Auditor General's Reply to Various Statements Made in Respect to his February, 2009 Special Report

1. MINISTER'S STATEMENT

The local construction industry, therefore, relies on these means and methods as a guide only and all excavators qualify their bids to not include the costs for hard rock removal.

AUDITOR GENERAL'S COMMENT

The geotechnical soil report anticipated this problem. Consequently, it clearly and comprehensively identified the geotechnical properties on the build site. The report went over and above the industry standards for bore hole drilling samples. The report was comprehensive enough that the contractor did not qualify its bid to not include hard rock removal.

2. MINISTER'S STATEMENT

It is incorrect to state that the new contract has provisions to reimburse the contractor for delay clams for geotechnical difficulties.

AUDITOR GENERAL'S COMMENT

Section 8.6.3 of AIA 101-2007, which is unique to the new contract, states the following:

"Any and all claims which shall as of the date hereof have accrued to either party under the construction management agreement, including without limitation claims for delay and/or costs and/or remedies that shall remain lawfully available to the either party and shall be resolved either by agreement of the owner and contractor or by the dispute resolution procedure set out in the construction management agreement."

3. MINISTER'S STATEMENT

The Auditor General incorrectly describes the general contractor as the "sole" contractor on this project by late summer 2008.

AUDITOR GENERAL'S COMMENT

AIA 101-2007, the contract for the project, dated 1 December 2008, is between the Government of Bermuda (the owner) and LLC Bermuda Limited (the contractor). This contract formalised what in fact was reality since the late summer. The Minister's use of sub-contractors on site to dispute my assertion that there was a sole contractor for the project is inappropriate.

4. MINISTER'S STATEMENT

I am very pleased to report that with the exiting of the Canadian partner and the change in contract the project, has virtually 'leapt' out of the ground as all Bermuda can plainly see. This progress speaks for itself.

AUDITOR GENERAL'S COMMENT

An interesting word, "leapt"; an interesting phrase, 'out of the ground". I have a voice recording of a meeting held in Toronto on August 25, 2008, attended by the Permanent Secretary, Chief Architect, Project Manager, et al, at which the Construction Manager states: The office building component of the project was to go ahead for "political reasons to try to bring something out of the ground sooner than later. In order for appearance purposes, people see the steel going up, through the Minister's office, even though it's not on critical path please try to get some steel up so that at least from the street it looks as though something is coming up."

I would be willing to make a copy of the 4-hour-plus recording available to legitimate interested persons.

The Minister's own technical officers had voiced concern over the Canadian partner's specialised experience for this project. Nonetheless, the exiting Canadian partner was one of the parties in a company that the Minister recommended to Cabinet to be the contractor on the project just months earlier. So the Minister is now taking credit for the exit of the Canadian partner?

5. MINISTER'S STATEMENT

"The new contract allows much more scope for cost overruns" is untrue.

AUDITOR GENERAL'S COMMENT

Section 8.6.3 of AIA 101-2007, noted above, does not appear in the first contract. On February 5, 2008, $291,000 in change order payments was requested under this section.

Furthermore, the previous certifying architect had denied ten (10) requests for change orders. Therefore, the inclusion of Section 8.6.3 in the new contract to allow such change orders is very convenient, to say the least

6. MINISTER'S STATEMENT

Speaking of the issue of the advance payment of $600,000…

AUDITOR GENERAL'S COMMENT

This explanation is neither here nor there. The fact remains that eleven months into the contract, $600,000 was paid to the contractor to keep it afloat. FACT. (Attachment 1)

7. MINISTER'S STATEMENT

(a) I am unable to speak to the unsubstantiated suspicions and conclusions in this aspect of the Special Report, as we have no information to support them.

(b) However by way of a fully contractually compliant contractor at this time, I have every reason to set such suspicions and conclusions aside.

AUDITOR GENERAL'S COMMENT

(a) As the Minister states just prior to this statement, I said that the alternative risk reducing arrangements to replace the security provided by a bond would require a financial viable company. The Minister has already brought attention to the $600,000 advance payment "that was used to assist LLC in maintaining positive cash flow and so that it could continue seamlessly with the construction of the Magistrates Court/Hamilton Police Station building."

My substantiated (including bank statements – available to legitimate interested persons) suspicion and conclusion is that he does not have a financially viable company and he has the information to support my suspicion and conclusion.

(b) The Minister does not have a fully compliant contractor at this time. Amongst other things, the contractor has received at least $665,000 in accelerated administrative fees to which it had no contractual right. Further this modus operandi is frighteningly similar to how the ProActive contract started out. The Minister may have the luxury to ignore past experience and set such suspicions and conclusions aside, but the Auditor General does not.

8. MINISTER'S STATEMENT

(a) The Auditor General repeats his unsubstantiated and factually incorrect allegation regarding the alleged inadequacy of the monthly payment requests and their supporting documentation.

(b) Invoices can be corrupted and I maintain that the system of checks and balances now in place provides a proven and accountable means to validate the monthly payment requests.

AUDITOR GENERAL'S COMMENT

The Minister goes on and on and on and on about there being no need for supporting invoices and substituting management and technical controls for invoices is exercising appropriate control. The certifying architect can only certify the value rendered for a specific period of work.

Obtaining invoices and reviewing cleared cheque detail and bank statements is an important step in the certification process. Management and technical controls are no substitute for detailed supporting documentation for payments. They are a very important complement, but they are no substitute. Invoices can be corrupted? Who is going to corrupt the invoices now? Would the present "proven and accountable means to validate the monthly payment requests" have caught a $14,500 request for payment for the purchase of a car? A $1,000 request for payment of a charitable donation to the Progressive Labour Party? (Attachment 2)

MINISTER'S STATEMENT

The Auditor General's statement to the effect that more than $665,000 was paid outside the terms of the contract is misleading and needs to be corrected.

As an overview, it is regrettable that the Auditor General did not take the time to exercise due diligence and interview the key stakeholders to obtain an understanding from them on the matters covered by this section of the Special Report.

With respect to the $665,000, the math here is inconsistent with the factual project record math … there is no line item.

AUDITOR GENERAL'S COMMENT

Section 7.1.7 of the old contract and Section 5.1.6 of the new contract discuss the method of determining progress payments. Both contracts call for the percentage of completion method to determine all components of progress payments. Administration fees are a component of progress payments and should therefore be paid on a percentage of completion method. The $665,000 is a calculation based on the straight-line method and is therefore outside of the terms of the contract.

The Minister needs to stop using the term "due diligence" in reference to my work. It is getting tedious and I am finding it difficult not to launch into a disrespectful challenge to this statement. Before my Special Report is finalised, all key stakeholders are given an opportunity to comment and challenge the facts. The Minister has noted that I met with him and his Permanent Secretary and discussed in detail the Ministry's response to my draft Report. The Ministry's detailed response to my draft Report did not include any objection to my findings on the $665,000.

The $665,000 administration payment is determined by adding two budget lines from the payment request schedule: #1010, a credit of $108,266; #1050, $773,495 (Attachment 3).

10. MINISTER'S STATEMENT

The allegation that Government is financing an under funded contractor is completely unsubstantiated. It is a very serious statement that should be either validated or withdrawn.

AUDITOR GENERAL'S COMMENT

I quoted the Ministry's own document in my Special Report which clearly conveys that the contractor is under funded (Attachment 1) In addition I have LLC bank statements for the period February to July, 2008 that shows month-end balance of $393,053, $108,862, ($365,884), ($684,150), ($621,280), ($622,539). These statements clearly reveal a contractor with cash flow problems. (I am willing to make these statements available to legitimate interested persons.)

11. MINISTER'S STATEMENT

The reality is that the administrative and management costs being questioned can spike at the beginning of a project, etc, etc.

AUDITOR GENERAL'S COMMENT

Yes, and so what? The contractor is surely aware of this when he bids on the project, and contractual payment terms would surely take this into consideration. The Minister now admits that we have a project that needs, amongst other things, tower cranes, scaffolding and safety equipment, forklifts, site office trailers, and generators, and the contractor of choice does not have this equipment and, again in accordance with the Minister's own explanation, doesn't have the financial resources to supply them unless the Government pays spiked claims at the beginning of the project – a spiking, incidentally, that is not provided for in the contract.

12. MINISTER'S STATEMENT

To paraphrase, amongst other things very high hoarding costs resulted in the $1.9 (million) general requirements total.

AUDITOR GENERAL'S COMMENT

At no time during our discussions with Ministry and project personnel, nor in the Ministry's reply to my Draft Report, was the high cost of hoarding (in common nomenclature, boarding) mentioned as the reason for the $1.9 million general requirements. Our enquiries confirm that the cost of hoarding was included in and paid under the original contract. Additional hoarding would have been minimal.

13 MINISTER'S STATEMENT

The Ministry agreed the terms of the audit engagement as set out in his, the Auditor General's, letter of 28th January, 2009.

AUDITOR GENERAL'S COMMENT

The letter in question has been completely misinterpreted by the Minister and his Permanent Secretary. In accordance with auditing standards, this is a courtesy letter only; it is not asking for permission to undertake the audit, nor does it set out the terms of the audit engagement. In the case of the Auditor General, the authority to undertake the audit and the terms of the audit engagement are set out in the Constitution and in the Audit Act 1990.

14. MINISTER'S STATEMENT

The Auditor General… informed His Excellency the Governor, among others, that I was indeed the 'D. Burgess" whose name appeared on the cheque.

AUDITOR GENERAL'S COMMENT

I did not inform the Governor or the Minister of Finance (who is described above as 'among others') that the D. Burgess was THE D. Burgess. I gave both persons a copy of the cheques and said that I am sure this will be of interest to you and it gives some indication of the audit environment that I am working in. I did not feel it was necessary for me to say the names referred to the Premier and Minister of Works & Engineering.

I cannot talk to the mental processes of the Governor and the Minister of Finance but from the context of my findings, any conclusion would not be an overly tortured one. Informing the Governor and Minister of Finance was not informing every Tom, Dick, Harry and Jane of these cheques.

Informing the Governor and Minister of Finance is in accordance with generally accepted auditing standards which require the auditor to inform top officers of the organisations of any important matters that come up during the audit.

Further the audit process was not completed. After informing the Governor and Minister of Finance, the next audit step was to talk to the Permanent Secretary of Works & Engineering concerning my findings.

If the matter was not cleared up at this stage and it actually got into the draft stage of my Special Report, the Permanent Secretary and the Minister would get a copy of the draft and would have had another chance to dispute the authenticity of the cheques.

And if it actually got past this control feature, the Audit Committee would have had an opportunity to challenge it – all before any reference to the cheques appeared in a publicly-released document or on the public airwaves. But before any of this could happen, the Minister himself went public and had blown up facsimiles of those cheques plastered to our TV screens.

15. MINISTER'S STATEMENT

The Auditor General stated that he understood my reaction in this regard, noting that had the same thing happened to him, he would have done the same thing!

AUDITOR GENERAL'S COMMENT

The Minister's discussion of the facts surrounding the removal of the Ministry's cooperation is accurate enough as to not require any challenge from me. However, the Minister makes a big point of the fact that I said I would have done the same thing. The removal of Ministry cooperation, my threat to prosecute, and the Ministry's rescinding its withdrawal of cooperation, never was a point under discussion. Other than a few tongue-in-cheek passing remarks, that was an issue that had been put to rest and it appeared mutually agreed that it did not warrant rehashing.

My comment about reacting the same way was to discovering the falsified cheques. I have no doubt if I had been the person whose name appeared on a falsified cheque, I would be furious, yes. But after 30 years as Auditor General, this reaction would not have extended to refusing the Auditor General his Constitutional right to access Government records. The Minister should have performed due diligence and asked the Attorney-General about the legality of his action before he did it and not after.

Knowledge of the Minister's initial action will remain in the public domain, and damage to my and my Office's reputation will linger as a result of this action, irrespective how it concluded.

The Minister wants us to accept that he was overcome by the circumstances and this should cause the Auditor General to exclude the matter from his report. I disagree fundamentally with this. Removal of cooperation with the Auditor General is a very, very serious matter and it is definitely one that meets the criteria for inclusion in the Auditor General's report to the House of Assembly.

The Audit Committee agreed with this. The Audit Committee did, however, suggest that I should consider putting it into context along the lines put forward by the Minister. I did consider this, but I concluded that, whatever the circumstances, a Minister simply does not have an excuse to suspend the Constitution. By attempting to put it in context would be to downplay the Minister's action and belittle my concern. My Special Report fairly describes the matter, notwithstanding the uneasiness the Minister may now have with his decision.

16. MINISTER'S STATEMENT

The Director of Tourism and the Permanent Secretary showed the Auditor General an actual print-out from ESPN confirming that the BDOT's television ads ran.

AUDITOR GENERAL'S COMMENT

At no time in the meeting with the DT and the PS was I presented with ESPN broadcast documentation confirming that ESPN ran the Tourism ads. The Ministry's official letter in response to my draft Report did not dispute the finding as reported. My audit documentation supports my Special Report (Attachment 4).

17. MINISTRY'S STATEMENT

The employee referenced in the Report was awarded a severance package in line with a pension programme that had been in place for decades.

AUDITOR GENERAL'S COMMENT

First of all, it was not and is not my intention to disparage the work performance and reputation of the referenced employee, the Director of Sales and Marketing. Indeed, I understand that his personnel file would disclose that his work performance was excellent and he was well regarded in the industry.

Given time, and if need be, I will confirm this. In the meantime, I publicly apologise to the former Director of Sales and Marketing for having to disclose in detail the terms of his separation agreement in order to prove the veracity of my Special Report.

Had the Director of Sales and Marketing come under the local pension plan, he would have been eligible for a cash payment of $9,146 for his accumulated vacation only. $123,411 in pension benefits entitlements would have been vested in the local plan from which he would have received a pension at age 65.

Since he was departing under the North American plan, the vested pension amount was payable immediately and no pension is payable at age 65. As my Special Report says, applying these rules (not the rules of the local plan as I have been accused of doing) the Director would have received a cash payment of $9,146 plus $123,411 or $132,557 ($132,750 in my Special Report). In addition, however, the Director of Sales and Marketing was positioned well enough that he was able to negotiate further payments consisting of a lump sum of $62,580 payable immediately, $125,160 representing 12 monthly instalments of $10,430, and $123,589 representing the value of additional benefit entitlements which would have been payable if the Director were granted an additional six years of service based on a salary $40,649 in excess of his salary at termination. (I would be willing to give legitimate interested persons access to the severance agreement that details these facts.)

SUMMARY NOTE

In the last analysis, I have no axe to grind concerning who is given Government contracts, so long as good governance procedures are followed along the way, beginning with open and transparent tendering procedures. At a minimum, these procedures can be found in Financial Instructions, the Civil Service Code of Conduct and the Ministerial Code of Conduct. Deviations from openness, transparency and acceptable standards of accountability affect the audit environment, increase the audit risk, impact on the auditor's professional opinion, and produce reportable findings to the House of Assembly.