Archived – Audit of the Contribution Agreement with the Shubenacadie First Nation

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Project Number 6B019
Final Audit Report
June 17, 2008

Table of Contents


1.0 EXECUTIVE SUMMARY

1.1 Introduction

1.2 Audit Objectives and Scope

1.3 Summary of Findings

1.4 Recommendation

2.0 INTRODUCTION

2.1 Background

2.2 Context

2.3 Mandate and Authority

2.4 Objectives and Scope

3.0 OBSERVATIONS AND RECOMMENDATIONS

3.1 Statement of Assurance

3.2 Objective #1: Process of Entering Into the Agreement

3.3 Objective #2: Managing the Agreement

4.0 MANAGEMENT ACTION PLAN

APPENDIX A – ANALYSIS OF AMOUNTS AT RISK

1.0 EXECUTIVE SUMMARY

1.1 Introduction

Fisheries and Oceans Canada (DFO) entered into a Contribution Agreement with the Shubenacadie First Nation (hereafter called the "SFN" or the "Recipient") to continue the process established by DFO for providing increased access to fisheries resources and to assist in fisheries capacity building under the Marshall Response Initiative. The Maritimes Region was accountable for the administration of the Contribution Agreement that came into force September 1, 2005 and terminated March 31, 2007.

The Contribution was for an amount "up to a maximum" of $5,000,000 of which DFO disbursed a total of $4,285,853.85 as shown in Table 1 below.

Table 1 – Summary of Payments by Payees

Paid to

Amount

Vendors of used vessel, gear and equipment

$2,670,541.50

In-trust for land and building purchases

$237,039.00

The First Nation

$1,378,273.35

Total Contribution Payments

$ 4,285,853.85

This document describes the findings and conclusions for the first two objectives mentioned in the next section. The auditors are not able to provide an opinion regarding the third objective given that the auditors were unable to examine the necessary information to conclude on this objective. Obtaining information from the Recipient has proved to be challenging for both the program staff and the auditors due to disagreements between various parties and failure to make books, records and supporting documentation available for audit.

1.2 Audit Objectives and Scope

The Terms of Reference for this audit engagement, which received concurrence of the Assistant Deputy Minister, Fisheries and Aquaculture Management and the Regional Director General, Maritimes Region focused on internal control processes and the use of funds by the Recipient. However, our initial audit enquiries necessitated the transition to a forensic audit engagement with objectives to provide assurance on:

  • the propriety of the process employed to enter into the Contribution Agreement;
  • the suitability of the internal controls employed by the Department to administer the Agreement; and
  • the appropriateness of the Recipient’s use of funds provided through the Contribution Agreement.

The scope included an assessment of transactions claimed and paid under the Agreement from September 1, 2005 to the date of commencement of the audit. The work consisted of examining

files maintained by the Regional Office and documents received from other parties. Interviews were conducted with DFO staff, Recipient representatives and other parties. The audit fieldwork was carried out between January and November 2007.

1.3 Summary of Findings

Regional staff faced numerous challenges administering the Agreement and there is no indication that anyone intentionally disregarded existing policies or procedures. Regional staff based their payment decisions on the information available to them at the time, and remained cognizant of the importance of dealing in good faith about the integrity and intentions of the First Nation. Moreover, the Regional staff provided assistance over and above what would normally have been expected to move the Contribution forward.

DFO possessed the authority to enter into the Contribution Agreement with the SFN; however, the source authority was not clearly documented in departmental files.

The acquisition process for the used vessels, gear and equipment was appropriate and the related payments were in compliance with the terms and conditions of the Contribution Agreement.

Weaknesses were observed in the monitoring processes undertaken by the Regional Office for payments made directly to the SFN. These weaknesses are partly the consequence of the Recipient failing to fulfill all obligations for financial and project reporting and the manner in which program staff reacted to specific issues. Program staff was unaware that suppliers were not paid and in the absence of quality monthly reports became largely reactionary with limited monitoring capacity. Notwithstanding, the program staff did recognize risk indicators, and early in 2006 when it became apparent Recipient reports were not forthcoming, adjusted their procedures to require the Recipient to submit supplier invoices to demonstrate payment eligibility. Moreover, in October 2006, the Maritimes Region suspended further contribution payments based in part on media allegations of improprieties and leadership challenges potentially affecting the Recipient’s capacity to fulfill all their obligations under the Agreement. Nonetheless, weaknesses in monitoring the Recipient’s use of the funds resulted in DFO making payments to the Recipient that it turns out have not been used for the intended purposes based on the documentation available for this audit.

Based on information obtained to date, we have assessed that the "amount at risk" is in the order of $647,158.54(6) as tabulated in Table 2. Supporting evidence identifies $67,802.74 of ineligible payments made by DFO, $449,034.84 in unpaid suppliers for which DFO provided payment to the Recipient, and $130,320 in claims that could not be validated because proper books, records and supporting evidence were not available from the Recipient.

Table 2 - Summary of Amounts at Risk

(a)
Expenditure
Category

(b)
Total DFO
Payments

(c)
Ineligible
Payments

(d)
Supplier
Unpaid

(e)
Unverified
Claims

Vessels

2,426,000.00

0.00

0.00

0.00

Equipment, Gear and Housing

1,043,121.32

0.00

(1)251,316.00

88,320.96

Fisheries Management & Capacity

360,472.53

(2)59,402.74

(4)15,718.84

30,000.00

Navigational Training

456,260.00

(3)8,400.00

(5)182,000.00

12,000.00

Totals

$4,285,853.85

$67,802.74

$449,034.84

$130,320.96

Notes:
1. Includes unpaid amounts of $159,506 for vehicles and $91,810 for safety equipment.
2. Fisheries consultant ($48 K) and legal fees ($11,402.74) that predate the Agreement.
3. Ineligible training allowances ($8,400).
4. Unpaid legal fees for which funds were advanced.
5. Unpaid portion of the funding provided to the Recipient for training tuition/ course fees
6. Total funds at-risk: $647,158.54 [the sum of columns (c)(d) and (e)].

We identified $67,802.74 of ineligible claims made by the Recipient. This includes $48,000 in fisheries consultant fees and $11,402.74 in legal fees that predated the Contribution Agreement coming into force; and an overpayment of $8,400 toward training allowances.

We identified $449,034.84 in payments to the SFN that did not reach the intended suppliers. This includes: $159,506 for vehicles, $91,810 for safety equipment, $15,178.84 in legal fees and $182,000 for training tuition. Specifically, we determined:

  • Five eligible vehicles were acquired and $228,000, the maximum set out in the Contribution Agreement, was paid to the Recipient based on bills of sale indicating the vehicles were long-term financing arrangements. The payment was made on an understanding that the transaction was a form of "bridge financing". We obtained sufficient information to conclude that $159,506 had not been used for the purpose intended and that the Recipient failed to properly account for the money received.
     
  • DFO paid the SFN $133,582.83 over two payments of $41,772.83 and $91,810.00 for safety equipment. One supplier confirmed receiving $3,451.87.
     
  • DFO paid the SFN $56,117.53 for legal fees of which $11,402.74 was ineligible as noted above. The supplier only received $28,996.20 for eligible services rendered; therefore, the additional $15,718.84 paid by DFO would have been used for other purposes.
     
  • In the case of the navigational training, three contracts were supplied to the Regional Office in support of an advance payment of $456,260 for tuition/course fees, participant allowances and classroom rental. We concluded from the information gathered to date that:

    • classroom rentals were fully paid in the amount advanced ($11,260);
       
    • $182,000 of the $220,000 advanced for training tuition was not paid to the supplier; and
       
    • 722 or $216,600, of a possible 750 weeks or $225,000 are eligible for training allowances ($8,400 ineligible). Of this eligible amount, we were only able to validate through records that 682 weeks or $204,600 was paid to the eligible persons.

We did not obtain sufficient evidence to verify if $130,320.96 of contribution funding provided to the Recipient reached the intended payees. This includes: $88,320.92 for gear and equipment, $30,000 in accounting fees and $12,000 of eligible training allowances as mentioned earlier.

We conclude that there were early indicators that the risk related to the implementation of the Contribution Agreement was high. Measures were taken by the Maritimes Region starting in early 2006. The Region required the Recipient to provide supplier invoices as a means to confirm the eligibility of the payments.

In conclusion, DFO should apply subsection 15(3) of the Contribution Agreement which stipulates that the First nation "shall refund to DFO, forthwith on written request by DFO, any money advanced to the First Nation for which unsatisfactory evidence has been furnished by the First Nation that the moneys have been expended in accordance with this Agreement."

1.4 Recommendation

It is recommended that the Assistant Deputy Minister, Fisheries and Aquaculture Management initiate action to: recover the ineligible expenses paid by DFO; communication with the SFN to obtain evidence demonstrating the remaining funds at risk were properly dispensed; and pursue the recovery of funds due where sufficient evidence of eligibility is not provided.

2.0 Introduction

2.1 Background

The Minister of Fisheries and Oceans Canada (DFO) entered into a Contribution Agreement with the Shubenacadie First Nation (also known as the Indian Brook First Nation and hereafter called the "SFN" or the "Recipient") to continue the process established by DFO for providing increased access to fisheries resources and to assist in fisheries capacity building under the Marshall Response Initiative.

After entering into the Contribution Agreement, the Recipient created an incorporated company to operate the fishery for reasons which appear to make good business sense such as to allow the company to acquire property and to limit SFN’s liability in the event of a claim involving the fishery.

DFO was to contribute to the SFN up to a maximum of $5,000,000 to be used exclusively for paying eligible costs as follows:

  • twelve used fishing vessels with equipment, to a maximum amount of $3,000,000;
  • new fishing gear and equipment, to a maximum of $150,000;
  • used fishing gear and equipment, to a maximum of $250,000;
  • upgrade of vessel electronic equipment, to a maximum of $50,000;
  • new safety equipment, to a maximum of $150,000;
  • five new vehicles, to a maximum of $228,000;
  • one off-reserve fisheries housing complex to a maximum of $237,039;
  • one off-reserve housing unit for fishers, up to a maximum of $37,961;
  • development of fisheries management to a maximum of $387,000;
  • navigational training, to a maximum of $460,000; and,
  • travel and organizational meetings to a maximum of $50,000.

The Maritimes Region was responsible for the administration of this Agreement which came into force on September 1, 2005 and terminated on March 31, 2007.

2.2 Context

There has been some conflict between the SFN fishers and DFO fisheries officers in the past related in part to fisheries access. The Marshall Response Initiative was intended to facilitate fisheries access and build the capacity of recipients to manage their affairs related to commercial fishing. Therefore, the Contribution Agreement with the SFN was viewed as an important relationship transformation mechanism. The Agreement presented many challenges to the SFN and the DFO Regional staff administering it. However, both recognized its importance and sought to maximize the potential benefit to the Recipient.

2.3 Mandate and Authority

The Audit and Evaluation Directorate was asked by the Assistant Deputy Minister, Fisheries and Aquaculture Management and Regional Director General, Maritimes Region to carry out an audit of the Contribution Agreement with the SFN. The preliminary audit work in December 2006 highlighted indicators warranting detailed examination and consequently the engagement mandate was expanded as forensic audit on the implementation of the Agreement. The authority for DFO to audit the Recipient is defined in Section 12 of the Contribution Agreement.

2.4 Objectives and Scope

2.4.1 Objectives

The objectives of the forensic audit are to provide assurance on the:

  • propriety of the process employed to enter into the Contribution Agreement;
  • suitability of the internal controls employed by the Department to administer the Contribution Agreement; and
  • appropriateness of the Recipient’s use of funds provided through the contribution.
2.4.2 Scope

The audit scope included an examination of documents and assessment of transactions claimed and paid under the Agreement. Interviews with program staff and other parties were carried out. Audit work was performed at DFO Headquarters, in the Maritimes Region and extended to private sector firms with business relationships with the Recipient. The audit work was carried out between January and November 2007.

We would like to acknowledge the effort and support of the Headquarters and Maritimes Region throughout the audit.

2.4.3 Limitations

Numerous challenges were encountered in obtaining documentation demonstrating the Recipient’s use of contribution funds to determine if actions were consistent with the Contribution Agreement.

Obtaining information from the Recipient has proved to be challenging due to disagreement between various parties. As a result, we do not have sufficient information regarding the use of funds by the Recipient to report completely on the third audit objective. Accordingly, this report provides limited information with regard to the use of the funds. However, it does offer information where available to identify contribution funds which are at risk or were not used for their intended purposes.

We do not have sufficient information to conclude on the third objective.

3.0 observations and recommendations

3.1 Statement of Assurance

In our judgement, sufficient and appropriate audit procedures have been applied and sufficient evidence gathered to support conclusions contained in this interim report. The conclusions are based on a comparison of the situation against the audit objectives as they existed at the time of the audit.

3.2 Objective #1: Process of Entering Into the Agreement

Criterion: The Department possessed the necessary authority to enter into a Contribution Agreement with the SFN and demonstrated diligence in the process to bring it into force.

3.2.1 Funding Mechanism

The SFN contribution was funded under Phase II of the Marshall Response Initiative. The original closure date for the initiative was extended to March 31, 2006, to allow for the fulfilment of commitments in signed Longer-term Fisheries Agreements and to continue to manage the risks to the fishery where agreements were not signed.

The Fisheries and Aquaculture Management Sector advises that the Marshall Response Initiative terms and conditions provided the necessary authority; and that legal and financial advisers had corroborated this position prior to entering into the Contribution Agreement with the SFN. Although we were informed the issue was discussed and assertions were obtained, we did not see specific documentation which supported this discussion or decision.

We support management’s assertion that the Department had the necessary funding authority, but in our opinion, insufficient documentation is retained on file by the program staff to clearly demonstrate the specific authority.

3.2.2 Negotiating and Establishing the Agreement

In 2002, the Mi'kmaq of Nova Scotia and the Governments of Canada and Nova Scotia signed an Umbrella Agreement and established the "Made-in-Nova Scotia Process" which involved the negotiation of Aboriginal and Treaty rights; a Tripartite Forum; and a Consultation Table. This process facilitated the negotiation of the Contribution Agreement with the SFN under the Marshall Response Initiative.

On October 13, 2005, a letter of offer for $5 million funding was presented to the SFN and a majority of SFN Band Councillors agreed to enter into a fisheries arrangement by way of a special meeting chaired by Indian and Northern Affairs Canada on October 14, 2005.

Eight SFN Councillors signed the Contribution Agreement on December 14, 2005, on behalf of the SFN detailing the capacity items up to a maximum of $5 million. The Agreement became effective September 1, 2005 and ended on March 31, 2007.

It is our opinion that DFO took appropriate steps to ensure the Contribution Agreement was legitimate as signed by the quorum of Councillors, including consultation with [protected information] representatives of the Department of Indian and Northern Affairs regarding the process.

3.2.3 Incorporated Fisheries Company

The SFN representatives responsible for signing the Contribution Agreement made the decision to establish an incorporated company registered with the Nova Scotia Registry of Joint Stocks to operate the fishery on behalf of the SFN. A Band Council Resolution dated September 13, 2005, states that accounting and legal advice recommends that interim fisheries be conducted within a wholly owned corporation of the Band for "accountability and liability purposes".

The company was established for reasons which appeared to make good business sense, such as allowing the company to acquire property and to limit the SFN’s liability in the event of a claim involving the fishery. However, as the contribution progressed it became less clear as to who represented the Recipient and/or company, and their responsibilities for communication with DFO staff. Notwithstanding, DFO correctly continued to recognize the SFN as the Recipient and sole authority for contribution funds. Cheques were issued to the name of the SFN.

3.3 Objective #2: Managing the Agreement

Criteria:

  • Effective management practices were in place and were appropriate to ensure compliance and financial integrity.
  • Payments were made in accordance with the terms and conditions of the Agreement, the Treasury Board of Canada Secretariat (TBS) Policy on Transfer Payments and departmental policies and procedures.
3.3.1 Reporting Requirements and Claims Process

The Region did track payments by expenditure category to ensure individual funding areas were not exceeded. However, payment processes did not conform to the reporting or management practices specified in Section 7 of the Contribution Agreement or cash management provisions of the TBS Policy on Transfer Payments. Specifically, payments were not issued on a monthly basis as stipulated nor were they based on proper cash flow projections.

Payments were issued by category of allowable cost and based on a "package" of receipts dropped off at the Regional office. Claims were put together by DFO representatives based on the "package" that were often disorganized and had to be sort through by DFO staff. This task would have been done by the Recipient under other Contribution Agreements.

The information provided by the Recipient did not include the required Contribution Project Reports, which would have supplied detailed progress on the project and a representation from the Recipient that funds were used for the intended purpose. Only two Project Reports (January 18 and March 31, 2006) were found in departmental files.

Despite the Recipient’s failure to provide the documents stipulated in subsection 11(3) of the Contribution Agreement, no advance payments were withheld, although we observed that ineligible expenses were identified and payments were refused in a few instances.

While DFO may be required to provide direction and assistance at times, the Department should ensure that the Recipient is responsible for the preparation of cash flow projections, expenditure claims and project reports as required under the Agreement. Moreover, an appropriate level of thoroughness should be applied when assessing expenditure claims and reporting to ensure that the expenditures are valid, that funds will be used for the intended purpose and the transactions represent fair value.

3.3.2 Review of Expenditures Claimed
3.3.2.1 Overview of Contribution Payments

The Department disbursed $4,285,853.85 of the potential $5,000,000. DFO paid $2,670,541.50 to vendors of used vessels and used gear and equipment and $237,039.00 in trust for land and building purchases. The remaining $1,378,273.35 was paid directly to the Recipient. Table 3 summarizes the maximum permissible funding amounts by main category as specified in the Agreement and payments made.

Table 3 - Summary of Contribution Payments

Allowable Expenditures

Agreement Maximum

Amount Paid

Comments

Vessels:
Nine 45’ used vessels

$2,250,000.00

$1,805,000.00

Seven purchased
- DFO paid

Three 40-45’ used vessels

$300,000.00

$156,000.00

Two purchased
- DFO paid

One used scallop dragger

$450,000.00

$465,000.00

One purchased
– DFO paid

Equipment and Vehicles:      
Used gear/equipment

$250,000.00

$244,541.50

Paid by DFO
New gear/equipment

$150,000.00

$149,957.99

Paid to SFN
Upgrade electronic vessel equipment

$50,000.00

$50,000

Paid to SFN
New safety equipment

$150,000.00

$133,582.83

Paid to SFN
Five new trucks

$228,000.00

$228,000.00

Paid to SFN
Two houses

$275,000.00

$237,039.00

Paid to SFN lawyer in trust
Other Categories:
Fishery Management/ Capacity Building

$437,000.00

$360,472.53

Paid to SFN
Navigational Training

$460,000.00

$456,260.00

Paid to SFN
Totals

$5,000,000.00

$4,285,853.85

$714,146.15
not disbursed

In addition to the above noted payments, we were advised that two additional amounts were set up as "Payables at Year-End" at March 31, 2007 totalling $98,943; $37,961 for housing and $60,982 for fisheries management. The Region indicated these amounts would be paid pending the submission of appropriate claims by the Recipient and on the result of the audit.

3.3.2.2 Vessel Purchase

The Agreement allowed $3,000,000 for the acquisition of 12 used fishing vessels with equipment of three different categories for specific Lobster Fishing Areas. A total of 10 vessels were acquired at a cost of $2,426,000.

The Maritimes Region employed an appropriate process in the evaluation and procurement of used vessels, gear and equipment funded under the Contribution Agreement. The process employed by DFO adhered to the requirements of the Contribution Agreement and payments were made pursuant to Subsection 6(3) of the Agreement.

The Recipient did not appear to properly register or care for the vessels once in their possession as was their responsibility under subsection 3(6) of the Contribution Agreement. However, the Transport Canada Vessel Registration System showed all 10 vessels as being registered in the name of the "Shubenacadie Band" as of November 21, 2007.

3.3.2.3 Vehicle Purchase

The Department paid the Recipient the maximum allowable under the agreement in good faith based on an understanding that the transaction was a "bridge financing" arrangement. The audit observed that the acquisition documentation clearly demonstrated that the five eligible vehicles acquired were financed for 60 months, or longer in some cases, which would not indicate bridge financing. However, the Regional staff recognized that the interest costs and additional life and disability insurance costs that were built into the financing costs were not eligible expenditures and these costs were borne by the Recipient.

Based on information obtained, the auditors identified that the recipient disbursed $68,494 of the $228,000 of the funds advanced by DFO for the vehicles thereby indicating that the remaining $159,506 was used for other purposes. The lack of documentation obtained from the Recipient or his agents do not allow the auditors to determine what use was made of the funds.

3.3.2.4 House Purchase

The Agreement allowed for the purchase of two off-reserve houses to a maximum of $275,000. There are two appraisals, one for the building and another for the land on file purported to support the value of the property purchased in Clark’s Harbour for $237,039. These appraisals were provided at DFO’s request. However, the audit determined the appraisal provided for the building was done for insurance purposes sometime in 1998 and was neither relevant for a market value assessment nor appropriate for that purpose. There was a separate appraisal for the land value.

3.3.2.5 New Safety and Fishing Gear/Equipment

New safety equipment could be acquired up to a maximum amount of $150,000. DFO provided the payments of 41,772.83 and $91,810 for a total of $133,582.83 to purchase safety equipment. One supplier confirmed receiving $3,451.87 related to the first payment; the second payment did not reach the intended supplier. Attempts continue to determine the disposition of the remaining $38,320.96. The amount at risk is identified as $130,130.96 ($133,582.83-$3,451.87).

The Agreement allowed $150,000 to purchase new fishing gear and equipment and payments were made to the SFN based on invoices submitted by a single vendor on two separate claims totalling $149,957.99. The vendor was acquiring the equipment from others and the invoices from these sellers were also supplied to demonstrate the primary vendor was not receiving a mark-up on the purchases. The vendor received the full amount paid to the Recipient.

3.3.2.6 Training Costs

In December 2005, DFO advanced $456,260 to the Recipient: $11,260 for classroom rental, $220,000 for tuition fees; and $225,000 for student training allowances. The auditors identified no discrepancies for the classroom rental which was paid in full but the same is not true of the other two categories.

The Recipient submitted to DFO invoices from the training supplier totalling $229,500 for three "Inshore Fishing Vessel Deckhand – L1" training sessions each with maximum attendance of 50 students. DFO paid the entire tuition allocation of $220,000 to the Recipient. The auditors determined that deckhand and medical/marine basic first aid training was provided during the fall of 2005 but attendance was not to capacity, and that the supplier only received $38,000 in payment. The remaining $182,000 of the funds advanced to the Recipient was not used for the intended purpose and is considered at risk.

The Recipient provided a detailed listing of students along with amounts that were purported to have been paid to these individuals who were represented as having taken the training. The Contribution Agreement stipulates 150 students at $300 per week per student over a five week training period for a total of $225,000. The general ledger listing indicates students were paid $500 per week. The total amount of the listing, after adjusting for amounts that do not appear to be payments to students was $341,036 indicating that students or individuals were purported to have been paid with funds other than those allocated in the Contribution Agreement for this purpose.

Based on the provided general ledger listing DFO paid the SFN the maximum allowable amount of $225,000 for training allowances. Representatives in the DFO Regional office indicated they only paid based on a $300 weekly amount and assumed that 150 persons attended five weeks of training. Documents provided to the Regional office by the Recipient paraphrased information from the training supplier give the impression that 150 people attended five weeks of training.

These documents further clouded the issue and would have reinforced the Regional Office’s belief that they funded the proper amount. Notwithstanding, it would have been reasonable for the Region to advance the full amount to the Recipient based on documentation available at the time. The discrepancy in the number of trainees only became apparent during the audit after the supplier furnished trainee lists for all courses provided under the terms of the training contract thus enabling an accurate eligibility determination.

Our analysis of the training information indicates the Regional Office paid $225,000 based on the belief that 750 person weeks (three courses x 50 people x five weeks) were eligible for the $300 weekly training allowance but course records indicate that only 722 person weeks (144 people x four weeks + 146 people x one week) are eligible for payment. Specifically:

The provided training did not span five weeks for all trainees as originally thought but rather consisted of component courses totaling a maximum of five weeks per student (four weeks for the deckhand and "train the trainer" course and one week for the Med/FA training).

  • Course lists revealed that not all attendees participated in the full five week program. A total of 152 different people participated in training with actual attendance being 144 for deckhand courses and 146 for Med/FA courses.
     
  • Based the course trainee lists provided by the training supplier, it was determined that only 722 person weeks are eligible for payment of the training allowances rather than the 750 as originally envisioned when the funds were advanced to the Recipient.
     
  • Analysis of the company’s general ledger listing revealed that employees were paid $500 per week and that there are a number of inconsistencies between trainee names identified by the supplier and those paid allowances by the company. We conclude that $204,600 (682 weeks) of the funds disbursed to trainees by the company is an eligible expenditure. There may be valid reason for the differing names but at this time we do not have sufficient information to validate the additional $20,000 paid.

Based on the foregoing, of the $225,000 advanced to the SFN, only 722 weeks at $300 per week for a total of $216,600 would qualify as eligible expenditures and that $204,600 was disbursed to eligible trainees by the company. Therefore, training allowance funds at risk total $20,400, and include an ineligible amount of $8,400 and $12,000 in payments that could not be validated.

3.3.2.7 Fisheries Management/Capacity Building – Salaries and Fees

The Manager of Fisheries position was filled by the Head Councillor duly authorized by Band Council Resolution to implement the Interim Commercial Fishing Access. The incumbent was paid on a salary basis from September 2005 through March 2006 with the paid contribution portion totalling $54,000 as stipulated under the Agreement. Four other Band Councillors who were also signatories on the Agreement were paid a total of $116,800 in salaries and consulting fees under "Administrative and Development" during this same seven month timeframe. These individuals also received reimbursement of travel costs.

Information in one of the two progress reports supplied by the Recipient provides some detail on the activities and deliverables. In that report, the five above mentioned positions and others are listed for their roles and the activities undertaken on behalf of the fishery. Salaries and consulting fees paid do>hat $11,402.74 ligible claim (see section 3.3.3) addition, information provided by the legal firm indicates theipient accumulated eligible legal fees totalling $44,715.04 but only $28,996.20 was paid. We conclude that $15,718.84 ($56,117.53-$11,402.74-$28,996.20) of the provided funding was not used as intended; therefore, legal fees at risk total $27,121.58 ($15718.84+$11,402.74).

We obtained information indicating the $30,000 advanced to the Recipient for accounting fees may not have been paid, but the concerned creditor declined to provide documentation to support the assertion.

3.3.3 Payment Outside of Period of Agreement

Payments were made for claims of expenditures that predated the Contribution Agreement coming into force on September 1, 2005, and there is no indication this was authorized in advance under the terms and conditions. Subsection 8.4.3 of the 2002 TBS Guide on Grants, Contributions and Other Transfer Payments states in part: "If retroactive expenses have been incurred prior to application for assistance and prior to the start date and the applicant wishes to receive reimbursement for the retroactive expenses, again the applicant must request their inclusion as eligible expenses during the application process."

The audit identified a payment for the Fisheries Consultant of $90,000 which was represented as $82,000 to cover the period September to December 2005 and an advance of a further $8,000 to pay fees for the next period. A subsequent claim covering the period ending March 31, 2006, included a list of "salaries and consulting fees" which clearly indicated that $48,000 of the $82,000 previously claimed was for the period March 1st to August 29th, 2005, a period that pre-dated the Agreement. It appears the Department staff failed to identity this discrepancy.

DFO paid the Recipient $11,402.74 for legal fees based on an invoice dated August 31, 2005. Information supplied by the legal firm indicates these fees relate to services rendered during the period June 13 to August 31, 2005.

Overall, our analysis identified $59,402.74 of ineligible payments which predate the Agreement; $48,000 for Fisheries Consultant fees and $11,402.72 in legal fees.

3.3.4 Purchase Pre-Approval and Monitoring

The Recipient provided proposed agreements to purchase (e.g. quotes) navigational software and training as stipulated in the Contribution Agreement; however, the acquisition of used gear and safety equipment did not respect this protocol. Generally the Recipient would have already taken possession of the items and requested payment based on invoices. The Region staff however, did inquire about questionable items submitted as allowable costs. For example, correspondence appears in the Regional files with regard to why only one supplier was used to procure new fishing equipment and gear.

Weaknesses were observed in the monitoring processes undertaken by the Regional Office for payments made directly to the SFN. These weaknesses are partly the consequence of the Recipient failing to fulfill all obligations for financial and project reporting and the manner in which program staff reacted to specific issues. Early in 2006 it became apparent the reports were not forthcoming, therefore, the Region required that Recipient provide supplier invoices prior to payment as a means to confirm payment eligibility based on evidence that goods and/or services were provided. However, without recipient financial reports confirming how the provided funds were actually dispensed the Region had no way of knowing if the funds were used as anticipated. As a result, the program staff was unaware that suppliers were not paid using the funds provided to the Recipient for that purpose based on the invoices submitted.

Regional staff became concerned in September 2006 over governance challenges faced by the Recipient, community unrest and media allegations of impropriety and. As a result, in October 2006, the Maritimes Region suspended further contribution payments to the Recipient; and the following month the Region informed the Band of the status of the contribution agreement and communicated in writing that an audit would be undertaken by the DFO

In our view further monitoring could have been performed to evaluate the validity of the expenses being claimed by the Recipient and to obtain some assurance that the third party vendors were being paid. Regular reporting from the recipient could have assisted in this endeavour.

3.3.5 Overall Conclusion

It is clear from court submissions and anecdotal information that the Recipient ran out of funds sometime in late 2006 and that many outstanding debts still existed with creditors. Many of these debts coincided with funds already advanced by the Department. As a result, it would appear that the funds provided by DFO were not always used for their intended purpose.

Based on information obtained to date, of the $1,378,273.35 of public funds advanced to the Recipient, we have assessed that the "amount at risk" is in the order of $647,158.54. Supporting evidence identifies that $516,837.58 of provided funding was not used for the purpose intended and there is no evidence available to show this amount was used for other eligible expenditures.

This determination is the sum of $67,802.74 ineligible expense claims and $449,034.84 that did not reach the suppliers for which the funds were advanced. The remaining $130,320.96 could not be validated because proper books, records and supporting evidence were not available from the Recipient.

The failure of an authorized representative of the Recipient to provide monthly expenditure and progress reports to DFO reduced the Region’s ability to identify issues, exercise proper monitoring to ensure that funds were used for the intended purpose and to deal with issues in a timely fashion.

Recommendation

It is recommended that the Assistant Deputy Minister, Fisheries and Aquaculture Management initiate action to: recover the ineligible expenses paid by DFO; communication with the SFN to obtain evidence demonstrating the remaining funds at risk were properly dispensed; and pursue the recovery of funds due where sufficient evidence of eligibility is not provided.

4.0 Management action plan

Recommendation

Management Action Plan

Status Report Update

Actions Completed

Actions Outstanding

Target Date

1. It is recommended that the Assistant Deputy Minister, Fisheries and Aquaculture Management initiate action to: recover the ineligible expenses paid by DFO; communication with the SFN to obtain evidence demonstrating the remaining funds at risk were properly dispensed; and pursue the recovery of funds due where sufficient evidence of eligibility is not provided.

 

a) Fisheries and Aquaculture Management will meet with the Chief and Council of Shubenacadie First Nation (SFN) to explain the audit results and seek additional information regarding the amount at risk and the possible consequences of not providing the requested information. AED will provide assistance to FAM.

    Initial: June 2008

Revised:

b) Fisheries and Aquaculture Management will set up a working group to review input received from SFN     Initial: May 15, 2008

Revised:

c) The working group will examine the additional information submitted by SFN to determine its applicability to the funds identified as being at risk and to identify the final total that could be considered for recovery.     Initial: June 14, 2008

Revised:

d) Fisheries and Aquaculture Management will initiate the recovery for funds not supported by evidence of eligible expenses or implement other measures.     Initial: June 30, 2008

Revised:

Appendix A – Analysis of Amounts at Risk

Follow this link to go to the Amounts at Risk table