Federal auditor says pandemic loan program lacked control over contract spending

The federal government’s pandemic-era loan program for small businesses suffered from contracting problems due to a lack of oversight, Canada’s auditor general says.

The Canada Emergency Business Account (CEBA) was introduced at the height of the pandemic to help out small businesses forced to close or limit their operations due to public health measures. The program offered interest-free loans backed by the federal government. A portion of the loan would be forgiven if it was repaid by a certain deadline.

A report from Canada’s auditor general, released Monday, says the program was able to quickly provide loans to struggling businesses and the vast majority of the funds went to eligible businesses. But the audit found “significant weakness” in the program’s management of contracts.

Export Development Canada (EDC), the Crown corporation responsible for administering the loan program, heavily relied on sole-source contracts with one contractor to deliver the program.

More than 90 per cent of the program’s $230 million in administrative expenses was paid to Accenture, a professional services and IT company, based on sole-source contracts, the report said.

EDC flagged early on in the process that it didn’t have the capacity to administer the program on its own and would need to seek outside help, the report said. But the Crown corporation “outsourced many key aspects of the management of the CEBA program without strong checks and balances in place,” the report added.

Specifically, EDC allowed Accenture to determine the scope and prices in its contracts, with little pushback.

Auditor General Karen Hogan told the House public accounts committee on Monday that she would have expected a program like CEBA to be administered by the public service, not a Crown corporation. She also said that because the program was managed by an arms-length organization, there should have been more departmental oversight.

“I would have expected better oversight by the Department of Finance and Global Affairs [Canada] and they really did fail in their responsibilities to exercise oversight over that Crown [corporation],” she told MPs.

“I am concerned about the over-reliance that they have put on this one single vendor [Accenture], and the lack of oversight by departments is such that bad decisions are not being questioned.”

In her report, Hogan questioned the decision to give Accenture hourly contracts rather than fixed price contracts, which she said eliminated an incentive for the company to complete tasks quickly or with fewer resources. Some contracts also lacked penalties for cases where work wasn’t performed to certain standards, said the audit report.

“EDC did not verify that the resources charged were appropriate or that the hours claimed by each resource were accurate prior to making payment,” the report said.

The report cites a call centre that Accenture set up as an example of EDC failing to properly monitor costs. The initial contract said the call centre would be needed for four months and would cost just under $3 million. Hogan found that the centre was still operating as of March 2024 and its cost had ballooned to just over $23 million.

The report also noted that the centre’s cost per call also skyrocketed “from an average of $31 in 2020 to a high of $589 per call in April 2023.”  At some points, agents only answered six calls per day, the report said.

“EDC did not verify or analyze the costs in the invoices, and because it did not require that timesheets be provided, it missed important information about how the call centre was operating,” the report said.

The report also said that EDC paid an average of 14 hours per agent per day, even though the call centre only operated nine hours a day.

Company picked its own subsidiary for contract

The audit found that Accenture was tasked with running an informal selection process to identify a vendor that would run an accounting system to track and monitor loans and collections. Accenture ultimately recommended one of its own subsidiaries for the $36-million contract, despite other vendors meeting the technical requirements for this aspect of the program. Accenture’s recommendation was accepted by EDC, the report said.

“In our view, this was a conflict of interest that EDC did not manage. In addition, we note that Accenture was compensated to run a process in which it ultimately won the contract. These practices do not align with EDC’s procurement principles of fairness and transparency,” the report said.

Issues with continuing to rely on Accenture for administration of the program were identified as EDC began to consider how to start collecting defaulted loans. EDC began to formulate a competitive process for the administration of this aspect of the CEBA program.

But “persistent delays in planning for this phase by the Department of Finance Canada and lack of clarity about roles and responsibilities for the collection of defaulted loans” resulted in EDC abandoning its competitive process and ultimately relying on Accenture for this aspect of the program, the report said.

Billions sent to ineligible businesses

While the audit found the CEBA rollout succeeded in getting loans to businesses quickly, it also pointed out that billions of dollars went to businesses that didn’t qualify.

The audit found that 91 per cent of CEBA recipients were eligible for the loans they received — but roughly $3.5 billion in loans went to ineligible applicants.

The auditor general found that eligibility verification under the initial requirements — known as the payroll stream — was largely successful and accurate. But the report identified problems with eligibility under an expanded set of requirements that was introduced later in the program.

EDC found 30 ineligible recipients under this expanded stream, which was based on non-deferrable expenses such as rent, as opposed to a business’s payroll. But the auditor general estimates that there could be as many as 26,000 applicants that didn’t qualify under these requirements.

The report said EDC approved some of the loans under the non-deferrable expense stream based on recommendations from Accenture, “even though documentation clearly indicated ineligibility or basic information was missing.”

Some of the documents that were accepted lacked a business name or included expenses that fell outside of the eligibility period.

In order to qualify for the forgivable portion of the CEBA loans, businesses had to pay back most of the funds earlier this year. Unpaid loans are now accruing 5 per cent interest and need to be repaid by 2026. Because the program is ongoing, the government will be relying on Accenture until 2028, the audit said.

Hogan made a number of recommendations for EDC to improve its contracting process. The Crown corporation agreed to implement them.

Hogan also recommended that EDC do further eligibility checks for businesses under the non-deferrable expense requirements and proceed with collections if warranted. EDC agreed to this recommendation only in part, arguing that “implementing it would be challenging and may also come at significant cost.”

“EDC will work with Finance Canada to consider legal and cost implications, and will explore potential options to recoup the partial loan forgiveness amounts. This will inform whether EDC can — or should — move forward with the recommendation,” a statement from the organization said.

Hogan told reporters on Monday that she was disappointed EDC only partly agreed with her recommendation on the verification and collection of ineligible loans.

“I’m concerned about the … reticence of wanting to go back and recover funds,” she said at a news conference.

“If the government doesn’t want to recover, I expect that they’re just going to be clear and transparent with Canadians.”

WATCH | Hogan says she expected basic ‘due diligence’ in pandemic loan program: 

Hogan says she expected basic ‘due diligence’ in pandemic loan program

While answering questions about her latest report on the Canada Emergency Business Account (CEBA), Auditor General of Canada Karen Hogan says she expected a basic level of ‘due diligence’ and monitoring of expenditures, regardless of the pandemic.

Typically, cabinet ministers hold press conferences to take questions after the auditor general releases a report. No federal minister was made available on Monday. Instead, Finance Minister Chrystia Freeland’s office referred CBC News to a written statement from the finance department.

“While the Auditor General offers some good and useful recommendations, this report fails to properly acknowledge that CEBA was designed and delivered during a global pandemic. Within less than two weeks, the federal government stood up new, emergency support for 898,000 small businesses across the country. This was a historic, national effort, at a time of crisis, to support our small business owners and their employees,” the department’s statement said.

But Hogan said Monday the pandemic shouldn’t be used as an excuse for a lack of proper oversight.

“I would expect a basic level of due diligence and monitoring of expenditures regardless of whether a pandemic exists,” she said during her press conference.

Hogan also released audit reports on Monday that examined federal supports for seniors and military procurement. Hogan reported that the government couldn’t demonstrate how it decides if money paid under the Old Age Security program is sufficient to support seniors.

On military procurement, Hogan found that contract negotiations and rules that state spending must be invested back into the Canadian economy can slow down military purchases and drive up costs.