This is the full text of Auditor General Larry Dennis' reply last year to the Bermuda Industrial Union's Statement on the Auditor General's Special Report on the Berkeley project. It is republished here in the public interest.

I shall first address the false statements in the Bermuda Industrial Union's November 25, 2002 press release. I shall then address the emotional and extraneous context in which they are made. Before I do so, however, there is one thing in respect to my Special Report on the Berkeley Institute Senior School Capital Project that I perhaps value above all else. The Government own Audit Committee reviewed my Report and found it to be balanced. In the reporting environment in which an Auditor General operates, there can be no higher accolade.

FALSE STATEMENTS

1. Bermuda Industrial Union officials state that during the thirty plus years of the "reign of terror and error", multiple capital projects were carried out including:

Westgate Prison

CedarBridge Academy

Tynes Bay Incinerator

National Stadium

and go on the state:

"Yet for the first time in the history of Bermuda, the Auditor General has chosen to perform a management control systems audit on a major capital project."

A. WESTGATE PRISON

I issued a special report on the WESTGATE CORRECTIONAL FACILITY in October 1995. It was tabled in the House of Assembly on April 2, 1996. The report covered the determination of qualified bidders, bid period and letter of acceptance, performance bond, additional contract payment and liquidated damages.

In view of the amount of attention performance bonds are currently getting, one of my comments in relation to the performance bond was:

"Our review of the contract indicated that the successful bidder did not include a performance bond. Instead, with the approval of Cabinet, the contract price was reduced by $500,000 in lieu of a bond".

My special report included three recommendations which are still very much applicable today but, in the interest of brevity, I shall not repeat here.

B. CEDARBRIDGE ACADEMY

Management control systems audits are specifically chosen because of presumed problems and the likelihood of finding reportable items. If during the initial discovery phase, however, we conclude that the likelihood of finding reportable items is remote, we discontinue the audit and direct our resources elsewhere. This happened twice in respect to CEDARBRIDGE ACADEMY - midway through the project and at the end of the project. Notwithstanding, in my 1998 Annual Report, I note:

"Project records for 1998 showed that CedarBridge Academy...exceeded amounts budgeted by $11.3 million. Coding misclassifications, some of which were not corrected, caused some of these overruns.

These miscodings distort the report figures, and show that the project (was) managed without the Ministries involved exercising adequate budgetary control."

I recommended:

"To ensure that capital expenditures are recorded accurately and that project costs are monitored and controlled, the Ministries of Education, Finance, and Works & Engineering should establish reporting procedures for development projects that produce reliable information that can be used to monitor and control costs."

The Ministries responded:

"The Ministries were aware in 1997 that the CedarBridge project would likely be overspent because insufficient funds were budgeted for equipment acquisitions. Consequently, the Legislature approved revisions to the Total Authorised Figure (TAF)...at the first opportunity when the 1998/99 estimates were being considered by Parliament in 1998.

I recall being pleasantly surprised that the CedarBridge project was devoid of major problems and, notwithstanding the $11.3 million (which was all properly authorised and approved), we found that the construction project was well run. Consistent with my practice of reporting only those matters which I feel are significant, I publicly reported only the $11.3 million over expenditure. I felt there was nothing else of significance.

C. TYNES BAY INCINERATOR

Expenditures for the TYNES BAY INCINERATOR project were budgeted over the years 1981/82 through 1977/98. My mandate to undertake management control systems audits became operative in 1991 by which time $25 million had already been spent. As soon as I was able to divert my Office's resources away from financial audits to management control systems audits, I did. My first management control systems audits were undertaken in 1995, by which time $66 million of an eventual $74 million had been spent on Tynes Bay. Accordingly, most of the reasons for conducting a management control systems audit had already transpired. Further, I doubted that I could shed much more light on the problems with the project that had not already been discussed publicly. I therefore determined that my resources could more effectively be employed somewhere else.

D. NATIONAL STADIUM

On November 19, 2001, the Ministry of Finance asked me to apply certain management control systems audit procedures to the NATIONAL STADIUM project. I submitted my report to the Ministries of Finance and Youth & Sport on June 7, 2002. As far as I am aware, Cabinet considered the report soon after. Although the report has not yet been included in a public document, I made the following recommendations:

"Capital estimates should be based on detailed plans, and subsequent changes and additions should be clearly segregated and disclosed so that cost increases can be easily identified and tracked."

"Approved capital Estimates should show total estimated costs for each specific and identifiable project and should include indirect costs."

Finally, records to March, 2002 indicate that approximately $5 million was spent on National Stadium prior to November 9, 1998, and $23 million was spent on National Stadium since November 9, 1998. Overall, I concluded that the administration of the National Stadium project to date has been good within the parameters imposed.

2. Bermuda Industrial Union officials state:

"Not only did the Auditor feel compelled to perform a rare, if ever, management audit, but also on page nine (9) of his report, he questions the financial capability of BIU subsidiary, Union Asset Holdings Ltd. to meet claims of up to $6.89 million under the Bond, if called upon to do so."

My decision to perform a management control systems audit of the Berkeley project was not rare.

Yes, I do question the ability of the BIU subsidiary, Union Asset Holdings Ltd., to meet the claims of up to $6.8 million under the Bond if called upon to do so. Why? Because proof of the ability of the BIU subsidiary, Union Asset Holdings Ltd., to meet its claims if called upon to do so, should be in the files of the Ministry of Works and Engineering. It is not. In addition, the length of time it is taking to get there after repeated requests is unnerving, to say the least. It is an axiom in auditing that it is not the responsibility of the auditor to prove the organisation correct; it is the responsibility of the organisation to prove that it is correct. Inconsistencies and delays heighten professional scepticism and, if they continue long enough, they begin to taint the audit environment.

3. Bermuda Industrial Union officials ask:

"The question is why was there no audit of this project (Westgate) or other large government projects, which finished late or over budget prior to November 9, 1998?"

I have already pointed out that this statement is false. It is a pity that Union officials keep repeating it.

4. Bermuda Industrial Union official state:

"The Auditor General goes on to conjecture that it is unlikely that the Bermuda Industrial Union is in a financial position to satisfy the Bond claims, should there be any."

I do not make any such conjecture.

What I say is "it is unclear whether the BIU's assets are available to its subsidiary to satisfy Bond claims. In my view, it is unlikely." It is a big difference between saying it is unlikely that the Bermuda Industrial Union has the assets to guarantee the bond and it is unlikely that the Bermuda Industrial Union's assets would be available to settle bond claims against its subsidiary.

And why do I think it unlikely that the BIU's assets would be available to satisfy bond claims? Union Asset Holdings Ltd. is a separate corporation enjoying limited liability. In this situation, the parent organisation's assets would not normally be available to satisfy the debts of the subsidiary. Further, why would the Bermuda Industrial Union go through the trouble of setting up a limited liability company if it were not going to take advantage of the limited liability benefit? Do I need to know the answer to this to satisfy my significant concerns about the bond? No, at least not until I receive the assessment documentation and determine that there is a link between Union Asset Holdings Ltd.'s potential liability and the Bermuda Industrial Union's assets.

5. Bermuda Industrial Union officials state:

"He (meaning me), like many others, believes that it is impossible for a working class organisation to have enough assets to guarantee such a bond required for such a project."

I shouldn't have to think whether or not a working class organisation has enough assets to guarantee such a bond. In this case the fact should be a matter of public record. It is not.

What stunned me in the officials' above statement is that it implies that the union did guarantee the bond. This is the first time I have come across any indication of this fact. I'm sure I shall come across the guarantee as soon as I am given the files pertaining to the assessment of Union Asset Holdings Ltd's ability to cover the 6.8 million bond, an exercise which the Ministry of Works and Engineering is required to do in accordance with rules, regulations or instructions, and the evidence of which I have the right to examine in accordance with the Audit Act 1900 and the Constitution.

EMOTIONAL AND EXTRANEOUS CONTEXT

If officials of the Bermuda Industrial Union or of any other organisation think that by playing the race card I am going to duck and cower into some dark recess, they are mistaken. I am not impressed. I am not embarrassed. I am not intimidated. I shall wear the outrageous and off-the-subject accusations as a badge of honour that indicates the length that officials will go to escape accountability when they have no legitimate answer to legitimate questions. The scandalous comments say more about those making them than they do about me.

Siren phrases and statements such as "reign of terror and error", "he shares the all too common belief that people of African descent are illiterate and chained in darkness", "duly humble and suitable subservient", "descendants of slaves", "he, like many others, believes that it is impossible for a working class organisation", are not meant to shed light on the problem at hand. They are meant to play to the emotional impulses of human nature and thereby, hopefully, to obscure the truth. In the modern exercise of this tragedy in Bermuda, it is used as a last refuge of those who wish to escape accountability. As such, people who would employ such methods jeopardise and demean the aspirations and legitimate claims of the very people they purport to represent and, to put it bluntly, they insult the trials and steadfastness of those who went before.

My failure to contact the Bermuda Industrial Union is noted by Union officials as evidence that I believe that those in "the BIU are descendants of slaves and have no right to expect courtesy or consideration. We are firmly of the view that respect for the efforts of Bermuda's working class who built this great Union should have dictated no less."

I didn't contact the BIU because the only reason I would have to contact the BIU would be if, during my examination of the assessment documentation, I discovered that the assets of the BIU were placed as collateral to cover the $6.8 million Bond given by its subsidiary. Since I have not yet been given the assessment documentation, I would not know whether there is this connection.

Furthermore, if I did determine that I needed to know more about the BIU's financial situation, the first thing I would do would be to examine the Union's financial statements that are supposed to be on file with the Registrar General. As I noted in my Special Report, the Bermuda Industrial Union had not filed statements since 1999. The finances of the BIU are required by law to be a matter of public record. They are not only the business of the Auditor General, they are the business of any other member of the public. Accountability is achieved by presenting union members audited financial statements on a timely basis and filing them with the Registrar General within the time frame required by the Trade Union Act. Officials of the Bermuda Industrial Union themselves show disrespect for Bermuda's working classes' who built this great Union" by not making themselves accountable for their stewardship of members' assets.

Officials of the Bermuda Industrial Union mention many achievements of the Union. I concur that the Bermuda Industrial Union is an organisation that makes major business decisions on a daily basis. I concur that the Bermuda Industrial Union can boast ownership of several major city properties. On a personal basis I even applaud the Bermuda Industrial Union for feeling compelled to help assist the economic empowerment of a solely owned Bermudian company that is supportive of the Union's goals and objectives. This, however, will not excuse any action if it does not hold up to public scrutiny.

Finally, allow me to give some gratuitious advice on the question of performance bonds. It is gratuitous because it is not my responsibility to give unsolicited advice. But since my legislation allows me to give solicited advice, I shall stretch this clause at the expense of what some might quite rightly say is outside my remit.

The question of performance bonds has caused so much controversy that I have continued to be amazed why a very simple solution was not adopted. The solution is one of POLICY versus ADMINISTRATION. Way back in October 1995, I made this statement in my Special Report on the Westgate Correctional Facility:

"The question of performance bonds should be examined in light of current industry practice in Bermuda (we were informed that they are just about impossible to obtain in Bermuda) and the problems encountered on this project. The policy may need revision but some bond or insurance should be obtained on large projects in order to provide adequate protection of public assets."

This was in 1995, and this was discussing the problems in relation to large and established construction firms. One could conclude, then, that to require a bond would definitely exclude any newly formed firm. The Government knows this. Indeed, I note in my Special Report on Berkeley that officers of the Ministry of Works and Engineering reported in 2000 that "a company with no track record will find it difficult, if not impossible, to obtain a bond for 10% of the tender total."

If the Government's declared philosophy was to enfranchise those no-track-record companies, why would the Government include as Government policy the very criteria that they knew would disqualify them?

There is nothing sacred about a performance bond. It is but one of many options available to mitigate risk. Being aware of the Government's desire to broaden the pool of those participating in mainstream economic activity, I was continually expecting to see a policy statement issued to the effect that performance bonds would no longer be required when bidding for Government work. This policy change would become part of the rules of tender and be communicated to all potential bidders. Of course, as Auditor General, I would have also expected to see that alternative methods were employed by the Government to substitute for the elimination of this risk-reducing instrument. For instance, a substitute could be measures such as were effectively employed at CedarBridge - contracts broken up into smaller parcels and control of construction sites maintained by Works and Engineering.

Instead, the Government turned the Performance Bond into a sacred cow, paid out $700,000 of public funds, and in the process appears, until proven otherwise, to have performed administrative inexpediencies in order to give the appearance that this bond is in place and is callable.

This concludes my comments on the statement by officials of Bermuda Industrial Union. However, a comment from me on a statement that appeared in Tuesday's Royal Gazette seems appropriate at this time.

If officials of the Bermuda Industrial Union really believe that "it is no ones business whether or not Pro-Active actually paid the $700,000 surety fee to the BIU", they don't understand the potential seriousness of the problem that is stealing its way through the system. My concerns are grave enough that I do not think I should be coy. I shall explain the most important.

1. If the $700,000 surety fee has not been paid, senior officers in the Civil Service who processed the payment in good faith are compromised. As noted in my Special Report, before approval was given to pay the $700,000, staff of the Ministry of Works and Engineering expressed concern that the Ministry had not received any evidence that Pro-Active had paid the Surety the fee. In other words, it was common knowledge in the Ministry that evidence of the payment from Pro-Active to the Surety was needed before the Government's reimbursing payment to Pro-Active could be made.

Following on from this, in my opinion documentation presently in the Ministry's files does not meet the requirements anticipated by section 11(2) of the Public Treasury (Administration and Payments) Act 1969, which states:

"...where any expenditure is injured by or on behalf of or in connection with the operation of any Government Department..., the appropriate public officer...shall cause the bill, invoice or other statement of account...in respect of the transaction in question to be certified, and shall as soon as may be cause the bill, invoice or other statement of account certified as aforesaid to be transmitted to the Accountant-General."

Nor would the documentation presently in the Ministry's files meet, again in my opinion, the requirements of 10.4(3) of Financial Instructions which state in respect to the responsibility of authorised officers:

"ensure that the appropriate documentation is attached for all payments prior to submission to the Accountant-General for payment."

In both situations penalties are provided for failure to act as instructed. I have no doubt that all senior officers of the Civil Service who were instrumental in processing the payment of $700,000 acted in good faith and with full expectation that the required, evidential documentation would be forthcoming. If for only this purpose, the documentation that evidences Pro-Active's payment to the surety should be provided now.

2. If the $700,000 surety fee has not been paid, the premium has not been received by the insurer and the bond is not in effect. This could suggest that the bond was never expected to be called, a suggestion that needs to be dispelled immediately. The documentation that evidences Pro-Active's payment to the surety should, therefore, be provided now.

3. If the $700,000 surety fee has not been paid, Pro-Active has received a $700,000 interest-free injection of public funds for which Government has received no value. Most charitably, I might describe it for now as an interest-free cash advance to help with cash flow problems that was received under false pretences. The documentation that evidences Pro-Active's payment to the surety should be provided now.

This is where we find ourselves today. Officials of the Bermuda Industrial Union can call my modus operandi racist if they like. It will not alter the fact that I shall get the information I am required to be given in accordance with the law and the Constitution. The conduct of certain parties to date has tainted the audit environment. Not only do inconsistencies and delays heighten professional scepticism, obstruction inspires suspicion.