Cover Story


International Journal of Auditing – January 2007Public Scrutiny Puts SAI Audit Practices to the Test - Sheila Fraser

In 2002, when the Office of the Auditor General of Canada (OAG) agreed to audit the federal government’s management of three contracts that had been awarded to a com-munications agency 7 years earlier, no one could have envisioned the consequences. The initial audit took only 8 weeks from the start to the final report, but the find-ings about the program that awarded the contracts dominated the Canadian political agenda for 4 years. Unexpected results included a public judicial inquiry prompted by the audit findings—the first in the OAG’s 128-year history—criminal prosecutions, and jail terms for a few key players. In the process, the Auditor General of Canada’s working papers were subpoenaed and its methodology was challenged. The lessons learned from this experience of intense public scrutiny and the changes made to the OAG’s practices as a result may be useful to other SAIs.

Background

In March 2002, the then Minister of Public Works and Government Services asked the OAG to audit three contracts totaling 1.6 million Canadian dollars (1.1 million euros) that had been awarded to a communications agency in the late 1990s for advertising services designed to increase the visibility of the government of Canada. That audit report, presented to Parliament in May 2002, revealed significant shortcomings at all stages of the contract management process. Because of the nature of the findings, we referred the government’s handling of the three contracts to the Royal Canadian Mounted Police (RCMP), our national police service.1 We also decided that we would undertake a governmentwide audit of the sponsorship program and advertising activities of the government of Canada.

Sponsorships were intended to increase the visibility of the federal government in the province of Quebec by associating the government with popular sports and cultural events and organizations. In exchange for government funds, organizations agreed to provide visibility to the government by, for example, using the Canada wordmark2 and the Canadian flag at their events and on promotional material. Communications and advertising agencies acted as intermediaries between the government and the events organizations and received production fees and commissions.

Audit Findings on the Sponsorship Program

Our audit found that Parliament had not been informed of the program’s objectives or the results it achieved and was misinformed as to how the program was being man-aged. Those responsible for managing the program broke the government’s contracting rules in the way they selected advertising firms and awarded contracts to them. We found significant shortcomings at all stages of the contract process: in making the deci-sion to contract the work, developing the contract specifications, selecting the contrac-tor, and ensuring that the government received the contracted goods or services before paying the contractor.

There was a lack of transparency in decision making. No written program guidelines provided clear criteria for eligibility, and no written objectives indicated that the program had been part of a national unity strategy. Moreover, a lack of documentation prevented us from determining why an event was selected for sponsorship, how the dollar value of a sponsorship was determined, or what federal visibility the sponsorship would achieve.

Furthermore, there was little oversight of financial activities, and fundamental princi-ples of control were violated. Roles and responsibilities were not segregated to elimi-nate opportunities for fraud or an override of controls by management.

There was little evidence of analysis to support the expenditure of more than 250 mil-lion Canadian dollars (173 million euros) from 1997 to March 2003. Over 100 mil-lion Canadian dollars (69 million euros) of that was paid to communications agencies as production fees and commissions.

In some cases, sponsorship funds were transferred to Crown corporations3 using highly questionable methods that appeared to have been designed to provide significant com-missions to communications agencies while hiding the source of funds and the true nature of the transactions. Some payments were based on false invoices and contracts.

Appearing before the Standing Committee on Public Accounts, I informed parliamen-tarians of the appalling lack of regard for rules and regulations that we saw in the way contracts were managed. Equally disturbing was that it happened in the very depart-ment, Public Works and Government Services, that is supposed to ensure prudence, probity, and fairness in contract management throughout the government. The prob-lem was not a lack of rules but the failure to observe existing rules.

Our audit revealed that the government had run the sponsorship program in a way that showed little regard for Parliament and its financial administration legislation. Controls and oversight mechanisms that should have been in place had collapsed. Moreover, politicians and senior bureaucrats were reluctant to recognize their responsi-bilities and to be accountable for their actions.

The Gomery Commission

Our governmentwide audit report on the sponsorship, advertising, and public opinion research activities of the Canadian government was tabled in the House of Commons on February 10, 2004. A few days later, the government announced the creation of a Commission of Inquiry into sponsorship and advertising activities. It also hired a special counsel to recover funds that might have been improperly received through the sponsorship program. The government cancelled the sponsorship program in December 2003, several months before we tabled our audit in the Canadian legislature.

The public inquiry, headed by Justice John A. Gomery, a judge of the Superior Court of Quebec, had a double mandate: (1) to investigate and report on questions raised in our report and to make recommendations to the government of Canada based upon its factual findings and (2) to prevent mismanagement of sponsorship programs and advertising activities in the future.

For the first time in the OAG’s history, all of our working papers were subpoenaed, and a written statement of evidence provided us with an opportunity to explain our audit methodology. My staff and I appeared before the Commission on two occasions, for a total of 4 days. Hearings were broadcast live on national television.

The Gomery inquiry could have discredited our methodology and harmed our cred-ibility. Any serious doubts about our facts or findings raised in the course of the public inquiry could have tarnished the confidence the public and Parliament have in our audit institution.

But our meticulous adherence to methodology and professional standards stood us in very good stead throughout the events. And the Gomery inquiry concluded its hearings without any serious challenge to the credibility of our report. Justice Gom-ery commended our work in his final report: “It became apparent to me through-out the hearings that, with virtually no exceptions, the conclusions of the Auditor General of Canada, expressed in Chapters 3 and 4 of her 2003 Report to Parliament, have been confirmed.”

Our audit of the sponsorship and advertising activities of the Canadian government and the ensuing activities of the Commission of Inquiry lasted over 4 years and put enormous pressure on our staff and resources. The credibility of our office was put to the test. Our practices and methodology were scrutinized as never before, and we had to respond to an unprecedented number of media inquiries.

As a result of its investigation, the RCMP laid fraud charges against the senior bu-reaucrat who managed the program and three advertising executives. Thus far, the se-nior bureaucrat and two advertising executives have been found guilty and sentenced to jail terms.

Lessons Learned

Given that an audit had never been the subject of a public inquiry in Canada, we documented the events and lessons learned. Having our working papers subpoenaed for the public inquiry taught us that we could no longer assume that our working audit papers will remain confidential.

We have since developed guidance for dealing with audits that have the potential of leading to public inquiries. One step we have taken is to involve senior management and communications staff early in the audit process.

We have also taken steps to further strengthen our audit evidence to ensure that it can withstand a vigorous challenge. For example, we have decided that interview notes should be signed by interviewees when the contents are evidentiary in nature.

As soon as our report was tabled, the public discussion about it became extremely political as the government and opposition parties engaged in a political tug of war about who was responsible. When we saw how the public debate was evolving, we stopped giving media interviews. Despite this decision, we continued to be men-tioned in news stories about the “sponsorship scandal,” as it was called by the media, for many months.

The parliamentary Public Accounts Committee later commended our work, noting the following:

Efforts were made by some witnesses to discredit or refute certain elements of the Auditor General’s report [on the sponsorship program]. These efforts were generally self-serving and wholly unconvincing. From past experience, the [Public Accounts] Committee is quite familiar with the audit methodology employed by the Office of the Auditor General and the vetting process the Of-fice [SAI Canada] follows to confirm the findings that methodology produces. This process is painstaking and thorough.

The overwhelming weight of the evidence presented to the [Public Accounts] Committee has consistently confirmed and strengthened the observation and conclusions made by the Auditor General in her report [on the sponsorship program].

That our report withstood intense public scrutiny reflects well on the rigor of our audit work and the professionalism of the men and women who work at the Office of the Auditor General of Canada.

Finally, it was rewarding for me, as head of our supreme audit institution, to ascertain firsthand that Canadians and parliamentarians continue to hold our office in high regard and have great confidence in the quality of our audit work.

The Auditor General of Canada’s report to the House of Commons on the sponsorship program is available online here:

English version or French version.