The Bermuda Housing Corporation operates pursuant to the Bermuda Housing Act. It administers a number of programs in pursuit of its mission Part of this involves managing and leasing a large inventory of properties comprising houses and apartments. Some of these properties are owned by the Corporation, others are leased from their owners. The Corporation adds to its inventory of properties by purchasing and constructing dwelling properties, and by renovating vacant and derelict properties and altering other properties that their owners are willing to rent. The Corporation also arranges and guarantees financing for owners to cover the costs of renovations and alterations.

The net book value of the Corporation's inventory of rental properties exceeds $50 million. The Corporation's total annual expenditures, the major portion of which are for capital acquisition, construction and maintenance projects, are approximately $30 million. Each year, the Corporation receives grants of approximately $3 million from the Government to defray the amounts by which its expenses exceed it revenues - its annual losses.

The Corporation's General Manager (now suspended) was appointed to that position late in 1999.

In late 2001, my Office began planning an audit of systems used by Government and its agencies to manage major capital projects, including those of the Bermuda Housing Corporation. A preliminary examination of the Corporation's systems in early 2002 revealed apparent control weaknesses. I became aware of media comment and rumours that were circulating about alleged improprieties by Corporation staff, and accordingly, audit procedures were planned to address these concerns.

Because of the nature and persistence of the rumours, I discussed the proposed audit with the Government. On March 8, I met with the Premier, the Minister of Health & Family Services (who is responsible for administering the Bermuda Housing Act) and the Chairman of the Housing Corporation. On March 11, I received a letter from the Premier requesting that I, as Auditor General, conduct a full investigation of all aspects of the Housing Corporation's financial operations - see Appendix 1.

The Audit Act provides me with authority for, but also limits the scope of, investigations of this nature. The Act gives me access to all property and records of the Housing Corporation, and requires Corporation executives and staff to provide the information, explanations and assistance I require. However, I have no access to the records of companies, businesses or people with whom the Housing Corporation transacts business. Nor have I authority to require non-Government people to provide me with information or explanations. As explained in section 3 of this report, these limitations effectively restrict my ability to fully investigate all aspects of allegations of "kickbacks" because such transactions, if they occurred, would not appear in the Corporation's records.

It was because of these limitations, and because the Premier asked me to do so, that I reported in April 2002 to the Director of Public Prosecutions when I believed I had sufficient findings to warrant a Police investigation into possible criminal activity. The Police are not subject to the investigative limitations that I am, and the Police and my staff are liasing as their respective work progresses.

The scope of my investigation focused mainly on internal controls and systems for ensuring the economic and efficient expenditure of funds and protection of the Corporation's assets. Particular emphasis was placed on controls in place or needed to prevent and detect fraudulent and other wrongful activities.

My investigation is ongoing. I will include any significant further findings, and those included in this report, in a future report to the House of Assembly at an appropriate time.

This report does not contain recommendations to address the problems identified because such recommendations need to be discussed first with senior management. I will issue a report with recommendations to the Housing Corporation when the current management uncertainties have been resolved.

There has been serious and widespread failure to comply with many of the Housing Corporation's legislative authorities, administrative policies and control procedures. Control deficiencies were particularly severe relating to the awarding and administration of construction and maintenance projects. Tendering and quotation processes were rarely used, and when they were, the fairness of the process was sometimes questionable. In most cases, project work was performed based on broadly worded purchase orders with estimates of the value of the work to be performed. There is little or no evidence that most of these estimates represented competitive prices, and some were wildly in excess of the value of the work performed.

Internal controls to ensure that the Housing Corporation pays only for goods received and work performed were also weak. Available documentation to support project payments was often lacking or incomplete, or insufficiently checked and approved. For many projects, functions such as selecting the contractor, signing the purchase order, approving the work done, and authorizing and signing the cheque were concentrated in one person - usually the General Manager. Similarly, some of the Corporation's Property Officers performed a range of functions incompatible with the principles of sound internal control.

Another major concern relates to loans made by the Corporation. Forty-six loans totalling $770,000 are outstanding that are the requirements of the Bermuda Housing Act in that nine of them are not for the purposes allowed, none are secured, and none were approved by the Minister.

The serious and pervasive control deficiencies outlined above, as well as other weaknesses and practices detailed below, preclude the Corporation from discharging its duty to demonstrate that its financial affairs have been administered with due regard for economy and efficiency. To the contrary, I am satisfied that in many instances, appropriate value for money spent has not been received. In addition, control deficiencies increasingly cultivated an environment conducive to financial inefficiency and mismanagement, and in which kickbacks and other fraudulent activities could occur and remain largely undetected. It is unsurprising that allegations of wrongful behaviour by Corporation officials have surfaced, that managers have been released for cause, and that senior managers have been suspended pending the outcome of investigations of their activities.

The following more detailed observations support the above summary findings and conclusions:

A Government-owned corporation with the mandate and mission of the Bermuda Housing Corporation should have approved policies and procedures for the awarding of construction and maintenance contracts to ensure, and be able to demonstrate, that as a minimum:

? ?suitable suppliers have opportunities to submit tenders or quotations for the provision of work or services;

? tenders and quotations received are treated fairly and contracts are awarded to the tender or quotation that best satisfies the communicated specifications;

? formal contracts are executed that protect the Corporation's financial and other interests;

? payments are disbursed pursuant to contracts only for work performed and services provided that has been inspected and approved as satisfactory by an appropriate Corporation official;

? claims for cost overruns are assessed and, if valid, are approved by an appropriate Corporation official; and

? the Corporation conducts its contract administration, and is seen by the public to conduct its contract administration, openly, fairly and without favour or restrictive practices.

The Corporation has policies and procedures for awarding and administering construction and maintenance projects that satisfy the above criteria. The problem is that it rarely fully adheres to them. For example, the Corporation's policies call for formal contracts to be executed for projects in excess of $50,000. The investigation revealed that while contracts were executed for all projects under the Vacant and Derelict program, they were not executed for all other projects in excess of $50,000. As well, an examination of a substantial selection of the Corporation's recent projects and related payments revealed that it failed to satisfy virtually all of the above-listed criteria.

I acknowledge that Government has relaxed its policy requiring public tendering for all large contracts, particularly where tendering might diminish the chances of smaller less-established contractors. In my view, however, this does not relieve the Corporation of its responsibility to obtain reasonable and competitive prices for its projects. This could be achieved, for example, by obtaining a selection of quotations and a process to ensure that the best value is chosen. Whatever the method or process, it should be clear, publicly communicated and seen to be fair and consistently applied.

In practice, the Housing Corporation only uses a tendering process for the very largest projects, and even then, it was not always used fairly. For example, tenders were obtained for the construction of a large number of housing units. It was then decided to construct a substantially smaller number of units and the contract was awarded to one of the original tenderers. Aside from there being no documentation to show how the successful tenderer was chosen, this was unfair to potential contractors who did not tender because of the size of the project, or who could perhaps have tendered a better price for a smaller project.

A larger concern is that the majority of the Corporation's construction projects were initiated without obtaining a selection of quotations, or executing a formal contract. Many construction and repair projects were initiated by issuing a purchase order with only a general description of the work to be performed and a price. A lack of detailed job specifications, at this stage, increases the risk of incorrect or unsatisfactory work being performed. It also precludes the Corporation demonstrating, and prevents auditors or others assessing, whether prices paid are reasonable.

Some purchase orders were supported by the contractor's written quotation for the work, but there was rarely evidence that other suppliers had an opportunity to submit quotations, or that the quotation represented a competitive price. This practice is unfair to contractors who do not have an opportunity to compete for Government business. It is also unfair to taxpayers who are paying more than necessary to construct the Housing Corporation's own assets, and to the Corporation's clients who are paying more than necessary to refurbish and repair their properties under the Vacant and Derelict and property management programs (see 3.2 below).

Construction cost overruns occur in even the best managed operations, but the incidence and extent of such overruns at the Housing Corporation appear excessive. Just how excessive many of these were, however, is difficult to assess. This is because project records routinely lack information on why the overruns occurred, or how paying for the overruns was justified. It seems that cost overruns claimed by contractors were virtually never questioned or rejected. A review of a sample of projects for which quotations had been received ranging from $22,000 to $390,000 revealed cost overruns from 10% to 100% of the estimate. In one case, work quoted at $390,000 eventually cost more than $740,000.

For some other projects reviewed, the price for the work shown on the purchase orders (and subsequently paid) appeared exorbitant. To assess the reasonableness of some of these prices, I employed a quantity surveyor and a contractor to estimate the market value of the work performed. The amounts quoted and paid exceeded the assessed value by amounts ranging from 32% to more than 200%. A similar comparison was impossible for some apparently exorbitant quotations because, as explained in 3.1 above, the description on the purchase orders of the nature and extent of the work performed was too vague.

In six instances, cost overruns were increased by contractor's invoices being paid twice, and the errors remaining undetected or being detected much later. One such duplicate payment was for $32,000, and two others were each for $10,000.

Deficient internal controls and weak project management have undoubtedly cost the Housing Corporation and/or its clients dearly, though how much is impossible to quantify. The size and circumstances of some of the excessive costs raise suspicions that something worse than mismanagement could be involved - see 3.6 below.

Well-managed organizations have procedures and controls to mitigate the risk of inappropriate, duplicate, incorrect or otherwise improper payments. Such controls are designed to ensure that purchases are properly approved, that payments are supported by proper documentation, and are for satisfactory goods or services received. Inherent in internal controls is that duties of people in the process should be arranged so that one person alone is unable to perpetrate and conceal a fraud. For example, a person who could order and take delivery of goods, and effect payment or even authorize payment for the same goods, would be in such a position. Such controls are meant to protect the organization's resources and, as well, to protect staff who might otherwise be suspected if fraud does occur.

The Housing Corporation's policies provide for procedures and controls of this nature. Unfortunately they are not strictly complied with or enforced. A large percentage of payments reviewed during the investigation lacked evidence that all the required documentation and control procedures had been performed, or they had been performed by a person whose other duties conflicted with the principles of sound internal control. These deficiencies included:

? ?no purchase order or contract prepared to initiate the ordering of goods or services;

? lack of evidence and/or authorization that satisfactory goods had been received or the services provided;

? purchase orders prepared or signed after the supplier's invoice was received;

? no evidence that invoice amounts, calculations and extensions were verified;

? inadequate segregation of duties of people performing controls and processes. For example, for some payments a senior official signed the original contract or purchase order, approved the work performed, authorized the payment, and signed the cheque.

The following were among other examples of expenditure controls being weak or circumvented, or of inadequate supporting documentation:

? ?An abnormally large number of payments were made by manually-produced cheques or cash. Many large cash expenditures were made from revenue receipts, a practice considered inconsistent with acceptable administration and management control practices.

Except for small "out-of-pocket" expenses, only emergency payments should be made by manually-produced cheques or cash. This is because such payments can usually escape an organization's normal verification and authorization procedures. Approximately 25% of the Housing Corporation's payments were made by manually-produced cheques or cash. For the majority of the payments reviewed during the investigation, there was no apparent justification for treating them as emergency payments.

? ?The documentation to support charges incurred on a senior official's Corporation credit card was inadequate. The only documentation available was the statements from the credit card company. There were no invoices or receipts or other documentation to verify that the charges were for legitimate Corporation business. There was also no indication that a second party had checked the charges for validity. This situation contrasts with the controls exercised over the use of credit cards by senior officials in Government departments where strictly enforced usage and documentation requirements apply.

The investigation revealed that several companies and businesses that regularly perform construction and maintenance work for the Housing Corporation are not registered with the Tax Commissioner or Insurance Officer. This means they are not remitting payroll taxes or pension contributions as required by law. As well, some companies and businesses are registered but are not remitting, or are remitting amounts inconsistent with the amount of work they are doing for the Housing Corporation. I have forwarded details of these anomalies to the Tax Commissioner and the Insurance Officer for further investigation and action and I shall report on them in a future report to the House of Assembly.

Under the Vacant and Derelict property program, the Housing Corporation (as agent for property owners) enters into contracts with construction companies to refurbish the owners' properties. When work is complete on a property, the costs of refurbishment are converted into a loan to the owner, and the Corporation facilitates a mortgage with a financial institution to secure the loan. Thereafter, the Corporation lets and collects rents for the property, and remits mortgage payments to the lending institution.

Administrative deficiencies in the initiation of this process have caused problems and, in some cases, resulted in the Corporation incurring substantial costs. The problem stems from the informal manner in which property owners are notified of the likely costs of refurbishments (costs that they will ultimately assume in the form of a mortgage loan). Sometimes these costs are communicated to the owner verbally, sometimes in a letter, and sometimes in a lease agreement. Sometimes refurbishment work begins before the owner is notified of the estimated costs.

When the actual refurbishment costs substantially exceed the originally agreed estimate (see 3.2 above), property owners are understandably unhappy. Some property owners were persuaded to assume (in their mortgage loan) these extra costs. Others have refused, and the Housing Corporation has had to write them off.

In one instance, the property owner was informed that refurbishment would cost $390,000. The eventual cost, however, exceeded $750,000. The owner refused to assume the additional costs and the Corporation (and the taxpayer) therefore will likely have to bear these costs. This was not an isolated instance. In seven similar cases, the owners have so far agreed to pay only $145,000 of cost overruns totalling $320,000, and the Corporation may well have to absorbed the difference. In my view, this illustrates ongoing mismanagement and a disregard for financial consequences.

There are allegations and media reports that Corporation officials have solicited and received kickbacks.

In an operation like the Housing Corporation, kickbacks to Corporation officials could take many forms. They could be payments by cheque or cash, they could be work or construction services, or they could be a range of benefits or favours provided to or conferred on officials. In consideration of a kickback, an official could apply favour when awarding contracts, approve inflated work estimates, approve payments of actual or fictitious cost overruns, certify inadequate work, etc.

It should be readily apparent from this that if kickbacks were happening, no record of them would appear in the Housing Corporation's records. They would be transactions between the Corporation official and the contractor. They might not even appear in the personal records of the official or the contractor, unless the kickback was in the form of a cheque. Even inflated work estimates or fictitious cost overruns could be made inconspicuous in the contractor's records without too much difficulty.

As explained in section 1 of this report, I have no access to the records of contractors who perform work for the Housing Corporation, and I cannot require them to provide me with information. Nor do I have access to the personal records of Housing Corporation officials. Accordingly I can neither substantiate nor dispel these allegations. These will be matters for the Police to pursue in their investigation.

If kickbacks have occurred with any frequency, the impact of the consideration given for them could be discernible in the records of the Housing Corporation. Such indicators might include contracts being awarded without obtaining a selection of competitive tenders or quotations, purchase (work) orders being issued for apparently excessive prices, and payment for significant cost overruns without evidence to support the validity of the costs. However, the fact that all these have occurred at the Housing Corporation, and have occurred frequently (see 3.1, 3.2 and 3.3 above), does not prove that kickbacks have occurred. They could equally be the result of gross mismanagement.

Other possible symptoms or enablers of wrongdoing by officials could include lax control over expenditures, duplicate payments, concentration of duties in one individual, officials living above their apparent means, using a limited source of contractors, and a climate within an organization that seems to tolerate inappropriate behaviour. As discussed above, many of these apply to the Housing Corporation. With regard to tolerating inappropriate behaviour, the Corporation has in recent years dismissed two staff members respectively suspected of stealing Corporation property and receiving kickbacks. Yet in neither case has the Corporation demonstrated its intolerance for such activities by prosecuting the offenders.

A number of the Corporation's officials were apparently operating sideline businesses, at least partly, from the Corporation's offices. No evidence could be located to indicate that these activities had been sanctioned as required by the Government's Code of Conduct.

In conclusion, my investigation of the Corporation's records produced no indisputable corroboration that kickbacks or other fraudulent activities have occurred. My investigation, however, has not dispelled these allegations. The poor internal control environment and the apparent culture of the Corporation were certainly not conducive to mitigating the risk of wrongdoing by Corporation officials.

The Corporation has outstanding loans receivable totalling approximately $770,000, and has guaranteed repayment of many mortgage loans that it has facilitated for its clients. The administration of these loans and guarantees is another area where approved policies, and even legislated requirements, were routinely disregarded.

Sections 47 and 48 of the Bermuda Housing Act 1980 empower the Corporation to make or guarantee loans only for the purposes of acquiring or leasing land, constructing, converting or improving dwellings, or other related purposes. All such loans or guarantees must be secured by first mortgages or approved by the Minister.

Despite these legislated constraints, nine of the loans were for purposes not allowed by the Act. None of these were secured by a first mortgage, and none were approved by the Minister. As well, some mortgage loans were increased for such unapproved purposes as debt repayment, divorce settlement costs, and tuition fees.

Additionally, the Corporation has made loans to five of its officials of amounts up to $11,900. None of these loans were for dwelling property-related purposes, none were secured and none were approved by the Minister.

Management also disregarded policies and controls established by the Board. For example, not all loans, mortgage guarantees and deeds of further charge were forwarded to the Board's Mortgage Committee for approval, and most mortgage and loan files lacked all the required supporting documentation. Further, although the Mortgage Committee is (or should be) a critical control component within the loan and mortgage approval process, its operating criteria are in some ways deficient. As well, discussions with Committee members revealed that some are unaware of all these criteria. Documentation of the Committee's processes and decisions is also often deficient.

The Government's Code of Conduct calls for disclosure of actual or apparent conflicts of interest situations. While the Code does not define all potential conflicts of interest, it would seem to encompass situations where members of the House or senior Government officials have significant business transactions with Government organizations. In my view, documentation should be available to demonstrate, as a minimum, that non-arms length business is transacted at reasonable commercial prices. And as the Code of Conduct directs, these situations should ? "

The following instances did not comply with the above disclosure and conduct standards:

? ?Since November 2000 the Corporation has been managing two rental properties owned by a member of the House. The Corporation refurbished the properties for $73,000 and charged the cost to an interest free loan account in the member's name. Under a still unsigned agreement, the excess of rents collected over the lease payments to the member, less any maintenance costs, are used to pay off the loan. However, the excess is proving insufficient to cover the maintenance costs and the loan account is increasing instead of decreasing.

This is one of the loans referred to in 3.7 above that is beyond the authority contained in the Bermuda Housing Act. Some of the properties covered by the loan are not dwellings and the loan is not secured by a first mortgage nor was it approved by the Minister. In addition, it does not satisfy the disclosure and conduct standards described above. Not only did management not ensure that documentation was available to demonstrate that the agreement represents arms-length values and arrangements, but management did not bring it to the attention of either the Audit Committee or the Board of Directors.

? ?In November 2000, the Corporation began major renovations on two apartments owned by a Minister. The apparent intention (no written agreement can be located) was for the Corporation to manage the renovated properties and use the excess of rental income over lease and maintenance costs, to pay off the cost of the renovations - a normal arrangement for agreements of this nature. In early 2001, after $152,000 had been spent on renovations, a senior Corporation official agreed with the Minister to purchase the property for the Corporation. The total cost to the Corporation, including the renovations and other incidental costs, was $610,000.

Despite this purchase being a transaction between two Government-related parties, no independent appraisal or similar evidence was obtained to demonstrate that the acquisition cost was reasonable. Furthermore, although a Director signed the purchase documents, there are no minutes or other evidence that the Board of Directors approved this purchase as required by Corporation policy.

? ?In a similar case, a senior Government employee sold two apartments to the Corporation for $285,000 after which the Corporation spent a further 200,000 renovating them. Here again, despite the related party nature of the transaction, no appraisal or similar evidence was obtained to demonstrate that the acquisition cost was reasonable. As well, although a Director signed the purchase documents, there are no minutes or other evidence that the Board of Directors approved the purchase.

It is not inappropriate for members of the House and Government officials to transact business with Government. When property sales like these are negotiated, however, as the Code of Conduct infers, the documentary evidence retained should demonstrate that the prices and arrangements arrived at are beyond question or reproach - if anything, the evidence should surpass what would normally be expected between non-Government related parties.

The above examples were not the only instances where properties were purchased without first obtaining an independently appraised value. An appraisal was obtained for only one of the twelve properties purchased during the past two years.

The Bermuda Housing Act establishes a Board of Directors. Although the Act is silent on the duties and responsibilities of the Board, it is reasonable to assume that such responsibilities should include overseeing the activities of management. In most board-governed organizations, this involves as a minimum;

? ?establishing corporate goals and policies;

? reviewing and approving operating plans and budgets;

? ensuring that management implements the business strategies, stewardship systems and internal controls necessary to pursue corporate goals and comply with policies;

? obtaining periodically from management the information needed to assess, and hold management accountable for, its performance and financial and operating results;

? formally appraising at least annually the performance of the chief executive officer; and

? (in a publicly owned organization) being accountable to the responsible minister by periodically reporting the results of discharging the above and any other responsibilities assigned to it.

If the Board of Directors of the Bermuda Housing Corporation had been discharging these responsibilities effectively, it would surely have become aware of at least some of the Corporation's management problems and control deficiencies. Similarly, when rumours and allegations of wrongdoings surfaced, the Board should have demanded that management explain or resolve the underlying issues to its satisfaction. The governance supplied by the Board was ineffectual and the accountability inherent in the usual Board/Management relationship was near to non-existent.