PACP Committee Report
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PART II — A SUMMARY OF THE EVIDENCE
The key to addressing these kinds of problems [serious mismanagement and breaches of the public trust] is understanding what caused them in the first place. In the early 1990s, many popular management theories emphasized innovation and service and devalued rules and control. … We began moving away from transactional controls. … [The public benefited from better service.] But we also lost some of our rigour. We removed some departmental controls while we were reducing central oversight. As we brought in new staff, we did not make sure that they had the training they needed to do their jobs well. We did not develop the information systems that would help us keep proper track of financial and operational performance … we may have lost sight, sometimes, of the basics.10
[W]ith the cutbacks during program review, many of the controls and oversight mechanisms were reduced during that period. I think people focused on the front line delivery and the delivery of services. In many of what are sort of viewed as being administrative procedures, there were cutbacks on that. I think when we look to many of our audits we can see evidence of that. This one though, I quite honestly don’t think is the same. This one was set up outside the normal framework of public works. This wasn’t just a few people trying to go a little faster by reducing a few of the controls. From the very beginning of this program it would appear to have been set up and established quite outside what is generally not a bad framework for control and oversight within the Department of Public Works and Government Services.11
PUBLIC WORKS AND GOVERNMENT SERVICES CANADA
The Sponsorship Program was managed by a branch of Public Works and Government Services Canada (PWGSC, the Department). This Department was given statutory existence in July 1996, following the 1993 merger of Public Works Canada and Supply and Services Canada.
The new entity was — and still is — one of the largest in the federal government, and presides over a complex, costly, and vital mandate. According to the Minister’s message that appeared in the Department’s Performance Report for the period ending 31 March 1997, PWGSC supported the “day-to-day operations of more than 100 departments and agencies across government,” including contracting activities. With reference to the latter, the Minister noted that:
As the country’s largest [public sector] purchasing agent, [the Department] manages some 75,000 contract actions, buying goods and services from businesses and individuals valued at $8.2 billion annually.12
Currently, the Department has 14,000 employees. It contracts for and awards approximately 40,000 contracts on an annual basis, makes about 20,000 amendments to contracts, all totalling around $10.5 billion. With this high volume of contracts comprising significant outlays and involving the work of large numbers of its employees, the Department exercises careful scrutiny over its transactions. As the Department’s current Deputy Minister, Mr. David Marshall, noted, PWGSC normally “operated under a fairly sophisticated system of internal controls.” Former Deputy Minister, Mr. Ranald Quail told the Committee that there were:
[c]ontrols in place in the Department to deal with the way in which matters were to be managed, witness a strong governance framework, strong executive operation, well-developed risk management operation and an internal audit function. As well, we had developed an ethics and development program that began in 1997.
The Auditor General made a similar observation, writing in paragraph 3.91 of her report that:
[t]o achieve its objectives, PWGSC has established a fairly sophisticated system of internal controls and accountability reporting. While our previous audits have found some weaknesses in contracting and other management processes, we have also found that the Department’s systems of internal controls are generally reliable.
Yet the Auditor General found that the Sponsorship Program “operated in a weak control environment.”
When he appeared before the Committee on 24 February 2004, Mr. Marshall, the current Deputy Minister of Public Works and Government Services, tabled two flow charts. The first depicted the Department’s control framework for a typical procurement process. This process is rigorous and designed to ensure that contracts are issued in conformity with government policies and result in value-for-money for the Crown and Canadian taxpayers. This, the Committee was given to understand, represents the norm. The second flow chart, modelled on the first, tells a different story. It depicts how procurement was managed inside the Communications Co-ordination Services Branch (CCSB). It shows that none of the steps of the procurement process, save a handful of the preliminary ones, were followed in the CCSB. (See Appendices D and E.) In effect, there was no control environment within the Branch that was managing the Sponsorship Program and the Branch was completely divorced from the Department’s rigorous control environment.
ADVERTISING AND PUBLIC OPINION RESEARCH SECTOR (APORS)
Prior to the creation of the Communications Co-ordination Services Branch in PWGSC, a series of entities within the Department handled advertising activities. Initially, the Advertising Management Group (AMG) was involved in the selection of advertising firms to provide advertising services to government departments and agencies. The AMG was also responsible for monitoring the quality and effectiveness of government advertising.
A separate group, headed by Mr. Allan Cutler, negotiated individual contracts with the advertising firms that had been chosen by the Advertising Management Group. The negotiation would establish the price and terms of the contracts. Mr. Cutler testified that there was little contact between the AMG and his group.
In 1990, Mr. Charles Guité became the head of the AMG. Mr. Cutler told the Committee that in 1994, Mr. Guité began “interfering in the contracting process by authorizing agencies to carry out work without a pre-existing contract.”
On 17 November 1994, Mr. Guité met with the group headed by Mr. Cutler that was responsible for negotiating contracts. Mr. Cutler testified that at this meeting,
Mr. Guité told us that the normal rules and regulations would not apply to advertising. He said that he would talk to the Minister and have them changed.13
One week later, Mr. Cutler and two of the employees working under his direction were told that they would be transferred to Mr. Guité’s section — which was physically located outside PWGSC — and would report to him. The Advertising Management Group had been renamed the Advertising and Public Opinion Research Directorate (APORD, which was itself renamed the Advertising and Public Opinion Research Sector — APORS — in 1993). Mr. Cutler told the Committee that at that time, Mr. Guité’s responsibilities were expanded to include not only the selection of advertising firms but also the negotiation and awarding of contracts to those firms.
Mr. Cutler testified that following his transfer, he became concerned about APORD’s contracting processes because:
[c]ontracts were regularly being backdated; commissions were paid for services apparently not performed; there appeared to be improper advance payments; in circumstances where ministerial, Treasury Board or legal authorization were required, they were not sought [and]; contracts were issued without prior financial authorization.
Mr. Cutler added that he:
[w]as expected to issue contracts on terms provided by Mr. Guité. I was no longer expected to negotiate prices with advertising agencies, or to insist on the established government contracting practices.
Deeply troubled by what he saw and what he was being asked to do, Mr. Cutler brought his concerns to Mr. Guité, whom he testified, “became upset.” As a consequence, Mr. Cutler was left with the impression that his job was in jeopardy. He began to keep a log that eventually covered the period between February 1995 and February 1996 detailing the contracting irregularities that he observed. Mr. Cutler stated that “on many occasions” he was asked to prepare and award contracts in circumstances he considered “questionable or improper.”
In April 1996, following his refusal to sign an approval authority and contract, Mr. Cutler indicated that he was told by his immediate supervisor (Mr. Mario Parent) that he would pay a price for his refusal. At this point, Mr. Cutler contacted his professional association (Professional Institute of the Public Service), which in turn wrote, on 13 May 1996, to Mr. Jim Stobbe, the Department’s Assistant Deputy Minister for the Government Operations Services Branch. Consequently, Mr. Cutler was asked to bring his concerns to the Department’s Audit and Review Branch, which he did.
INTERNAL REVIEW AND ERNST AND YOUNG AUDIT, 1996
The seeds of the problem [in the Sponsorship Program] were identified by the Ernst & Young audit back in 1996.
Norman Steinberg
On 28 May 1996, the Audit and Review Branch of PWGSC interviewed Mr. Cutler. A memo was then sent to Assistant Deputy Minister Jim Stobbe who requested a more in-depth review of the material provided by Mr. Cutler. On 7 June 1996, the Department’s Internal Affairs Directorate reported that the “[a]llegations made [by Mr. Cutler] in relation to the contracting processes of the Advertising and Public Opinion Research sector are founded.”
The Audit and Review Branch interviewed Mr. Cutler a second time and on June 19, the Branch informed Mr. Stobbe, via a memo, that “there is sufficient documentation to support allegations initially raised by [Mr. Cutler] specifically referring to backdating of contracts to facilitate the contracting process at the request of a client department.” Mr. Steinberg also wrote in the memo that:
[t]he issue here [is] one of policy and procedures which may in themselves be faulty, however individuals are trying to overcome these by taking shortcuts or inventing methods which have led to willful alteration of documents which, if examined by an audit or outside regulatory agency would raise questions of probity in the manner in which the department is fulfilling its duties and obligations with respect to contracting.14
As an example, Mr. Steinberg indicated that:
[a]n original requisition was submitted by [Mr. Cutler] clearly depicting an intentional and wilful effort to show the requisition was received at a later date to correspond with a request for contract date.15
He noted, however, that the actions he had reviewed did not appear to be for profit or personal gain and instead raised questions of an ethical nature. Responding to its initial review findings, the Audit and Review Branch began steps to bring in an outside firm to conduct an audit of APORS.
Mr. Steinberg testified that the Deputy Minister (Mr. Ranald Quail) was also informed in June 1996 of Mr. Cutler’s allegations of contract manipulation and of the pending audit initiated to investigate them.
On 24 June, Mr. Guité circulated a memo indicating that he had asked that all APORS files be kept under lock and key in preparation for the audit.
Ernst and Young, the firm hired to conduct the audit, examined APORS’ contracting activities that took place between June 1994 and 30 June 1996. The terms of reference called for a comprehensive audit and the identification and examination of any cases in which non-compliance with contracting policies would have led to possible instances of personal gain or benefit.
The results of the audit were released in a final report dated November 1996. Ernst and Young found that public opinion research was “in compliance with prescribed policies and procedures,” and that “with a few exceptions,” policies and procedures governing APORS were “appropriate.” Ernst and Young also reported that “no instances” had been found “where non-compliance might have led to situations of personal gain or benefit.”16
However, the audit also found with regard to advertising contracts that there were “recurring instances of non compliance with specific contracting policies.”17 More specifically, the report included the following observations:
| • | APORS chose the private-sector members of selection committees established to evaluate advertising firms for specific client departments, not the client departments as called for by policy. |
| • | Requisition forms from client departments authorizing the issuing of contracts were not always on file and there were instances in which proper authorization was missing. |
| • | Contrary to policy requirements, there were no legal or cost analyses for contracts where delegated authority was being exercised by APORS. |
| • | There were instances in which APORS did not comply with a requirement that it recommend contract approval to Treasury Board when the value of a contract exceeded APORS’ contracting limit; and |
| • | There were instances in which documents had been back-dated. |
Ernst and Young concluded that:
The initial mandate of APORS was to provide advisory services to government departments on advertising and public opinion research. Given procurement is only a small portion of their activity; individuals [i.e., employees within APORS] are not specifically trained in the procurement function. They do not have the necessary expertise as it is not their primary focus or goal. It may be more beneficial to all parties to incorporate the procurement and advertising and public opinion research within the normal procurement stream of PWGSC services.18
In other words, Ernst and Young recommended that the separation between the selection of advertising firms and the negotiation of contracts — procurement — that had existed prior to November 1994 be restored. Mr. Stobbe (the Assistant Deputy Minister responsible for APORS) reviewed the audit findings. A management response that Mr. Steinberg testified indicated “acceptance of the recommendations” and an action plan were presented to the departmental Audit and Review Committee in July 1997. In September 1997, according to Mr. Steinberg, the executive summary of the audit and the management response were provided to Treasury Board Secretariat for posting on its Web site.
Mr. Quail, the Deputy Minister in charge of the Department at the time, told the Committee that following the completion of the Ernst and Young audit, the Department obtained “an undertaking from the APORS group to take corrective action.” He later repeated this statement, adding “and it was left there.” In a subsequent appearance before the Committee, Mr. Quail stated that he started with:
[t]he assumption that the person that undertook to do the work that’s in the remedial plan associated with the audit will do it. I take that as a given, I expect it and that I think that’s a reasonable way to proceed with respect to trust.
Yet, the Committee saw no evidence that a formal follow up was undertaken to verify that APORS had implemented corrective action.
Indeed, Ernst and Young’s central recommendation was never implemented. Mr. Quail told the Committee that procurement “never went into the mainstream at all … it did not happen.” When he was asked why procurement had not been removed and placed within the Department’s central procurement function, Mr. Quail replied:
That was the way in which he [the Minister] wished to have that group [APORS] organized … he wanted procurement left alone.19
It is noteworthy, however, that the account of events provided by the Minister to whom Mr. Quail refers — the Hon. Alfonso Gagliano — differs significantly from that of Mr. Quail with respect to the responsibilities exercised by the Minister. According to Mr. Gagliano, he was not told of the problems identified by the 1996 audit, and was not made aware that an audit had been done. When asked if the failure to separate selection and procurement functions did not give rise to concern, the Minister replied: “Not at that time. I believe the Treasury Board guidelines were specific, that procedures should be followed. … I would like to remind you that the moment in the audit 2000 I found there were problems, that’s what I exactly did; I separated the two.” This version of events was given a measure of support by Mr. Guité, who told the Committee that the decision to leave arrangements as they had been before the audit would not have been his, but the deputy minister’s.
Thus the combination of roles remained undisturbed when APORS was merged into a new entity, the Communications Co-ordination Services Branch, as observed by the Auditor General when she conducted her audit in 2003: “[f]or the Sponsorship Program, …, contracting and financial management were handled by the CCSB and not a central division [in the Department].” She added that:
[t]he Executive Director of CCSB [Mr. Guité] reviewed the requests [for sponsorship funding] and decided which events would be sponsored and which communications agency would get the contract. … At the request of the Executive Director, program staff prepared the requisition and forwarded it to CCSB’s procurement staff, who completed the contract. … The Executive Director approved the payments to the contracted communications agencies.
There would be no further internal audits conducted until 2000 because, as Mr. Quail put it, “there was no indication that there was anything wrong. If there had been an indication of something wrong, we would have put in an audit sooner.”
The Sponsorship Program began as an initiative while APORS was still in existence. On 20 November 1996, PWGSC approached Treasury Board seeking approval for additional funding in the amount of $34 million to cover a two-year period. To that end, Treasury Board was asked to approve an item in the 1996-1997 supplementary estimates for $17 million and to create an item for a further $17 million in the 1997-1998 Reference Levels. According to the submission, the Advertising and Public Opinion Research Sector (APORS) at PWGSC:
[i]s responsible for, amongst other activities, fulfilling a Government of Canada initiative to promote all its programs, policies and services by means of sponsorship through selective events across Canada. The events are determined on the basis of audience, visibility, timing and potential impact on the government’s programs used at such events.20
The submission that was drawn up by Treasury Board Secretariat requesting the funding indicated that “[m]ost recently, APORS is responsible for fulfilling a Government of Canada initiative to promote all of its programs by means of sponsorship through selective events across Canada.”21 A list of events to be sponsored was appended to the submission. Mr. J.C. Guité, Director General of APORS was listed in the submission as the departmental contact. Approval for the funding request was signed by the then-Minister, the Hon. Diane Marleau, and then-Prime Minister Jean Chrétien. According to Mr. Quail, this decision “was the launch of the program.” He testified that the CCSB “got fully engaged in the Sponsorship Program after the approval of the submission that went forward signed by Minister Marleau and the Prime Minister.” Mr. Quail knew that the sponsorship initiative was an important one. As he told the Committee, it was:
[n]ot every day that you end up with a Treasury Board submission that talks about the need to improve communications, and you find rare, hard dollars to support it and it is signed by both the Minister and PMO. That is an important issue. I don’t have to be hit on the head. Those submissions are important documents.
This is not the way in which programs are normally initiated. When she spoke to the Committee, Ms. Kathy O’Hara (Deputy Secretary to the Cabinet, Machinery of Government, Privy Council Office) testified that:
A program … flows from a policy decision that reflects a policy decision. It requires a memorandum to cabinet, because the policy itself has to get approved. Once the policy is approved and the program is funded, then the department and the Minister take the mechanism to Treasury Board to get approval of issues.
In effect, sponsorship began as an initiative and only became a program much later. Again, according to Ms. O’Hara the Sponsorship Program:
[a]ctually wasn’t a program — … — until December 2002 … [when] Communications Canada actually proposed the program. Until then it was a part of a broad range of communications activities. Originally, going back to 1996-1997, it was handled by …, a unit called the advertising and public opinion research sector. This was a unit in public works that in 1997 merged and was moved into the CCSB, so when CCSB was created in 1997, the sponsorship activity moved into CCSB …., in August 2001, when CCSB itself moved, the sponsorship activity moved with it to the CIO [Canada Information Office]. Up until December 2002, when the program was created, it was part of a cluster of communication activities that were handled by those three: first the sector, then the branch, and then the CIO.
Mr. Quail, in his testimony, noted that the use of a Treasury Board submission to inaugurate the initiative that eventually became the Sponsorship Program “may not be exactly the way you do some things, it nevertheless is the way in which this program got started.”
Mr. Peter Harder, who during this period was the Secretary to the Treasury Board, advised the Committee that there was no awareness or discussion of problems in the Sponsorship Program in the course of Treasury Board decision-making about the submission. The role of Treasury Board, he asserted, was to ensure that departments understood the applicable rules and guidelines, and had established the appropriate frameworks, but that under the Financial Administration Act, deputy ministers are fully responsible and accountable for the financial management of their departments. Mr. Jim Judd, Secretary to the Treasury Board since May 2002, added that the Treasury Board was not aware of the 1996 internal audit because, until a revision of policies in 2000, there was no obligation on the part of PWGSC to disclose the audit. Mr. Judd’s testimony was in contrast to Mr. Steinberg’s later assertion that an executive summary of the 1996 audit and a management response had been submitted to Treasury Board Secretariat in September 1997.
THE COMMUNICATIONS CO-ORDINATION SERVICES BRANCH (CCSB)
In November 1997, the Communications Co-ordination Services Branch (CCSB) was established within PWGSC in order to develop a more coordinated approach to government communications. CCSB took over some of the responsibilities that had been handled by Canada Communications Group, which had been privatized, and also incorporated APORS and its responsibilities.
As part of efforts to improve the management of the government’s communications, processes, and products, the Cabinet Committee on Communications was given the task of overseeing the coordination and harmonization of corporate communications, advertising and public opinion research activities across government. PWGSC was asked to provide secretariat support to the Committee on Communications.22
While it is not yet clear how these decisions were reached, Ms. O’Hara of the Privy Council Office testified that the creation of the CCSB was “part of an internal reorganization” that is normally the responsibility of the Minister and the Deputy Minister.
When CCSB was created in November 1997, Mr. Quail and the Department did not take the results of the 1996 audit (that had been reported in July 1997 to the Audit and Review Committee he chaired) and corrective measures into account because, according to Mr. Quail, the 1996 audit:
[d]ealt with, …, advertising and public opinion research, APORS, and it was a different year …, [the 1996 audit] didn’t really relate to the results of the action of Groupaction. In addition, … it did not occur to me that it was a relevant document, that we had dealt with it, we had taken action with it, and that we had put it to bed and we had moved on. It was as simple as that.
He added that at the time he “did not see a connection” between the problems unearthed in 1996 and the shortcomings revealed by subsequent audits of CCSB.
Thus, when APORS evolved into the CCSB, any lessons learned from the past were not applied or even considered in the process of restructuring. And the public servant under whose direction serious breaches of contracting procedure had taken place in APORS — Mr. Guité — became the Director General of the new entity. This happened in spite of the problems that had been identified within APORS by Ernst and Young, and the nature of the allegations made by Mr. Cutler.
Mr. Quail testified that when the Department established the CCSB, he wrote to Mr. Guité to inform him that now he was in charge of a Branch, “he would be subject to the processes and review contractual quality control, contract settlement, [in order to] prod awareness and prevention.” Mr. Quail stated that he:
[a]dvised him [Mr. Guité] that he should meet with Norm Steinberg, our director general of audit, and go over the governing Treasury Board and Public Works and Government Services Canada policies and directives, and that is what I expected would be done.
But Mr. Quail added that he “did not cross-relate the two” (i.e., his decision to ask Mr. Guité to speak to Mr. Steinberg was not related to the findings of the 1996 audit). In further testimony, he indicated that he could not recall whether he had followed up with Mr. Guité to see if he had spoken to Mr. Steinberg as requested.
A. The Executive Director of CCSB
During the evolution of APOR to APORS, and then to CCSB, Mr. Guité received a series of promotions. He began as a director of advertising and research in the former Department of Supply and Services, and in 1995 he became a director general and was reclassified from an EX-1 to an acting EX-2.
Between 1995 and 1998, Mr. Guité was confirmed in his EX-2 position and subsequently promoted to an EX-3. According to Ms. O’Hara, Mr. Guité’s reclassification to an EX-3 position would have been accomplished under authority delegated to the Deputy Minister, Mr. Quail.
Almost a year following the establishment of the CCSB, PWGSC approached Treasury Board seeking approval for the creation of a new position, that of Assistant Deputy Minister, Government of Canada Communications Co-ordination Services, and its classification at the EX-4 level. Mr. Quail testified that Mr. Guité himself initiated the series of moves that led to his reclassification and had obtained the support of the Minister:
Mr. Guité felt that as a result of the continuation of the sponsorship program at the level that was now being approved by Treasury Board on a sequential basis — we never had really a multi-year funding program, but did it by way of sequential Treasury Board submissions — that the position deserved to be looked at. He talked to me about that, and he also talked to the Minister about it. The Minister raised it with me and said that he would like the matter looked at, and whether or not we could move to have Mr. Guité classified at the EX-4 level.
Treasury Board Secretariat evaluated the proposed reclassification and supported it. On 24 September 1998, Treasury Board approved the reclassification and Mr. Guité became an Assistant Deputy Minister reporting directly to the Deputy Minister, Mr. Quail. Throughout this process, the focus was on the position and the responsibilities it entailed rather than on the person who would fill it and his performance. Mr. Quail stated that the proposal to reclassify the position was “drafted against the responsibilities and not the individual.” According to the Minister at the time, the Hon. Alfonso Gagliano he:
[d]idn’t sign a Treasury Board submission to appoint Mr. Guité. … I signed the Treasury Board submission creating a position called Assistant Deputy Minister for Communication and Coordination. That was the position. The filling of the position was not my responsibility.
The Committee also learned that Mr. Guité received performance bonuses throughout his tenure at the helm of CCSB. Prior to becoming an EX-4, Mr. Guité, according to Mr. Quail, would have prepared the evaluation of his own job performance and sent it to the Assistant Deputy Minister for review and approval. After becoming an EX-4, these job performance reviews were sent to Mr. Quail who “would have taken into consideration any comments that [he] had from outside, in particular the Minister’s office.” Mr. Quail stated that he “had no complaints. Okay? So that is the way in which it was done.”
B. The Management of CCSB and the Sponsorship Program Under Mr. Guité
1. Centralization of Decision-making
In her November 2003 Report, the Auditor General indicated that CCSB staff had informed her that the Executive Director “had not involved them in making decisions on sponsorships.” In paragraph 3.24 of her report, she added that:
[a]pparently only a handful of people had participated in decision making, and those who remain at PWGSC, Communications Canada, and other government departments were unable to tell us why certain decisions had been made.
Appearing before the Committee, the Auditor General explained the central concern to which this situation gave rise. “…(The way that group operated CCSB, it did not have the normal checks and balances, even in separation of duties, that you expect to find in an organization. There was a lot of authority vested in the executive director for example.”
This view of the CCSB is supported by the evidence given the Committee by its witnesses. Ms. Huguette Tremblay, who was an administrative assistant and office manager under Mr. Guité (and then his successor, Mr. Tremblay) testified that those involved in the Sponsorship Program within CCSB were not a very big group, in total “maybe ten people. It was very small.”
Mr. George Butts provided the Committee with a very clear description of the way in which procurement process for the Sponsorship Program operated within the CCSB. (A flow chart of how the process ought to work is provided in Appendix D to the report. A second flow chart showing how it actually worked in CCSB can be found at Appendix E.) Mr. Butt’s testimony is worth citing in its entirety:
First of all, in the requirements definition, the Executive Director played a key role in all that was happening. The Auditor General very clearly pointed out there were a number of questions about which program was decided on or funding and how much funding would be decided for each program. Those decisions were all made at the executive director level.
As well, the Executive Director, acting as the project authority, authorized the expenditure of funds and signed the requisitions under section 32 [of the Financial Administration Act], committing the funds to be spent. That signed requisition was then processed within CCSB itself.
There are a lot of questions about the strategy. Few records exist to explain what happened.
Clearly the Executive Director, acting as the project authority, looked at existing lists of companies that were in place for quite some time, and that became, in effect, the procurement strategy that was followed.
Moving into solicitation, again the Executive Director determined from that list of prequalified contractors who would be invited. Little information again exists to describe why some were and some were not. I raise this point because again the Auditor General questioned whether these were competitive awards or not, and clearly this is not in accordance with the contract policy.
By inviting these companies to submit a proposal, as opposed to the regular process of posting an RFP [Request for Proposal] and developing evaluation criteria, they would issue a letter of intent along with a questionnaire. They would invite the companies to come in and make a presentation, and then that presentation was reviewed by a selection committee at a very high level and a determination made as to which contractor should get the contract.
With respect to evaluation and negotiations, again it’s very difficult to understand how this happened. Records do not exist to explain how a particular source was selected. It’s clear, however, that again it was the executive director who was doing the reviewing and moving forward with, “Let’s go to contract approval.”
Delegated authorities were not respected in this case. The authorities I mentioned earlier are department-wide within CCSB. The Executive Director guarded this. He approved the entry to the contract. He also, in effect, lacked any type of competition in what was going on, as the Auditor General has stated.
On contract awards, the approval grid again was not respected. The Executive Director kept this very, very close … the small team that was there. The Auditor General also recognized in her report that there were a number of verbal agreements lacking contractual documentation.
So when we talk about distributing documents to the finance authority and the project authority, some of these came after the fact.
In contract administration, again the project authority, the Executive Director fulfilled both roles, acting as contract authority and amending contracts as he so chose. Clearly this was an absence of the checks and balances provided within the PWGSC system and it again allowed the projects to go unchecked. The Auditor General clearly pointed out that 21% of all of the contracts reviewed were able to grow, again without any explanation in the contract documentation, in the files.
On the payment process, the acceptance of deliverables was done again by the project authority, not against milestones or hard and fast deliverables of draft reports, etc., but against a reasonability check. So it’s very difficult to determine if the services were actually delivered under all of the contracts that were reviewed.
The sign-offs under section 34 [of the Financial Administration Act] saying, yes, goods and services have been delivered in accordance with the contract, were done again by the executive director. Lack of evidence of the deliverables, however, causes us to question that.
Moving to the payment authority, …, rather than a detailed review of, yes, this was done, a verification of the certification, the payment authority was exercised again within CCSB. The Auditor General reported that the certification under section 33 of the FAA [Financial Administration Act] had been authorized; however, the section 34 certifications lacked credibility in many cases because of insufficient information on the file.
Mr. Guité’s own account of the distribution of responsibilities within the office substantially agrees with that provided to the Committee by Mr. Butts and Ms. Tremblay. As Mr. Guité explained in his discussion of the role of the Minister (see below), the selection of events to sponsor was made from lists provided to the Minister or his staff (in his absence), and discussed at periodic meetings with Mr. Guité. When the invoices arrived, Mr. Guité possessed sole authority to signing them off (although he frequently relied on reports from staff to confirm that the events involved had taken place and the “product” had been delivered).
We wouldn’t be here today if the internal audit hadn’t done that initial audit in 2000.
Auditor General Sheila Fraser
Between 1996 and 2000, there was no review or internal audit conducted of APORS and the entity that it was merged into, the CCSB. Mr. Quail testified that he:
[d]idn’t have any reason to order or to call up an audit, or have any thoughts about the need to call up an audit until I did in February 2000. Is it normal? We carry out 15 to 25 audits per year. That’s all we do in the department. It’s quite a few, and that we did that on the basis of a structure that we had in place in terms of risk management, etc., and that we did not have CCSB scheduled before I asked for the audit in 2000.
However, in February 2000, Mr. Quail requested the Department’s internal audit unit to conduct an audit of the Sponsorship Program. By that time, Mr. Guité had retired from the Public Service, and Mr. Pierre Tremblay — who had transferred to the CCSB from the Minister’s office several months beforehand — became acting Executive Director.
According to Mr. Quail, his decision to initiate an internal audit was motivated by his:
[c]oncern with the management of the program when I initiated the internal audit in 2000, …, is that looking at the horizon and looking at what had happened in HRDC [Human Resources Development Canada] wasn’t a grants and contributions programs, but it seemed to me to be prudent that we would undertake an audit in the Department with respect to the Sponsorship Program.
Mr. Steinberg told the Committee that Mr. Quail directed the Audit and Ethics Branch to examine two specific aspects of the Sponsorship Program:
[f]irst, the decision-making process for entering into sponsorship agreements; and second, the contracting process for the agency of record and communications agencies that provided services for sponsored events.
The internal audit began 16 February 2000 and involved a review of sponsorship events that took place between November 1997 and 31 March 2000, and examined a total of 276 files out of a total of 580 known files based on risk. Mr. Steinberg summarized the findings in the following manner:
The contracting process for the agency of record and communications agency did not comply with Treasury Board rules and directives. There was also a lack of documentation — and therefore evidence — of how sponsorship events were approved. The decision-making process did not ensure that sponsorship contracts were transparent; that they complied with contracting requirements or that they were appropriate to achieving value-for-money for the Government of Canada.
As Mr. Steinberg testified, the internal audit revealed “significant and material weaknesses” in the management control framework that was in place in the CCSB with regard to the Sponsorship Program. He emphasized that he considered these lapses “to be significant and unacceptable.”
The results of the audit were presented on 16 August 2000 to the Department’s Audit and Review Committee chaired by the Deputy Minister. The Audit and Ethics Branch and the CCSB, working with Treasury Board Secretariat, drew up a 37-point action plan to address the audit findings (see Appendix F). Mr. Steinberg then gave a series of briefings on the results to senior officials from Treasury Board Secretariat, the Privy Council Office, and the Prime Minister’s Office. On 25 September 2000, Mr. Steinberg briefed Minister Gagliano. At that meeting, he presented the Minister with the final audit report approved by the Audit and Review Committee.
Mr. Steinberg stated the Minister “expressed concerns that all files were not audited,” and requested that the audit work be extended to include 100 % of the files. He also discussed the action plan drawn up to respond to the audit with the Minister and assured him that it could address the weaknesses that had been found. As acting Executive Director, Mr. Tremblay was in charge of implementing the action plan.
Not long afterward, Mr. Quail and Mr. Gagliano decided to freeze the Sponsorship Program until the end of the fiscal year (31 March 2001) to allow time to implement the action plan.
In September 2001, the CCSB was eliminated, and its communications activities were transferred to a new entity within PWGSC, Communications Canada, which also took over the responsibilities of the recently closed Canada Information Office (CIO). The Sponsorship Program was among the activities transferred to Communications Canada.
THE AFTERMATH OF THE 2000 INTERNAL AUDIT
One of the actions that was called for in the action plan called on the Audit and Ethics Branch to conduct a follow-up review of the sponsorship files. The Audit and Ethics Branch began this review of the files — by then transferred to Communications Canada — on 15 January 2002 and completed it toward the end of February of that year. The review examined the adequacy of documentation on sponsorship files approved between 31 May 2001 and 1 September 2001. A sample of 120 files was examined out of the total of 323 that had been approved during this period.
The follow-up review concluded, in its final report, that:
[f]or the period reviewed, Communications Canada has, with very few exceptions, ensured that all mandatory documents required per the CC [Communications Canada] management process exist and have been included in the approved sponsorship files.23
Following the 2000 internal audit and the implementation of the action plan, Ms. Tremblay testified that “there was a much better paper trail in the files.”
In September 2001, the CCSB was merged with the Canada Information Office to become Communications Canada under Executive Director Guy McKenzie. As part of her audit, Mrs. Fraser looked at sponsorship files managed by Communications Canada and found that, despite the fact that “some circumvention of contracting rules continued,” Communications Canada “improved its documenting of the use of criteria in selecting events to sponsor.” She found that there were:
| • | Improvements in selecting and approving individual projects. |
| • | Better analyses of the level of sponsorship for each event. |
| • | Better enforcement of the terms and conditions of contracts. |
| • | Improved compliance with relevant authorities. |
When he appeared before the Committee, Mr. McKenzie described the efforts he and his staff put in to ensure that the sponsorship files — which he testified were “very thin” when he first saw them — were properly managed. A number of activities were no longer deemed to be eligible for sponsorship — advertising, production of videos, television series, and capital infrastructure — and the focus was put on sponsorships for community-based events run by non-profit organizations. Communications agencies were eliminated as intermediaries. In December 2003, the Sponsorship Program was cancelled.
THE QUICK REVIEW TEAM (QRT) AUDIT
In May 2002, the Auditor General tabled her Special Report in which she presented the findings of an audit of three contracts for work related to the Sponsorship Program.24 As part of an array of measures taken in response to the Auditor General’s report, the Department initiated a review of sponsorship files covering the fiscal years 1997-1998 to 1999-2000. (A full list of actions taken by the government can be found at Appendices C and H.) A team of departmental employees (Quick Response Team, QRT) looked at a sample of 126 of the 721 sponsorship files from this period, while Consulting and Audit Canada reviewed all 721 files to determine their completeness and to report on any areas of concern.
These reviews produced the following key concerns:
| • | incomplete and complex project files, resulting in difficulty in determining whether deliverables were met; |
| • | changes to communications agencies (e.g., name changes, mergers) and their affiliations, which added to the complexity of the files; |
| • | absence of reports in PWGSC files; |
| • | potential over billing and potential errors in rates of pay and inadequate reporting; |
| • | potential breach of the Financial Administration Act (FAA), Treasury Board and departmental policies; and |
| • | subcontracting without a competitive process.25 |
Elaborating on these concerns, the QRT reported that most of the 126 files of primary interest:
[h]ad deficiencies from a records management perspective. Many files were incomplete, and lacked project information such as requests from organizers, contractual agreements, deliverables lists, signed requisitions, invoices and post-mortem reports.26
Commenting on potential over billing and errors in rates of pay, the Team wrote that there may have been:
[a] pattern of over billing by certain communications agencies. In other words, it appeared as though excessive hours were billed by the contractor to perform work that did not warrant the number of hours billed, or that sponsorship funds were paid out for work that was not completed. Information in some files indicated high-dollar value amounts with vague information about what deliverables were expected.
In addition, some communications agency employees were billing as employees of two different communications agencies, raising concerns about the total amounts billed to PWGSC. For example, in some cases, hourly rates for employees varied within the same contract, raising concerns over the validity of the hours charged. The way in which rates of pay were established was also cause for concern.27
With regard to subcontracting, the QRT reported that:
[c]ommunication agencies often subcontracted production work to their own affiliated companies, which were often co-located with the communication firm, and, in some cases, commissions of 17.65% were levied on the work performed. Generally, if the work was done in-house, a commission would not apply. It was normally a contractual requirement for communication agencies to seek three bids for subcontracted work with an estimated value in excess of $25K in order to ensure the Government of Canada received good value for its money, yet there was often little evidence in the files to suggest that such a competitive process was undertaken.28
Many of these concerns were also raised by the Auditor General in her November 2003 Report.
Mr. Rodney Monette, who lead the QRT review, summed up the team’s findings in the following manner:
Several key concerns were identified, including: incomplete and complex project files and contracts with vague deliverables, resulting in difficulty in determining whether deliverables were met; changes to communications agencies, such as name changes and mergers and changes to their affiliations, which added to the complexity of the files; absence of reports in the files; potential overbilling and potential errors in rates of pay and inadequate reporting; apparent breaches of the Financial Administration Act, Treasury Board policies and departmental policies; and subcontracting without a competitive process.
Mr. Monette informed the Committee that not all of the communications agencies had managed their sponsorship files poorly, and that in fact some “tended to have reasonably good records.” He added that “Vickers and Benson, Palmer Jarvis, Groupe Everest, and Compass Communications, …, tended to have reasonably good records.” Commenting later, he added that with regard to Media IDA Vision and Groupe Everest, his “understanding of their systems and procedures and internal controls [was] that they’re generally quite good … we had reasonable confidence in their files.” On the other hand, “there were other companies such as Groupaction, Lafleur, Gosselin, and Coffin Communications where these records were not as good.” Of the production costs looked at by the QRT, Mr. Monette testified that of a total of $70 million, $34 million went to the firms with the better files and $36 million went to the firms with the not so good files of the production files. He indicated that the predominant problem associated with that $36 million would have been over billing.
Nevertheless, although the files with some of the communications agencies may have been in good order, the problems identified by the Auditor General lay with the CCSB. As she told the Committee:
All of those documents, all of that proof should be in those files [at the CCSB] before the payment is authorized. Quite frankly, it’s not good enough, many years after the fact, to find a post-mortem payment to justify a payment. How could that certification have been made if there was not evidence at the time to make it? … our report, [and] the previous internal audit report, the Kroll report, clearly show that there was lack of sufficient evidence at the time the payments were certified to be able to justify those payments.
Following the completion of the QRT’s review, the Department initiated a forensic audit of selected files, and referred certain issues to the RCMP. Mr. Monette testified that the files for the sponsorship of the Pan Am Games in Winnipeg and files for the sponsorship of the Team Canada-China were generally in good shape and were therefore not referred to the RCMP. The Department also began a time verification audit, initiated the recovery of funds where warranted, and began to investigate potential breaches of the Financial Administration Act, and Treasury Board and departmental policies.
In the course of her audit, the Auditor General found that the CCSB had transferred sponsorship funds to three Crown corporations: VIA Rail, Canada Post, and the Business Development Bank of Canada (BDC). She informed Parliament that the CCSB:
| • | [m]ade many of the transfers to Crown entities through communications agencies, who were paid commissions to move the money. |
| • | [h]ad no agreements or partnership arrangements with the Crown corporations whose programs it sponsored. |
She added that her audit had found that:
[s]ome payments were based on artificial invoices and contracts; others were subsidies — sponsorship money used by the Crown corporations to cover their normal operating costs.
Mrs. Fraser observed that in exchange for receiving sponsorship funds, Crown corporations and departments were to provide visibility for the Government of Canada. However, in 1998, the Treasury Board’s policy on the Federal Identity Program was amended to require Crown corporations (which previously had been exempted) to apply the Canada wordmark prominently on all their corporate identity applications. Given that requirement, the Auditor General questioned:
[w]hy CCSB needed to pay Crown corporations for providing visibility, particularly in those cases where we found no documented evidence of any additional visibility purchased with sponsorship funds.
She commented that she found that the particularly disturbing aspect of these sponsorship payments was that:
[e]ach involved a number of transactions with a number of companies, sometimes using false invoices and contracts or no written contracts at all. These arrangements appear designed to provide commissions to communications agencies, while hiding the source of funds and the true nature of the transactions. The parliamentary appropriation process was not respected. Senior public servants in CCSB and some officials of the Crown corporations were knowing and willing participants in these arrangements.
Mr. Marc LeFrançois, former President and Chief Executive Officer of VIA Rail,29 testified that effective control systems were in place at VIA Rail; there was an internal audit function, external audits were performed, and both Houses of Parliament, the President of Treasury Board, and the Minister of Transport all subject VIA to scrutiny.30
Mr. LeFrançois rejected the Auditor General’s observations about VIA’s role in the Sponsorship Program, telling the Committee that her:
[n]egative comments are in sharp contrast to the clear audit opinions that VIA Rail received for the years 1998, 1999 and 2000 from VIA Rail’s external auditors at the time, Mr. Denis Desautels, the Auditor General of Canada, and the firm Raymond Chabot Grant Thornton.
Mr. LeFrançois asserted that sponsorship funding used by VIA in the Maurice Richard series and the VIA Magazine project had the following characteristics:
VIA Rail received full value for all monies spent; the monies spent were part of VIA’s mandate and encouraged by a department of government, the Department of Public Works; the process by which monies were spent was not improper and no commissions were paid knowingly by VIA Rail for services rendered to it.
The Sponsorship Program, he argued, was not VIA Rail’s responsibility but that of PWGSC and that VIA’s receipt of money from the Government of Canada in support of the government’s priorities was “a common occurrence. The receipt of sponsorship funds directly or indirectly in aid of government policy was in the ordinary course of business.” He denied that VIA had issued fictitious invoices; VIA Rail, he asserted, “did not participate in any imaginary, unreal, counterfeit or not genuine transactions and did not deliver any fictitious documents,” nor did it participate in a process to hide the true nature and scope of the transactions. The Auditor General’s “negative comments,” according to Mr. Lefrançois, “could only be made in a much broader context about which VIA Rail had no knowledge.”
Mr. LeFrançois initially did not dispute the finding that a verbal agreement between himself and Mr. Guité had formed the basis for advancing money from VIA to L’Information essentielle for the Maurice Richard series. He argued, however, that the “court has ruled a long time ago that a verbal agreement is as legal as a written contract,” and that such an agreement “between people that respect each other is as valid as a written contract.”
The Auditor General found that VIA had paid three invoices issued by L’Information essentielle even though there was no contract between VIA and the agency. Mr. LeFrançois testified that as chairman of the board he “took it for granted that the rules,…, would be followed and that they would be followed and that there would be a signed contract.” He then told the Committee that there was indeed a contract, but in draft form only, and that he had found the draft in his office, in May 2002 “or something like that” which he refused to sign because the work had already been performed. Mr. LeFrançois dismissed discrepancies found in VIA Rail’s financial statements as “an error of interpretation” and “an error of communication of no importance.”
Mr. LeFrançois’ claims were in marked contrast to earlier testimony given by Mr. Shahid Minto, of the Office of the Auditor General, who had informed the Committee that the process used by the CCSB to reimburse VIA surprised the Office because:
VIA Rail had already paid L’Information essentielle this money. It required the issuance of a fictitious contract by CCSB, a fictitious invoice by VIA Rail, and the involvement of a communications agency, which received $112,500 for simply moving money between two government entities. VIA Rail did not report this transaction to its board or audit committee.
Mrs. Fraser responded to the assertions made by Mr. LeFrançois in later testimony before the Committee. She provided a copy of a letter signed by Mr. LeFrançois in which he agreed with the facts as stated in Chapter 3 of her November report and testified that:
[i]n late 1998, Mr. Guité asked Mr. LeFrançois to advance $1 million to Public Works for the Maurice Richard series and VIA agreed. It was a verbal agreement. December 1998 the producer invoiced VIA for $650,000 — … — and two additional invoices came in August 1999 and those were paid by VIA. Again, there was no contract, no tendering, no evidence as to what had been received.
So up until September 1999 VIA had paid these amounts to Information essentielle. In October 1999 the Maurice Richard series, the first broadcast was done, October 1999. In December 1999, Public Works contracted with Lafleur for some $923,000, including GST, for production work on the Maurice Richard series, but the series had already aired. Then on January 18, 2000, Lafleur certified that the work was completed for the event that was to be held between July 31, 1999 and August 14, 1999. On January 10, payments were approved by Public Works, somewhere over $1 million — … — based on that certification Lafleur invoiced Public Works $862,000 and that was approved and paid on March 16. And on March 31, 2000, VIA invoiced Lafleur and Lafleur delivered the cheque to VIA on the same day.
We saw no indication of any support in the file as to why VIA, a railroad company, would be billing a communications agency. So we say there is no substance to this transaction. It was a mechanism. The contract and invoices were put in place to refund VIA for the amounts that it had advanced on behalf of Public Works. There should have been a memo or a letter or something between VIA and Public Works, at best, and they went through this other mechanism to get their money back.
The Auditor General also raised questions about value-for-money relating to VIA Magazine. Mr. LeFrançois told the Committee that he believed that in the case of the VIA Magazine:
[T]here were no commissions being paid … we bought advertising in that magazine for $500,000 per year. If you look at the report of the Auditor General — what does she say in there — that Satellite Publishing is receiving. … The deal was, …, that Cabinet decided to invest $500,000 a year in VIA Magazine to buy advertising … there was Health Canada and Attractions Canada advertising in the monthly magazines that were produced. The government made a commitment to pay an amount, not to us, but to the business that published the magazine. With that amount, it bought advertising, and, according to the information I have, it paid the same price as anyone else.
In her report, Mrs. Fraser concluded that:
It appears that these transactions were part of an elaborate process used to obtain funds from current PWGSC appropriations to pay for a highly irregular and questionable expenditure incurred by VIA Rail in the previous year and also to facilitate the payment of a commission to the communications agency. In our opinion, this resulted in the circumvention of the parliamentary appropriation process31
The Committee found nothing in the evidence presented to it that would in any way detract from, or contradict, those conclusions.
The Hon. André Ouellet, former President and Chief Executive Officer of Canada Post32 denied that Canada Post had spent any money under the Sponsorship Program; instead, he argued, Canada Post was engaged in marketing activities and therefore was not bound by the same rules and procedures that applied to the Program:
The Auditor General said, “You didn’t respect the sponsorship rule.” We said, don’t ask us to respect the sponsorship rule, we don’t think it’s sponsorship. We’re telling you it is a marketing venture, so don’t ask us to apply to a marketing venture the rule of a sponsorship project. It’s two different things.
The Auditor General noted this difference of view in her report. Yet the problems brought to light by the audit are of concern, regardless of whether they related to sponsorship or not. The Auditor General reported that, in both cases examined (the Maurice Richard television series and Stamping the Future) she was unable to find documentation to support payments made by Canada Post; no signed contracts, no signed proposals or business case to support decisions, and no evidence of cost-benefit analyses.
Mr. Ouellet insisted throughout his testimony that Post Canada had managed the projects listed by the Auditor General effectively, in compliance with standards, and within established budgets. He also persisted in his view that adequate documentation was maintained and that it was supplied to the Auditor General during the course of her audit.
VIA Rail and Canada Post sponsored a television series on Maurice Richard that was produced by L’Information essentielle. The Auditor General raised concerns about the lack of documentation at VIA and Canada Post relating to their involvement in the series. In the case of Canada Post, the Auditor General found that the corporation paid $1.625 million without a signed contract, a signed proposal, or evidence of a cost-benefit analysis (although Canada Post claimed to have performed the latter), all of which are required under Canada Post’s own sponsorship policy. Mr Ouellet did not accept the Auditor General’s criticism: “We had documentation. … We had a signed letter of intent with full explanations from L’Information essentielle, so we had documentation.”
In addition, in response to the Auditor General’s claim that “Canada Post should have followed its sponsorship policy and maintained appropriate documentation,” (Report, 3:11) Mr. Ouellet testified that the involvement of Canada Post in the Maurice Richard series fell under marketing, not sponsorship, and, therefore, Canada Post’s sponsorship policy did not apply. He testified that although he recommended that Canada Post be involved in the project, he did not have decision-making authority and it was “the Vice-President of Marketing and Sales [Mr. Alain Guilbert] who authorized the contract, which was approved by the then-president [Mr. Georges Clermont].”
Mr. LeFrançois, on the other hand, accepted that VIA’s contract with L’Information essentielle “… was not signed when it should have been signed in accordance with corporate policy.” However, he claimed to be unaware at the time that the contract went unsigned, and added that when he found out, he refused to cover-up the problem:
As chairman of the board, I took it for granted that the rules, which are clear and precise at VIA Rail, would be followed and that there would be a signed contract. When I saw that the contract had not been signed in that case, I found a draft contract at the office. I believe that was in May 2002 or something like that. I refused to sign the contract because I normally don’t sign contracts retroactively. I simply told my staff: “The project is over. Why would I sign the contract? To put it on file?” That’s not the way I manage a business. If you don’t have a signed contract, you didn’t sign it, and that’s all.
Further, Mr. LeFrançois disagreed with the Auditor General as to the severity of the matter, stating that a verbal contract is a valid contract in Canada, and that:
We put in writing that we apologize for that [i.e., not having a signed contract] and we admitted our fault. But I was not going to kill the person in the administration who lost the contract somewhere.
The Auditor General also raised concerns about suspicious invoicing on the Maurice Richard series involving VIA Rail. In her report, she notes that L’Information essentielle sent VIA two identical invoices on the same day in the amount of $130,000, both of which were paid along with another for $650,000 (representing the total $910,00 that was paid). Moreover, she stated that a fictitious invoice was issued by VIA to Lafleur for funds that the CCSB had transferred through the communication agency, rather than sending the cheque straight to VIA Rail. Mr. LeFrançois contradicted the Auditor General’s finding, claiming that:
VIA Rail did not issue any invoice which was fictitious. The actual invoice issued by VIA Rail. … It is real and accurate. … VIA Rail did not participate in any imaginary, unreal, counterfeit or not genuine transactions and did not deliver any fictitious documents. … All of the documents produced reflect transactions initiated by the Department of Public Works, are fully transparent and show proper accounting and stewardship of assets.
Mr. LeFrançois, however, was unable to provide an adequate explanation of the method by which this money was transferred to VIA Rail from CCSB through Lafleur.
In response to the Auditor General’s finding that VIA had advanced funds to L’Information essentielle for the Maurice Richard series “… on CCSB’s behalf without a contract or other legal obligation to do so,” Mr. LeFrançois claimed that the project was a good one, whether VIA Rail ended up receiving the money from the CCSB or not:
We had the money. I didn’t need to wait to receive the cheque from Public Works Canada. We didn’t need cash. The decision to proceed was made by the marketing department. If you read my affidavit carefully, you’ll see that I had sought assurances from the vice-president of marketing that, in the event the $750,000 was not reimbursed to us by the Government of Canada, she nevertheless wanted to proceed with the transaction. … So the marketing department decided to go ahead with the project, and we had the necessary money.
When the Committee asked Mr. LeFrançois why, if the Maurice Richard was a good project, he rejected it initially, he testified that his initial decision was not, in fact,
[r]eally a rejection. … When Robert Guy Scully came to present the project to me, we obviously talked about the Maurice Richard series. Since everyone knows this great Canadian, we didn’t need to talk about it for very long. We knew that it would be a truly interesting project for all Canadians. When he came to see me in October or November 1998, I told Mr. Scully that his project was extremely interesting, but that we had already approved VIA Rail’s budgets for the following year, that is to say 1999. So I told him that his project was excellent, but that I wouldn’t submit it to the marketing department because its budget estimates had already been prepared and there was already an established plan.
Finally, Mr. LeFrançois argued that representing the $910,000 as an account receivable in VIA Rail’s financial statements — another concern raised by the Committee since only $750,000 was expected to come from CCSB — was an error of communication between him and the accounting department:
… It was written that expenses of $910,000 had been paid in advance. However, it was written in the footnote to the financial statements that an amount of $910,000 was receivable from an agency of the Government of Canada, whereas the figure should have been $750,000. That was an error of interpretation made when the information was exchanged.
Moreover, he told the Committee that this was nothing more that an insignificant accounting error:
… When I saw it was $910,000, I said no, the government would reimburse only $750,000. But at the end of the day, when you look at the financial statements, this is not material.
2. Stamping the Future Contest
The Auditor General also raised questions in her report relating to the involvement of sponsorship funds and Canada Post in the Stamping the Future contest, that Canada Post participated in with the U.S. postal service and over 30 other countries. When he appeared before the Committee, Mr. Ouellet defended the use of funds that he argued Canada Post thought came from the Government of Canada’s Millennium Partnership program:
We received $521,739 from the federal government. All of this money was well spent on the delivery of this worthwhile project. … Lafleur Communications worked hard for the money they were paid by Canada Post. Their mandate included developing and overseeing the production, printing and distribution of the bilingual contest promotional materials to schools and post offices; obtaining mailing lists of all grade-one to grade-five schools in Canada; developing lesson plans for use by teachers; organizing the press conference to announce the launch of the program; assisting with the management of the gala dinner, award ceremonies and announcement of winners; and, obtaining necessary licences to conduct a contest on certain provinces. The firm’s work on the project was tightly managed by our director of stamp marketing, who consistently ensured that the work was on budget, or remained under budget. In other words, we had a highly professional business arrangement that managed to achieve the result.
Further, he sought to absolve Canada Post of any wrongdoing relating to commissions paid to Lafleur:
Yes, Lafleur got a commission, but we didn’t pay the commission. The commission was paid by the government. We got only the money that I told you we received, $521,000, and we used that money to pay for all of the activities surrounding that project.
Mr. Ouellet testified that the Auditor General’s report was not accurate regarding the amount paid by Canada Post to Lafleur:
You say, Canada Post turned around and paid Lafleur $516 thousand… . It’s not true. We paid Lafleur for work done over a period of time. There’s been documentation justifying all of their bills and Lafleur was paid by us only after work done for which they there were proper justifications. … You’re saying that Lafleur on top of the money that he got from the government — for which … Canada Post had nothing to do, this was a payment made by the government — you said that on top of that Lafleur got also commissions or fees for work done … this is not accurate. I know that there’s a paragraph in the auditor’s report that says one of Lafleur’s invoices paid by Canada Post shows a commission to the agency of 17.16%, which CPC informs us was for finding a partner for an ad placement fees. We reviewed this. In fact, we didn’t pay Lafleur.
He explained that Canada Post was only following directions when it received the government funding through Lafleur:
We realized it [that the money from CCSB was going through Lafleur] when we saw the document that said here’s how the money will be paid. You send the bill to such agencies. They will sign the contract, and they will retain a percentage, and you will get your money. … Our people, running that project, realized it because before they sent the bill they had to know how to do it, and to whom to send the bill, and we did it in good faith. … I accept that it does not look good, and especially the way the Auditor General presented it does not look good, but let me tell you that the people at Canada Post who handled that file were quite sure that they were doing the thing correctly, and they made sure that the agency that worked with them on this project was paid only for work done.
Mr. Ouellet also countered the Auditor General’s concerns that her office could not find a business plan in Canada Post’s records:
To think that we would have a study, an analysis of this is not to know how we choose stamp projects in Canada. … I could supply you the minutes of the stamp advisory committee who discussed this and thought that it was a good project and decided to approve it. … I am telling you that three-quarters of the stamps that we approve every year do not have that type of thing because this is not the purpose of the stamp committee and it’s not the purpose of Canada Post. If you would have to justify these type of things, you would have only a few stamps produced every year.
As with the Maurice Richard series, Mr. Ouellet again contradicted the Auditor General’s claim that Canada Post should have followed the Corporation’s own sponsorship policy:
We explained to the people working for the Auditor General that this was not a sponsorship program; this was a stamp program that we have every year a series of stamp issues and this was part of our stamp program. It was not a sponsorship program in any way, shape or form.
THE ROYAL CANADIAN MOUNTED POLICE
Commissioner Giuliano Zaccardelli informed the Committee that he had read the Auditor General’s report and agreed with the content and her recommendations as they relate to the Royal Canadian Mounted Police. He admitted that the RCMP had applied for sponsorship funding, telling the Committee that:
[w]hen we applied [for sponsorship money], we applied as an agency of government to another agency and those were the rules that we were led to believe were in existence at the time. That’s how we got our money. We applied and we received the money. Every cent that we had was spent on events related to enhancing the image of the RCMP and to promote the wordmark of Canada.
The process of obtaining sponsorship funding involved contacts between the Commander of the RCMP’s C Division responsible for Québec, Deputy Commissioner Odilon Emond and Mr. Guité of the CCSB. The RCMP was aware, at the time, that Lafleur Communication Marketing and Gosselin were acting as intermediaries between the CCSB and itself on Mr. Guité’s recommendation when it came to the Sponsorship Program. The Commissioner testified that Lafleur and Gosselin “worked with [the RCMP], spent a lot of time with us, and were helpful in giving advice.”
Commissioner Zaccardelli explained that production work done by the communications agencies involved “[g]etting posters produced, getting media time, …, and certain other products that [the RCMP] would use at certain events.” Asked how payment for these costs was initiated, the Commissioner answered that the RCMP “would receive the invoices and then … would verify that we got those goods and … we would send it back to the agency to look after.” When he was asked earlier if the RCMP had ever checked to see that the $1,081,910 paid for production costs was actually spent for those purposes, Commissioner Zaccardelli replied that “to the best of our knowledge it was.” He then added that:
[w]hile we requested certain things, the agreements were between Public Works, not us, and these advertising agencies. … We required certain things, but the agreements weren’t between us and the agencies; they were between the agencies and Public Works, and they would provide the materials we needed. There are a couple of cases where, again, the commanding officer in C division saw certain figures and questioned the costs or the commission that was being taken by the agencies. He raised those matters, but we had no dealings regarding them. That was between the agency and the government department.
Nevertheless, Commissioner Zaccardelli was adamant that the RCMP had received good value-for-money for Canadian taxpayers through its use of the sponsorship funds. He asserted that:
[w]ith the $1.6 million or $1.7 million that we received, we put on over 700 events throughout Canada. A lot of those events would not have taken place. Therefore the RCMP would not have been promoted, and also the wordmark would not have been promoted. We would not have been able to put on those events without assistance from the sponsorship funds … we would not have been able to hold those events which demonstrated what we were doing, connecting with the communities and demonstrating the Canadian wordmark.
But the RCMP did not do a thorough analysis of the events afterwards. Asked if a post-mortem had been done, the Commissioner answered that:
[i]n hindsight, and the Auditor General has highlighted this, we probably could have done a better job of that. We didn’t do as good a job of looking at whether we got maximum value, whether we could have done things better. There was some examination, but it was lacking in depth.
According to Mr. Zaccardelli, when concerns were raised about the RCMP’s management of sponsorship funds — one year prior to the Auditor General’s audit — the RCMP initiated an internal audit as well as administrative reviews. These reviews brought to light “a number of administrative errors” in response to which the RCMP took “immediate and appropriate corrective measures” that were put in place “in the spirit of continuous improvement.” The RCMP:
[i]mplemented controls to ensure that policies, procedures, and regulations are clearly understood, monitored, and enforced within the RCMP. Sponsorship guidelines have been developed and were made available to all managers and staff in January 2003. Internal audits are conducted on an ongoing basis … to ensure that all policies, procedures, and regulations are strictly adhered to …
Commissioner Zaccardelli told the Committee that he “personally was not involved in any case related to [the Sponsorship] program.” When asked if what he had seen bothered him, he replied: “I wasn’t there at the time.”
The Auditor General noted a number of irregularities with regard to the RCMP’s 125th Anniversary activities. These included high commissions paid to communication firms, possible double billing, a lack of documentation, the RCMP bank account set up to hold sponsorship monies, and the use of sponsorship funds for normal RCMP operating expenditures (to purchase horses).
With regard to possible double billing, Commissioner Zaccardelli testified that the RCMP is aware of the concerns about double billing that the Auditor General raised; but he could not go into detail because those concerns are the subject of a criminal investigation.
The Auditor General also noted that there was a serious lack of documentation on many of the sponsorships involving the RCMP. Mr. Zaccardelli told the Committee that errors were made and that, in the future, if a similar situation were to arise, things would be done differently:
We got $200,000 first, it was given to us. And then we realized that we should have an agreement. Then there was an agreement signed for $800,000. That was in headquarters. But in Quebec, that $500,000-$600,000 never became the subject of an agreement. And that’s an error. I mean in hindsight, if we had another situation, I guarantee you it would never be done this way. That’s one of the major lessons learned.
Questions were also raised by the Auditor General about a non-government bank account that was set up for all deposits and payments to the RCMP’s Quebec Division, in contravention of the Financial Administration Act. All transactions for the Division were recorded in a manual accounting system instead of the RCMP’s corporate system and the Auditor General was unable to verify some of the transactions from the account because some of the supporting documents had been destroyed.33
Commissioner Zaccardelli told the Committee that he could not recall who decided to establish the bank account. He acknowledged that setting up the account in the way that it had been was a “mistake,” but that it was made with good intentions. He assured the Committee that:
[t]here was absolutely no attempt to defraud or to misuse. And even that bank account, because I know the people and they feel bad, but they were trying to be holier than the Pope, …, by separating those monies. That’s how much they cared about making sure that there was no crossing over.
The Commissioner also insisted that the “mistake was in setting up this bank account in the first place,” but went on to state that:
[a]ccording to the rules, two officers must sign off on cheques. They complied with that rule, but the initial mistake made was setting up this bank account, in violation of Treasury Board and RCMP guidelines. The account was subsequently managed properly, but its purpose, to separate the funds to ensure that …
With regard to the destruction of some supporting documents, the Commissioner explained that RCMP regulations call for documents related to sponsorship issues to be kept for two years whereas financial records must be kept for seven. He testified that the documents in question “were destroyed because employees believed they were sponsorship papers, not financial records.” Commissioner Zaccardelli stated that he could not answer for the employees who had made these mistakes — some of whom have since retired — and did not provide an answer when asked if they had been sanctioned or taken to task.
In her report, the Auditor General indicated that the RCMP had used sponsorship money to purchase horses, a purchase that instead should have been made out of operating funds. In response to these concerns, Mr. Zaccardelli told the Committee that the RCMP did, in fact, buy the horses with sponsorship monies, but that “[n]obody told us to bend the rules … a senior officer in Ottawa inquired and he was told verbally [by Mr. Guité], ‘Go ahead and do it.’” The Commissioner that the individual involved has now retired. Commissioner Zaccardelli maintained that the horses were:
used throughout the Province of Quebec and other parts of Canada to, again, promote the RCMP and to promote the wordmark and to promote Canada so they were used as per the sponsorship said we would do.
The Auditor General, in accordance with her legislative mandate, restricted her audit to the actions of government entities. The Committee sought, nevertheless, to obtain the views of the communications agencies that had been involved with the Sponsorship Program in order to deepen its understanding of the relationship that existed between them and the Communications Co-ordination Services Branch at PWGSC. Consequently, the Committee heard from three witnesses associated with agencies mentioned in the Auditor General’s report and one witness, Mr. John Hayter, Chairman and CEO of Vickers & Benson, which was not mentioned. Mr. Hayter appeared as an individual and not as a representative of his agency.
THE RELATIONSHIP BETWEEN THE MINISTER AND THE COMMUNICATIONS AGENCIES
The former Minister of Public Works and Government Services who held office while the Sponsorship Program was operative, the Hon. Alfonso Gagliano, admitted that he knew some but not all of the heads of the communications agencies involved in the Program, and agreed that he had met with them — but never on a regular basis. These occasional meetings, according to the former Minister, never involved a discussion of funding. He testified that he was unaware that the agencies were receiving “such large sums of money to transfer cheques.”
Mr. Claude Boulay, former Vice-president and principal shareholder of communications agency Groupe Everest, indicated that he knew Mr. Gagliano, but denied ever discussing the Sponsorship Program with him. He added that Mr. Gagliano “was not the person managing the Program,” which “was managed by officials.” Mr. Boulay testified that he had no knowledge of instances in which the former Minister, his office, or the Prime Minister’s Office (PMO) had intervened to influence the selection of sponsored events. He later insisted that the people with whom he had worked were departmental officials because it was “at that level that decisions were made and it was those people who in fact managed the overall program.”
THE RELATIONSHIP BETWEEN THE CCSB AND COMMUNCATIONS AGENCIES
As indicated above, witnesses associated with the communications agencies — with the exception of Mr. Bernard Michaud who had been comptroller at Groupaction — readily agreed that they had had frequent contact with CCSB and Mr. Guité in particular to discuss their role in the Sponsorship Program. They rejected the suggestion, however, that there had been anything improper in their dealings with CCSB or its director. Mr. Boulay testified that neither his nor the other agencies were involved in the selection of sponsored events and Mr. Boulay, and Mr. Gilles-André Gosselin (Founding President and President/CEO of Gosselin et Associés Communications Stratégiques Incorporée, 1992-1998) both denied giving gifts or favours to Mr. Guité or his staff.
Perhaps not surprisingly, witnesses connected with the communications rejected suggestions that they had failed to fulfil their obligations with respect to the Sponsorship Program in any way. None claimed any knowledge of the use of verbal, as opposed to written, contracts.
One aspect of the relationship between agencies and the CCSB was particularly troubling. In 1998, Mr. Gosselin hired Mr. Mario Parent to work for his agency. Mr. Parent had recently been the Co-ordinator of the Advertising Program at CCSB under the Director, Mr. Guité. Mr. Parent had been involved in the series of events that led to the sidelining of Mr. Allan Cutler. (see above) According to a newspaper account, Mr. Parent had approved an increase in Mr. Gosselin’s hourly rate by more than 50% — from $135 an hour to $205 an hour.34
Mr. Gosselin told the Committee that he had known Mr. Parent for some time on a professional basis and admitted that he had discussed his agency’s rate structure with Mr. Guité,—but insisted that Mr. Parent was not involved. He furthermore denied that any collusion was involved in the decision to increase the rates to bring them “more in line” with the industry standard. Mr. Gosselin said that he could not confirm — nor did he deny — reports that he had invoiced the government for 3,673 hours in a single year, amounting to 10 hours per day and fees of $625,325 — adding only that he had worked very hard that year and was hospitalized as a result. The Committee offers no comment on this testimony but assumes that the issues it raised will be thoroughly investigated and appropriate action taken.
| 10 | Alex Himelfarb, Clerk of the Privy Council, Eleventh Annual Report to the Prime Minister of Canada on the Public Service of Canada, March 2004. |
| 11 | Sheila Fraser, Auditor General of Canada, testimony before the Standing Committee on Public Accounts, 3 May 2004 (38:1135). |
| 12 | Public Works and Government Services Canada, Performance Report for the period ending 31 March 1997, Ottawa, 1997, p. 1. |
| 13 | The Minister of Public Works and Government Services at the time was the Hon. David Dingwall. See Appendix B. |
| 14 | Public Works and Government Services Canada, Memorandum to Mr. J. Stobbe from Director General Audit and Review Branch, file No. 1530-96-056-11/5, 19 June 1996. |
| 15 | Ibid. |
| 16 | Ernst and Young, Advertising and Public Opinion Research Sector: Compliance Audit of Contracting Process, Final Report, November 1996, Executive Summary. |
| 17 | Ibid. |
| 18 | Ibid., emphasis added. |
| 19 | The Hon. Alfonso Gagliano was Minister of Public Works and Government Services at the time. |
| 20 | Treasury Board No. 824628, 21 November 1996. Emphasis added. |
| 21 | Ibid. |
| 22 | Treasury Board, No. 82565, 15 September 1998. |
| 23 | Public Works and Government Services Canada, Audit and Ethics Branch, Follow-up Review of Sponsorship Files Final Report, 2001-717, 4 March 2002, p. 3. |
| 24 | The three contracts in question were not for sponsorships but for background analyses and therefore, as a result, were not covered by the 2000 internal audit done by PWGSC. |
| 25 | Public Works and Government Services Canada, Quick Response Team Sponsorship File Review — Final Project Report, 10 October 2002, p. 2-3. |
| 26 | Ibid., p. 3. |
| 27 | Ibid., p. 3-4. |
| 28 | Ibid., p. 4. |
| 29 | Mr. LeFrançois was named to the position of Chairman of the Board of Via Rail by former Prime Minister Brian Mulroney in 1993 and was nominated President and Chief Executive Officer in September 2001. |
| 30 | Via Rail reports to the House of Commons through the Minister of Transport. |
| 31 | Office of the Auditor General, Chapter 3, November 2003 Report, p. 11. |
| 32 | Mr. Ouellet was the Chair of Canada Post Corporation from January 1996 until November 1999 when he became President and CEO. At the time of his appearance before the Committee, Mr. Ouellet was under suspension from his duties as CEO. |
| 33 | Auditor General of Canada, Report of the Auditor General of Canada, November 2003, Chapter 3, p. 19. |
| 34 | Globe and Mail, “Ad Firm Billed Ottawa to Surf Gun Sites,” Toronto, 7 December 2002, p. A1. |