The Parliamentary Health Service Ombudsman has been criticised over its handling of four contracts worth more than £1m by the National Audit Office, but ombudsman Dame Julie Mellor was cleared of wrongdoing.

The report, dated September 2014 but made public shortly before Christmas, said: “We found no evidence of material irregularity, or undue influence… arising from conflicts of interest.”

Dame Julie Mellor

Dame Julie Mellor suggested former colleagues as potential suppliers

However, the NAO highlighted a catalogue of governance failings and poor processes, which it concludes could leave the ombudsman body “exposed to the criticism it had not exercised the expected stewardship and governance over public funds”.

The NAO investigated four specific contracts awarded by the PHSO in 2012 and 2013 after concerns emerged in 2013 during internal audits that “procurements had been unduly influenced” due to Dame Julie’s relationships with the companies.

In three of the four contracts the successful bidders included former colleagues and business partners of Dame Julie who she suggested as potential suppliers. In the other contract her former employer PwC was one of the bidders.

While the probe found no evidence of undue influence arising from conflicts of interest, it said this conclusion could only be made after “detailed examination”. It added that, based on actions taken and its documentation, the PHSO “would find it difficult to robustly defend itself against the charge that interests played a part” in decision making.

The NAO said that apart from where the ombudsman excluded herself from the decision making process in one contract, the actions taken “were not sufficient to avoid the perception that procurement decisions could be seen to have been influenced by the existence of interests”. It continued: “We have identified that the declarations made were not complete. The declarations made, and actions taken, were not recorded.”

The four contracts were:

  • A contract with PA Consulting costing a total of £816,414 to develop a strategic plan. One of the bidders was PwC, where Dame Julie was a partner and still receives a “small financial benefit”. She declared a potential conflict of interest and removed herself from the decision panel. The contract was later extended by eight months without any competition prompting an internal memo expressing concern that the NAO said was not acted upon. The report said one consultant worked roughly four days a week for eight months at a cost of over £250,000 without any consideration of value for money and quarterly reviews of the contract did not happen.
  • A contract with Rosemary Jackson Consulting to provide senior leadership coaching with a total cost to December 2013 of £70,035. The NAO said Dame Julie had used Ms Jackson twice before when she worked at the Equal Opportunities Commission and British Gas. The NAO said Dame Julie had also used Ms Jackson several times when she ran her own business in the 1990s. In 1998 they formed a company together although it never traded. The report said “full declarations” about these past relationships were not given to the deciding panel although Dame Julie spoke last and did not chair the panel, which made a unanimous decision.
  • A contract with consultancy BritainThinks costing a total of £108,132. The NAO said Dame Julie had prior business relationships with the lead consultant from the company and although she told the NAO she recalled declaring this, the NAO report said it was not recorded in the evaluation document and it was not clear what action was taken. Dame Julie decided not to be part of the formal panel and spoke last on what was a unanimous decision.
  • A contract with Conroy Consulting to provide support for senior management recruitment costing a total of £44,286. Dame Julie provided the name of a person from the company to PHSO staff as a potential supplier. They had worked with her in the late 1980s and again while she was at the Equal Opportunities Commission. None of this was documented but the NAO said Dame Julie took no further part in the procurement.

It called management of the contracts “ad hoc” and dependent on individuals, and also found problems with the contracts including no termination clauses and “ambiguity over expenses”. Documents also failed to provide a proper record of events, including one tender evaluation report that described Dame Julie as chairing the panel when the four panel members in interviews with the NAO said this was not the case.

The NAO said: “Whilst seemingly a point of detail, this documentation is the formal evidence that protects the organisation from challenge by evidencing that proper process has been followed. The PHSO is currently unable to demonstrate this.”

A statement on the PHSO website said: “At the outset and in its governance statement in the annual report and accounts, the PHSO has openly acknowledged both the weaknesses in some of its former procurement processes with the help of the NAO and is driving improvements in processes and accountability for contract management, conflicts of interest and value for money.”