The Details of the Commercial Arrangement with Douglas Aerospace

© 2015 Prosperity Advisers Group Uncontrolled copy if printed

Wagga Wagga City Council

The Details of the Commercial Arrangement with Douglas Aerospace

September 2015

1. Executive summary

Uncontrolled copy if printed 1

Wagga Wagga City Council Commercial Arrangements with Douglas Aerospace

1.1 OVERVIEW

Prosperity Audit Services has been engaged by Wagga Wagga City Council (“WWCC”) to conduct an independent investigation in relation to the commercial arrangements with Douglas Aerospace Pty Limited (“Douglas Aerospace”) and its related proponents.

In October 2012, WWCC entered into commercial arrangements with Douglas Aerospace to partially fund the construction of two aircraft hangers at Wagga Wagga Regional Airport (the “Airport”). WWCC agreed to provide a commercial loan to Douglas Aerospace up to a maximum value of $2.5m to assist in the construction of the hangars.

Council established the Douglas Aerospace Review Committee (“DARC”) following the May 2014 Supplementary Council Meeting to provide oversight and advice in regard to solvency issues and other concerns surrounding WWCC’s arrangements with Douglas Aerospace. Douglas Aerospace has since entered voluntary administration and the final outcome and financial implications for WWCC are currently unknown.

Our investigation was performed at the request of the DARC following the preparation of a draft report by Council staff in relation to WWCC’s commercial arrangements with Douglas Aerospace. We have been requested to review the findings in the draft internal audit report and perform other procedures to recommend for improvements for WWCC’s consideration.

The detailed scope was agreed with the Council prior to the commencement of the investigation.

The investigation was performed during June and July 2015.

1.2 INVESTIGATION APPROACH

Our investigation was conducted by interviewing certain members of the DARC, Councillors, the WWCC Internal Audit Manager, WWCC directors, management and relevant WWCC staff.

1.3 CONCLUSIONS FROM THE INVESTIGATION

In our opinion, the commercial arrangements with Douglas Aerospace have resulted in a potentially adverse financial outcome for the Council that could have been prevented with a more robust project management, due diligence and governance approach. When they did proceed, appropriate safeguards found in normal banking/financing arrangements (such as director and bank guarantees, registered mortgages and payment of the borrower’s contribution up-front) were not effectively implemented by management.

For a project of this magnitude that involved multiple directorates, we believe that Council staff had the ultimate responsibility for the project’s outcomes.

Based on our investigation, it appears that a number of shortcomings with respect to project management, WWCC’s procedures and specific shortcomings by management exposed WWCC to preventable risks. The key shortcomings noted during the investigation have been outlined in Table 1 and have been categorised as follows:

Project management framework; Due diligence processes; Risk management framework; Performance of management; and Audit and risk committee.

Further detail on the conclusions arising from the investigation has been included as follows in section 2.




Table 1: Key shortcomings identified during the conduct of the investigation.

No. Key Shortcomings Identified Explanation Reference to

detailed findings

1 In our opinion, the commercial arrangements with Douglas Aerospace were not subject to appropriate project management processes.

As acknowledged by management in a report to Council, we understand that it is uncommon for WWCC to grantfinancial assistance at a level to that loaned to Douglas Aerospace.

Notwithstanding the above, the commercial arrangements with Douglas Aerospace were not subject to appropriateproject management processes such as:

o establishment of a steering committee;o engagement of appropriately qualified and experienced experts (probity, finance, legal etc.);o utilisation of WWCC’s tender processes to evaluate market participants.

The proposed structure of the commercial arrangements was inappropriate as they created a conflict of interest forWWCC. The conflict arises from the Council’s role as financier, landlord and building regulator.

A delay of 5 months in WWCC’s building compliance response to the deficiencies in the hangar’s fire safety certificationarose from a decision by “relevant directors” to not pursue a Show Cause Notice issued in May 2014. A subsequentShow Cause Notice was later issued in October 2014 to restart the compliance process. In our opinion, it is unlikely thatthis delay would have arisen if it were not for the conflict of interest created by the poor development of the commercialarrangement structure.

The process for the release of loan funds was poorly developed and resulted in WWCC releasing loan funding based ona letter of request from Douglas Aerospace without confirming the status of the construction project.

2.1

2 In our opinion, insufficient due diligence processes were conducted over Douglas Aerospace, the sole director of Douglas Aerospace or the builder (Indistri) before entering into the commercial arrangements.

The timeframe agreed in the planning and development of the commercial arrangements with Douglas Aerospace wasinappropriate and did not allow sufficient time to complete a thorough due diligence process.

An independent assessment over the proposed construction costs for the hangars was not obtained as part of the duediligence processes.

There was no documented due diligence process conducted over Indistri..

Despite a number of clear warnings included in the independent external financial assessments, additional due diligenceprocesses were not undertaken to clarify or resolve these warnings.

The due diligence procedures did not include a search for director bankruptcies, previous corporate insolvencies and theactivity of related parties.

2.2





detailed findings

3 In our opinion, the risks associated with the commercial arrangements were poorly assessed, documented and managed. Risk mitigation strategies for a project of this nature were not appropriately implemented.

Based on our inquiries of management and procedures performed, it was unclear where the ultimate responsibility for the risk assessment for the project lay within WWCC.

In a project that involves multiple directorates, we believe that the Council Management should have the ultimate responsibility and actively manage the project and its risks.

The risk assessment conducted was insufficient for a project of its magnitude and risk profile. The risk assessment identified nine risks for the entire project.

We do not agree with a number of the ratings within the risk assessment concerning risk probabilities and risk consequences.

The risk assessment does not appear to have been updated during the implementation of the arrangements with Douglas Aerospace, and accordingly, there is no evidence to support whether risks were managed on an ongoing basis.

Risk mitigation strategies that we would consider to be standard practice for a project of this nature that were not implemented, including obtaining director/bank guarantees, obtaining a deposit from the borrower and appointing an independent quantity surveyor to certify the satisfactory completion of each construction milestone.

2.3

4 In our opinion, WWCC did not have adequate internal expertise to manage a project of this nature. Shortcomings were also identified in relation to the performance by Council staff.

Two Council resolutions were not fully actioned by management.

Council Management did not clearly communicate the findings of the due diligence processes in the report to Council, dated 30 January 2012 i.e. the overall conclusion of the Independent external financial assessments was not included in the report to Council and the Independent external financial assessments were not attached to the report, while favourable supporting material was attached for Council consideration.

We understand that the implementation of the commercial arrangements was delegated by a member of Council staff to another member of Council staff. Legal advice obtained regarding the execution of loan securities was not implemented in its entirety.

Legal advice obtained in relation to the re-direction of payments to Douglas Aerospace (rather than directly to Indistri) was reactionary and was obtained 12 months after transactions had already been processed.

A member of Council staff prepared the cheque requisitions to release payments to Indistri as well as signing the statutory declarations as a witness. In our opinion, this compromised the segregation of duties between the Council’s Directorates.

A member of Council staff processed a double payment of $173,250.00 and an overpayment of $4,214.25 to Douglas Aerospace in error.

Council Management did not act promptly to reduce further exposure following the Douglas Aerospace default on the loan facility.

2.4





detailed findings

5 In our opinion, the Audit and Risk Committee (ARC) was not consulted in a proactive manner to assist in the planning and development of the commercial arrangements.

The ARC was consulted in relation to the proposed arrangements with Douglas Aerospace. However, this review wasundertaken after the Council had resolved to proceed with the arrangements.

The ARC was unable to provide any effective feedback on the arrangements prior to their implementation.

2.5

2. Detailed findings and recommendations



2.1 Project management framework to be reviewed and enhanced by management Risk rating of finding: EXTREME

Finding(s) and risk Recommendation(s) Agreed action(s)

Currently WWCC does not have a policy or procedure on project management. We understand that WWCC’s project management framework relies on the following practices:

Council staff participate in a compulsory Project Management Fundamentals trainingprogram (for level 3 Managers and above).

Council has standard templates for use as part of the Project Managementmethodology.

The Project Management Office (PMO) meets fortnightly to monitor projects andprovide a monthly report to the executive leadership team (“E-team”).

Quarterly spreadsheet reports are provided to Councillors and the Audit and RiskCommittee (currently being updated into a Performance Planner system format).

The commercial arrangements with Douglas Aerospace were not subject to WWCC’s project management processes. However, given that there is no formal policy or procedure on project management at WWCC, the consistency of project outcomes would largely be dependent on the skillset of the staff involved in managing each project.

In our opinion, a project management framework based on best practice would have assisted in achieving a more favourable outcome in respect of the commercial arrangements with Douglas Aerospace. These benefits may have included:

The establishment of a WWCC steering committee (or equivalent) to oversee theproject and coordinate clear lines of responsibility for the project’s success. In a project that involves multiple directorates, we believe that various members of the ELT involved in the project have the ultimate responsibility

Where there was insufficient expertise within WWCC to manage a project of thisnature, an appropriately qualified and experienced probity officer may have been engaged.

Setting of appropriate timeframes for the planning, development, decision-making andimplementation of the project.

Consideration of alternate opportunities or the conduct of a competitive tenderprocess for the anchor tenancy of Precinct 2A.

Better development of the structure of the arrangements with Douglas Aerospace,including the identification of the conflict of interest between WWCC’s Directorates as

2.1.1 WWCC project management framework to be reviewed and enhanced by development of policy and procedure documentation. The development of the documentation should take account of the following matters:

The issuance of loan funding should becaptured under WWCC’s project management framework.

The project management framework should link to the Granting of FinancialAssistance Policy and require an appropriate level of planning and development prior to implementation (including the conduct of a sufficientlythorough due diligence process, whererelevant).

The project management framework should adopt a coordinated approach forundertakings of an uncommon natureand include the establishment of aWWCC steering committee (or equivalent).

The WWCC steering committee shouldbe charged with the overall responsibilityfor the project. Where there is insufficientexpertise within WWCC to manage aproject, the steering committee shouldengage an appropriately qualified andexperienced expert (probity, finance,legal etc.).

2.1.1. Management Response to Recommendations Conditional agreement by management. While management did not consider this to be a project (see below) it is acknowledged that Council does not currently have a policy in place regarding loans to third parties. This policy is currently being developed and it is anticipated that this will be presented to Council at the November 2015 Policy and Strategy Meeting. Consideration will be given in the development of the draft policy as to whether or not it should link to Council's project management methodology and this will be subject to the consideration of the elected body. The recommended requirements for an appropriate level of planning and development prior to implementing financial assistance (including the conduct of a sufficiently thorough due diligence process, where relevant) and the necessity or not of establishing a steering committee will be part of the consideration given in developing the draft policy. Even though Council did not establish a steering committee it is important to note that expert legal advice was sought as deemed appropriate.






they managed the following responsibilities:o Business development proponent for Precinct 2A;o Financier;o Landlord; ando Building compliance regulator.

Development of the terms of the arrangement that were commensurate with the levelof risk and on commercial terms rather than:

o An interest rate consistent with home lending rates at the time (i.e. 6.80%p.a.);

o A disproportionate rent free period of 5 years; ando The waiving of WWCC rates and water charges for 3 years.

Effective risk assessment processes including the identification of commercial riskmitigation strategies. This includes the establishment of controls such as obtainingdirector/bank guarantees and obtaining a deposit from the borrower prior to the draw-down of loan funding as is normal practice in a banking/financing arrangement.

Consideration over the appointment of the builder and their critical role in the successof the project. This may have included the use of WWCC’s purchasing power andtender evaluation processes.

Development of commercial processes for the release of loan funds, including theengagement of an independent quantity surveyor to confirm the satisfactorycompletion of each milestone prior to payment.

Root cause:

Lack of policy and procedure documentation.

Lack of internal expertise in managing a project of this nature.

Responsibility for project oversight unassigned.Risk:

Potential project failure.

Derivation of a return that is not commensurate with the level of risk.

Potential reputational damage to WWCC.

2.1.2 WWCC’s risk management framework should be reviewed and enhanced in line with any improvements made to the project management framework. Refer to section 4.3 for further detail.

Management Action(s)Develop a policy regarding loans to third parties.

Responsible Executive Director Corporate Services

Target Date 30 November 2015 (report to Council)

2.1.2 Management Response to Recommendations Management agrees with the recommendation to review and enhance the risk management framework. This is ongoing in any event as demonstrated by the July 2015 update in the Risk Management Framework and the review of the policy every 2 years. For the last few years, quarterly reviews of critical Organisational risks have been undertaken and reported through the Audit & Risk Committee. More recently, officers conducted a workshop with Councillors on 'risk appetite' and the risk appetite statements are being incorporated into Council's Risk Management Policy. Council has adopted a very comprehensive Risk Management Framework and this is subject to continual monitoring and review. The reference to section 2.3 in the recommendation(s) is confusing as no such section appears in the Prosperity






report. Management wish to make a number of statements regarding the findings in the section below.

Management Action(s) Review of Risk Management Framework with input from the Audit and Risk Committee. Responsible Executive Director, Corporate Services Target date 14 September 2015 (Report to Policy & Strategy Committee following input from the Audit & Risk Committee)




2.2 Due diligence processes for WWCC projects should be reviewed and enhanced by management Risk rating of finding: EXTREME


WWCC does not have a sufficient policy or procedure to assist staff in conducting due diligence processes. We understand that WWCC’s due diligence processes rely on the individual expertise of the staff involved. In our opinion, WWCC should develop policy, procedure and checklist documentation to support the conduct of sufficiently thorough due diligence processes. We note the following deficiencies in the due diligence process with respect to the commercial arrangements with Douglas Aerospace:

A bankruptcy search was not conducted over the business’s sole director.

An ASIC search for related party activities was not conducted.

Due diligence processes such as the consideration of the insurances, experience andexpertise of the builder were not conducted.

It is unclear whether Douglas Aerospace prepared a business plan for review.

The AEC Group Business Plan Review was of a generic nature and primarilyconsidered the marketplace as a whole was an insufficient replacement for DouglasAerospace’s business plan.

An independent assessment over the proposed constructions costs was not obtainedand had the arrangements been subject to project management processes, this wouldhave been outside of WWCC’s procurement policy.

The outcome of the independent external financial assessments was unsatisfactory(rated 19%) and contained a number of warnings which were of a significant nature,including:

o Complete financial statements were not provided.o Explanations sought from the external accountant were not responded to.o Related party balances constituted a significant portion of net tangible assets

and working capital.o Fixed registered charges were already in place by other financial institutions.o Douglas Aerospace was rated as “Unsatisfactory” and Douglas Aerospray

could not be rated due to a lack of information.

The Douglas Aerospace business was in a period of intentional downsizing whichmay have impacted their access to capital.

2.2.1 WWCC due diligence processes to be reviewed and enhanced by development of policy and procedure documentation. The development of the documentation should take account of the following matters:

The issuance of loan funding of this scaleshould be considered a higher riskproject under WWCC’s project management framework and accordingly,require the conduct of a sufficientlythorough due diligence process, including engagement of legal, financeand other experts.

WWCC’s due diligence processes shouldrequire a search for director bankruptcies, previous corporate insolvencies and the activity of relatedparties.

Where a WWCC project involves theconstruction of an asset to be used assecurity, additional due diligenceprocesses should be undertaken over thebuilder, whether directly engaged byWWCC or otherwise. Such processesshould include the review of previousconstruction projects undertaken by thebuilder.

2.2.1 Management Response to Recommendations Management generally agrees with this recommendation but disagrees with reference to due diligence on the builder. As stated earlier, this was not considered to be a Council "project". As a result it was not seen as being Council's role as the financier to conduct due diligence on the builder and to review previous construction projects undertaken by the builder. As also mentioned earlier, from enquiries made, it is not the usual commercial practice for a financier to undertake due diligence on a builder engaged by the borrower.

Management Action(s) Develop a policy regarding loans to third parties.

Responsible Executive Director Corporate Services

Target Date 30 November 2015 (report to Council)




2.2 Due diligence processes for WWCC projects should be reviewed and enhanced by management Risk rating of finding: EXTREME


Lending institutions were reluctant to provide a commercial loan to Douglas Aerospace on reasonable terms.

Douglas Aerospace had insufficient capital to contribute its 30% of the construction costs.

Root cause:



Responsibility for project oversight unassigned. Risk:

Insufficient information upon which to make investment decisions.

Misunderstanding of the project risks.



Results of a due diligence process (involving loan funding) should be reviewed by a WWCC steering committee. Where there is insufficient information or expertise within WWCC to form a decision, the steering committee should engage an appropriately qualified and experienced expert (probity, legal, finance etc.).




2.3 Risk management framework to be reviewed and enhanced by management. Risk rating of finding: EXTREME


Whilst we appreciate that there has likely been updates to WWCC’s risk management framework since the commencement of the commercial arrangements with Douglas Aerospace, there are enhancements that can be made to improve project governance, oversight, monitoring and increase the likelihood of favourable project outcomes.

During the investigation, we were provided with current copies of the following policy, procedure and checklist documentation:

WWCC Risk Management Policy (POL 079);

WWCC Risk Management Framework;

WWCC Risk Management Strategy;

WWCC Risk Management Plan;

WWCC Critical Issues Listing – March 2015; and

WWCC 5a. Risk Log.

Whilst the above documentation appears reasonable, it lack specific guidance on the day-to-day application of risk management processes. The application of specific risk management processes was, in our opinion, deficient in respect of the commercial arrangements with Douglas Aerospace. We note the following examples:

It is unclear where the ultimate responsibility for the risk assessment lies withinWWCC and who was ultimately responsible for the Douglas Aerospace project. In a project that involves multiple directorates, we believe that Council Management have the ultimate responsibility.

The risk assessment conducted (i.e. the WWCC 5a. Risk Log) was insufficient for aproject of this magnitude and risk profile. The risk assessment identified nine risks for the entire Precinct 2A project (including the arrangements with Douglas Aerospace).

The ratings assigned to the impact and probabilities for the risks identified in the riskassessment do not appear reasonable. For example, the probability for risk #R004 identifies a very low likelihood that project cost variations would exceed contingency amounts and the allocated budget. In our opinion, Council was not in a position to accurately assess this risk given the lack of documentation in relation to the project costings or oversight of the builder.

2.3.1 A WWCC steering committee should be charged with the overall responsibility for a project involving the provision of loan funds.

The WWCC steering committee should include a risk officer (or equivalent). Where there is insufficient expertise within WWCC to consider the risks of a project, the steering committee should engage an appropriately qualified and experienced expert (probity, finance, legal etc.).

2.3.1 Management Response to Recommendations Generally management agrees with this recommendation but does not agree that a blanket approach to establishing a steering committee will necessarily assist or improve the process in all instances e.g. loans to sporting or community groups. The development of more formal procedures and a checklist will provide sufficient controls for dealing with loans in the future. It is agreed that a steering committee should be established in the future in the relatively rare circumstances where Council is dealing with substantial loans in excess of $1M, with expert professional legal and third party input on more complex matters. The threshold dollar amount is subject to consideration in the policy to be developed.

Management Action(s) Develop procedures and checklists to support the policy for loans to third parties. The policy for loans to third parties will include the requirement for a steering committee to be established to assess any loan applications which exceed $1 million. Responsible Executive Director Corporate Services Target Date 30 November 2015 (report to Council)






The mitigation actions included in the risk assessment are insufficient. Responsessuch as “liaise with Douglas Aerospace project manager prior to and duringconstruction” does not constitute a mitigating action as it does not describe what stepswill be taken to reduce the likelihood of this risk occurring.

The risk assessment does not appear to have been updated during theimplementation of the arrangements with Douglas Aerospace, and accordingly, thereis no evidence to support whether risks were managed on an ongoing basis. Thisincludes the careful consideration of whether Douglas Aerospace was the mostappropriate tenant given the unsatisfactory results of the independent externalfinancial assessments.

Mitigating actions that were not appropriately identified include:o Appointing appropriately qualified and experienced experts (probity, finance,

legal etc.) to oversee and assist in the implementation of the project;o Obtaining an independent assessment over the proposed constructions

costs to verify the project costs;o Obtaining director guarantees;o Obtaining bank guarantees;o Obtaining a deposit from the borrower prior to the draw-down of loan funding;o Matching the release of loan funds to milestones rather than a letter of

request;o Appointing an independent quantity surveyor to certify the satisfactory

completion of each milestone.

We note that a number of the mitigating actions identified above were referenced in the legal advice obtained by WWCC but do not appear to have been actioned.

Root cause:



Responsibility for project oversight unassigned.

Legal advice not implemented in its entirety.

2.3.2 WWCC’s risk management framework should be managed on a dynamic basis as the risks involved in any project change over time.

2.3.2 Management Response to Recommendations Management agrees with this recommendation and Council's risk management framework and risk register is already regularly reviewed (on a dynamic basis) and referred to Council's Audit and Risk Committee. This review process is ongoing in any event, as demonstrated by the July 2015 update in the Risk Management Framework and the review of the policy every 2 years. For the last few years, quarterly reviews of critical Organisational risks are undertaken and reported through the Audit & Risk Committee. Officers conducted a workshop with councillors on ‘risk appetite’ and the risk appetite statements are being incorporated into Council’s Risk Management Policy.

Management Action(s) Review of Risk Management Framework with input from the Audit and Risk Committee. Responsible Executive Director Corporate Services. Target Date 14 September 2015 (Report to Policy & Strategy Committee following input from the Audit & Risk Committee).






Risk:



Potential reputational damage to WWCC

2.3.3 Where a WWCC project involves the loan funding or the construction of an asset to be used as security, additional risk mitigations strategies should be considered. These may include:

Obtaining director guarantees;

Obtaining bank guarantees;

Obtaining a deposit from the borrowerprior to the draw-down of loan funding;

Matching the release of loan funds tomilestones rather than a letter of request;

Appointing an independent quantitysurveyor to certify the satisfactorycompletion of each milestone.

2.3.3 Management Response to Recommendations Management agrees with aspects of the recommendations and they will be considered as part of the formulation of the new policy and procedures being developed. However it should be noted that: Director Guarantees were obtained

as part of the Loan FacilityAgreement — refer IntroductionSection (I).

Obtaining bank guarantees, whilstagreed in principle, was anunrealistic expectation in thissituation otherwise they would havesecured funds in their own right.

Obtaining a deposit from theborrower prior to the draw-down ofloan funding is disagreed with. Therationale for this recommendation isunclear on the basis that theborrower was to contribute 30% ofthe cost of construction. This doesnot appear to be a standardcommercial practice. A moreappropriate control in hindsightwould have been to request theborrower to produce evidence oftheir capacity to fund 30% of theconstruction costs.






Matching the release of loan fundsto milestones rather than a letter ofrequest is disagreed with as arecommendation as this wasalready provided for. Theframework for payments was clearlyoutlined in the loan facilityagreement, contractor agreement(clause 11) and collateral agreement. These agreementsprovided for release of funds basedon milestones as supported by aletter of request.

Appointing an independent quantitysurveyor to certify the satisfactorycompletion of each milestone isagreed With the benefit of hindsightwe would have had an independentassessment (not necessarily aquantity surveyor) carried out of thestage of completion prior to therelease of funds. It should be notedhowever that where a PrivateCertifier was commissioned by theowner (Douglas Aerospace in thisinstance), that person if doing theirjob properly, would ordinarily beproviding inspection reportcertificates to Council which wouldhave provided improved certaintyregarding the completion of eachmilestone - this did not occur.

Council is currently developing a






process to monitor the construction of projects being inspected by private certifiers to safeguard that buildings are constructed in accordance with the development consent.

Management Action(s) a) Develop a policy regarding loans to

third parties. b) Develop a process to monitor the

construction of projects being inspected by private certifiers to safeguard that buildings are constructed in accordance with the development consent.

Responsible Executive a) Director Corporate Servicesb) Director Planning & Regulatory

Services

Target Date a) 30 November 2015 (report to

Council) b) November — draft to the Corporate

Review Committee for subsequent consideration by the Executive Team




2.4 WWCC to consider management performance in light of project outcomes. Risk rating of finding: EXTREME


In sections 2.1, 2.2 and 2.3 we outlined the deficiencies in relation to project management, due diligence and risk management processes. The root cause for many of the issues identified during the investigation appears to be the lack of internal expertise in managing a project of this nature. Management failed to establish a project steering committee and there is a core issue in WWCC simultaneously acting as the:

Business development proponent for Precinct 2A;

Financier in loaning capital to fund the project;

Landlord in sub-leasing the site; and

Building regulator that requires the issuance of compliance notices for non-compliant building development.

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 project failed as there were a number of shortcomings from due diligence and risk management processes through to the execution of the project. In does not appear that a robust leadership and/or project management process was in place.

For a project that involves multiple directorates, we believe that various members of the ELT involved in the project have the ultimate responsibility for the project’s outcomes. Notwithstanding the above, we note the following issues in respect of management performance:

Council Resolutions

Two Council resolutions were not actioned by management as follows:o 17 October 2011 - A Memorandum of Understanding was not

developed with Douglas Aerospace by Council Management.o 19 December 2011 - The outcome of the Independent external financial

assessments was not satisfactory as reviewed by CouncilManagement, and accordingly, the proposed arrangements should nothave proceeded to public exhibition.

2.4.1 Council Management should consider management performance against the WWCC Code of Conduct and human resource policies and procedures in respect of the key findings noted under the Finding(s) and risk section (left).

Where appropriate, WWCC should develop staff management plans, tailored training and development goals to improve management performance.

2.4.1. Management Response to Recommendations The first part of recommendation 2.4 is a general statement and there are no references in the findings to specific breaches of the Code of Conduct or human resource policies and procedures. It is agreed that there are a number of process improvements resulting from an examination of this matter. However these should be viewed as improvement opportunities and not performance management or disciplinary matters. It is management's strong view that any departures from good practice in process were not motivated by any negative intent or deliberate demonstration of "bad faith" or insincerity.

The second part of recommendation 2.4 states "Where appropriate, WWCC should develop tailored training and development goals to improve management performance." This is a broad and non-specific recommendation that is not particularly instructive. If there are some definitive areas identified by way of a recommendation that enable the development of tailored training and development goals, management would be very receptive to initiating those training opportunities.






Reporting to Council

In our opinion, management did not clearly communicate the findings of the duediligence processes in their report to Council (dated 30 January 2012) asprepared by Council staff assisted in preparing the report’s content relating tofinancial matters. We note that the outcome of the Independent external financialassessments was unsatisfactory (rated 19%) and contained a number ofwarnings which were of a significant nature. These should have beencommunicated in a clearer manner to Council.

We acknowledge that there was some information provided in the report toCouncil in relation to the independent external financial assessments warningsover working capital and liquidity ratios. However, we believe the properinterpretation of the independent external financial assessments reports was nottransposed into the report to Council and accordingly, we believe that the reportto Council was misleading.

The overall conclusion of the independent external financial assessments wasnot included in the report to Council as prepared by the Council staff and theIndependent external financial assessments were not attached to the reportwhilst favourable supporting material was attached. We believe that had thisinformation been included, the project may not have proceeded.

In our opinion, we believe the commercial arrangements should not haveproceeded.

Legal Advice

Legal advice obtained regarding the implementation of loan securities was notimplemented in its entirety by the Council staff resulting in the second mortgages remaining unregistered.

Management Action(s)This is a matter for the elected Council to consider.

Responsible Executive N/A

Target Date N/A

Based on our discussions with interviewees in the course of our procedures, weunderstand that the implementation of the arrangements was delegated by Councilstaff. In our opinion, the ineffective implementation of the legal advice is largely dueto:

o The insufficient experience or expertise of a Council staff member;o The lack of supervision and review over the work performed a Council staff

member; oro A combination of the above two factors.

Certain legal advice was obtained after transactions had already been processed i.e.the legal advice (from Bradley Allen Love obtained 9 May 2014) to confirm WWCC’s






compliance with the LFA and CA regarding the payment of loan funds to Douglas Aerospace directly (rather than to Indistri) was obtained 12 months after the payments had already been made on 21 May 2013 (payment #9) and 30 July 2013 (payment #10).

Processing of Payments

In our opinion, the approval for the payment of loan funds by Council wasinappropriate and a result of the poor structure for the arrangements.

We understand that a Council staff member prepared the cheque requisition torelease payments to Indistri as well as signing the statutory declarations as a witnessfor payments #1 and #2. This compromised the segregation of duties between theCouncil’s Directorates and the overall management of the loan facility.

Council staff processed a double payment of $173,250.00 to Douglas Aerospace inerror (i.e. payment #4).

Council staff processed an overpayment of $4,214.25 to Douglas Aerospace in error(i.e. payment #9).

Council staff did not follow up Indistri for the statutory declarations required under theCA for each payment until 15 August 2014, over 12 months after some statutorydeclarations should have been obtained.

Management of Loan Facility Agreement (LFA)

Finance first prepared an invoice to Douglas Aerospace to commence the loanrepayments on 14 May 2013 when the first repayment was due by 9 January 2013 under the LFA. A delay of 4 months.

Council staff supplied incorrect information to Councillors in relation to the amount bywhich Douglas Aerospace was in arrears. On 8 May 2014, Council staff informed Council via email that Douglas Aerospace was in arrears by $71,568.92 at 14 April 2014. In our opinion, the amount outstanding at 14 April 2014 was $108,368.24 as outlined in table 7 of this report.

A letter advising Douglas Aerospace they were in arrears was sent on 15 January






2014 by Finance, 2 months after the payment was due on 7 November 2013. This demonstrates poor credit control processes.

Ineffective communication between Directorates as to whether the building certificatehad been issued when the business was operating. This is likely a result of the lack of coordinated approach and lack of steering committee to oversee the arrangements.

The delay of 5 months in building compliance arising from a decision by “relevantdirectors” to not pursue the Show Cause Notice issued on 19 May 2014. A subsequent Show Cause Notice was issued on 9 October 2014 to restart the compliance process. In our opinion, it is unlikely that this delay would have arisen if it were not for the conflict of interest created by the poor development of the arrangements with Douglas Aerospace. The conflict arises from the Council’s role as financier, landlord and building regulator in the project.

Council staff did not act promptly to reduce further exposure following the DouglasAerospace default on the loan facility.

In our opinion, for a project that involves multiple directorates, we believe that Councilstaff have the ultimate responsibility to manage and promote WWCC’s commercial interests.

Root cause:


Responsibility for project oversight unassigned.

Council resolutions not followed.

Reports to Council misleading.

Errors made in processing of payments.

Risk:











2.5 The involvement of the Audit and Risk Committee (ARC) in considering the risks associated with any WWCC undertaking should occur prior to the Council resolution Risk rating of finding: HIGH


On 28 March 2012, a confidential report (CONF-1 Commercial Arrangements with Douglas Aerospace Pty Ltd) was presented to the ARC. The report outlined the history of WWCC’s commercial arrangements with Douglas Aerospace including a timeline of events and the compilation of the documentation requested by the ARC. We understand that the information was presented in a number of A4 lever arch files. We understand that an offer was also made by Council staff to make the information available to any ARC member at a later date. We note that the ARC review occurred after Council had passed a resolution approving the arrangements with Douglas Aerospace on 30 January 2012. In our opinion, this limited the usefulness of any review being undertaken by the ARC. Notwithstanding the ARC’s recommendations noted during the meeting, we do not agree that WWCC considered reasonably the risks of the project, nor were sufficient risk mitigation strategies implemented on a timely basis. We believe that proper consultation with the ARC during the planning and development of the proposed arrangements with Douglas Aerospace would have assisted in achieving a more favourable outcome for WWCC. Root cause:

Lack of understanding of the role and purpose of the ARC.

Relative infancy of the ARC. Risk:




2.5.1 WWCC should utilise the resources and expertise of the ARC in a proactive manner. The ARC should receive sufficient information on a timely basis upon which to provide feedback to management (and the project steering committee) for all undertakings of an uncommon nature.

2.5.1 Management Response to Recommendations Generally management agrees with this recommendation. However, it is recognised that the role of the ARC is evolving and has changed significantly over time. It plays an important role in Council’s risk management regime and it is considered appropriate that the terms of the Audit and Risk Committee Charter be reviewed to give more focus to the ARC acting in a proactive manner. Management Action(s)

Review the Charter of the ARC to give more focus to the ARC acting in a proactive manner.

Report to the October/November Audit & Risk Committee meeting.

Report to Council 14 December 2015.

Responsible Executive Director Corporate Services Target Date 31 December 2015.


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Documents

The Details of the Commercial Arrangement with Douglas Aerospace