Government has "effectively lost control of a significant portion of the public purse", according to a new hard-hitting report from the Auditor General. Larry Dennis reckoned in March 2005 total spending unaccounted for topped $800 million.

Mr. Dennis pulled no punches yesterday as he blamed the "continued deterioration" in timely financial reporting by many Government bodies for creating an environment where fraud can thrive.

Commenting in his latest annual review of Bermuda's accounts for 2004-2005, the public accounts watchdog said he hoped delays stemmed from staff shortages, a "laissez-faire" attitude to responsibilities or an inability to maintain adequate and up-to-date cash records.

And he warned: "Because the alternative is that they are deliberate, and designed to prevent or defer the audit process. In which case, suspicions arise about possible wrongdoing or even fraud."

Of Government's 37 quangos and public funds, the report reveals that only ten issued audited financial statements within ten months of their fiscal year ending. Based on the last audited accounts for those bodies that were in arrears, Mr. Dennis estimated that the total spending unaccounted for at March 2005 was over $800 million. The Auditor General said in previous reports he had asked senior managers, permanent secretaries, Ministers and the Ministry of Finance to bring cash-flow records up to date, "to no avail".

Mr. Dennis cited one of the worst offenders as the Government's largest pension and insurance funds ? both falling under Ministry of Finance control.

He said the overall situation was serious because it breached financial laws and created an environment where fraud could thrive. Finance Minister Paula Cox, making initial comments on the report in the House of Assembly yesterday, rejected claims Government had lost control of finances in the way the independent watchdog described.

But she admitted more needed to be done in individual departments to improve financial accountability.

She told the MPs: "I would state categorically that in Bermuda this would not be an accurate description of the state of our public affairs."

Pointing to steps taken by Government to "strengthen the already sound stewardship of the public purse" ? like the introduction of a new internal audit team, which has carried out a risk assessment of the entire Government ? she said the focus of the Auditor General's report was on mismanagement, criminal sanctions and recovery of lost funds. It did not report on the "very many things" that went right in Government finances.

"His function requires him to focus on the exceptions," added Ms Cox.

"Clearly there is a signal that no matter what has been done, more needs to be done. We acknowledge and we accept that.

"We also accept responsibility for those actions that were not done to the highest level that they could and should have been done."

She added: "Should more be being done within individual departments and Ministries? Yes. Is more being done to ensure we raise the bar? Yes. Are there some items that are not moving at the rapid pace one would like? Yes." On late reporting, she admitted there were obstacles to overcome for some Government bodies and public funds, but said they were "being addressed and will be resolved". Management accounts have been prepared for a "significant portion" of the late accounts listed by Mr. Dennis, the Finance Minister confirmed.

The report ? a lot of which makes uncomfortable reading for Government finance chiefs ? also raises concerns about fraud, pension contribution and tax arrears, overspending Government departments and lack of action on recommendations in past reports.

In the wake of a series of Government frauds ? including the high-profile Bermuda Housing Corporation scandal involving Terrence Smith ? Mr. Dennis called for a new law protecting whistleblowers who report suspicious activity. And he also recommended changes to the way frauds and suspected frauds were reported.

The Auditor General yesterday, however, expressed "disappointment" both these recommendations were not accepted. He said he hoped Government would reconsider them.

Meanwhile, Mr. Dennis said it was "unacceptable" for the Government public pension fund to be owed more than $38 million in taxes and pension contributions.

The report states that 34 employers owed pension payments in excess of $40,000 that were more than 90 days late last June, totalling $2.3 million. While 39 companies owed the same amount of payroll taxes, in arrears totalling $6.3 million. More than half of all these outstanding debtors were on the 2004 IOU list.

Ms Cox, however, pointed to the work of the Attorney General's debt enforcement unit, formed early last year, which Mr. Dennis accepted was starting to make inroads on debt collection. Ms Cox said the newly-created Debt Enforcement Unit showed Government's commitment to collecting outstanding sums. The unit has already made a significant impact, she reported, with $4 million collected by the Tax Commissioner's Office between April and October, last year, compared to $5.2 million for the whole of 2004/5.

Nearly $700,000 in pension arrears has also been collected from tardy employers as a direct result of the new unit.

Ms Cox also said a proposed new Tax Court served notice that Government was calling time on people who owed outstanding taxes and pension contributions.

The report details 61 recommendations relating to poor accounting, inadequate or absent controls and failure to comply with laws ? only ten of which date from last year's report ? that the Auditor General said remained unaddressed. Some date back to 1992. Mr. Dennis, whose damning 2002 report on progress at the troubled Berkeley Institute project led to strong criticism from Government, said lack of action on the recommendations was a concern. He acknowledged some suggestions had been rejected by Government, but most had been accepted and no action had been taken.

"Presumably this means that management has decided to live with the risks associated with their control weaknesses, or to continue to flout legislative requirements.

"Absent or inadequate management processes and accounting controls create an environment conducive to error, misappropriation or even fraud."

On a positive note, Mr. Dennis said that he dropped 21 recommendations from his report because, in most cases, underlying problems were addressed or were "well on the way to being addressed". However, he added that a few of these cases were shelved because he had "given up hope that they would ever be addressed".