02/11/2012 07:30 EST | Updated 04/12/2012 05:12 EDT

Bankruptcy files run by public servants badly administered: audit

OTTAWA - They're the financial files from hell — bankruptcies so badly administered that federal bureaucrats have to step in to salvage them.

And a new audit says these overworked caretakers are themselves doing a poor job of reducing the financial chaos.

"Major deficiencies observed in (the) overall control structure present a moderate to high risk of exposure and require improvement," says the internal review by Industry Canada.

The audit examined one of the services provided by the Office of the Superintendent of Bankruptcy Canada or OSBC, the federal agency that supervises and regulates the administration of estates declared bankrupt or insolvent.

Normally, private-sector trustees in bankruptcy licensed by the agency handle the financial affairs of insolvent estates. But if these trustees are incompetent, fraudulent or die without a successor, the OSBC steps in and installs a federal bureaucrat known as a guardian trustee.

In recent years, there have been just five such guardian trustees across Canada available to rescue bad bankruptcy cases.

The files they inherit are typically a mess, with overdrawn accounts, missing records, double-counting and stale creditor payments — creating a big challenge to put things right again.

The audit looked at a sample from 950 such files in Ontario, all administered by just two guardian trustees in Toronto, helped by two public-service administrators.

The files examined for the 2010-2011 fiscal year were typically small, with an average value of about $5,000.

"More than 20 per cent of audited estate files showed financial recording considered inaccurate, not timely, and with some evidence of improper and ineffective review," says the report, among 10 major problems cited.

The auditors also found eight instances where an account balance was in the red — expressly forbidden by an agency directive against negative balances.

The October 2011 audit report — posted by Industry Canada only in the last few weeks — strongly suggests the Office of the Superintendent of Bankruptcy Canada is understaffed.

A spokeswoman for Industry Canada, the parent department of the OSBC, says the agency is putting more people in place to handle the workload.

"Additional ... staff with relevant qualifications have been assigned to the guardian trustee unit to perform administrative and trustee responsibilities," Stefanie Power said in an email response to questions.

"In the coming months, some of the current inventory is expected to be transferred to private-sector trustees who have qualified to serve as guardian trustees on a request-for-standing offer."

Power did not indicate whether the agency will be subject to the government's current downsizing exercise, which seeks savings of between five and 10 per cent from some 67 agencies and departments, including Industry Canada.

More than 80,000 Canadians filed for personal bankruptcy in the year ended Oct. 31, 2011, while another 45,000 filed so-called consumer proposals to pay off their creditors.

Bankruptcy numbers are down since peaking in 2009. But the Canadian Imperial Bank of Commerce last week said insolvencies — which include consumer proposals as well as bankruptcies — are likely to rise modestly this year because of an increase in low-paying and part-time jobs, and cuts in the public service.

Technical changes in Canada's bankruptcy law in 2008 have made consumer proposals more popular, reducing declarations of bankruptcy.

The Office of the Superintendent of Bankruptcy Canada says about 400,000 estates were under its purview in 2008-2009, a "significant increase over previous years."