general and head of the NAO, said: “It is disappointing that the Home Office had not maintained proper financial books and records for the financial year ending 31 March 2005 and has been unable to deliver its accounts for auditing by the statutory deadline. The Home Office has recognised the need to strengthen its financial control framework, and to improve its financial statements preparation processes to enable it to meet its accountability obligations to Parliament, and has taken or has in hand actions for this purpose. Senior management leadership and commitment will be vital to the department’s success in producing accounts for 2005-06 to meet the Treasury’s faster closing targets and statutory requirements.”
KPMG tops up
KPMG’s partners will have to set aside more than £50m from future profits to top-up the deficit in its UK pension scheme, following a ruling by the House of Lords, the most senior appellate court in England and Wales.
The House of Lords has rejected an application from KPMG to hear an appeal over a High Court judgement on the firm’s pension scheme. The High Court had determined that the KPMG pension scheme was not, as the firm argued, a money purchase scheme, but rather a defined benefits scheme. The Lords’ decision means that the High Court determination is confirmed.
As a result of the Lords’ decision, KPMG is forced to cover the deficit in its scheme. According to the firm’s 2005 annual report, the deficit stood at £88m - but this was before taking into account £13m set aside in 2004 to reduce the deficit, and a further £15m provisionally earmarked from last year’s profits.
Eddie Donaldson, head of human resources at KPMG, said: “We are pleased that there is now clarity as to the nature of the scheme, and a long period of uncertainty has ended. The issues involved some complex and technical areas of pension law, and KPMG had received strong legal advice to support its view that the scheme was money purchase in nature. But we accept today’s ruling, and KPMG will now agree with the trustee an appropriate plan to ensure the scheme is adequately funded over time.”
He added that the decision of the courts “underlines the importance” of the decision taken by the firm and the pension fund’s trustees to obtain clarification on the legal situation regarding the definition of the scheme. “Throughout, KPMG has been committed to protecting the interests of long serving employees of the firm,” said Donaldson. He added: “All pensions in payment have continued to be paid at agreed levels whilst the legal process has been worked through.”
Pensioners were represented in the case by City law firm Pinsent Masons. Isabel Nurse-Marsh, head of pensions litigation at Pinsent Masons, who acted for the pensioners both in the High Court and in the Court of Appeal, said: “The House of Lords’ decision not to allow KPMG to appeal is a huge relief to pensioners. During several years of uncertainty they have been very worried that their pensions might be reduced. Since they are retired, our clients have no ready means to make up any cut in their pensions. KPMG will now be obliged to fund the scheme’s deficit, just like any other defined benefit scheme.”
Pinsent Masons said that some of the rules of the scheme had been unclear, with one rule appearing to allow the reduction of pensions once they are in payment. KPMG had argued that the scheme was a money purchase scheme and that it therefore had no funding obligation on it to make good the scheme’s deficit. But the pensioners successfully argued in the Court of Appeal that the scheme was an average salary scheme, not a money purchase scheme, and that Section 67 of the Pensions Act 1995 and the terms of the scheme’s rules prevented reductions of pensions in payment.
Stephen Yeo, a partner at pensions consultancy Watson Wyatt, says there are limited implications of the result of the legal case for other employers and pensioners. “The KPMG scheme is quite unusual,” he said. “There must be only a handful of schemes that are unsure what type of scheme they are, with different records saying different things.” | 
