An independent auditor’s report of the Portland Hotel Society paints a picture of an organization that is inept at maintaining financial records, and either woefully incapable or unwilling to exercise financial oversight of senior executives.
Findings of the audit by KPMG Forensic were released today (March 20) by B.C. Housing following the resignations of all executive managers and members of the PHS board of directors less than 24 hours earlier.
Perhaps the most damning of questions raised in the KPMG report concern discrepancies between certain employees’ salaries as outlined in employment agreements versus those individuals’ gross incomes as reported in T4 documents.
Those discrepancies appear largely the result of vacation pay delivered to executive managers. It’s stated that vacation pay was “unusually” added onto salaries and calculated based on a percentage of salaries as opposed to as a percentage of hours worked.
“The average payout for vacation pay for four individuals we reviewed was approximately $20,000 per year,” the report states.
Executive and administrative managers with children also received child care benefits ranging from $4,800 to $7,020 per individual per year.
The report also calls attention to executive managers’ use of PHS credit cards. Those questions pertain to PHS founders and co-executive directors Mark Townsend and Liz Evans (who are married), as well as Dan Small and Kerstin Stuerzbecher.
Over the three-year period 2010-2012, Townsend was responsible for $476,279 in credit card charges and expenses, Evans for $140,138, Small for $107,124, and Stuerzbecher for $152,292.
The report provides no clear evidence indicating that PHS credit cards were used to purchase goods or services intended for personal use. However, it also repeatedly emphasizes that PHS could not account for how much money was spent, and that PHS repeatedly declined to provide KPMG with receipts and supporting documentation that would allow for expenses to be accounted for properly.
A lengthy appendix details credit card expenses that KPMG found could not be fully explained. Those include:
- $5,749 for a trip to Europe taken by Townsend
- $2,455 and $4,860 in travel expenses attributed to Stuerzbecher
- 23 charges totally $14,647 for travel with Air Canada spent by Townsend and Evans
- $14,955 for travel with British Airways spent by Townsend
- $9,266 spent by Townsend and Evans on a trip to New York City
- A number of additional flights and travel expenses
The report notes that those charges were defended by members of the PHS executive management team and described as related to conferences.
There were also charges for a limousine service, visits to spas, beauty care, clothing, and entertainment.
In addition, there is $9,000 in cash advances for which KPMG states it could not obtain any documentation.
Another section of the report takes issue with the lease of Townsend and Evan’s basement, which has been used by PHS for a fee of $1,400 per month.
The report notes that up to four employees use the basement as an office for PHS business on a regular basis. But it calls attention a lack of answers on how the cost of the lease was established.
KPMG also found issues related to how PHS establishes and operates contracts with affiliates.
For example, a PHS affiliate called DTES Community Janitorial Supplies buys materials in bulk and then sells them to PHS at a markup ranging from 28 to 36 percent. KPMG also found there was a “risk of a mismatch” between contracts awarded to an affiliate called DTES Maintenance and work that was actually performed.
The report goes on to raise questions of whether PHS has exercised the appropriate oversight of spending.
“We were told by multiple interviewees that there is no monitoring or authorization of PHS executive expenses,” the report states. “Substantial funds are spent by PHS management using their PHS credit cards or through expense reimbursements.
“In general, management has a greater ability to override internal controls and policies and avoid detection. We recommend that Board establish a process to monitor and authorize the payments of expense claims and credit card charges of senior PHS employees.”
As an independent auditor, KPMG had a mandate to review the PHS board of directors' management capabilities, the accurateness and completeness of records, and the effectiveness of controls over expenditures, among other areas.
In May 2013, KPMG provided a draft of its report to PHS in the interest of allowing PHS to respond to questions raised therein. The final report notes that PHS did provide a written response to KPMG, and that information in that response was taken into consideration when KPMG composed the final report released today. However, PHS declined to give KPMG permission to include excerpts from the PHS response in its final report.
PHS is a nonprofit that receives the majority of its funding from B.C. Housing and Vancouver Coastal Health.
It is best known for operating Insite, North America’s first and only legal supervised injection facility. It has also led the way on methadone treatment in Vancouver, needle exchange and distribution, and more controversial harm-reduction programs such as crack-pipe vending machines. In addition, PHS operates 16 housing sites in Vancouver that are home to more than 1,000 low-income residents.
According to filings with Revenue Canada, PHS revenue for 2013 exceeded $35.5 million, with 61 percent of that money coming from the government. For that year, management costs accounted for nine percent of expenses.