N.B. auditor general releases report on financial woes at credit union

A long-awaited investigation by New Brunswick’s auditor general into the near collapse of Caisse Populaire de Shippagan has revealed a string of failures ranging from the credit union’s mismanagement to shabby accounting.

 In a sweeping report released Tuesday, Mike Ferguson pieces together the sequence of events that brought the northern financial institution to its knees in 2007, leading the Liberal government prop it up with a nearly $40-million bailout.

The 54-page report identifies the failures in the chain of command _ from the credit union’s senior staff to the province’s regulatory regime _ that allowed the credit union to fudge its financial results, fattening the salaries of some senior management.

“Failure … of the former senior management team … failure of the board of directors at the time to provide effective oversight … and failure of the auditors,” Ferguson states in the report.

But New Brunswick’s former Conservative government also shoulders some of the blame, the report states, for failing to ensure adequate regulation and supervision of the credit union.

For example, the superintendent of credit unions _ only a part-time role at the time _ had been directed by the Justice Department to focus on other priorities. Also, the regulatory body at the time, the New Brunswick Credit Union Federation Stabilization Board, had inadequate powers to act once it became aware of the institution’s problems.

If government had taken action sooner, “the total loss to New Brunswick taxpayers would probably have been about half what it eventually was,” Ferguson states.

Premier Shawn Graham said the massive losses could have been avoided had the Conservatives not “avoided the issue.”

However, Tory Leader David Alward said problems at the credit union date back to the 1980s and have continued throughout successive governments.

The auditor general’s report, which examines “irregular activities” at the Shippagan, N.B., bank from 1998 to 2004, was submitted Tuesday to the legislature’s standing committee on Crown corporations. It includes six recommendations to ensure the current regulatory regime is robust.

The recommendations include ensuring the auditors of credit unions have the skills and experience necessary; enforcing term limits for members of the governing bodies of Crown corporations; and ensuring the government’s regulatory and supervisory bodies have the power and resources to do their job.

A copy of the report has been given to the RCMP, Ferguson told the committee.The investigation of the credit union brought in KPMG Forensic, a division of the financial services firm that specializes in white-collar crime, to perform field work.

KPMG noted “in general an adversarial tone to the correspondence coming from” the credit union, and management showed “contempt for the regulatory process,” Ferguson’s report states.

The KPMG report reveals that management at the credit union covered up financial problems to make the institution look profitable.

“Because the organization appeared to be doing well, one or more members of the senior management group were being paid large salaries and collecting large dividends,” Ferguson said.

For example, in 2003 the credit union reported a surplus of $700,000 but an adjusted net income reveals losses of more than $9 million. The equity to asset ratio would have been 1.3 per cent _ below the level required for a credit union in New Brunswick.

In addition, large bonuses were approved and paid to select credit union employees annually, even though annual evaluations did not exist and there were no criteria to establish bonuses, the report states.

The credit union, located in a town with fewer than 3,000 people in the Acadian Peninsula, started to compete with bigger banks in 2001.

The financial institution began offering high-risk financial products, such as high-interest loans, despite its inexperience with such products, Ferguson said.

KPMG learned that the credit union routinely made changes to loan files, a practice referred to as a “flush” process, so that toxic loans would not appear on delinquency reports.

 “You can look at what’s happened over the last year in the whole financial world and you can draw some comparisons,” Ferguson said to reporters Tuesday. “A lot of what happened at the Caisse Populaire de Shippagan is pretty much in common with what you see in some reports on what’s happened in the U.S.”

New Brunswick taxpayers have already given the institution a $37-million grant and could be on the hook for another $16.5 in guarantees to stabilize the credit union.

“The fallout from this problem is still going on,” Ferguson states in his report, pointing to its $1.4-million price tag.