The federal auditor general has slapped a Crown corporation's subsidiary for mismanagement.

The Auditor General of Canada issued a report today to the Yukon Legislative Assembly on the financial practices of the territory's Energy Solutions Centre (ESC).

The report raised serious concerns with some spending by the centre, which is a subsidiary of the Yukon Development Corp. (YDC). The latter entity is owned by the territorial government.

'In our view, the corporate governance and oversight of the company (ESC) simply failed. Management did not operate in the full interests of the company, nor did the board of directors exercise sufficient oversight and control to protect the public interest,' Ron Thompson, the assistant auditor general, said today at a press conference in Whitehorse.

'Our audit found serious problems in the overall management of the company. Here we found that the company's president entered into large contracts with two senior managers that, in our view, were inappropriate under the circumstances.'

These were concerns that had already been made public at the end of last year by new YDC president David Morrison.

Thompson said it was not clear why the ESC had even been created as a entity separate from the YDC or its subsidiary, Yukon Energy.

'It does not appear that the costs and benefits of setting up the company were carefully considered prior to its establishment,' the report stated.

As a result of the auditor general's findings, Premier and Finance Minister Dennis Fentie announced this morning he's moving the centre under the control of the Department of Energy, Mines and Resources.

'This is one area where we can quickly follow up on recommendations by the auditor general,' said the premier.

One of the problems was the fact that money was spent by the centre without the proper authority.

With it now under a department, Fentie said, the government has clear processes in place to govern spending that the centre will now follow.

He's not interested in dumping the centre all together.

'As a government, we feel the Energy Solutions Centre mandate makes sense,' he said.

The centre does energy audits for homes and businesses. It is supposed to 'promote, co-ordinate and facilitate energy programs with an overall goal to create energy cost savings and reduce greenhouse gas emissions,' according to the report.

As Morrison had said in December, there were concerns with money being spent on contracts without proper approval or documentation.

The report details some of these problems.

The hiring problem stemmed from filling the managing director and treasurer positions through contracts, instead of hiring them as full-fledged employees.

'It is not standard practice for government entities to fill management positions through such contracts,' read the report.

It said the contracts for services the two were being paid through are normally used temporarily. The report says management positions should not be filled with these contracts.

'We also found the payments made under them to be generous, considering the duties required.

'Based on our review of these contracts, the company's personnel costs have been higher than necessary.'

The auditor general found that in total, the person brought on as managing director was paid $370,127 for his services over a 25-month period.

'For the year ended 31 December 2003, he was paid over $168,000, which was more than any employee of the government of Yukon.' He also received another $12,000 for expenses that year.

'This is more worrisome in light of the fact that the managing director position reported to the president of the company, a small subsidiary of a government corporation,' the report stated.

As for the treasurer's contract, he received $103,88 plus $739 in expenses in 2003.

However, that wasn't the only money he took home from YDC.

He had a consultant contract with the parent corporation for an extra $37,600, giving him a total of $141,438 for the year, more than any regular government employee, including deputy ministers.

The other problem with these contracts is the amount they were scheduled to receive if they were fired.

The clause in the managing director's contract gave him a full year's wages for dismissal; the treasurer was to receive six months' worth.

Morrison terminated both of these contracts in spite of the high costs.

'We observed that the managing director's and treasurer's contracts were signed by the president, but the amount of the managing director's contract exceeded the president's signing authority.

'The board of directors was not presented with the contracts, was not informed of their specifics, and did not ratify the contracts.'

The report indicates the board of directors was kept in the dark as to what was really happening at the centre in general.

'The board of directors was not informed of many significant management actions. Nor did the board challenge management in order to determine the true state of affairs of the company, which would have led to action to change the situation,' the report states.

While the report had problems with the fact the board was not kept informed, it also chastized the board for not challenging 'management in order to determine the true state of affairs of the company, which would have led to action on the situation.'

The report also found that the ESC may have some trouble with the tax man for how it handled the contracts of the managing director and treasurer.

'As these positions appeared to be those of employees, but no income tax or other payroll deductions were withheld from their pay, it is possible that the company may not have followed tax rules properly in treating these managers as contractors,' the report states.

'If the Canada Revenue Agency investigates and finds these individuals to be employees, the employer, Energy Solutions Centre Inc., would have to pay the employer and employee contributions for both employment insurance and the Canada Pension Plan.

'Furthermore, the company may also be charged penalties and interest for failing to deduct and remit income tax in respect of amounts paid.'

Another area of concern surrounded how some contracts were handed out by the centre.

'We identified significant weaknesses in the company's internal and financial controls including a lack of segregation of duties,' said Thompson.

The report noted that the managing director negotiated, issued, signed and paid some contracts and had signing authority.

'This practice is contrary to basic internal controls that require appropriate segregation of duties,' said the report.

The lack of control on the handing of contracts 'exposed the company to higher risks of error and fraud,' it stated.

The report also shows that the managing director billed the centre $52,501 in expenses in 2003 and approved the payment for those expenditures to himself.

'We also observed that the managing director approved an invoice for reimbursement of a portion of his spouse's travel expense when she accompanied him on a trip.'

Morrison was asked if there was anything that could be done to get that money used for the spouse's trip back from the former managing director.

He said it had not been reimbursed and it wasn't clear if it ever could be returned.

'It's unclear whether that trip was authorized,' he said. 'It's something that shouldn't happen.'

The auditor general's officials said there is nothing to indicate there was any fraud in these cases.

Morrison is not sure what, if anything, can be done to deal with this matter.

'There's nothing in the report saying You need to conduct a fraud investigation,'' he said.

Morrison said he has already tried to deal with these situations. One step was immediately taking signing authority away from the centre and putting it in his own hands, where it still remains.

He said there is a new reporting system so he understands where the money is and where it goes.

As well, it is not possible now for someone to OK payments for his or her own expenses.

The solutions centre will be discussed tomorrow by the legislative assembly's Public Accounts Committee in the legislature.

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