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.

NOTE

(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!
 
 
 
 
lick here to edit.

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:

1. The original scandal, by a big margin, the most serious wrong doing in the very chequered history of outsourcing of public services in the UK. Two very rich companies helped themselves to hundreds of millions of pounds of tax payers money which they knew was not rightly theirs.
2. The fact that both companies were then allowed to carry on their business of supplying public services, not only as regards their existing contracts, but bidding for and being awarded new contracts, on the basis that the money had been repaid and they had cleaned up their act – even though the facts of the case, who authorised what and which levels, were not  then known and still are not known, and even though it was not then known whether the companies might be charged and convicted of criminal fraud on a huge scale against the public purse
3. The intolerable incompetence of the SFO in drawing out the investigation over 6 years – 6 years in which individuals under investigation, whatever one thinks of them, have not been able to earn a living, while they and their families live with the prospect of criminal proceedings at a later date. This monstrous delay, in what is by any measure one of the less complex of fraud cases, represents a miscarriage of justice: justice delayed is justice denied.
4. The fact, not yet spotted by the press or Opposition parties, that this is no longer a case (as it appeared in 2013) about companies charging for work which was never done. Yes, they did charge for work never done. But Mr Justice Davis declared this was no crime:  “The concern at that time was that SL [SERCO] had rendered invoices and been paid for monitoring services in respect of non-existent individuals. Investigation of those propositions revealed no evidence of any dishonest or fraudulent activity of this kind.”  As I noted in my 2016 book, that could only be the case if the contracts were so badly drafted as to leave the customer open to such exploitation, and/or officials were told what was happening, but took no action. But we are of course not allowed to know any of that. (1)
5. The dubious nature of  DPAs, which are open to the objection that they allow powerful and rich companies to buy their way out of a prosecution, despite acknowledging facts which disclose a prima facie case. And in this case, the negotiations look very dubious inDeed. Consider for example this extract from Mr Justice Davis’ judgement: “The SGL [SERCO Geographix, a wholly owned  subsidiary] engaged in quite deliberate fraud against the Ministry of Justice in relation to the provision of services vital to the criminal justice system. The SFO has argued that the public interest would not be served by SGL and/or SL being debarred from participating in any government procurement…... It is asserted that this would be disproportionate”.  So we know that the SFO was trying to avoid prosecuting the company because it thought it important it should be allowed to continue to operate, and win, contracts from Government!  I think most people would put it exactly the other way around: that it is precisely because of this wrong doing that they should not be allowed to continue in business. And of course, this murky discussion is conducted out of sight of the mere public, whose ‘interest’ is being prayed in aid. 
   

[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.


NOTES

1. One issue is the extent to which the Ministry of Justice as customer facilitated the loss of public funds by writing poorly drafted contracts  that were open to exploitation, by failing to scrutinise invoices properly, by failing to scrutinise SERCO’s accounts adequately and most seriously, by failing to respond adequately when certain facts were disclosed by the companies themselves (we don’t of course know what facts, and to whom, but the National Audit Office’s report shows that some sort of disclosure occurred way before 2013). A disciplinary inquiry was started by MoJ when the scandal broke but immediately suspected once the SFO investigation began, and never recommenced. Now, of course, there is no question of finding out the answers to these questions: ‘those involved have moved on’, the time-honoured Civil Service evasion – an excuse not available to SERCO staff.
2. In fact the judgement also refers to an earlier device to manipulate the margin, whereby costs incurred by other parts of the business, including SERCO Geographix, were retrospectively re-charged to SERCO itself. Mr Justice Davis notes: “Up to this point the conduct of SL and SGL was (to say the least of it) of doubtful legitimacy.”