Inside Attawapiskat's financial troubles

Anauditof the financial records of the Attawapiskat First Nations reserve has raised questions about the situation on the northern Ontario reserve and about its leader, Chief Theresa Spence, who has been on ahighly publicized hunger strikesince Dec.11 in protest against the government's treatment of First Nations.

How did the audit report become public?

First, CBC News obtained a leaked copy ofthe report and a few hours later made the audit public onits website.

Even if it hadn't been leaked, the government was obliged to make it public by Jan. 16. After the leak, Aboriginal Affairs and Northern Development Canada (AANDC) posted the report on its website.

The government and the Attawapiskat leadership have known about the contents of the report since the summer.

Why was Deloitte auditing Attawapiskat's books?

The federal government hired the company to do so in 2011 after Spence's public campaign to raise awareness about the housing and health crisis on her reserve. Deloitte was to look into how about $90 million in federal funding received by the reserve since 2005 was spent.

Deloitteexamined a sample of transactions from the six-year period and found that only about 20 per cent had complete records and no issues. The rest had no documentation or incomplete documentation or Deloitte could not determine "whether the expenditure claimed was in accordance with the terms and conditions of the funding agreements between Attawapiskat First Nation and AANDC."

Spence supporters have pointed out that since she became chief in mid-2010, the reserve's accounting practices have improved. Deloitte found that there were noissues with, on average, 15 per cent of transactions during the fiscal years 2005-06 to 2009-10compared to 33 per cent in the fiscal years they audited when Spence was chief (2010-11 and part of 2011-2012).

While that may be a big improvement, Deloitte's findings for 2010-11 are still a "serious problem," investigative accountant Alan Mak told CBC News. Mak is with the firm Rosen and Associates in Toronto.

Attawapiskat was under co-management during the time period audited. What's that?

That's the middle level of intervention by the federal government in order to improve the band's financial situation. AANDC and the band council agree on a co-manager, whose salary is paid for by the band.

When a First Nation is under co-management, AANDC says, "departmental tools and resources will be used to help the recipient manage their default situation" and that the co-manager and the First Nation will work collaboratively.

Clayton Kennedy was Attawapiskat's co-manager from June 2010until August 2012.Kennedy has said he is in a romantic relationship with Spence. He spoke to PostMedia News this week about his role, saying that Spence, "doesn't vote on items that are a potential conflict of interest."

Attawapiskat has been under co-management for over a decade, except for a brief period that ended in April 2012, when it was under a higher level of intervention called third-party management. That action was taken following Spence's declaration of ahousing emergencyon the Attawapiskat reserve in November 2011. Spence had denounced that move as blaming the victim and called it imposing "a colonial Indian agent."

When he ended third-party management last April, Aboriginal Affairs Minister John Duncan said it was "in recognition of the accomplishments that have been achieved."

Who was responsible for oversight of Attawapiskat's financial records?

Deloitte's audit suggests "a systemic deficiency within the organization," according to Mak. He says the chief and the band leadership are responsible for implementing effective internal controls.

As well, a separate and independent audit was conducted every year by independent chartered accountants. "That audit should have commented on the fair presentation of the band statements and whether there were any material misstatements," Mak says.

For Mak, Deloitte's auditleaves unansweredthe question of whether eitherlevel, leadership or independent audit,was effective.

Then there is government responsibility, since taxpayers' money was involved and Attawapiskat was under co-management.

Noting that each year there would have been annual financial statements and audit reports that, presumably, the government would have relied upon, Mak wonders whether the government "should have sent in additional third parties, such as Deloitte, to have conducted independent checks [sooner]."

In an interview Tuesday with Aboriginal Peoples Televison Network, Kennedy said, "There was a lack of oversight; there was a lack of controls." He argues that since the period audited, things got "turned around."

What did the independent audits find?

The band makes financial statements and related documentation available on its website, so score one for transparency.

In their audit of 2011, the independent auditors Ross, Pope and Company from Timmins, Ont., made some of the same points that Deloitte would later make, although not with the same level of detail and certainly not with the same amount of publicity.

Here are a couple of quotes from the letter Ross, Pope sent to Attawapiskat mangers to inform them of some of their audit's findings:

"During our audit, we noted that many general journal entries made had no supporting documents. When asked for explanations of the entries, often, none could be provided. This resulted in additional work being needed in order to substantiate amounts in several accounts.

"Not all payments were applied to the accounts payable sub-ledger, and invoices were not recorded properly."

Theaudit highlighted other problems beyond what Deloitte examined:

"During the current fiscal year, budgets were not compiled.

"We note that the collection of accounts and funding receivables are often in arrears. In fact, in many cases, collection efforts are not made until cash flows are in crisis situations."

That's just a sample of the problems with the financial records for Attawapiskat. However, Ross, Pope does add that after the period it audited, "policies and procedures have been implemented which improved many of the deficiencies mentioned."

Media coverage of the Deloitte audit has concentrated on the management letter from Deloitte. What's that about?

A management letter is a "courtesy of accountants when conducting an audit where we communicate to management what we've noticed in the course of our audit," that is, deficiencies, areas of improvement, internal control weaknesses, etc., Mak told CBC News.

He then added, "It's normally not released publicly" but provided in advance to management and to the board of directors if it's a public company, giving them an opportunity to respond.

No information has been made public as to whether Attawapiskat responded to Deloitte's letter. CBC News asked Serge Desrochers, who wrote the letter, about a response, but the company refused to provide details, citing client confidentiality.

AANDC does say in a Jan. 7 press release that "The findings and recommendations from the audit work were discussed in a teleconference with Chief and Council on Sept. 20, 2012" but gives no further details.

Mak notes that, "In this case, it seems curious that that letter was released, but I suspect it would have to do with Deloitte wanting to tell people that it gave management a heads up on these issues."

Is the Deloitte report evidence of malfeasance or corruption?

Deloitte does not say anything like that. Mak says that given the absence of documentation, an auditor cannot "conclude either way whether the affairs were properly conducted or not."

The next step, he says, would be toconduct a forensic audit, "to follow that money trail and find out where it went, despite the absence of documentation within the band."

Are the financial problems at Attawapiskat unique among First Nations?

According to AANDC, as of Dec. 7, 157 First Nations out of a total of about 630 (the number fluctuates) are under one of the three levels of default management. Sixty-three bands, including Attawapiskat, are in co-management, and 14 are under third-party management.

Are the bureaucratic and other problemson reserves improving?

In 2011, the auditor general issued a long-term report on federal government programs for First Nations on reserves.The reportsaid that "conditions have generally not improved and that, "in some cases, conditions have worsened since our earlier audits: the education gap has widened, the shortage of adequate housing on reserves has become more acute, and administrative reporting requirements have become more onerous."

"Services available on reserves are often not comparable to those provided off reserves by provinces and municipalities," the report adds.

The report is especially critical of the federal government's use of contribution agreements to fund services on reserves. Among the problems is the "significant reporting burden" required, "especially for small First Nations with limited administrative capacity. Communities often have to use scarce administrative resources to respond to numerous reporting requirements stipulated in their agreements."

John Wiersema, at the time the interim auditor general, said, "The government needs to go back and come up with a new approach if we are going to seriously improve the conditions on those First Nations reserves."