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Advanced Auditing

Notes paid $50,000 to each of the two unsuccessful bidders who had submitted proposals - in
effect making, without appropriate authority, two ex gratia payments of $20,000 each.
We concluded that DPW had examined the requirements for office space at various times
during the planning phase between 1970 and 1984, culminating in a study in 1983. We are
satisfied that the needs analysis was adequately done. Two options were possible for
meeting the accommodation needs of the federal government: either continue to rent
space in various buildings in the city, or build a new building. Given the direction to
create a “central federal presence”, the rental option was of interest only as a financial
alternative. We concluded that DPW had properly analyzed the options of renting or
building. We examined the pricing and availability analysis presented to the Treasury
Board in seeking Effective Project Approval to sign a lease purchase agreement with the
developer. The Department indicated that the lease purchase option was, in 1984 net
present value terms, $13.1 million more expensive (including developer’s charges and
higher costs of borrowing). The Treasury Board directed the Department to proceed with
the lease purchase option. In our 1986 Report we identified a similar occurrence in the
acquisition of the Guy Favreau Complex in Montreal. We noted then that, in analyzing the
options, the Department had used the Real Estate Investment Analysis System (REIAS),
which sometimes requires manual calculation to undertake cost analysis of all options.
When this is not done, as was the case again here, the Department is unable to present the
full range of possible costs that may follow from any one option. The Department
acknowledges that a sensitivity analysis should be done as part of the overall assessment
of risk.

In sum, the government acquired a building that cost about $80 million to construct, but
for which it has paid and will continue to pay a higher sum. We calculated that in current
year dollars the additional cost will be approximately $100 million (or $13.1 million in
1984 net present value). Even though Treasury Board was advised of the higher cost, the
Department was directed to acquire the building on the basis of lease purchase which, we
calculate, will cost almost 20 percent more than the alternative of Crown construction. We
noted that, in conducting regular progress inspections and reporting on deficiencies, DPW
had brought to the notice of the developers construction practices which, if left unresolved,
would reduce fire resistance. At the time of our audit, several of these matters had not
been resolved. The reported instances also reflect construction practices that affect the
load bearing capacity of some floor slabs, which the Department advises us, will require
remedial work. Although the Department noted and reported major deficiencies during
construction, it was not always advised of corrective action by the contractor. Corrective
action to remedy some of these deficiencies has been taken and is continuing, but no
assurance has been given that all of them will be corrected to the Department’s satisfaction.
Based on our examination, and on previous audits of lease purchase projects reported by
the Auditor General, it is our opinion that lease purchase is the most costly method for the
Department of Public Works to acquire buildings.
Question:
Pen down your views to the above case study.

Source: http://www.oag-bvg.gc.ca/internet/English/parl_oag_198811_19_e_4246.html

11.3 Summary

 A special audit report is the report issued by an auditor after inspecting the financial
records of a company following a directive for the audit to be performed before the usual
annual audit.

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