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We Are Indigo co-founder Pat McFie, nee McPhee. (Photo: Supplied)
We Are Indigo co-founder Pat McFie, nee McPhee. (Photo: Supplied)

BusinessDecember 7, 2023

Auditor general issues damning findings into Manaaki dispute with Callaghan Innovation

We Are Indigo co-founder Pat McFie, nee McPhee. (Photo: Supplied)
We Are Indigo co-founder Pat McFie, nee McPhee. (Photo: Supplied)

A new chapter in the controversial dispute between an Auckland tech company and a government agency, with the tabling of a withering report in parliament today.

A highly critical report from the auditor general has been tabled in parliament today, the latest twist in an acrimonious dispute between government agency Callaghan Innovation and Manaaki, a firm which had provided an array of support services to startups. 

The dispute arose when Callaghan Innovation became aware of serious allegations within the startup community. It was in the process of procuring support for new startups, and wanted to ensure that businesses tendering for the right to provide that support were of suitable character. Callaghan commissioned due diligence reports on all applicants, one of which surfaced serious allegations made against Manaaki. 

Manaaki contends that investigator John Borland had a conflict of interest due to having previously carried out work for one of the firms he interviewed as part of the due diligence process. These ultimately led to Callaghan’s decision to remove Manaaki from eligibility under what Manaaki believed was an unfair process. The reports were sufficiently troubling that Callaghan distributed them to some other parts of government, and they were ultimately leaked to media, including The Spinoff.

Read more: Deep inside the explosive We Are Indigo saga and Fresh chaos engulfs We are Indigo / Manaaki

The report is sharply critical of Callaghan’s actions. “The due diligence process was not transparent,” according to auditor general John Ryan. Later, he contends that “there was a lack of natural justice in the due diligence process.” The report does not confirm a conflict of interest, but does say that “the contractor’s correspondence… suggests that, even before Callaghan Innovation engaged him, the contractor had formed a view that there was evidence of potential fraud in We Are Indigo’s dealings with Company A and MBIE.”

A summary of the findings noted that “It was reasonable for Callaghan Innovation to implement a more intensive due diligence process to protect founders. However, it was important that the process treated all those involved in the procurement fairly and transparently. Callaghan Innovation’s process was neither transparent nor fair.

“Callaghan Innovation did not give enough thought to how it proposed to manage the potentially sensitive information the due diligence process might uncover, or what it would do to respond to any significant concerns that the process identified. The due diligence process lacked natural justice. Manaaki had a limited opportunity to give its version of events in response to the first due diligence report, and no opportunity to respond to the second report.

Vic Crone was CEO of Callaghan Innovation at the time (Photo: RNZ)

“Callaghan Innovation did not adequately consider how a perception of bias created by the contractor’s previous work could taint the due diligence. This has weakened the procurement process and exposed Callaghan Innovation to the risk of challenge.”

The auditor general’s report is extensive, at 72 pages – but it pointedly does not assess the allegations within the reports, merely whether there was substance to Manaaki’s view about the conflict, and the fairness with which it was treated. In his concluding remarks, Ryan says “Callaghan Innovation’s objective to protect founders was well intentioned. Unfortunately, in my view, Callaghan Innovation should have considered its actions more carefully throughout the due diligence process.”

In a statement attributed to We Are Indigo – the parent company of Manaaki – its CEO Pat MacFie claimed vindication from the report.The report clearly states that the processes followed by Callaghan during the tender along with their actions were not to the standard expected of a government organisation.” It goes on to say that “the flawed tender process has taken a material toll on We Are Indigo and its people, effectively leading to the cessation of all activities of Manaaki,” and notes that it is continuing to “seek remedy” from Callaghan.

Vic Crone was CEO of Callaghan until midway through 2022, and oversaw much of the early part of the dispute. In a statement provided to The Spinoff she said she welcomed the auditor general’s views, but believed the report points to a lack of clarity around government due diligence guidelines as much as errors on Callaghan’s part. “I also look forward to the due diligence guidelines being adequately modernised so that all of government have the benefit of clarity in doing their work moving forward.” 

Crone also noted the limited scope of the report, and said it should not obscure the actions the original due diligence reports sought to uncover. “Sadly, the evidence of poor behaviours in the innovation ecosystem is strong, whether it’s the many people who bravely approached me in confidence sharing their own stories, the recent due diligence reports, or Callaghan Innovation’s own research finding that 49% of founders had experienced inappropriate behaviours.”

Investigator John Borland believed that the auditor general’s report conflicts with one completed by the Private Security Personnel Licensing Authority, a division of the Ministry of Justice, which Borland said reviewed the same information and found no conflict of interest. 

In response to questions posed by The Spinoff, he made it clear that he had a low opinion of the auditor general’s report. “In my opinion the government would have been better spending over a year of tax-payer funded money working to prevent the very issues the evidence from witnesses within my reports identified, around founder bullying and business behaviour. Particularly after they were provided [to] the PSPLA/Ministry of Justice who investigated the same matter pertaining to my involvement.”

Callaghan Innovation provided a statement acknowledging the report, saying it accepted “the process for vetting suppliers did not meet the high standards expected of a public sector organisation.” It said it had learned lessons and changed the way it interacts with suppliers.

“As part of the overall procurement process we were trialling a more intensive due diligence process which was the subject of the OAG inquiry.  While well-intentioned, we acknowledge that parts of our trial due diligence process did not meet best practice.

“Put simply, we should have told potential suppliers upfront about specific details of the due diligence process (in particular which provider will be used to conduct it) and given Manaaki more opportunities to respond before finalising the report – we accept that was a failing on our part and we have apologised for the shortcomings in our process and the impact on Manaaki in particular.

“We also accept that we should have put in place additional special information security and confidentiality procedures, given the potentially sensitive nature of information discovered in intensive due diligence processes. Our job now is to ensure we address the findings of the report and ensure our future procurement process exceeds expectations.”

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