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Health Canada is demanding the Congress of Aboriginal Peoples return up to $260,000 in ineligible expenses after an audit found directors of the native advocacy group divvied up thousands of dollars in federal cash with insufficient evidence of where the money went.

The federal department has suspended all funding to the organization, led until recently by new Conservative Senator Patrick Brazeau, until the group comes up with a plan to pay back the money and respond to the government's concerns.

Health Canada launched an audit in late 2007 to find out what happened to $472,900 it transferred to the congress for projects aimed at improving aboriginal health in areas such as early childhood development and diabetes.

Auditors discovered a long list of problems, including improper per diem claims, the hiring of consultants without contracts or competition and the handing out of large sums of cash to directors with little explanation.

"The audit findings identified concerns with CAP's internal financial controls including approximately $260,000 of ineligible expenses in consulting fees, travel and meeting costs and per diems for CAP employees during 2005-06," according to a statement from Health Canada released to The Globe and Mail.

The audit found most of the department's money was spent on board meetings, yet the minutes of those meetings were either non-existent or made "little reference about the health programs."

The department said it will not finalize and publish the audit until it is repaid by the congress. Health Canada's comments were in response to questions from The Globe, which obtained a draft audit report dated March 28, 2008.

The congress disputes Health Canada's $260,000 figure, saying the draft audit requested only $54,678 be paid back, while a further $205,795 was deemed "qualified," meaning there was insufficient information to make a decision on the expenses.

"The Health Canada draft audit report was correct in finding that cash was, at times, used to pay meeting participants," the congress said in a statement to The Globe through its accounting firm, Raymond Chabot Grant Thornton. "The per-diem amounts paid to Directors were generally in cash. This practice was discontinued from April 2006 onward, prior to the draft audit report."

The congress stressed the report is not yet final and there will be adjustments in the amount of money Health Canada wants returned as the congress clarifies its explanations of certain expenses.

Mr. Brazeau, 34, was vice-chief of the organization in 2005 and rose to president and national chief in February of 2006. During his nearly three years in charge of the advocacy group for off-reserve aboriginals, he attracted attention with his blunt calls for native leaders to be more transparent and accountable with taxpayers' money.

The draft Health Canada audit disputes $16,050 in payments to the congress president and vice-president, but the organization said the salaries of those two office-holders are usually adjusted based on the number of programs in which they participate.

Auditors took issue with a practice whereby thousands of dollars in cash would be handed out at board meetings.

"The audit found that large amounts of money (varying between $11,000 and $18,000 - exceptionally $65,000 for the Annual General Assembly) were sometimes disbursed to the Finance Officer to enable the distribution of cash allocation to the CAP Directors when they attended meetings. It was also noted that the accounting records only showed 'Miscellaneous' instead of showing the payees' names on some of the cheques issued."

Auditors recommended the congress use cheques in future, rather than distributing substantial amounts of money in cash. The congress said the cash payments covered legitimate per diem claims.

At a board meeting in May of 2006, each board member was given $7,250 toward the health projects, even though the period in which to conduct the work had expired.

"There was no provision in these arrangements to require the affiliates to justify the use of the transferred funds and to allow for a verification of how the funds were used," the audit states.