Scandals in Auditing – Otago District Health Board


Fraud is defined as the intention to falsify statements and documents for creating personal or/and corporate gains (Knechel, Salterio, & Ballou, 2007). Fraud is an emerging problem globally and domestically. The most significant fraud of state services in New Zealand history – a despicable scandal of Otago District Health Board (ODHB) was disclosed during December 2008 (McLean, 2008). The 47-year-old Michael Swann, as a chief information technology officer of ODHB, perpetrated a multimillion-dollar fraud by generating illegitimate and fallacious computer-related invoices. Swann together with 48-year-old Kerry Harford, who was his friend and accomplice, defrauded the ODHB of approximately $NZD17 million over six years (RadioLIVE, 2009). Indeed, this contemptible scandal has detrimental implications on the stakeholders of ODHB. This report would discuss the role of the auditor in the scandal and the consequences that the alleged pair suffered as a result of their fraudulent behaviours.

ORGANISATION – Otago District Health Board (ODHB)

ODHB is a publicly funded health sector. Today, ODHB serves 181,500 people, which is approximately 70% live within Dunedin City (ODHB, 2010c). ODHB was officially established on 1st January 2001, as one of 21 DHBs, by New Zealand Government with an aim to be accountable for planning, funding, and performing government-funded health care services for the well-being of Otago population (ODHB, 2010a). Historically, ODHB was known as Healthcare Otago (ODT, 2008a). Swann was employed by ODHB as a full-time technical leader in May 1998, which was during the period of ODHB pre-establishment (ODT, 2008a). In November 1999, Swann became the head of Information Technology with authority and purchasing power for ODHB (ODT, 2008a). Sonnford Solutions owned by Harford was incorporated at Companies Office in November 2000. Insidious fraudulent activities commenced instantaneously until 2006 due to internal inspection. Serious Fraud Office (SFO) began financial forensic investigations during October 2006 (ODT, 2008a).


The ODHB experienced the $NZD16.9 million fraud convicted by Swann, who was the chief information technology officer, and Harford over six years (McLean, 2008). The dishonest and fraudulent activities were performed via illegitimate 198 IT-related invoices from Harford-owned company Sonnford Solutions to the IT Head Office of ODHB, where Swann utilised his authority and position to sign-off these falsified invoices (NZPA, 2009c; ODT, 2008a). Swann claimed that he was devising “the computer risk mitigation system” due to his dissatisfaction regarding the IT supplier and support of the hospital’s main servers (NZPA, 2008b). He suggested that the payments were for “risk mitigation” and insurance cover on behalf of the large RS6000 servers of Dunedin Hospital servers (NZPA, 2008b). However, these arguments were nullified. In fact, during these six years, Swann utilised the funds for maintaining his “high-flying” and extravagant lifestyle – owing several high-quality cars, properties, boats and a 50-metre luxury yacht (ODT, 2008c; The Work For You, 2006). Harford appeared as an accomplice, who received 10% of the total payments of $NZD16,902,145.27 and transferred the residual 90% to Swann-associated companies or/and entities (NZPA, 2008b; Schofield, 2009). Harford-owned company, Sonnford Solutions, as the catalyst of this entire fraudulent activity, was sending falsified invoices to ODHB over six years (NZPA, 2009a).


This scandal could be the largest fraud committed by a state employee opposing a Government institution within New Zealand (ODT, 2008c). Swann, as the chief IT officer of ODHB, abused his power, position and authority completely during 2000 to 2006. Swann perpetrated fraudulent and dishonest activities caused an enormous financial loss/deficient to ODHB, where financial resources were especially scarce (Schofield, 2009). He defrauded the ODHB together with his business associate and friend, Harford, whom Swann had known since university during the 1980s (NZPA, 2008b). Harford’s Sonnford Solutions invoiced the board for IT-related services which they never provided (ODT, 2008d). Swann used his authority to sign-off these fallacious invoices on behalf of ODHB and make subsequent payments to Sonnford Solutions. As mentioned previously, the total payment receipts were split between Harford and Swann-related entities – that is, 10% and 90% respectively. Although Swann possessed the permission to sign for expenditures up to $NZD 0.2 million per annum, however, he was still able to steal on average of $NZD2.8 million [$16.9M/6years] per annum (Hartley, 2008).

The letter that warned about Michael Swann (ODT, 2008b)


This despicable fraud has detrimental implications on internal and external stakeholders of ODHB. Internally, the CFO (Chief Financial Officer) and CEO (Chief Executive Officer) employed during the alleged period, including Ewan Soper (The CFO of ODHB between 1998 and 2003 ) and Richard Thomson (The ex-chairman of ODHB; appointed to be the chairman of ODHB in 1999), had to undergo serious scrutiny (Hartley, 2008; ODT, 2008a). Since the most significant fraud of state services in New Zealand history occurred under the chairmanship of Thomson, he was held responsible for this $NZD16.9 million fraud over six years (McLean, 2009). Thomson, thereby, was sacked from his ODHB chairmanship in February 2009 by Minister of Health, Tony Ryall (NZPA, 2009b). His role was replaced by a board member, Errol Millar (NZPA, 2009a). Further, there were also adverse effects on external stakeholders of ODHB significantly, including the patients cared by ODHB. According to Dr Paul Hutchison, National MP, who suggested that $NZD17 million could have provided “more than 1100 knee replacements or 1200 primary hip replacements, or nearly 700 coronary by-pass operations” (McLean, 2009) to New Zealand general population, especially the people in Otago district.

ROLE OF THE AUDITORS – Audit NZ & Internal Audit Committee & Internal Auditors

Lopes L.J. (1896) describes an auditor as “a watchdog and not a bloodhound”. This concerns us with the potential problems driven by audit expectation gap. Audit NZ, internal audit committee of DHB and other internal auditors were the key auditors of ODHB (Hartley, 2008). The general public and non-audit related individuals would expect auditors to prevent and detect this largest state services fraud during these six years. However, auditors could only perform their duties optimally based on the information presented by an organisation. In other words, ODHB had provided insufficient information to its auditors. Bruce Robertson, former Audit NZ external audit director, indicated that no information related to Swann’s past was specified during the auditing period of early 2000s (Hartley, 2008). This means that Audit NZ was not aware of Swann’s bankruptcy history from an unsuccessful computer company (ODT, 2008a). If similar information were given, Audit NZ would not merely focus on system performance of ODHB, but pay much attention on Swann’s behaviours and IT activities simultaneously (Hartley, 2008). Indeed, internal audits were also inadequate. Ewan Soper3 claimed that while the finance people were inspecting Swann quietly and carefully under his direction, the jeopardy of Swann raising personal grievances opposing ODHB may result. There was no ground for the auditors to investigate Swann further (Hartley, 2008). These arguments caused criticisms regarding whether Ewan Soper should have taken an audacious position as he was accountable for the internal audits of ODHB. Overall, ODHB was subjected to seven audits performed by Audit NZ and no fraudulent activity has been detected (The Work ForYou, 2006). Therefore, the solution for bridging this expectation gap would enhance auditing procedure in the future. This may include improvements in developing auditing standards, reviewing procurement process and/or introducing new internal controls and fraud policy (ODHB, 2010b).


The alleged pair was found guilty during December 2009. The hearing about these fraudsters was finalised by the High Court at Dunedin on 11th March 2009 (NZPA, 2009a). Swann was jailed for nine-and-a-half years while Harford was jailed for 4 years and 3 months (NZPA, 2009b). In May 2009, a restraining order was issued by the High Court over Swann’s assets that include “12 properties, 21 vehicles, five vessels and five containers” (NZPA, 2009b). Though the term of imprisonment sentence was not at the maximum of twenty-one years, the SFO was delighted with the hearing outcome (NZPA, 2009a). ODHB spent approximately $NZD1.3 in legal fee for the most significant fraud of state services in New Zealand history.


Dishonest and fraudulent activities could be presented insidiously over a long-period. Fallacious actions could affect diverse people associated with the firm internally and externally. Auditors are essential in detecting and preventing possible frauds. However, in this case, improvements in auditing procedure were required. Swann and Harford suffered legal imprisonment as a result of their fraudulent and misappropriate behaviours.

You are more than welcome to request for the reference list =)


Posted on March 6, 2011, in Business, Current Issue. Bookmark the permalink. Leave a comment.

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