Wagga City Council’s dealings with Douglas Aerospace were plagued by gross ineptitude and mismanagement on the part of its staff, the external review into the saga has concluded.
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The Advertiser can for the first time reveal the contents of the external report conducted by Prosperity Audit Services into council’s relationship with Douglas Aerospace – a document which paints a damning picture of chaos and dysfunction in regards to council’s handling of the affair.
The report’s most alarming findings include:
- The loan proposal was put on public exhibition in late 2011 despite Douglas receiving an unsatisfactory rating from an indepenent external financial assessment – an action in clear violation of council’s resolution on the issue passed on December 19 of that year;
- Douglas Aerospace had insufficient capital to contribute its agreed 30 per cent of construction costs for the hangar – a deficiency either missed or ignored by council – and no deposit was sought from the company when the loan terms were agreed;
- It took council staff four months from when Douglas’ first loan repayment was due to send the company an invoice for payments;
- Unnamed council directors delayed the response to deficiencies in the hangar’s fire safety certification by five months by electing not to pursue a Show Cause Notice when the issue first arose – a course of action caused by a conflict of interest in the commercial arrangement in the opinion of the external auditors;
- Funds were released to Douglas on request without council confirming the status of construction progress;
- Incorrect information regarding the amount Douglas was in arrears in April 2014 was supplied to councillors by council staff – underestimating the in arrears amount by more than $35,000;
- Council staff erroneously processed a duplicate payment of $173,250 to Douglas and on a separate occasion overpaid the company a further $4,214.25; and
- Council failed to undertake accurate due diligence on Douglas, with staff failing to ascertain whether the company’s directors had ever been declared bankrupt or whether it had previously had been insolvent.
- Scroll down to read the full report
The due diligence process undertaken by council staff also failed to obtain an independent assessment over proposed construction costs for the hangars, while clear warnings included in the external financial assessment were ignored.
In our opinion, the commercial arrangements should not have proceeded.
- Prosperity Audit Services report
Other due diligence deficiencies identified in the report include uncertainty about whether Douglas Aerospace ever prepared a business plan in relation to its deal with council and a noted failure on council’s part to obtain an independent assessment over proposed construction costs for the hangars.
No documented due diligence was ever conducted on the builder of the hangar, Indistri Engineering – an Albury-based builder involved in the construction of the hangar which received some of the loan payments directly.
Risk management processes put in place were found to be “insufficient” and council failed to action a number of mitigating actions it was advised to by its legal counsel.
The report concluded council staff, chiefly the directors involved in the project, were ultimately responsible for the shortcomings the investigation uncovered.
A report by council staff submitted to councillors following the public exhibition period in early 2012 was “misleading”, the external audit found, with a skewed picture of Douglas Aerospace’s financial health presented in the document.
“The overall conclusion of the independent external financial assessments was not included in the report to council as prepared by the council staff and the independent external financial assessments were not attached to the report, whilst favourable supporting material was attached,” the audit report found.
“We believe that had this information been included, the project may not have proceeded. In our opinion, the commercial arrangements should not have proceeded.”
Council staff failed to implement legal advice sought regarding the implementation of loan securities, with that inaction resulting from the insufficient experience and expertise of a key employee, along with a lack of supervision and oversight over the work performed by that employee.
The version of the report seen by the Advertiser does not name any council employee referred to in the document.
The commercial structure at council created to handle the Douglas deal spanned multiple directorates, which the report found created clear conflicts of interest with staff across various departments simultaneously responsible for acting as development proponents for the airport precinct, financiers, landlords and the building regulator.
“The conflict of interest that arises from the above structure should not have occurred under proper project planning and appropriate mitigating controls should have been established,” the report found.
In one example of that conflict of interest highlighted in the audit report, a council employee was responsible for preparing a cheque requisition for the release of payments to builder Indistri Engineering and signing statutory declarations as witness to the first two payments under the loan agreement.
The report found those actions “compromised the … overall management of the loan facility”.
Council staff were also found to have not acted promptly to reduce further exposure to the organisation once Douglas defaulted on its loan in May this year.