The two worlds of town councils and the companies they hire to manage estates often overlap.

Town councils sometimes take on staff from the companies they hire to provide services to make for smoother operations.

But in the case of Aljunied-Hougang-Punggol East Town Council (AHPETC), its general manager and secretary are not just employees of a company hired by the town council, but majority owners with financial stakes in them.

In other words, they stand to gain financially from decisions they are party to as town council executives.

Corporate governance experts said what is appropriate in a situation that involves "double-hatting" individuals with ownership interests is for safeguards to be in place to isolate them from decisions involving their second hats.

At AHPETC, this was not the case, said the Auditor-General's Office (AGO) in its audit report of the financial accounts of the Workers' Party-run town council.

AHPETC's secretary Danny Loh Chong Meng and general manager How Weng Fan are majority owners of its managing agent company, FM Solutions & Services (FMSS).

The AGO found that AHPETC did not properly disclose or evaluate transactions where such potential conflicts of interests were present, putting the integrity of $25.9 million worth of payments at risk.

Some of its senior staff, such as its secretary and general manager, owned companies that the town council had contracted to provide estate management services. The staff involved in approving payment also had ownership interests in the company that was receiving the payment.

AHPETC, in its reply to the AGO report, disputed that there was inadequate disclosure of potential conflicts among their staff. "The Town Councillors were very much aware of the details of composition of FMSS and the relationship of the directors and shareholders as town council management," it said.

Auditors said the proper procedure is for the "double-hatting" individual with an ownership interest to abstain from decision-making on tenders with potential conflict.

In addition, all instances of potential conflicts must be reported to an oversight body, like the board of directors, for approval.

The chairmen of People's Action Party-run town councils, like MP Zainal Sapari of Pasir Ris-Punggol Town Council, said that is the way they handle double-hat staff even when there is no ownership conflict.

PAP MP Zaqy Mohamad, who chairs Chua Chu Kang Town Council, said "the individual should have a role that doesn't have to do with finances or awarding of contracts, like managing residents' feedback".

RACHEL CHANG