Follow-up on the Comprehensive Audit of the Attawapiskat First Nation

1. Background

The Attawapiskat First Nation is an Indian Band located in the James Bay Region of Northern Ontario and forms part of the Mushkegowuk Tribal Council. The Attawapiskat First Nation receives annual funding from the Government of Canada, including Aboriginal Affairs and Northern Development Canada for various purposes, including housing, health, education and other similar services.

The Attawapiskat First Nation has been under co-management, a form of intervention used by AANDC with the goal of improving the financial situation of a recipient, for over ten years. As a result of urgent housing health and safety issues, the community declared a state of emergency in November 2011. Shortly thereafter, a "comprehensive audit" of the Attawapiskat First Nation and AANDC was initiated. The comprehensive audit, conducted by the accounting firm Deloitte, included two components: 1) a recipient audit of the Attawapiskat First Nation to assess compliance with AANDC and Health Canada funding agreements; and, 2) an internal audit of AANDC's management control framework for housing.

For the recipient audit, a sample of 400 AANDC and 125 Health Canada transactions for the period April 1, 2005 to November 30, 2011 were selected and tested. The results of testing noted that more than 80 percent of the samples could not be substantiated with supporting documentation. An audit opinion could therefore not be provided by Deloitte that the funding was spent for its intended purposes and in compliance with the terms and conditions of the respective funding agreements.

As an audit opinion could not be issued, Deloitte was asked by AANDC to undertake specified auditing procedures with regards to expenditures claimed by the Attawapiskat First Nation for the period from April 1, 2005 to November 30, 2011. The total expenditures for each of the years in scope of the comprehensive audit were as follows:

Included in the above total funding during the period audited, was $8.3 M in funding for housing-related activities. As the comprehensive audit was initiated as a result of concerns related to housing in the community, the sample chosen for the audit included a significant focus on housing-related transactions.

The final comprehensive audit report, which is available on AANDC's website, summarized the specified auditing procedures performed and the results on the application of these procedures. Overall, the specified auditing procedures performed by Deloitte resulted in the following:

Following the release of the comprehensive audit in January 2013, AANDC's Deputy Minister requested that the Audit and Assurance Services Branch (AASB) initiate follow-up work on the 81% (ie., 323 out of 400) of the transactions for which Deloitte was not able to obtain sufficient, appropriate audit evidence to determine if any of the documentation that was not obtained during the comprehensive audit could in fact be located and reviewed, and then to report on the results of any additional review work that could be undertaken.

2. Objective and Scope of the Work

The objective of the follow-up work was to perform an analysis of the unsubstantiated transactions from Deloitte's original sample of 400 in order to determine if there is any additional documentation available to substantiate the transactions. The scope included all 323 sample transactions for which Deloitte's testing resulted in one of the following three conclusions:

• "No supporting documentation": Original documentation to support both the occurrence (ie, invoice, pay register, time sheet, contract, agreement, etc.) and the completeness (ie, payment information, such as cancelled cheques, electronic funds transfer receipts and bank statements) was not obtained.
• "Incomplete documentation": Original documentation to support the completeness (ie, payment information, such as cancelled cheques, electronic funds transfer receipts and bank statements) was not obtained.
• "Occurrence questionable": Original documentation to support the occurrence (ie, invoice, pay register, time sheet, contract, agreement, etc.) and/or explanations for the eligibility or reasonableness of the transaction was not obtained.

3. Follow-up Work Performed

As per the Deputy Minister's request to follow-up on the comprehensive audit of the Attawapiskat First Nation, AASB immediately worked to put in place a new contract with Deloitte so that the follow-up work could start as soon as possible. However, the commencement of the follow-up work was delayed until the summer 2013 as outlined in the following timeline of events:

• February 11, 2013 – Following consultations with Deloitte, terms of reference for the follow-up work were developed and the contract was put in place.
• March 2013 – Several meetings between AASB and Deloitte were held to discuss: the scope of the follow-up work; and how and when to contact the First Nation to receive consent to contact suppliers and to search bank records and previous accounting records over the scope period in order to recreate the financial records.
• April 9, 2013 – Deloitte was instructed by AASB to contact the First Nation to let them know of the follow-up work and to make arrangements to gather the required documentation.
• April 12, 2013 – Deloitte informed AASB that they contacted the Chief of the First Nation by telephone and she told them that as she had not received notification from AANDC that the follow-up work was taking place, she required an "official letter" to be sent by the Department before cooperating with Deloitte's request. The Chief also informed Deloitte that the band office would be closed from April 13 to 28, 2013 for the formal hunting season.
• April 12, 2013 – AANDC's Chief Audit and Evaluation Executive (CAEE) wrote a letter to the Chief to advise that the Deputy Minister of AANDC had requested a follow-up on the comprehensive audit in order to provide an opinion on the consolidated statement of expenditures provided by the Attawapiskat First Nation. The Chief was advised that the follow-up audit would initially focus on the 323 transactions identified in the comprehensive audit as having "uncertain, incomplete, or no supporting documentation" and would also include an assessment of the First Nation's bank transactions for the 2011-2012 fiscal year.
• April 13 to 28, 2013 – Attawapiskat First Nation office was closed.
• April 18, 2013 – The Chief sent a lengthy email to several AANDC senior officials expressing her concern over the coordination of the follow-up work, including the notification she received by phone from Deloitte on April 12, 2013. In the email, the Chief also noted that the First Nation would not be available until July to participate in the follow-up work.
• April 26, 2013 – The CAEE replied to the Chief's email of April 18, highlighting the importance of the project and the Department's commitment to completing the audit follow-up on the outstanding issues in a timely manner.
• May 9, 2013 – The Chief wrote to the CAEE and objected that Deloitte staff had visited the community in April 2012 seeking the supporting documentation while she, Council, and the First Nation's co-manager were at a Toronto court hearing. The Chief wrote that the First Nation "looks forward to your department's request for permission to attend at Attawapiskat First Nation" and will ensure that any authorizations to visit will be granted "when the staff and resources necessary to locate the necessary documentation in support of the 323 transactions at issue are at hand".
• May 28, 2013 – The CAEE sent a letter to the Chief, noting that she would like to set a date for the auditors to review the outstanding documentation. In the letter, it was also noted that AANDC has been in contact with Health Canada officials and further discussions would take place with them to learn about the approach they used to complete their recent follow-up work.
• June 5, 2013 – A teleconference took place between AASB and Health Canada representatives who completed follow-up work on the 82% of the 125 Health Canada transactions which were unsubstantiated. They explained that representatives from their Ontario regional office dealt directly with the First Nation in obtaining additional supporting documentation.
• June 28, 2013 – The CAEE wrote to the Chief to advise that AANDC officials would perform the follow-up audit work, further noting that AANDC officials would provide the First Nation with a list of the 323 transactions in question as well as the specific documentation required for each transaction. The CAEE asked that the information be provided within one month's time after which AANDC officials would travel to the community to examine the documents.
• July 11, 2013 – First Nation contacts for the follow-up work were identified by Ontario regional office representatives to be the First Nation's Executive Director and Expert Resource.
• July 16, 2013 – A message detailing the 323 unsubstantiated transactions and the required documentation was sent to the First Nation's Executive Director and Expert Resource, with a request that the documentation be made available by August 15, 2013 at the latest. The list contained 323 transactions, all of which had been included in the original audit sample but the auditors were not able to obtain sufficient documentation. The sample included various expenditures and other transactions including year-end adjusting entries, affecting a wide variety of general ledger accounts, from 2006 to 2011 (the scope of the comprehensive audit).

From July to November 2013, several conference calls took place between the Executive Director and AASB, in which the list of transactions was discussed. During the same period, the First Nation sent documentation for a total of 110 sample transactions (34%), all of which were reviewed and analyzed by AASB auditors. Many of the transactions for which documentation was received were missing the proof of payment in order to fully substantiate the occurrence of the transactions.

AASB conducted a site visit to Timmins from January 16 to 17, 2014 to meet with the First Nation's Executive Director and external auditors to obtain support for the sample transactions that are a result of year-end adjusting entries. Over the two day visit, AANDC collected documentation for an additional 71 transactions, bringing the total number of transactions for which documentation had been received to 181 of 323 (56%). Note, however, that at this point, for many of the expenditure transactions, documentation to demonstrate payment was still outstanding.

After the site visit to Timmins, AASB made arrangements with the Executive Director for a site visit to Attawapiskat to take place during the week of February 17, 2014 to review original documentation for all samples received by email and to locate and review any additional documentation that existed. The external auditor of the Attawapiskat First Nation, Ross Pope and Co., offered to send its staff to the site visit to assist AANDC in gathering documentation. Despite existing challenges in planning a site visit to Attawapiskat due to the limited accommodation available in the community, the audit team was successful in securing accommodations and travel arrangements.

The site visit to Attawapiskat took place from February 17 to 21, 2014 and the audit team consisted of three auditors from AASB. In addition, two staff from the external auditing firm, knowledgeable of the First Nation's accounting processes, practices and records accompanied the audit team on the site visit to Attawapiskat to assist in locating and obtaining documentation. During the site visit, the team was able to locate and review documentation and to obtain explanations to substantiate additional transactions. Documentation reviewed on-site included outstanding payment information (bank statements and cancelled cheques or electronic funds transfer receipts), invoices, vendor listings and general ledger summaries.

As can be seen in the table below, the audit team was able to obtain additional documentation, bringing the total number of transactions that could be supported by audit evidence to 184 (46%), from 77 (19.25%) in the comprehensive audit.

The results shown above are further detailed in Section 4 below, including a breakdown of testing results by fiscal year.

4. Results of Follow-up Work

Overall, the audit team was able to obtain complete documentation to support an additional 107 sample transactions. The detailed results of testing, which notes the original conclusions provided by Deloitte from the comprehensive audit as well as AASB's conclusions after the completion of the follow-up work, is contained in Appendix A of this report. The detailed results can be summarized in the tables below:

¹ These two amounts are negative because there were credit amounts (i.e., reversals of expense accounts) chosen in the sample that were greater than positive (debit) amounts, resulting in net negative totals.

As can be seen from the tables above, the audit team was able to completely substantiate 46% of the 400 transactions with audit evidence, and thus reach the conclusion that the transactions are "complete – no issues". In terms of dollar value, however the percentage complete was much higher (i.e., 77.8%, or $29,545,294 of the total transaction value of $38,007,882). Transactions without proper supporting documentation represented 54% of the 400 transactions sampled and had an associated dollar value of $8,462,588 . As total housing-related funding for the period included in the audit was $8.3 million, the relative percentage of housing-related sample transactions that could not be substantiated is $1,842,260 (or 22.2% of $8.3 M).

In carrying out the follow-up work, the audit team made the following observations with respect to areas where controls could be improved:

• Recordkeeping practices: Especially for the earlier years in scope (ie. 2005-2006, 2006-2007 and 2007-2008), the audit team observed that the recordkeeping practices of the First Nation could be improved. There was very little banking information retained for these earlier years and other supporting documentation was also lacking. A new accounting system was implemented after 2006-2007 and as a result, it was very difficult to obtain accounting information with respect to the first two years.
• Oversight of Capital Projects Accounting: The First Nation contracts out the accounting and recordkeeping of its capital projects to a third party. The third party accountant provides to the First Nation, on a monthly basis, a trial balance of all accounts for capital projects but no other supporting documentation. The First Nation updates its own accounting system to agree with the balances provided in the monthly trial balances provided. No other supporting documentation is obtained and it does not appear that any oversight or monitoring of this third party accounting is being carried out.
• Authorization for Expenditures and Adjustments: It was observed that authorization for some expenditure and adjusting entry transactions was not properly documented or retained. For instance, although in some cases, the team was able to obtain invoices for services or goods received, there would be no properly approved contract, agreement or purchase order provided. With respect to adjusting entries (i.e., for credit notes issued to suppliers), there was little evidence of proper authorization in the form of documented approvals from the appropriate manager.

5. Recommendations

Based on observations and the results of the testing completed, and through consideration of previous AANDC results as well as those obtained by Health Canada, the audit team is making following recommendations:

1. The Attawapiskat First Nation should implement corrective actions to address findings arising from the original Comprehensive Audit, including reviewing its accounting policies, practices and procedures to ensure that transactions are documented, approved by an authorized official, and retained in accordance with the Terms and Conditions of the funding agreements with AANDC.
   
   Attawapiskat First Nation's response: The First Nation has and continues to implement corrective actions to address the apparent deficiencies with respect to documentation.
2. The Attawapiskat First Nation should strengthen its oversight and monitoring of the third party accountant that performs the accounting function for its capital projects to ensure that year-end reporting is accurate. This would include obtaining from the third party accountant full records of all accounting transactions performed during the year.
   
   Attawapiskat First Nation's response: The First Nation agrees that greater oversight of the third party accountant is necessary, as is the need to obtain records of each transaction performed during the year. We further note that the Project Manager for capital projects maintains an additional set of records and therefore the issues identified can be addressed with minimal effort.
3. AANDC should recognize a receivable from the Attawapiskat First Nation in the amount of $1,842,260, representing 22.2 percent of total housing funding, less any housing holdbacks for the same period, to reflect the value of housing-related transactions that could not be substantiated through the Comprehensive Audit or these follow-up procedures.
   
   Attawapiskat First Nation's response: We have significant concerns with the recommended 22.2 per cent receivable suggested, an amount of $1 842 260.00. The majority of the funds comprising this amount relate to two major contracts, each of which was completed and the full funds disbursed, as detailed above [see Section 6]. While the documentation related to these transactions may be incomplete, no findings, documents or evidence suggests that the funds were not disbursed as stated.
4. AANDC should conduct a financial review for 2012-2013 and 2013-2014 focused on the highest risk funding, with a related detailed review of the financial statements, co-ordinated with Health Canada.
   
   Attawapiskat First Nation's response: While we are aware of the need for the First Nation to exercise greater oversight concerning its accounting, record-keeping and documentation, we are unclear what is meant by the term "financial review", nor how AANDC envisions this review unfolding. We look forward to clarifying this with you.

6. Response from Attawapiskat First Nation

On July 25, 2014, the Attawapiskat First Nation provided a response to the findings contained in this report. Responses related to the report’s recommendations have been captured in Section 5, while the following section outlines the First Nation’s concerns related to the Detailed Testing Results presented in Appendix A:

1. Invoices for Housing Contractor, XXX: Samples 184, 203, and 204 all relate to a 25-unit housing project undertaken by XXX, the contractor, operating out of XXXXXXXX, Quebec. The funds for this project were placed in a separate bank account under the oversight of XXXXXXXXXXX, a representative of XXX, financial account manager for Major Capital Projects. A contract was completed and invoices forwarded to XXX’s XXXXXXXXXXX office, which disbursed the appropriate fund based on completion certificates. As such, the invoices and related documentation was not kept by Attawapiskat First Nation.
   
   Work on this project exceeded the funding approved by Canada Mortgage and Housing Corporation, and was supplemented with First Nation sources. The First Nation concluded a final, non-disclosable settlement with XXX, was made for these units to the resolution of both parties.
2. Funding for Modular Housing: Samples 197, 198, 201, 202 and 254 relate to a twelve unit modular housing project administered and funded from First Nation sources. The contractor, XXXXXXXXXXXXXXXXXXX, has been paid in full and payment has been acknowledged by the contractor. The building supplier, XXXXXXXXXXXXXXXX has also been paid in full. However, due to the nature of the funding, the contractor was paid on an on-going basis as funds became available from First Nations sources, leading to some difficulty in tracking the relevant payments. However, we can confirm that the units were completed and the general contractor and building fabricator have been paid in full for their respective works.
3. Renovation materials prepaid: Samples 253 and 255 each represent renovation materials that were prepaid for winter road delivery from a XXXXXXXX based supplier, which was arranged by the Band Manager at the time. Items were delivered for use for community renovations.
4. Payment to XXXXXXXXXXXXXXXXXXXXXX: Samples 256 relates to a final settlement with the supplier, XXXXXXXXXXXXXXXXXXXXXX, for final payment for goods supplied for the construction of eight units in 2007. We note that the relationship with this supplier was difficult and it was therefore difficult to obtain documentation relating to the transaction.
5. Purchase of community house: Finally, Sample 220 represents a payment to a community member for turnover of her house to community housing. The value of the home was determined with reference to materials ordered and renovations completed the previous summer by the occupants. This transaction was initiated by the former Band Manager. Records are accordingly not available.

Appendix A: Detailed Testing Results