PEI

Atlantic Lotto needs better direction, say auditors

The four Atlantic provinces have not provided clear direction to the Atlantic Lottery Corporation in terms of its mandate, say Atlantic Canada's four provincial auditor generals.

Executive salaries increased without consulting provinces

It will be the first time in two decades the Atlantic Lottery Corp. will come under the scrutiny of all four Atlantic provinces.

The four Atlantic provinces have not provided clear direction to the Atlantic Lottery Corporation in terms of its mandate, say Atlantic Canada's four provincial auditor generals.

The group delivered a report on a joint audit of the Atlantic Lottery Corporation Wednesday morning.

They said provincial governments have not provided clear performance expectations or clarified what powers the board and management of ALC have to make autonomous decisions.

According to the four auditors general, that has limited the corporation's ability to deal with strategic challenges, including the pursuit of new opportunities for revenue growth.

High risk of venture not communicated

On ALC's failed investment in Geonomics Global Games, the company behind the internet lottery game Geosweep, the report says Atlantic Lotto management did not properly communicate the risks involved in the investment to provincial shareholders.

Of the four provinces, only Prince Edward Island and New Brunswick agreed to invest.

"Management did not fully disclose all relevant information and risks to the Board," the report states.

"Management presented summarized due diligence findings which did not identify the high risk nature of investing in a technology startup. In particular, reports did not highlight the lack of revenue and cash flow, the investment's reliance on the success of the game, and its unproven business model."

The $8-million investment was made in 2011, and written off four years later, with Prince Edward Island and New Brunswick responsible for the financial loss.

The report says ALC's board of directors, made up of representatives from the four provinces, should have provided a more critical appraisal of management's plan, and should never have approved a project which was outside the corporation's mandate "before sufficient approvals were obtained from all shareholders."

The report says a projected return on investment of 510 per cent over five years could have suggested this was a high-risk venture, yet "the risk analyses prepared by management did not identify any high risks associated with this investment."

Lacking 'due regard for economy'

The auditors general also said they found problems with the board and management of ALC spending money without seeking the support of provincial shareholders.

"Increases in executive compensation were made without shareholder consultation and have been significant," the report states.

"Also, in some cases, stakeholder relations, board and staff expenditures lacked due regard for economy. These expenditures may or may not have been acceptable to the four shareholder governments."

According to the report, ALC initiated a salary review in 2013-14 which led to significant increases in compensation provided to senior executives. But the corporation never sought the input of the four shareholder provinces.

Atlantic Lotto hired an outside consultant for the review, which concluded non-executive salaries were in line with the region, but led to big increases for executives, with a boost to base salaries of up to 39 per cent over three years, and increases in maximum bonus levels of up to 220 per cent.

The maximum compensation for Atlantic Lotto's CEO Brent Scrimshaw rose from $298,350 to $321,300 as a result of the review. Bigger increases were provided for the chief operating officer Jim Porter and chief financial officer Patrick Daigle, with their salary and maximum potential bonuses rising from $219,780 to $341,940 over a three-year phase-in period, an increase of 56 per cent.

The audit report says the process of increasing executive salaries took place with board approval, but without consultation with provincial government shareholders "to determine their expectations related to compensation. ... We recommend the Board seek direction from shareholder governments on whether the Corporation's executive compensation is in line with shareholder expectations."

ALC said it would do that. In August of 2016 it also began publicly disclosing executive compensation levels, and the names and positions of all employees earning more than $100,000, something else the audit report calls for.

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