Nfld. & Labrador·CBC Investigates

After years of oversight warnings, a financial scandal at the school district. What now?

Questionable spending at the Newfoundland and Labrador English School District has been referred to the police. Could it have been avoided, and what happens now to make sure something like this doesn't happen again?

Recommendations to tighten controls go back a decade, and largely went unheeded

In a report issued last month, the auditor general issued a report critical of financial oversight at the Newfoundland and Labrador English School District. (CBC)

The storm, just over a week before Christmas, blanketed parts of metro St. John's in 15 centimetres of snow, with more than double that burying parts of the Burin Peninsula.

But that same day — ​Dec. 16, 2013 — something strange happened at the Newfoundland and Labrador English School District.

As people in eastern Newfoundland fired up their snowblowers, someone at the district issued a purchase order for lawn mowers — using tax dollars to pay for lawn-care services at two schools somewhere in the region.

It was a curious decision — and one that does not appear to have raised any red flags at the time, even with all that white stuff on the ground.

"There is nothing to my knowledge that was challenged on this particular series of transactions, because there were a number of transactions involved here," Auditor General Julia Mullaley told CBC News.

According to the auditor general, it was one of six purchase orders for lawn maintenance services approved over a two-month period beginning in mid-October of that year.

That's despite the fact the school district had lawn mowers of its own.

And the company it hired wasn't actually in the lawn mowing business.

And the school district employee who approved all of this got a blank template from the company, allowing them to edit or change the numbers.

Auditor General Julia Mullaley's report found that 'the board of trustees and senior management had not exercised the required oversight over NLESD's internal control environment.' (Paul Pickett/CBC)

"I think the very best-case scenario could be that there was some rational reason why they would be hiring someone to do work that the district has staff to perform, and it just simply wasn't documented well," Mullaley said.

"I guess the other thing that could have happened was that the services were rendered earlier in the year and that the paper flow — the purchase orders, the invoices — came after the fact."

And the worst-case scenario?

"The worst-case scenario certainly, with these types of risk factors, would be that fraud or fraudulent activity [took place]," Mullaley said.

Last month, Mullaley issued a report of 60-plus pages on purchasing at the facilities division of the school district from 2011 through 2016.

That report revealed numerous questionable transactions like this one.

It was critical of the board and senior management for not exercising the required oversight over internal controls — controls that are supposed to prevent things like this.

Some of those controls are still not in place today.

So how could this happen?

And what happens next?

'They want me to turn this around'

In his role as CEO of the school district, Tony Stack is the person in charge of fixing all of this.

"I'm accountable to the board of directors, and they've made it clear that they want me to turn this around," Stack told CBC News in a recent interview.

"And that means turning it around in terms of the policies or procedures, but as well as the culture. And I'm committed to that, and I'll be held accountable for that."

He says there have already been changes to tighten up financial controls, including:

  • A new risk-management policy.
     
  • Procedures for whistleblowers to come forward.
     
  • An expanded internal audit division.
     
  • Financial training and ethics training for employees.

Last month, when the auditor general's report was released, Stack said officials moved quickly at the first indication of fraud, in late 2015.

"We took immediate action," he told reporters that day. "Nobody was shying away from this."

But the auditor general found there were repeated warnings over the years about potential problems related to lax financial oversight at the school board.

Warnings in 2013 and 2015

Stack joined the then-Eastern School District as a senior manager in 2012. He took over direct responsibility for the facilities division — ground zero for financial oversight issues — when the province's school boards amalgamated in September 2013. He served in that role until being appointed CEO in 2017.

In 2013 and again in 2015, a whistleblower warned that a school district employee "fixed quotations to benefit vendors of choice" and "approved purchase orders for work that was not necessary or work that did not get done."

According to the auditor general, there was "no evidence" this was investigated.

And in May 2015, the district's internal auditor flagged issues with a particular vendor — a sharp increase in payments, double billings, vague invoices, and many invoices under $1,000, suggesting purchase orders were being split to come under a threshold that would have required more authorization.

Tony Stack is CEO of the Newfoundland and Labrador English School District. (Ted Dillon/CBC)

"We talked about tightening our controls, plus there was a heightened sense of awareness around this particular individual that was mentioned as dealing with these vendors, which ultimately turned out to be the individual we dismissed," Stack said.

"So we had a lot of heat and light on that."

That auditor general found the district "continued to pay invoices submitted by this and other vendors when there was insufficient detail to determine the date and extent of the services provided."

Stack said he was not aware of the 2013 whistleblower warning, and board officials didn't feel they had information they could act on for HR purposes until the fall of 2015. Before that, he said, there was no "smoking gun."

So does Stack feel he should've known more or could've done anything differently during that time period?

"This has been a very gut-wrenching period. We take stewardship of the public purse very seriously. But moreover, every educational dollar is precious for the students of this province, we're a student-focused organization," Stack said.

"It kills me that we have one of our own take advantage of an operational environment, take advantage of the situation at the time, to essentially behave in a completely unacceptable manner."

But wasn't the lack of proper oversight by the board part of the problem that led to this situation?

"I would agree with that," he said.

Problems identified a decade ago

Those problems were identified as far as back as 2008, long before Stack began working for the district.

CBC News reviewed correspondence between the school district and its external auditor about recommendations to tighten up controls — recommendations that were not followed.

There was repeated advice to create a register to track capital assets — basically, a list of what the district owns, and where it is — that was rejected.

And there were repeated calls for an internal control policy manual.

Meanwhile, an internal auditor's review nearly a decade ago highlighted weaknesses in oversight for the facilities division that is now under the microscope.

A 2009 internal auditor's report can't be released because it is part of a Royal Newfoundland Constabulary investigation. (CBC)

But that 2009 internal auditor's review remains off-limits. The district says it can't be released, because it is part of an ongoing fraud investigation by the Royal Newfoundland Constabulary.

After the school district ramped up its probe at the end of 2015, someone sent an anonymous letter to the premier's office. The comptroller general was sent in, then the auditor general, with the police waiting in the wings.

The fallout so far: three employees fired, according to Stack.

One of them was charged and convicted on three counts, with 15 other fraud charges dismissed. That former employee is now appealing his convictions.

Other fraud-related investigations are active.

None of the other former school district employees or companies that may have benefited from improper activity have been publicly identified.

AG: 'significant weaknesses' still there

The auditor general says the school district must take action to ensure something like this doesn't happen again.

"I think most important right now is that the district really put a concerted effort into addressing these significant weaknesses, because they're still there," Mullaley said.

"And it's important that they move forward to address these risks and put the right controls in place. That's the most important thing in my mind."

I think most important right now is that the district really put a concerted effort into addressing these significant weaknesses, because they're still there.- Julia Mullaley

Stack said he agrees.

Earlier this month, school district managers and the board of trustees met with the auditor general to discuss her findings, and what should happen next.

There is another meeting of trustees planned for this coming weekend.

"People are rightly upset," Stack said.

"We are committed to spending the educational dollar on what it should be spent on, and that's student learning and not any waste … or losing any money or bleeding any money to fraudulent activity."

That will likely mean a significant outlay of cash to put new financial systems in place.

In the meantime, what would happen today, if someone issued a purchase order for lawn care on the day of a snowstorm? Would it be caught?

"I think so," Stack said. "Yes, I would. We have currently — now it's all human resources that are doing this — people within our finance division have very close scrutiny on purchases.

"Again, it's not as strong as it should be, because we need the system for it."

Read more from CBC Newfoundland and Labrador

ABOUT THE AUTHOR

Rob Antle

CBC News

Rob Antle is producer for CBC's investigative unit in Newfoundland and Labrador.

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