Audit of Grants and Contributions

Transcription

1 Audit of Grants and Contributions May 1, 2013

2 Key Dates Opening conference (launch memo) May 2011 Audit plan sent to management September 2011 End of fieldwork July 2012 Audit report sent to management July 2012 Management response received September 2012 Penultimate draft report approved by CAE November 2012 Audit committee recommended December 2012 Deputy Minister approval May 2013 List of Acronyms ADM CFO DRAP EC ESB FAA FB G&C GCPAF IVFR PAYE TBS Assistant Deputy Minister Chief Financial Officer Deficit Reduction Action Plan Environment Canada Environmental Stewardship Branch Financial Administration Act Finance Branch Grants and Contributions Grant and Contribution Project Approval Form Independent Verified Financial Reports Payable At Year End Treasury Board Secretariat Prepared by the Audit and Evaluation Team Acknowledgements The audit team composed of Audit Managers Sophie Boisvert and Stella-Line Cousineau, and Auditors Lise Gravel and Daniel Chénier, under the direction of Jean Leclerc, would like to thank those individuals who contributed to this project and, particularly, employees who provided insights and comments as part of this audit.

3 Table of Contents Executive Summary... i 1 INTRODUCTION Background Objectives and Scope Statement of Conformance FINDINGS AND RECOMMENDATIONS Governance Funding Applications and Decisions Agreement Preparation Management and Financial Controls Quality Assurance and Service Standards Project Oversight and Audits Previous Recommendations CONCLUSION Annex 1 Audit Methodology and Criteria Annex 2 Follow-ups: Audit and Evaluation of Class Grants & Contributions Annex 3 Audit Sample Annex 4 G&C programs 2010/2011 Main Estimates Environment Canada

4 Executive Summary This audit of Grants and Contributions (G&C) was included in the departmental Risk- Based Audit Plan as approved by the Deputy Minister, upon recommendation of the External Audit Advisory Committee. The purpose of the audit is to provide assurance that major elements of the governance, risk management and control processes over G&C are adequate, and that Environment Canada was compliant in implementing the 2008 Treasury Board Secretariat Policy on Transfer Payments. This audit is national in scope and focuses on approved contributions in the fiscal year. The audit also includes a follow-up on remaining recommendations and management commitments from the 2005 Follow-up to the Audit and Evaluation of Class Grants and Contributions. The audit team concluded that the Department has made progress in the implementation of its own reform of the G&C program administration, particularly with the development of measures to simplify and standardize the management of transfer payment programs regarding the preparation of agreements. Overall, the Department has implemented several measures to ensure compliance with the key elements of the Policy on Transfer Payments. Tools to simplify and standardize the management of the transfer payment program and to improve controls have been developed, and a risk-based approach is used to identify the monitoring requirements of contribution agreements, including the need for contribution audits. However, some improvements are still required in the following areas: G&C governance, training, approval of agreements, service standards, payment process and monitoring of advances, and a strategy for conducting external recipient audits. Summary of Recommendations The senior level G&C Committee, in consultation with senior program managers who have G&C responsibilities, should carry out the following: Clarify the overall governance of G&C, and oversee the development and execution of a G&C training plan that takes into consideration the needs identified by managers. Establish common overall guidance for documenting non-application-based funding rationale and decisions. Define the Department s overall strategy and requirements for G&C service standards, and review current processes to allow for more timely approval of funding. Review and redefine the current strategy and risk-based approach to contribution audits, in order to address the concerns identified. The Chief Financial Officer (CFO) should review and improve the controls and verification procedures pertaining to G&C transactions, including the following: i) Clarify the delegated financial authorities. ii) iii) Define the required controls over contribution advance payments. Strengthen verification and reporting process under section 33 of the Financial Administration Act. Environment Canada i

5 1 INTRODUCTION 1.1 Background This audit of Grants and Contributions (G&C) was included in the departmental Risk- Based Audit Plan as approved by the Deputy Minister, upon recommendation of the External Audit Advisory Committee. In February 2007, the Government s independent Blue Ribbon Panel on G&C provided recommendations aimed at simplifying the administration of G&C government-wide, while strengthening accountability and risk-based approaches for managing programs. In response to these recommendations, the Government of Canada developed an Action Plan that sets out objectives for reforming the administration of G&C over a three-year period, starting in The Action Plan consisted of three core elements: Policy Reform (new Treasury Board Secretariat [TBS] Policy on Transfer Payments issued in 2008); Departmental Action Plans; and Horizontal Enablers. Responding to this government-wide initiative, Environment Canada (EC) initiated its own reform of the G&C administration in May The implementation of the reform was co-led by the Assistant Deputy Ministers (ADMs) from the Finance and Corporate Branch (FCB) 1 and Environmental Stewardship Branch (ESB). Their initial mandate was to provide leadership and oversight on the development of an action plan in response to the reform. More specifically, the objectives were as follows: streamline and modernize EC funding practices; better align G&C investments with departmental priorities; become more client-focused; and bring greater consistency to the way G&C programs are managed. 2 Although ESB was heavily involved in the development of the action plan, due to a shift in priorities and budget constraints ESB involvement in the implementation of the action plan was reduced. The FB (FB), through the Partnership Unit, 3 continued work in its area of responsibility; however, the Department no longer had a single focal point in the program branches specific to G&C. In the context of the Deficit Reduction Action Plan (DRAP), the G&C administration and processes are currently being reviewed with the goal of identifying possible efficiency gains. The current audit report is timely to help inform this review. During the year covered by this audit ( ), there were 21 distinct G&C programs 4 administered by the Department, representing approximately 1324 funding projects approved for a total value of $116.8M. 5 Of the 1324 G&Cs, 14 were grants and 1310 were contribution agreements. 1 Subsequently Finance Branch 2 As per Grant and Contribution Reform presentation at Executive Management Committee meeting, May 27, Previously the Partnering and Cost Recovery Group 4 As per the Government of Canada Main Estimates (see Annex 4). 5 G&C database as of November 2, 2011, Approved Projects tab. This includes both grants and contributions, as well as application-based and non-application- based agreements. Environment Canada 1

6 1.2 Objectives and Scope The objectives of this audit are to: provide assurance that major elements of the governance, risk management, and control processes over G&C programs at EC are adequate; and provide assurance that key elements of the G&C activities at EC are being executed in compliance with the TBS Policy on Transfer Payments (2008) and related directives and guidelines. The audit was national in scope, and the testing focused on G&C approved in the fiscal year (see Annex 3 for details). The scope does not include an examination of G&C program design, as this is covered mainly through cyclical evaluations. This audit also includes a follow-up on outstanding recommendations from the 2005 Follow-up to the Audit and Evaluation of Class Grants and Contributions (see Annex 2 for details). Given the difficulty in identifying the various sites where G&C files were kept, the information was obtained directly from program areas, instead of having the audit team go on-site to obtain the information. As such, the audit team needed to rely on managers to ensure that information received was complete. 1.3 Statement of Conformance This audit has been conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury Board of Canada. In our professional judgement, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions were based on a comparison of the situations, as they existed at the end of the fieldwork in July 2012, against the audit criteria. 2 FINDINGS AND RECOMMENDATIONS Overall, since EC initiated its reform of the management of G&C in May 2009, the Department has implemented several measures to simplify and standardize the management of transfer payments, while improving controls over the preparation of agreements. However, improvements are required in some areas. Of the 24 audit sub-criteria described in Annex 1, we found that the Department had met 15 completely, six were not met due to moderate issues, and two were not met due to minor issues. One criterion was not met. The following describes the issues identified. Environment Canada 2

7 2.1 Governance A department s governance pertaining to G&C is enabled by the clear delineation of responsibilities, authorities and accountabilities that supports the effective coordination between all parts of the organization and ensures that all parties within the organization are aware of, and comply with, their responsibilities. In addition, the organization should ensure that necessary training, tools, resources and information to support managers are available Roles and Responsibilities The audit concluded that functional responsibilities over some G&C-related functions are not clearly defined within the Department. For example, FB has, in addition to its purely financial role, also assumed responsibility for the standard content, development and quality assurance of contribution agreements through its Partnership Unit. However, the Unit s role and mandate were never formalized and the lack of documented roles, responsibilities and governance led to some confusion. In addition, there is no formal functional lead to support EC managers with the application processes, management and monitoring of contribution agreements and to ensure coordination of the management of all G&C programs. Interviews indicated that the level of involvement and support by financial services officers 6 in the preparation of the contribution agreements varies greatly across the Department. Therefore, managers are not always precisely clear on what services are provided from the FB s Partnership Unit and Finance Directorate. At the time of the audit, a number of initiatives were underway to address some of these issues. The development of a departmental policy on transfer payments is in progress; the policy will detail departmental roles and responsibilities for G&C. In addition, the Finance Directorate was also redefining the roles and responsibilities of its financial officers through its New Service Delivery Framework. As part of this framework, the Directorate was reviewing its core activities and standardizing key financial processes across the Department, including those related to G&C. The framework is intended to address some of the disparities noted above. Furthermore, in the context of DRAP, a senior-level G&C Committee was recently created to identify efficiencies and opportunities to streamline G&C processes and provide a broader oversight of G&C processes Training and Support to Managers As part of EC s reform, a comprehensive Guide to Grants and Contributions at Environment Canada, along with standardized templates on risk assessment, standard agreements and reporting templates, were developed and are available on the Department s G&C intranet site. The website also provides other tools, including recipient reporting forms that have simplified the work for program managers and helped improve consistency across the Department. 6 Financial services officers provide advice on G&C. Environment Canada 3

8 As well, since the coming into force of the 2008 TBS Policy on Transfer Payments, EC employees received formal and ad-hoc training. Formal training on the preparation of agreements and the use of standardized agreement templates was delivered by the Finance Directorate. In addition, financial services officers spent considerable time coaching and advising program managers. However, interviews with program managers identified the need for more guidance on the overall G&C life cycle management processes, including project selection, risk assessment, project monitoring, payment process and closure. The Finance Directorate is aware of these needs. The FB has developed a G&C Policy Compliance Review that is intended to be a reference document, and that is the result of a risk assessment and review of EC s practices and procedures specific to G&C life cycle. Recommendation #1: The senior-level G&C Committee should clarify the overall governance of G&C, and oversee the development and execution of a G&C training plan that takes into consideration the needs identified by managers. Management Response We agree with this recommendation. ADMs agree that there is the need to clarify the overall governance structure on G&C s and such will be done through departmental G&C reform. To date, senior management ADM and DG committees have been established to facilitate the G&C reform strategy and work plan. On Training, ADMs agree that there is the need to develop a structured training plan for G&C s, inclusive of program roles and responsibilities. Currently the FB holds annual formal training sessions on the updates to and administration of the contribution agreement. G&C reform discussions have noted needs of Program Managers that were outside of finance roles and responsibilities. 2.2 Funding Applications and Decisions The TBS Transfer Payment Directive states that departments must ensure that potential recipients have ready access to information about transfer payment programs, and that a description of each program, including application and eligibility requirements and the criteria against which applications will be assessed, is made public. Two types of solicitation processes exist within EC: the non-application-based and the application-based. Non-application-based programs are not required to undergo a competitive process, in accordance with the program design approved by Treasury Board. In contrast, application-based programs have solicitation-related requirements and processes built into their core design. Environment Canada 4

9 2.2.1 Application-based Programs The audit examined the adequacy of the funding application, solicitation and submission processes along with the eligibility assessment process, as they apply to applicationbased contribution programs. In the fiscal year, there were 21 distinct G&C programs administered by the Department (see Annex 4), representing approximately 1324 funding projects. Based on our analysis, 65% of the contribution agreements were for application-based programs, for a total value of $35.8M. Results of interviews with program managers indicated that overall potential funding recipients are known and clearly defined. Most managers use targeted communication tools appropriate to their program, standard funding application forms are available online, and a variety of tools are used to communicate and explain the funding programs assessment criteria. Each program has its own assessment method, and some programs assess applications with the help of partners such as other levels of government or non-profit organizations Non-application-based Programs Whereas funding application and approval processes for application-based programs tend by their nature to be more transparent and open (i.e., public), non-applicationbased programs present a greater challenge. Departments must still ensure they can demonstrate due diligence in selecting and approving recipients of transfer payment programs; this matter has been raised in past Office of the Auditor General of Canada audits of other departments. Our interviews with managers have revealed that while the rationale for funding awarded to recipients of non-application-based programs is normally justified, there is no common approach to documenting the funding rationale or decisions across programs. For example, there is no EC-wide policy or guidance that defines the minimum requirements for documenting the selection of recipients for funding. Recommendation #2: The senior-level G&C Committee should establish common overall guidance for documenting non-application-based funding rationale and decisions. Management Response We agree with this recommendation. ADMs agree that the ADM level G&C committee will establish overall guidance for documenting non-application based funding rationale and decisions, this in conformity with the TBS common business processes. The mapping of the EC G&C business process across the lifecycle, which was led by FB, is complete and will identify areas in common and areas to work on. This work will assist the Department to establish common approaches. Environment Canada 5

10 2.3 Agreement Preparation The audit examined whether the contribution agreement preparation process is adequate, especially whether agreements are: 1. consistent with the program terms and conditions; 2. documented and recorded accurately, and in accordance with EC policy and processes; 3. and signed prior to the start of the period covered by agreements; 4. and whether authority to amend agreements is limited to authorized personnel, signed by the approved authority, and retained with the original agreement. The audit concluded that all criteria were met with the exception of the approval of agreements, as described in section 2.4 of this report. In addition, the testing did not find any instances where a contribution was being used in lieu of goods and services contracts. The Guide to Grants and Contributions at Environment Canada provides clear definition and recommends that program managers consult their financial services officers for ambiguous and/or hybrid projects. 2.4 Management and Financial Controls Contribution agreements require several approvals before the agreement is put in place. In that context, the audit examined the management and financial controls over G&C through the exercise of key delegated authorities and approvals. Delegated signing authorities are normally organized as follows: Delegated Financial Signing Authorities Spending Authority (sections 32 and 34 of the Financial Administration Act [FAA]) is exercised in three steps; - Expenditure Initiation - Commitment Authority (FAA section 32) - Performance Certification (FAA section 34) Transaction Authority: Agreement or Contract Approval Payment Authority (section 33 of the FAA) is to requisition payments against appropriations and to ensure that all statutory and regulatory requirements for the control of funds and the requisitioning of payments are met. Source: Authority Delegation Training Reference Manual, Canada School of Public Service, August 2010 Environment Canada 6

11 2.4.1 Delegation Instruments At EC, two documents describe who can approve a grant or contribution agreement: EC Delegation of Financial Signing Authorities and Designation Order Instrument and the Guide to Grants and Contributions at Environment Canada. The audit identified the following discrepancies between the two documents: Part C of EC Delegation of Financial Signing Authorities and Designation Order Instrument, which is the official delegation instrument, contains a section specific to G&C which stipulates that Approval of agreements - Expenditure initiation with availability of funds is delegated to managers at Levels 1 to 4, depending on the nature and the amount of the contribution. The delegation instrument does not clearly distinguish between the Expenditure Initiation, Commitment Authority and Approval of Agreements. For example, the statement Expenditure initiation with availability of funds is misleading, as the certification of the availability of funds is part of Commitment Authority (section 32 of the FAA) and is a separate authority in the instrument. The Guide to Grants and Contributions at Environment Canada states that Authority to approve contributions is delegated to a Level 5 (Manager) in all regions. This contradicts the official delegation described above, which specifies delegation to higher levels (levels 1 to 4). Also, as with the official delegation instrument, this statement does not distinguish between the different authorities and can therefore be interpreted as including the approval of the agreement. The audit confirmed through testing that Expenditure Initiation was exercised by the proper level of authority, at the ADM s level. However, the audit found issues with the exercise of Commitment Authority (FAA section 32) and with the transaction authority (approval of the contribution agreements) as explained in the ensuing sections Commitment Authority The audit testing of Commitment Authority under FAA section 32 revealed that none of the transactions selected contained the appropriate approval. Ten of 30 sampled transactions were incorrectly approved by a financial officer who did not have delegated authority, and the remaining 20 transactions did not contain the required signature under section 32. This was partially the result of inconsistencies with the Grant and Contribution Project Approval Form (GCPAF). The form required various signatures from the responsible manager and from FB, but the item for which the managers had to sign did not include section 32: instead, the form contained a signature block specifying that certification pursuant to section 32 of the FAA was for Finance use only. This finding was promptly raised with the Finance Directorate, which informed us that they were aware of the situation and that the form would be corrected in time for fiscal year The audit confirmed that the correction was made to the GCPAF and that the correct form is available online for users. Although the Commitment Authority was not properly exercised, the risks of spending an amount higher than the amount of funds available were minimized by other controls. Environment Canada 7

12 Particularly, the G&C funds are kept centrally by Finance Directorate until the funding recommendation is approved, and only then is the money transferred to the program area to be committed for G&C Approval of Agreements The audit revealed that only six of the 30 sample agreements tested were appropriately approved as per Part C of Delegation of Financial Signing Authorities. As explained in section 2.4.1, having two different tools describing financial authorities over the G&C, combined with the fact that both tools do not clearly make the distinction between the different authorities, has resulted in having unauthorized managers at lower levels approving (i.e., signing) contribution agreements Performance Certification The audit team also examined whether the payments that were authorized complied with the TBS Policy on Transfer Payments and section 34 of the FAA, and effectively certified that the reimbursement being claimed by a recipient is in accordance with the terms and condition of the agreement. The audit concluded that, with the exception of one instance in the sample, performance certification pursuant to section 34 of the FAA was properly performed by program managers. The audit testing revealed the following: The approval of advances and requests for payments were issued following confirmation of a signed contribution agreement. There was no issue with the appropriateness of the amount requested and remaining availability of funds under the agreement. Payments were consistent with eligible expenses. Payment terms and conditions as set in the contribution agreements were all met. Program managers certified both requests for advances and requests for reimbursements pursuant to the FAA section 34. Payments were only made to recipients named in approved and active agreements. The testing found one instance where section 34 was not properly exercised: this related to the creation of a Payable at Year-End (PAYE) for work that was supposed to have been completed in the previous fiscal year. That PAYE was not subsequently paid because the work had not been done. Proper ongoing monitoring by the program manager would have identified this issue much earlier in the process. The audit also noted that contribution advance payments are not recorded as advances in the financial system or otherwise identified or controlled in the system. As well, contribution advances are not recorded or included in the G&C database (management control system). Consequently, the financial system cannot be used to differentiate between payments that are disbursed to recipients for expenses incurred and work completed, and payments provided in advance that are due to the Crown until properly accounted for by the recipients. From a financial reporting perspective, this is consistent with Treasury Board Accounting Standard 3.2. However, it does not provide for the control and reporting of advances for management purposes. As a result, managers have to use parallel systems to track advances, which increases the risk that Environment Canada 8

13 advance payments would not be subsequently accounted for by recipients and that funds owed to the Crown would not be recovered. The audit team did not find evidence of any advance not being recovered or accounted for in the audit sample; but the risk is significant, given that 63% of the sample was subject to an advance Payment Authority Payment authority under FAA section 33 is performed by the Finance Directorate and certifies that verification under section 34 has been performed adequately. Through section 33, the CFO is responsible for quality assurance of the adequacy of the overall account verification process. The audit concluded that the quality control pertaining to the payment authority under section 33 of the FAA was not always effectively exercised. The following issues and weaknesses were noted: 1. FAA section 33 verification did not promptly detect irregularities specific to the Commitment Authority (FAA section 32) and Approval of Agreements, as described in previous sections. 2. A standard checklist for section 33 to support finance officers in the performance of FAA section 33 was implemented in the fall of 2011, but results of interviews indicated that some finance officers had developed their own guidelines and tools to process contribution agreement payments that took place before April In order to standardize the process, the FB implemented a checklist specific to G&C in fiscal year FB conducts a post-payment accounts verification process to assess the adequacy of the section 33 verification performed by the different accounting offices. The results of the verification process are used to improve controls and processes where appropriate. At the time of the audit, G&C transactions were not subject to this process, given that they were subject to a full pre-verification by the accounting offices. Therefore, at the time of this audit, errors or issues uncovered through the section 33 verification specific to G&C were not being logged and monitored in order to improve controls and processes. However, the 2012 revised National Framework Quality Assurance on Accounts Verification was modified to include the capturing of the critical and non-critical errors detected during the pre-payment verification of high risk transactions, including G&C transactions. Finance managers have indicated that results of the analyses will be conducted, and corrective measures will be defined and documented. The Finance Directorate plans to have exception reports for G&C transactions implemented in fiscal year Recommendation #3: The CFO should review and improve the controls and verification procedures pertaining to G&C transactions, including: i) Clarify the delegated financial authorities. ii) Define the required controls over contribution advance payments. iii) Strengthen the verification and reporting process under section 33. Environment Canada 9

14 Management Response We agree with these recommendations. ADMs support the CFO to do the following: 1. FB undertook a comprehensive review and update of the departmental delegation instrument in the Fall of This review has revealed that there was the need for improvements, particularly as it pertains to the transaction authority for grants and contributions. It is also management s intent to revise any documents, such as the Guide to Grants and Contributions, such that it refers to the delegation instrument via a web link. In this way, any changes to the delegation instrument will automatically become the reference within a given document. 2. ADMs agree that there is the need to review the controls pertaining to the recording of contribution advance payments as they are controlled by management outside of the financial system. This will be addressed in the G&C reform discussions. Internal controls in the management of contribution advance payments were also recently reviewed through recent ICFR work undertaken on G&C procure-to-pay: work will be on-going with FB Accounting Operations and Financial Services in this regard. However, the recording of contribution advance payments within the financial system has received clear direction Government-wide through TBAS 3.2 that directs reporting within the department s statement of operations. EC s practice aligns itself with the TB direction, namely that advance payments are recorded in the financial system as expenses, rather than advances. No further action in this regard is required. 3. FB has strengthened its verification and reporting processes and will continue to do so under Section 33 with the implementation on April 1, 2011 of the National Framework Quality Assurance on Accounts Verification. FB has also created accounts verification checklists for Sections 32 and 34 in order to support Responsibility Centre Managers ant therefore mitigate risks originating with the delegated manager. In recent ICFR work undertaken by FB on G&C procure to pay, the Section 33 verification internal controls were reviewed and they have been strengthened. Further, in , the FB has moved to further standardize its departmental processes, collaborating to build best practices Section 33 checklists which is an added-value product, to ensure departmental standardization and internal reporting of this verification. Environment Canada 10

15 2.5 Quality Assurance and Service Standards The audit team examined whether quality assurance and service standards were used to monitor and improve processes for the preparation and management of G&C agreements Quality of Agreements As part of the implementation of EC s G&C Reform & Action Plan, the Department has developed and standardized procedures and templates to improve the overall quality and consistency of the content of contribution agreements. The testing confirmed that the tools are being used and that controls over the quality of the agreements exist. Agreements equal to or greater than $100K and less than $250K are reviewed by the Partnership Unit, and contributions equal to or greater than $250K are reviewed by the Director General (DG), Finance Directorate. This control is used to identify and correct inconsistencies in the agreements before they are approved. The audit noted that files requiring approval by the Partnership Unit or the DG Finance contained the appropriate sign-off. It is worth noting that of 1324 agreements found in the G&C database, 82.1% of the agreements (1087 agreements) are below $100K, and the quality review is therefore performed by the program managers and financial services officers Service Standards The Deputy Minister announced in August 2009 that the Department was planning to embark on many new initiatives over a period of years, including early deliverables such as creating service standards for grants and contributions delivery to reduce wait times between application, notification and receipt of a contribution agreement for all programs before March 31, It is also a requirement of the TBS Policy on Transfer Payments that Deputy Ministers establish reasonable and practical departmental service standards for transfer payment programs. Following this announcement, service standards (mostly related to timelines to process agreements) were drafted and implemented for one of the G&C programs (EcoAction) and for the Finance Directorate. While these standards were supposed to be applied to other funding programs, the audit did not find any evidence that other program areas had implemented service standards. The audit team examined the time required to obtain the various approvals from FB once the funding is approved. The testing revealed that the majority of draft agreements were reviewed within 1 to 4 days for each approval step. Rationales for longer delays were documented, and were related to issues such as recipient legal name, cash flow projections, expenditure initiation, missing approval signatures and missing information. Although progress has been achieved in implementing service standards, interviews with program managers have consistently raised significant concerns over the total time required to process and receive all necessary approvals to provide funding to recipients. This is of particular concern, given that program funding is often provided for recipients to conduct environmental studies or operations that are time-sensitive or seasonal. Environment Canada 11

16 Interviewed managers recommended that the funding application, review and approval processes should be initiated earlier in the year to allow for timely execution of the G&C. Recommendation #4: The senior-level G&C Committee, in consultation with senior program managers, should define the Department s overall strategy and requirements for G&C service standards, and should review current processes to allow for more timely approval of funding. Management Response We agree with this recommendation. We note that service standards are primarily a Program Branch responsibility. ADMs agree that the departmental ADM G&C committee will define the overall strategy and requirements for G&C service standards. With regards to more timely approval of funding, the G&C reform has addressed this with a phased approach that will align with departmental budget allocation and planning processes across all votes and that will support the timely execution of departmental G&C approvals. 2.6 Project Oversight and Audits Project Oversight The Department has implemented a systematic and consistent approach to assess risks specific to each contribution agreement and determine monitoring and reporting requirements. Each contribution is assessed against a series of factors relevant to the project and recipient. The result of this risk assessment determines the terms and conditions to be incorporated into the contribution agreement, including reporting and auditing requirements. The main goal of this approach is to improve the oversight of projects, while reducing the administrative burden for recipients and project managers. The audit concluded that the monitoring of contribution agreements, as determined by a risk-based approach, was adequate in most of the project files reviewed as part of the testing, the exception being the case noted under section (control of advances). The audit also concluded that the sampled files were appropriately closed out, through financial and non-financial operations such as ensuring that all advances have been accounted for, properly recording closing entries, retaining agreements/amendments on file, and archiving files Contribution Audits The 2005 Audit and Evaluation of Class Grants and Contributions highlighted the need to introduce a Recipient Audit Program, and FB had previously committed to carrying this out. However, this recommendation was not implemented as originally intended, and EC does not have a departmental Recipient Audit Program. Environment Canada 12

17 While some recipient audits have been conducted in response to program managers requests, there is no central repository or means to precisely identify these audits. The Finance Directorate also confirmed that it was rarely made aware of when a program conducts a recipient audit; and to its knowledge, very few recipient audits are being conducted. Nonetheless, in accordance with the TBS Policy on Transfer Payments, the Department always retains the right to conduct its own audits of recipients; the required provision is included in all the agreements tested. Two types of contribution audits are or can be conducted at EC. First, in each contribution agreement, EC reserves the right to conduct a recipient audit of the performance of the recipient against the signed agreement. This type of audit is paid for by the department. The second type of audit is an Independent Verified Financial Report (IVFR) where the recipient engages an independent party to conduct a review of the funding and expenditures related to the agreement and prepare and certify a final report detailing the project funding and use of EC funding. Instead of EC contracting its own external/independent audits of the funding provided to contribution recipients (i.e., recipient audits), past practice has been to include, in high-value agreements, the requirement for the recipient to conduct their own external (3 rd party) audit of their use of contribution funds, and provide the results to EC. With the advent of the recent G&C reform, the requirement for certain recipients to provide external contribution audits has been clarified and standardized. The requirement for the conduct of Independent Verified Financial Reports (IVFRs) at the end of the project is now to be included in contribution agreements when the following conditions are met: a. The agreement is MEDIUM or HIGH risk (option of asking for an IVFR for LOW risk projects is allowed, but it should be done on an exception basis and in cases of agreements with a very large dollar value). b. EC is providing $100K or more in funding in any fiscal year of the agreement. c. The recipient is eligible to receive payments in advance (NOTE: if there is no provision for advances in the agreement, there is no requirement for an IVFR). The audit could not determine how many agreements would require an IVFR, as the information currently captured in the G&C database does not facilitate this type of analysis. However, based on accessible information, nine out of 1310 contributions issued in met only two out of the three conditions required for an IVFR. This means that, at the very most, 1% of the total agreements would be subject to an IVFR. Based on the audit evidence, in our opinion there are a number of concerns with EC s current approach to conducting contribution audits, including IVFRs: EC presently cannot easily determine if, and how many, recipient audits or IVFRs have been conducted. The rationale supporting the criteria for conducting an IVFR is not entirely clear. Particularly, the audit team could not obtain a clear explanation of why the recipient s eligibility for an advance would impact the risks or the need for an IVFR. The criteria for conducting IVFRs could be considered as too restrictive. Even though statistics are not maintained to record the number of recipient audits or IVFRs, a brief Environment Canada 13

18 search in the G&C database using two of the three IVFR criteria resulted in a very small amount (1% of the agreements) of potential IVFRs. EC presently cannot determine the results of recent recipient audits or IVFRs, or if the necessary corrective actions were taken (e.g., funds recovered). The lead functional responsibility for determining the strategy and approach for conducting contribution audits (recipient audits and/or IVFRs) and monitoring their results is not clearly defined. Recommendation #5: The senior-level G&C Committee, in consultation with senior program managers, should review and redefine the current strategy and risk-based approach to contribution audits, such as by addressing the concerns identified. Management Response ADMs agree that the departmental ADM level committee will review and define departmental requirements noting that there are alternate ways, in addition to audits of contribution agreements to address financial monitoring issues as identified in the audit. The department has accomplished much in the way of understanding the monitoring practices undertaken of its recipients. The current approach as described below reflects the reality, context and responds to the needs of the department. Corporate Finance led a review of EC s risk-based approach in Q4 of 11-12, with the involvement of representatives from all program branches. The resulting report of the review has been circulated to all those who participated. It is being taken into consideration within next steps of G&C reform. Departmental monitoring, inclusive of structured Financial monitoring, was included in the review. The review highlighted GOC practices (of key departments involved in G&C reform) that enable corporate financial monitoring of recipients through financial analysis. This approach is aligned with the TBS Guideline on Recipient Audits (published in 2010) that support the Policy on Transfer Payments and the Directive on Transfer Payments and has updated the GOC direction on financial monitoring since the original departmental G&C audit in 2005, and provides guidance on the placement of contribution audits within departmental monitoring plans. The importance of this new Guideline is that recipient audits are only to be used to complement other departmental monitoring activities rather than be the focused activity upon which financial monitoring is based. We note that the departmental audit directs attention to hi-cost actions, contribution audits, that are either managed by the department (compliance audits) or the recipient (project audit). Such practices would require funding by EC to cover their cost. Given the significant low-risk files that we have and the high number of advance payments (90% of total value as first payment), EC has reviewed the practices of departments and would propose to explore such practices: an intermediary step that analyses in a structured way a recipient s audited financial statements, the results of which would serve to indicate whether financial issues are present. This process, which accounts for a couple of hours of EC staff time for analysis, presents results that become Environment Canada 14

19 input factors into the decision matrix for the need of other financial-type reviews/audits. The benefit is that it is a corporate analysis that provides departmental-wide knowledge to understand actual financial risk and the financial health of recipient organizations (inclusive of dependency on EC s funding). 2.7 Previous Recommendations Outstanding recommendations from the 2005 Audit and Evaluation of Class Grants and Contributions have all been reviewed in the context of the current audit. Of the five outstanding recommendations, one has been implemented and closed, one is partially implemented, and the remaining three will be rolled up into the current audit recommendations. Cross references are provided in Annex 2. 3 CONCLUSION While improvements are required in some areas, overall the Department has implemented several measures to ensure compliance with the key elements of the TBS Policy on Transfer Payments. Tools to simplify and standardize the management of a transfer payment program and improve controls have been developed. A risk-based approach is used to identify the monitoring requirements of contribution agreements, including the need for external contribution audits. However, the overall governance pertaining to the G&C processes needs to be clearly defined and communicated, and Environment Canada Delegation of Financial Signing Authorities must be reviewed to ensure that key G&C signing authorities are well articulated and that accounts verification specific to FAA section 33 is consistently applied. While some areas have implemented service standards, an overall strategy and requirements for G&C service standards across the board need to be defined. Environment Canada 15

20 Annex 1 Audit Methodology and Criteria Methodology A judgmental sample of 30 contribution agreements (see Annex 3 for details) was selected from the G&C database. The sample included transfer payments from the following programs: Habitat Stewardship; Action Plan on Clean Water- Freshwater; EcoAction 2000; Science Horizons Youth Internship and International Environmental Youth Corp; Environmental and Sustainable Development; and Environmental Research and Development. Interviews were conducted with program managers, project officers and the project manager, as well as financial services in each of these programs. Interviews were further conducted with financial experts from the Partnership Unit within the Financial Planning and Reporting Division, and the Accounting Services Section, all within the FB. The conduct of the testing and interviews was concluded by the end of July Given the scope of this audit, briefing sessions were conducted with ADMs heavily involved in the management of G&C. The results of this audit have also been vetted with Executive Management Committee members. Audit Objectives and Criteria The audit objectives and criteria, along with the audit assessment, were as follows. Audit Objective Provide assurance that major elements of the governance, risk management and control processes over G&C at EC are adequate. Audit Criteria 1. Current governance structure is adequate 2. Application, solicitation and submission process is adequate Audit Sub-Criteria Met / Not Met Cross References in Audit Report Section 1.1 Authority, responsibility and accountability are clear and communicated. 1.2 Necessary training, tools, resources and information to support managers exist. 2.1 The characteristic and size of the target audience is known. 2.2 An appropriate method of public communication is used to inform the target audience. 2.3 The public communication clearly explains who is eligible for funding under the program. 2.4 Application forms are readily available, easy to complete and request all information needed to assess eligibility. 2.5 All submitted applications (complete or incomplete) are accurately recorded in a system. Not met moderate issue Not met moderate issue Met 2.2 Met 2.2 Met 2.2 Met 2.2 Met 2.2 Environment Canada 16

21 Audit Objective Provide assurance that major elements of the governance, risk management and control processes over G&C at EC are adequate. Audit Criteria 3. Eligibility assessment and recommendation process is adequate Audit Sub-Criteria Met / Not Met Cross References in Audit Report Section 3.1.A Recipients' applications (application-based programs) are consistently assessedagainst approved eligibility criteria. Met B Due diligence is carried out in selecting and approving recipients of non-applicationbased programs. 3.2 Personnel with financial authority certify that sufficient funds are available (FAA section 32). 3.3 Applications that are rejected are recorded and contain appropriate evidence of analysis and rationale. Not met minor issues Not met moderate issue Met Required approval is adequate 4.1 Quality assurance and service standards are maintained and improved through Centre of Expertise (Partnership Unit) review. 4.2 The turnaround time from when a recommendation leaves the program to when approval is granted is known and communicated. 4.3 All funding recommendations are approved by the Minister or delegated authority, consistent with the Department's delegation of authority on a timely basis. Not met moderate issue Not met minor issue Not met moderate issue Agreement preparation process is adequate 5.1 Agreements are consistent with the program terms and conditions. 5.2 Agreements are documented and recorded accurately and are in accordance with EC policy and processes. 5.3 Agreements are signed by approved authority prior to start of period covered by agreements. 5.4 Permission to amend agreements is limited to authorized personnel, and agreements are signed by approved authority and retained with the original agreement. Met 2.3 Met 2.3 Met 2.3 Met 2.3 Environment Canada 17

22 Audit Objective Provide assurance that key elements of the G&C at EC are being executed in compliance with the TBS Policy on Transfer Payments (2008). Audit Criteria 6. Payment process is adequate and complies with TBS Policy on Transfer Payments Audit Sub-Criteria Met / Not Met Cross References in Audit Report Section 6.1 Approval of claims and Met 2.4 request for payments are only issued following confirmation of: a) a signed contribution agreement or grant letter; b) appropriateness of the amount requested and remaining availability of funds under the agreement; c) eligibility of expenses; and d) compliance with performance conditions of agreements (FAA section 34). 6.2 Payments are: Met 2.4 a) only made to recipients named in approved and active agreements; and b) recorded accurately in the financial system and in the proper period. Where inappropriate payments have been detected, corrective actions are promptly taken. 6.3 Quality control under section Not met of the FAA is effectively exercised. 7. Monitoring 7.1 A risk-based approach to the monitoring of contribution agreements exists (i.e., frequency, extent and type of monitoring, such as risk profiling of the recipients and recipient audits). 7.2 Compliance with agreement terms and conditions is monitored, including the requirement for audit where applicable G&C project files are appropriately closed out. Not met moderate issue 2.6 Met 2.6 Met The criterion was based on Section 6.5 of TBS Directive on Transfer Payments. Environment Canada 18