Report on Recipient Audit of Indian Business Corporation
Name: Indian Business Corporation
Location: Alberta
Default status at time of audit: Not in default (2011-2012)
Current default status: Not in default (2015-2016)
Time period covered by audit: April 1, 2008 to March 31, 2012
Amount of AANDC funding audited: $2,225,800
Background
Aboriginal Affairs and Northern Development Canada (AANDC) selected the Indian Business Corporation (IBC) for a recipient audit in 2012-13 based on their 2011-12 risk assessment score and other risk factors.
This recipient audit was undertaken to:
- Ensure compliance with the Terms and Conditions of AANDC Funding Agreements;
- Ensure compliance with Treasury Board and AANDC policies and directives;
- Evaluate efficiency and effectiveness of the financial management framework in place to manage the programs, as well as the recipient's organizational capacity; and
- Assess the adequacy of the financial control measures and mechanisms in place to manage risks effectively.
Samson & Associates, an independent audit firm was commissioned to undertake the recipient audit. They examined 3 funding agreements and one Letter of Offer. The audit was conducted in February 2013. (A Letter of Offer is a legal agreement used by Aboriginal Business Canada to issue funds before joining AANDC).
The Indian Business Corporation was established in 1987 with the goal of providing financing opportunities for First Nations peoples.
The Indian Business Corporation is one of over 30 Aboriginal Capital Corporations across Canada that receives funding from Aboriginal Affairs and Northern Development Canada. Aboriginal Capital Corporations provides developmental lending to Aboriginal clients, with loans that generally have higher risk profiles than those acceptable to mainstream financial institutions. Indian Business Corporation is a wholly owned company of a trust company for which the beneficiaries are the First Nations of Alberta under Treaty #6, Treaty #7 and Treaty #8.
The mandate of Indian Business Corporation is to provide individual First Nations farmers, ranchers and businesses on and off reserve in Western Canada with access to capital. Indian Business Corporation also provides financing for commercial equipment such as large trucks and backhoes. Other activities include consumer lending and loans for commercial purposes. The loan portfolio of Indian Business Corporation is currently valued at $10M.
Findings
The audit revealed that the amount recoverable under each specific agreement was $0.
The audit also revealed that the Recipient complied with the terms and conditions of the funding agreements and Letter of Offer, with the exception of 2 articles in the Letter of Offer.
Program Administration
Issue #1: Conflict of Interest Article 2.2 in the Letter of Offer states that "Loans to Aboriginal Businesses related to the Recipient by direct or indirect equity interest must be reviewed by an independent audit firm through an external analysis acceptable to the Minister and can only be approved by the full Board: a copy of the analyst's report should be kept on file for inspection." The audit revealed that a loan in the amount of $571,299 was approved and that expenses of $181,352 had been incurred prior to the independent analysis. In addition, a review of the loan application file revealed that the recipient had not performed its due diligence as required by their lending policy. For example, the business plan did not have an estimated cash flow of income and expenses and there was no indication as to the borrower's capacity to reimburse. Finally, one of the two analyses performed by the recipient recommended that Indian Business Corporation not proceed with the loan.
Issue #2: Article 5.1 c) in the Letter of Offer states "That the Board of Directors of Indian Business Corporation limit total compensation to the Directors of the Corporation and Trustees of the Indian Business Corporation Business Trust to $100,000 annually including honoraria, expenses, retainers, meeting fees, and any other payments, and that such payments will be disclosed in the audited financial statement." The audit revealed that while there was supporting documentation for the expenses claimed by members of the Board of Directors, the total amount claimed exceeded the $100,000 per member in annual compensation. Indian Business Corporation overpaid members of the Board of Directors by $145,992 between October 1, 2008 and September 30, 2012.
Policies and Procedures Supporting the Delivery of the Programs
A review of the Board of Directors' Policy revealed that some procedures were not included in the Policy, such as:
- The procedure for determining the appropriate rate of remuneration for the Board of Directors;
- The Terms of Reference for the Board Members and President;
- The election process for the Board Members and President (including the advertisement of the Annual General Meeting and ending terms to the election procedures);
- The terms of reference for each Executive Committee; and
- A review of the Board of Directors policy revealed that travel expenses were to comply with the "National Joint Council Travel Directive". The audit revealed that members of the Board of Directors were not taking into consideration economical factors when planning their travel, as required by the Directive.
In addition, the audit revealed that two loans were written off: one loan to the President and one loan to the President's brother. The reason specified in the file for writing off the loan to the brother is that he could not be located, despite repeated efforts.
Financial Management
The recipient's financial and administrative controls over its loan portfolio and the Business Support Officer were adequate and operating effectively.
Recommendations
The following recommendations are formulated to address the issues identified in the report and to help strengthen the existing internal controls in place to deliver the programs:
- It was recommended that for future loans to Aboriginal businesses related Indian Business Corporation's direct or indirect equity interest, an independent external analysis be provided and accepted by the Minister prior to the loan being disbursed.
- It was recommended that the Recipient recover from its Board members the amount of $145,992 that would reduce the Board of Directors' expenses to $100,000 each as per Article 5.1 c) in the Letter of Offer, and that the recipient ensures that it complies with this requirement for future fiscal years. However, if the Recipient fails to recover the funds from its Board of Directors it is recommended that AANDC exercises their right of default in accordance with Article 9.1 f) which states: "The following event constitutes a default: in the opinion of the Minister, the Recipient fails to meet any term, condition or undertaking in the this Arrangement is not complied with in any material respect and any such defect has not been cured by or remedied within thirty (30) days or written notice of such defect having been provided to or condition of this Arrangement" and recall the $2,000,000 capitalization loan."
- Some members of the Board of Directors of IBC are also members of the Board of Directors of Indian Business Corporation Energy, which is wholly-owned a subsidiary company of IBC whose main purpose is to generate opportunities for First Nations wishing to take greater control of their oil and gas resources. Therefore, the auditors recommend that IBC management review the Board of Directors" expenditures claimed under Indian Business Corporation Energy and ensure that the expenses claimed are reasonable and that the Duty to Loyalty principle was applied whereby the best interests of Indian Business Corporation and its beneficiaries (Treaty #6, #7 and #8 communities) are considered.
- It was recommended that Indian Business Corporation include procedures in its Board of Directors Policy that include:
- The appropriate remuneration rate for the members of the Board. The policy should take into consideration remuneration of other similar Aboriginal Capital Corporation organizations.
- Terms of Reference outlining the roles of the Board members and President.
- Election process for Directors (including the advertisement of the Annual General Meeting to detailed election procedures).
- Terms of Reference for the Executive Committees.
All items should take into consideration the duty to loyalty whereby the best interests of Indian Business Corporation and its beneficiaries (Treaty #6, #7 and #8 communities) are considered.
- It was recommended that the General Manager of Indian Business Corporation inform the Board of Directors of the Government of Canada's "National Joint Council Travel Directive" rates, rules and regulations. In addition, a policy should be created whereby the General Manager could be in a position to refuse paying for travel expenses, without jeopardizing his position at Indian Business Corporation, when travel expenses were incurred by the Board of Directors that were not in the best interest of the Indian Business Corporation.
- It was recommended that the Board of Directors enforce the Duty to Loyalty policy and require the President of Indian Business Corporation to reimburse his loan. In addition, the Board should initiate recovery of outstanding loans to Indian Business Corporation (i.e., loan to President's brother).
Conclusion
A copy of the final report was sent to the Recipient. No recoverable amount was identified. The Department is working with the Recipient to develop an action plan to address the recommendations.