Chinta Puxley, THE CANADIAN PRESS

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WINNIPEG - A forensic audit has found top federal bureaucrats mismanaged at least $10 million at the Department of Indian Affairs office in Manitoba and fostered a poisonous work environment.

But auditors found no evidence of fraud or criminal wrongdoing and all three unnamed managers have since returned to the department.

"No illegal activities were uncovered as a result of this audit," said Anne Scotton, chief audit and evaluation executive at Indian Affairs. "There is no evidence that money that is not accounted for went to any of the staff members including the three that are . . . in the report."

Among the problems, the audit found that the Crown was shortchanged almost $8 million as part of a northern transmission deal with Manitoba Hydro which was intended to bring remote First Nations onto the provincial power grid. Senior managers also failed to maintain proper books and wrote off a "recoverable" $2.7 million in the deal.

Auditors also found the department overpaid the Fairford First Nation $1.2 million in a land-claim settlement because it wasn't made clear that the money had to be repaid. In another case, a senior manager signed a deal for a First Nations project in Winnipeg worth almost $500,000. That figure far-exceeded the manager's authority.

The audit also uncovered a poisoned work environment run by a "small inner circle of favourites." Federal bureaucrats in the Manitoba office were "pushed to do what they were told, regardless of whether that meshed with public service values or their specific responsibilities," the audit said.

Staff who were critical underwent workplace assessments "to cast doubt on the mental health of individuals and ease them out," the audit found. The department also suffered from high turnover and absenteeism, the report said.

All the department's regional offices across the country are undergoing similar audits, but Scotton said there is no evidence to suggest there are systemic problems within the bureaucracy.

"We're finding much more attention is being paid to due diligence, to the compliance with the rules and regulations and we're finding that the financial authorities are not being exceeded," she said. "People are aware of their obligations and responsibilities as civil servants."

But that hasn't satisfied some who were hoping bureaucrats would be held to the same standards as First Nation reserves.

Morris Swan Shannacappo, grand chief of the Southern Chiefs' Organization, said reserves have to account for every penny they spend but the government has allowed at least $10 million that goes unaccounted for.

"The accountability has to be there by the department with regards to how our money is being spent," Shannacappo said.

Although they have been pushing for an update since the audit began over a year ago, Manitoba aboriginal leaders weren't invited to the technical briefing in Winnipeg by Ottawa bureaucrats. The department didn't seem to have a plan to give a similar briefing to native leaders, Shannacappo said.

"It makes it look like they were trying to hide something or afraid some of the leadership might ask some questions," he said.

The audit was launched following allegations of financial mismanagement at the department. A preliminary assessment done in 2007 found there was enough evidence to warrant a full-scale forensic audit.

Three managers were led out of the department offices and put on paid leave while the audit was conducted. One manager has been re-instated while two others were demoted but still work for the department.

Gina Wilson, the department's senior assistant deputy minister, said "immediate actions" were taken once the problems came to light and the regional team continues to address the issues highlighted in the audit.

"We'll be moving to a much strengthened organization," she said.