In a recent post, I said that the SCERO/G4S electronic monitoring scandal (“this one will run and run” – Serious Fraud Office) had given rise to many scandals, one nesting inside the other, as it were.
Another has come to light. The Financial Reporting Council, regulatory body for accountants, actuaries and auditors, has published findings against Deloittes and two auditors. The findings were of misconduct in:
failing to respond to clear indicators of the risk of potential fraud on a UK Government Department, despite such indicators being visibly set out on the SERCO Geographix audit file (for the years in question)
failing to comply with important audit standards and included failings in relation to identifying the risk of fraud or material misstatement and the exercise of professional scepticism.
These are the accounts which, the SFO alleges, were manipluated so as to enable SERCO to give a false account of the profitability of its electronic monitoring contract to the MoJ.
Deloittes was fined £6.5m and the individuals also fined. Deloittes was also severely reprimanded and required to put in place extra training.
It perhaps may be a good idea for Deloittes to look for a new trainer, as previous fines and severe reprimands against Deloittes for professional failings in the Aero Inventory and MG Rover cases (2016 and 2015) have clearly not had the desired effect. They were also damned by the House of Commons Select Committees' inquiry into the Carilion collapse. Either Deloittes is out of proper control or it cynically shrugs off such reprimands, severe or not, as the price of doing business. With a turnover of over $40bn, the fines are loose change; as for reputational damage – well, it's not entirely clear that how easy it would be possible to damage Deloittes reputation.
Corruption is contagious. I hasten to add, I am not suggesting used dollar bills were handed over to Deloittes in brown envelopes: it’s clear from the FRC report that is not what happened. But in a way, frank corruption like that is easier to guard again, investigate and deal with. No, what I mean here is a sort of moral contagion: when one person, or company, decided to cut corners and bend the rules, then other bodies, other companies and individuals adjacent to the wrong doer, or doing business with it, may well come under pressure to turn a blind eye, not raise awkward questions, in short, not to exercise ‘professional scepticism’.
No such action has occurred in relation to G4S, further evidence that in accounting terms, the two companies dealt with the issue in different ways, as I noted in my last piece.
The Serious Fraud Office’s six (!) year investigation of the electronic monitoring scandal that broke in 2013 took a smallish step forward this month, as regards SERCO – albeit a rather damp squib, the SFO having concluded that, while they were satisfied that alleged fraud was organised by, and for the benefit of, the main company, there was no evidence of ‘a controlling mind’ (just sorta happened, I guess!). So only a couple of smallish fry were offered up.
That leaves G4S. From the start, G4S were uncooperative with the inquiry, and were not offered the deal (Deferred Prosecution Agreement) such as the SFO and SERCO agreed, that allowed SERCO to, in effect, buy off a corporate prosecution (not that they needed to worry - the SFO told the judge that SERCO were too important a supplier of public services to be prosecuted – too big to prosecute, one might say.)
There may be differences, of course. G4S’s equivalent of SERCO’s Geographix reported losses in 2010 and 2011 and only a 11% profit in 2012 – such rotten luck, at a time when SERCO’s Geographix, in the same business, with the same UK customer, was reporting a profit of 80%! However, the position is obscured by the fact that G4S was doing similar business outside the UK.
Any outcome with G4S will rather point up the contrast with SERCO – if G4S are charged corporately, why not SERCO? If G4S aren’t charged at all, why were the SERCO officers charged, and for that matter, how did the SFO manage to take 6 years working out that G4S should not be charged?
If an outsourcing company is charged corporately with fraud, that would be devastating. Except that G4S isn’t beholden to the UK Government to the extent that SERCO is. The UK still accounts for 40% of SERCO’s revenue, and its main customer is Government (central and local Government, including justice, defence and transport, healthcare and immigration). Hence the new Chairman’s preoccupation with its penitence, reform and helpful suggestions for a new start on outsourcing.
G4S, by contrast, is a truly global company, taking less than a sixth of its profits from the UK and Ireland, moreover its exposure within the UK to Government is far less – and rapidly reducing. It has been taking steps to rid itself of the UK Government as customer (1) – G4S already announced that it is exiting Secure Training Centres and Immigration Removal Centres, and while it has bid into the Prison Operators Services framework competition, I suspect that in the aftermath of the Birmingham prison fiasco, there will be no more appetite in G4S for these tight margined, operational difficult and reputationally hazardous contracts. G4S’s exposure to the UK Government is now minimal. That in itself is a headache for the MoJ, since 2 suppliers is not a competitive market. They must be relying on MITIE and others to take up the role, perhaps buying out the long term G4S PFI contracts. That would be a brave decision, in Sir Humphrey’s words, given the state of the prison system, and the serial incompetence of the customer.
Thus, G4S could be far better positioned than SERCO to fight any charges. I hope they do. Because that is the only way, we, the public, will ever learn what actually happened, including, crucially, the multiple failures by the MoJ itself, that helped facilitate the loss of hundreds of millions of pounds of taxpayers' money.
(1) The UK Government. But curiously, the Scottish Government has only last month let the contract for EM in Scotland to G4S. Perhaps they know something we don't, or perhaps they just don't care what the English do!
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Postcript added 18 December
Readers of my book, and of this blog, will be aware of my keen interest in the saga of the scandal which broke as long ago as 2013, involving SERCO and G4S wrongly billing the Ministry of Justice for huge amounts of public money on their contracts for tagging of offenders. The companies were forced to repay nearly £200m – many times the take of the Great Train Robbery or Brink’s Mat heist.
The matter was referred to the Serious Fraud Office whose investigations – incredibly – are still not concluded, 6 years later. In my 2016 book, ‘Competition for prisons’, I devoted a chapter to this story, and noted then that it was unlikely the real story would ever be told, as it suited all parties that it should not be, and that the interminable SFO investigation has conveniently kept the facts under wraps (1). Trying to get at the facts, I have also pursued FoI applications, in one case as far as a FoI Tribunal (I won).
Why raise this now?
Because on 18 December we should be allowed to know at least some of the facts. In July, Mr Justice Davis approved what is known as a ‘Deferred Prosecution Agreement’ between the SFO and SERCO. This device, introduced by the Crime and Courts Act 2013, allows the SFO and the company it is investigating to reach an agreement by which the company avoids prosecution. In return, the company pays compensation, undertakes to fully cooperate with the SFO’s ongoing investigation against individuals and to agree to comply with independent review of its accounting procedures.
Mr Justice Davis also stated that the Statement of Facts drawn up by the SFO, and agreed with SERCO, would remain confidential until 18 December, when a decision is due on whether any individuals should be charged. We may, then, be within days of knowing a good deal more about this case.
It is already clear that we are dealing with not one scandal but a whole series of scandals – one nesting within another, as it were. They comprise:
[EXPLAINER:] If the case is no longer about wrongful charging for work never done, what is it about? It is about manipulation of accounts so as to give misleading information to the customer Government, about profit margins. This is important because the contracts, which appear to have been poorly drafted, did not reduce the unit cost per tagging operation with increasing volumes. One would expect that to be so, because some of the development, infrastructure, etc costs are fixed, and do not increase proportionately as volumes increase. And they did increase very substantially. Thus, if a fixed unit price prevails, profit margins will rise. To guard against this, SERCO was contractually required to report actual costs and revenues as they occurred, as the basis for negotiation of any abatement should the profit margin exceed that assumed at contract signature. The case now is about whether the wholly owned subsidiary of SERCO that made and supplied the tags, SERCO Geographix, manipulated its accounts so as to falsely reduce the apparent profit margin as made visible to the customer. (2)]
6. Lastly there must be some concern whether the outcome will ascribe culpability where it should properly lie. Mr Justice Davis noted: “As it was described in vernacular terms during the private hearing, SGL cooked their books to allow SL to retain the profit, 50% of which was believed otherwise would have been clawed back by the Ministry of Justice…” and “SL [SERCO, the main company, and owner of SERCO Geographix] was the beneficiary of the fraud. Thus, the scheme was devised by management within SL. “ But then added: “However, no “directing mind” of SL currently can be shown to have been involved in the devising and the putting into effect of the fraud. So it is that SL is not a party to the DPA.”
It would appear therefore that the entire hierarchy of SERCO itself is out of the picture, leaving the focus only on officers of its subsidiary, SERCO Geographix. But given that the latter was wholly owned by the former and under its control and direction, how can it be that only SERCO Geographix is now in the frame? Indeed, what possible point or benefit could be achieved by those in SERCO Geographix, if the benefit of the fraud was reaped exclusively by the main company? Is there not evidence of a history of manipulating the margin that historically, clearly involved the main company? (2) And, one might ask, does that not give SERCO somewhat conflicted interests in negotiating the DPA?
That must be a matter of keenest attention now, whether proceedings are launched or not.
POSTCRIPT 18 December
Announced this week that two SERCO employees were to be charged. But neither a Director of SERCO. Job done! Except for that awkward conclusion by Mr Justice Davis: "the scheme was devised by management within SL [ie the main company].....However, no “directing mind” of SL currently can be shown to have been involved in the devising and the putting into effect of the fraud. " That can only mean that the main actors are missing from the charge sheet.
I was formerly Finance Director of the Prison Service and then Director of the National Offender Management Service responsible for competition. I also worked in the NHS and an IT company. I later worked for two outsourcing companies.
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