DEPARTMENT OF NATIONAL DEFENCE. CRTI Financial Management Audit

Transcription

1 DEPARTMENT OF NATIONAL DEFENCE For the Years Ended March 31, 2005 and March 31, 2006 November 2006 Final June 2007 Conducted by PricewaterhouseCoopers LLP (CRS)

2 CAVEAT This financial management audit was conducted at the request of the Assistant Deputy Minister (Science and Technology) to comply with the terms of Treasury Board funding approval and was not part of the annual Chief Review Services (CRS) Work Plan. Although conducted under the guidance of CRS, the audit was not required to undergo the same reporting rigour as a standard CRS product, including formal quality assurance and review processes, and approval by the departmental Audit and Evaluation Committee. PricewaterhouseCoopers LLP

3 TABLE OF CONTENTS Synopsis... i List of Acronyms... ii 1 Executive Summary Introduction and Background Audit Objectives Summary of Principal Observations and Recommendations Management Action Plan Mandate Terms of Reference Background Audit Objectives Audit Criteria Methodology Comparison of Key Findings from Previous CRTI Financial Management Audit Summary of Observations and Recommendations Criteria 1 Authorities are appropriately delegated, clearly defined and documented Criteria 2 Contracting in accordance with TBS policy and departmental/organizational policies Criteria 3 Matching funds are in accordance with TBS submission and/or MOU Criteria 4 FAA requirements are met and documents are retained Criteria 5 Payments are accurate and timely Criteria 6 Expenditures are recorded accurately and consistently Criteria 7 Effective funds management processes and practices are in place to plan and monitor budget/funds Criteria 8 Adequate information exists for monitoring at the OGD level and at the CRTI Secretariat Annex A CRTI Projects by Organization... A-1 Annex B Sampling and Testing Coverage... B-1 Annex C Detailed List of Sample Projects... C-1 Annex D CRTI Management Action Plan... D-1 PricewaterhouseCoopers LLP

4 Synopsis This report presents the results of the second financial management audit completed on the Chemical, Biological, Radiological and Nuclear (CBRN) Research and Technology Initiative (CRTI) for the two fiscal years (FY) ended March 31, 2005 and March 31, The CRTI is a $170-million five-year initiative that started in May Its purpose is to provide funding for projects that are aimed at enhancing Canada s capacity to deal with potential CBRN threats to public security. The participating organizations encompass research sectors from lead government departments, private industry and academia. The main objectives of this audit were to ensure CRTI funds were managed in accordance with the applicable legislation and departmental policies; accurate and timely information was being provided for decision-making purposes; and effective processes were in place to support investment and distribution of CRTI funds, project procurement and monitoring. Based on the results of the PricewaterhouseCoopers LLP audit, coupled with the financial information generated by CRTI, the financial management practices within CRTI and the six (out of 13) lead departments evaluated appear reliable. The recommendations focus on improvements to financial oversight with regard to the information provided for in-kind contributions, policies on year-end roll-over amounts, guidelines on project reporting, and compliance with applicable policies, regulations and the Memorandum of Understanding. The CRTI Secretariat as the Office of Primary Interest for this audit has responded to the report s recommendations and has provided a management action plan that it will be monitoring. In comparing the results obtained from the current audit to the previous audit, it is noted that CRTI management, with the cooperation of the participating lead departments, has made progress towards the establishment of a sound project accountability structure. i PricewaterhouseCoopers LLP

5 List of Acronyms AP CBRN CFIA CRS CRTI DND DRDC EC FAA FY HC IIA IS MOU OGD PHAC PRB PRC PwC PWGSC RD TA TBS TD Technology Acquisition Chemical, Biological, Radiological and Nuclear Canadian Food Inspection Agency Chief Review Services CBRN Research and Technology Initiative Department of National Defence Defence Research and Development Canada Environment Canada Financial Administration Act Fiscal year Health Canada Institute of Internal Auditors Interdepartmental settlement Memorandum of Understanding Other government department Public Health Agency of Canada Procurement Review Board Project Review Committee PricewaterhouseCoopers LLP Public Works and Government Services Canada Research and Technology Development Technology Acceleration Treasury Board Secretariat Technology Demonstration ii PricewaterhouseCoopers LLP

6 1 Executive Summary 1.1 Introduction and Background PricewaterhouseCoopers LLP ( PwC ) was requested by the Chief Review Services (CRS) of the Department of National Defence (DND) to provide professional services for a financial management audit of the Chemical, Biological, Radiological and Nuclear (CBRN) Research and Technology Initiative (CRTI) for the years ended March 31, 2005 and March 31, The CRTI is a $170-million five-year initiative that started in May Its objective is to enhance coordination and collaboration across three Canadian research sectors (government, private industry and academia) and provide funding to projects that are aimed at enhancing Canada s capacity to deal with potential CBRN threats to public security. Defence Research and Development Canada (DRDC), a DND agency, leads the CRTI on behalf of the federal science and technology community. There are 15 federal government organizations that have signed a memorandum of understanding to participate in the CRTI. The organizations with the largest level of participation include DRDC, the Public Health Agency of Canada (PHAC) and Health Canada (HC). The CRTI is a complex program with multiple lines of authority. A number of partner departments have multiple CRTI projects at different sites. All research projects have other partners besides the lead federal department, which could be other government departments (OGD), universities or private sector companies. There are multiple lines of communication regarding financial information with the CRTI Secretariat, including project managers in the partner organizations, portfolio managers in the CRTI Secretariat, departmental finance officers and the CRTI finance manager. The CRTI is coordinated by an interdepartmental Steering Committee that is chaired by the Assistant Deputy Minister for the Science and Technology community within DND. Ultimately, DND is responsible and accountable for the management of the CRTI fund. There are currently four project categories within the CRTI: Technology Acquisition (AP); Technology Acceleration (TA); Research and Technology Development (RD); and Technology Demonstration (TD). 1 PricewaterhouseCoopers LLP

7 1.2 Audit Objectives As indicated in the Statement of Work received from CRS, the objectives of the audit were to determine whether: i. CRTI funds are managed in accordance with the Financial Administration Act (FAA), Treasury Board Secretariat (TBS) policies and guidelines, and departmental or other organizational resource management policies; ii. Financial information to support reporting, performance monitoring and management decision making is both accurate and adequate; and iii. The process in place to support investment and distribution of CRTI funds, project procurement and monitoring, and CRTI financial oversight is effective and efficient. To address these audit objectives, a total of eight audit criteria were developed in conjunction with CRS. The audit work was conducted in June and July 2006 at both the CRTI Secretariat headquarters and at six OGD facilities (includes total dollar value of sample projects selected for testing at each OGD): # Location ($) ($) 1. Defence Research and Development Canada, 4,540,996 3,077,406 Ottawa (DRDC Ottawa) 2. Canadian Food Inspection Agency, Ottawa 1,167,667 1,851,213 (CFIA) 3. Defence Research and Development Canada, 2,397,500 1,834,272 Suffield (DRDC Suffield) 4. Health Canada, Ottawa (HC) 2,855,479 1,965, Public Health Agency of Canada, Winnipeg 2,479,111 2,159,010 (PHAC) 6. Environment Canada, Ottawa (EC) 1,575,003 1,098,489 Total 15,015,756 11,985,578 Total CRTI Projects 31,659,849 30,020,311 Coverage of Total CRTI Projects 47% 40% 1.3 Summary of Principal Observations and Recommendations Based on the work performed to address the eight audit criteria, the financial information generated by CRTI for monitoring and reporting purposes, and the financial management practices within CRTI and the six OGDs audited appear reliable. With respect to the audit objectives, the following conclusions have been made: 2 PricewaterhouseCoopers LLP

8 Objective #1 Funds Management The CRTI funds are generally managed in accordance with the FAA, TBS policies and guidelines. Some exceptions were noted in our testing and are presented further in this report. Objective #2 Reporting and Financial Monitoring Although efforts have been made to improve reporting and financial performance monitoring, additional efforts are required related to the consistent reporting of in-kind contributions from project participants and the submission of all required financial reports on a timely basis. Objective #3 Processes Supporting Investment and Distribution of Funds, Procurement and Monitoring The CRTI Secretariat adequately tracks the activities of the project participants, in particular the receipt of financial reports from the project participants and the interdepartmental settlement (IS) transactions with lead departments. Furthermore, the Secretariat adequately monitors suspense accounts used to flow the funding to and from lead departments. The IS transaction mechanism was examined as part of the audit process, and the system was found to be satisfactory. Funds are transferred through IS transactions and flow through suspense accounts. For the two years under review, we ensured that the suspense accounts at CRTI were brought down to $0 at year-end. We also ensured that unspent funds were properly returned to the CRTI at the end of each year. The CRTI Secretariat undertakes processes to support project selection and fund allocation. The project monitoring and financial oversight of the projects is carried out continuously and procedures were generally performed in an efficient and effective manner. Certain areas of improvement in the financial oversight are discussed in the principal observations below. Matching funds require improvements to the valuation, tracking and reporting to provide consistent information to the CRTI Secretariat. These costs represent a significant portion of the total CRTI project costs (i.e., budgeted matching funds were estimated at 33 percent in fiscal year (FY) 2004/05 and 43 percent in FY 2005/06). The major concerns include: There is no common definition of in-kind contribution for comparability; There is no common valuation methodology of in-kind contribution for consistency; and A consistent tracking system/process has not been established across all organizations to monitor and report on these elements and, therefore, adequate/auditable supporting evidence is not available for audit purposes. 3 PricewaterhouseCoopers LLP

9 In order to address this observation, the following recommendations have been developed: The CRTI Secretariat should develop a consistent definition of in-kind contributions and a common valuation methodology, which is consistent with existing CRTI guidelines on matching funds. This would improve comparability across the projects in terms of performance and future monitoring (recommendation #1). Each OGD should establish a tracking system (i.e., timesheets) for in-kind contributions for all CRTI projects to be included in the quarterly financial reporting. This time tracking will improve the accuracy of performance monitoring and project costs and help ensure compliance with the requirements of the Memorandum of Understanding (MOU) (recommendation #2). The CRTI Secretariat should enforce the reporting of in-kind contributions for acquisition projects, in order to be consistent with reporting requirements of other CRTI projects. Due to the short time horizon for AP projects, this reporting may only be required at the project close-out stage (recommendation #3). Roll-over amounts at year-end were less significant than what was noted in the previous audit: $507,767 for 2004/05 and $1,077,427 for 2005/06. This represented a roll-over percentage of 1.60 percent and 3.59 percent, respectively, based on the total budgeted committed funds for the fiscal year. This is significantly lower than roll-over requests from previous years, which represented 25 percent and 35 percent of budgeted committed funds, respectively, for the years ended March 31, 2003 and The CRTI Secretariat requires all unspent funds to be returned at the end of the fiscal year. We noted that for the fiscal years under review there was an inconsistent treatment of roll-over funding requests. This led to increased confusion and inability to appropriately plan by the OGDs. In order to address this observation, the following recommendations have been made: The CRTI Secretariat should maintain a consistent treatment of roll-over requests, which permits the required flexibility (i.e., consistent with the final 2005/06 treatment). Timely communication of the roll-over treatment to OGDs would facilitate planning and fund management (recommendation #8). For efficiency of financial management by the OGDs, the CRTI Secretariat should release approved funding to OGDs as soon as possible at the beginning of each fiscal year (recommendation #7). 4 PricewaterhouseCoopers LLP

10 Reporting of information to the CRTI Secretariat is not always done on a timely basis and is not consistently applied; for instance, no reporting of in-kind contribution is required for AP projects. Reporting of in-kind contributions should be required for all projects, including technology acquisitions. In addition, portfolio managers should follow up with OGDs for missing or late financial reports and/or final close-out reports. In order to improve overall reporting and monitoring by the CRTI Secretariat, the following recommendations have been made: Portfolio managers at CRTI should continue to track receipts of quarterly financial reports and follow up with the respective project managers for missing or late reports to ensure timely and appropriate governance over projects and compliance with the MOU. Further, should questions arise with regards to the information presented in the reports, portfolio managers should continue to enquire and follow up on a timely basis (recommendation #9). Project managers should ensure that they provide the required Final Close-out Report to the respective portfolio managers at CRTI to ensure proper governance of the projects. In addition, CRTI portfolio managers should continue to track receipt of final reports and follow up with the respective project managers for missing reports (recommendation #10). The CRTI Secretariat should continue to communicate its expectations to OGDs with regards to reporting of expenditures for quarterly reporting, i.e., actual expenditures and related accruals (recommendation #11). Compliance with appropriate policies, regulations and the MOU was generally observed; however, we identified examples from the OGDs visited of non-compliance with the FAA Section 32, 33 and 34 and with the MOU. Recommendations to improve overall compliance include: Each OGD should ensure that all CRTI transactions demonstrate evidence of approval by an appropriately delegated authority as required by Sections 32, 33 and 34 of the FAA. The CRTI Secretariat should follow up regularly, through ongoing dialogue with project managers and program administrators, to support the OGDs in their efforts to improve overall documentation related to these key financial controls (recommendation #4). Each OGD should maintain original evidence of appropriate delegation of authority over Section 32, 33 and 34 of the FAA. The CRTI Secretariat should follow up regularly, through ongoing dialogue with project managers and program administrators, to support the OGDs in their efforts to improve overall documentation related to these key financial controls (recommendation #5). 5 PricewaterhouseCoopers LLP

11 Each OGD should continue to ensure timely payment of invoices to avoid interest and penalty charges. Any interest charges should not be submitted to CRTI for reimbursement, consistent with the MOU (recommendation #6). Details of the observations and recommendations included in Section 4 have been grouped by specific audit criteria in accordance with the requirements of the Statement of Work issued by CRS. Annex B presents a summary of the coverage obtained during the audit. 1.4 Management Action Plan The Management Action Plan outlines CRTI s intention to address the issues raised in this report with respect to required changes to the CRTI governance and project accountability structures to prevent recurrence of these issues. The CRTI Secretariat has already recognized several of these issues, and actions have been taken. For example, it has developed a guidebook that should be followed by all participating lead departments on in-kind contributions (more effort will be devoted to streamline the reporting structure). The roll-over requests are being better managed as compared to the previous audit ending in The majority of the lead departments submitted their quarterly financial and progress reports to the CRTI Secretariat on a timely basis. With reference to the recommendations on non-compliance with FAA Section 32, 33 and 34 and with the MOU, the CRTI Secretariat will develop training sessions customized to the needs of project managers and administrators from lead departments. A feedback mechanism will also be developed to obtain comments from these departments on the current audit report. The Management Action Plan is presented in matrix format organized by audit criteria and linked to the eleven recommendations, as shown in Annex D. 6 PricewaterhouseCoopers LLP

12 2 Mandate 2.1 Terms of Reference PwC was requested by CRS to provide professional services for a financial management audit of the CRTI for the years ended March 31, 2005 and March 31, The audit work was conducted at the CRTI Secretariat in June/July 2006 along with six separate OGDs (includes the total dollar value of sample projects selected for testing at each OGD): # Organization 1. Defence Research and Development Canada, Ottawa (DRDC Ottawa) 2. Canadian Food Inspection Agency, Ottawa (CFIA) 3. Defence Research and Development Canada, Suffield (DRDC Suffield) 2.2 Background Field Work Dates ($) ($) July 4, ,540,996 3,077,406 July 7, ,167,667 1,851,213 July 17, ,397,500 1,834, Health Canada (HC) July 10, ,855,479 1,965, Public Health Agency of Canada July 24, ,479,111 2,159,010 (PHAC) 6. Environment Canada (EC) July 13, ,575,003 1,098,489 Total 15,015,756 11,985,578 Total CRTI Projects 31,659,849 30,020,311 Coverage of Total CRTI Projects 47% 40% The CRTI represents a $170-million five-year initiative that started in 2002/03 to significantly enhance Canada s capacity to deal with potential CBRN threats to public security. The CRTI was launched in May 2002 and has been very successful in building linkages among non-traditional partners across organizational boundaries. DRDC, an agency of DND, leads the CRTI on behalf of the federal science and technology community. There are 15 federal government organizations that have signed a MOU to participate in the CRTI. The organizations with the largest level of participation include DRDC, PHAC and HC. The CRTI is a complex program with multiple lines of authority. A number of partner departments have multiple CRTI projects at different sites. All research projects have other partners besides the lead federal department, which could be OGDs, universities or private sector companies. There are multiple lines of communication regarding financial 7 PricewaterhouseCoopers LLP

13 information with the CRTI Secretariat, including project managers in the partner organizations, portfolio managers in the CRTI Secretariat, departmental finance officers and the CRTI finance manager. The CRTI is coordinated by an interdepartmental Steering Committee that is chaired by the Assistant Deputy Minister for the Science and Technology community within DND. Ultimately, DND is responsible and accountable for the management of the CRTI fund. There are currently four project categories within the CRTI: Technology Acquisition or AP; Technology Acceleration or TA; Research and Technology Development or RD; and Technology Demonstration or TD. CRS required an independent and objective assessment of the CRTI financial management in accordance with the terms of the TBS. The financial management audit covered the two fiscal years ending March 31, 2005 and March 31, The CRTI disbursed funds of $31.6 million for the year ended March 31, 2005 and $30.0 million for the year ended March 31, As requested, the audit was conducted in order to provide a level of assurance regarding: CRTI financial information used for monitoring and reporting purposes; and CRTI financial management practices in the organizations reviewed and for the overall CRTI financial framework. In addition, TBS required that the audit include: An examination of the IS mechanism; and An examination of the processes and mechanisms used to identify (select) projects and allocate funds. This audit was limited to the following: The audit examined the IS mechanism to identify the main differences between this mechanism and that of reference levels and/or supplementary estimates; and The audit documented and examined the processes to identify projects and allocate funds but did not assess the merits of the selection or substance of the allocation decisions. 8 PricewaterhouseCoopers LLP

14 The following issues/topics were not part of this audit scope: Reliability of the project selection process including proposal process and lab cluster process; Consolidated risk assessment results/methodology; Reasonability of CRTI dollar amounts/funds allocated to projects; and Alignment of project objectives to CRTI mandate and priorities. Understanding that efforts have been made to address the observations from the previous CRTI financial management audit, we have taken these factors into account and adjusted our audit program accordingly to review actions which management has implemented, including ongoing and upcoming efforts. 2.3 Audit Objectives As indicated in the Statement of Work received from CRS dated March 2, 2006, the objectives of the financial management audit were to ensure: i. CRTI funds are managed in accordance with the FAA, TBS policies and guidelines, and departmental or other organizational resource management policies; ii. Financial information to support reporting, performance monitoring and management decision making is both accurate and adequate; and iii. The processes in place to support investment and distribution of CRTI funds, project procurement and monitoring, and CRTI financial oversight is effective and efficient. 2.4 Audit Criteria In order to assess the three audit objectives defined by CRS, the following criteria were reviewed during the audit for each recipient: 1) Authorities appropriately delegated, clearly defined and documented; 2) Contracting in accordance with TBS policy and departmental/organizational policies; 3) Matching funds in accordance with TBS submission and/or MOU; 4) FAA requirements are met (i.e., spending Section 32, account verification Section 34 and payment Section 33) and documents retained; 5) Payments are accurate and timely; 6) Expenses are recorded accurately and consistently; 7) Effective funds management processes and practices in place to plan and monitor budget/funds; and 8) Adequate information exists for monitoring purposes at OGD level and at the CRTI Secretariat. 9 PricewaterhouseCoopers LLP

15 2.5 Methodology For the purposes of the audit, PwC applied the following methodology: i. Reviewed relevant background documentation; ii. Interviewed key personnel, notably portfolio managers/portfolio management officer, financial officers and project managers at: a. CRTI Secretariat b. DRDC Ottawa c. CFIA d. DRDC Suffield e. HC f. EC g. PHAC iii. Completed transaction testing for sampled projects and IS transactions; and iv. Observed tangible assets for the projects sampled and located on site. The financial management audit was conducted in accordance with the standards of the Institute of Internal Auditors (IIA). 10 PricewaterhouseCoopers LLP

16 3 Comparison of Key Findings from Previous CRTI Financial Management Audit The first financial management audit report for CTRI was issued in May 2005, covering the fiscal years ended March 31, 2003 and March 31, The results of this initial audit were generally positive. However, three financial oversight areas required improvement including, matching funds, year-end carry forward amounts (roll-overs) and reporting to the CRTI Secretariat. The CRTI Secretariat has taken actions to address some of the recommendations resulting from the first audit and, as part of the overall financial management audit for the fiscal years ended March 31, 2005 and March 31, 2006, we reviewed these actions with the following results: Financial Oversight Areas Matching funds are in accordance with TBS submission and/or the MOU The IS mechanism: year-end roll-over amounts March 31, 2003 and March 31, 2004 Audit The OGDs do not have a common definition for matching funds. There is no established common valuation method or formal tracking of in-kind contributions. The roll-over amounts were significant for both years: 25% and 35%, respectively, based on the budgeted committed funds. The amount that the CRTI Secretariat deemed reasonable for roll-over for the second fiscal year was not specified to project managers until the end of the year. March 31, 2005 and March 31, 2006 Audit The OGDs have no formal definition or common valuation methodology for in-kind contributions. The tracking of in-kind contributions is inconsistent among the OGDs. CRTI has developed a guidebook that should be applied by all participating CRTI project managers. The roll-over requests are being better managed and, as such, were only 1.60% and 3.59%, respectively, based on budgeted committed funds. The CRTI Secretariat has been inconsistent with respect to the treatment of roll-over amounts authorized from year to year. 11 PricewaterhouseCoopers LLP

17 Financial Oversight Areas Contracting Process Reporting to CRTI Secretariat March 31, 2003 and March 31, 2004 Audit The contracting process is in line with organization s contracting policies. The quarterly financial and progress reports are not reported to CRTI secretariat on a timely manner. The reporting of in-kind contributions is inconsistent. March 31, 2005 and March 31, 2006 Audit The contracting processes observed continue to be in line with organizations contracting policies. The quarterly financial and progress reports are reported on a timelier basis, but some delays were still noted. There are no reporting requirements for in-kind contributions related to acquisition projects. 12 PricewaterhouseCoopers LLP

18 4 Summary of Observations and Recommendations The summary of observations and recommendations has been reported by each of the eight specific audit criteria in accordance with the requirements of the Statement of Work issued by CRS. 4.1 Criteria 1 Authorities are appropriately delegated, clearly defined and documented Observations PwC obtained the matrix of delegation of signing authorities of the organization (showing management levels, dollar thresholds for approval and specific authorities such as expenditure initiation, commitment authority, contracting authority and payment authority) and compared the matrix of delegation of signing authorities to TBS s Policy on Delegation of Authorities. The matrices show the various management levels, along with the spending authority under: Expenditure initiation with availability of funds (Section 32 of the FAA); Contracting authority under various types of contracts for goods and services; Contract performance and price (Section 34 of the FAA); and Payment authority (Section 33 of the FAA). The matrices were built around management levels where individuals are allocated a certain level of authority based on their responsibilities. The matrices were approved by the appropriate authority within each of the OGDs visited during the course of our fieldwork. Based on the testing performed, we identified an instance where the documentation for one signing authority appeared to have been inappropriately delegated Comments Based on the documents reviewed, we concluded that the lead OGDs we visited had established authorities that were overall appropriately delegated and clearly defined. We noted that the CRTI projects were managed in accordance with the same financial management approval procedures used for all other projects at the lead department visited. 4.2 Criteria 2 Contracting in accordance with TBS policy and departmental/organizational policies Observations We obtained a summary description of the contracting process at each OGD visited, through discussion with the various project managers and finance officers responsible for the CRTI projects. 13 PricewaterhouseCoopers LLP

19 The key elements reviewed as part of the discussion were: Bidding and selection of partners (OGDs and non-government partners); Definition of the project charter; Timeline of the contracting process; and Contract administration. Criteria 2 deals with the contracting processes that were reviewed through discussions with the various project managers and financial officers assigned to the projects. Actual compliance with the TBS policy was reviewed with Criteria 4, notably in the commitment process and Section 32 authority approvals. We learned that CRTI posts a general call for proposals on MERX whereby applicants respond with synopsis proposals outlining the project plan and required contracted parties. CRTI s subsequent selection process of approved projects serves as the selection process that justifies the sole sourcing of contracted parties presented in proposals approved by CRTI for funding. Based on the above, we noted that the contracts negotiated by OGDs with non-government partners for CRTI projects are sole-sourced. The rationale is primarily due to the specific experience and nature of technical knowledge held by these partners, as required by the projects. Further, all other contracting within CRTI projects follow a competitive process or solesource justification, as warranted by the situation and in compliance with TBS policies. Supporting documentation for all processes is maintained on file. Public Works and Government Services Canada (PWGSC) is involved in the contracting process, as required by the OGDs policies. Presented below are comments specific to the locations visited: i. DRDC Ottawa CRTI project resources are laid out and approved in the project charter. PWGSC is involved once the project manager drafts the Statement of Work. The specifications, intellectual property, deadlines and CRTI approvals are flowed through DRDC Ottawa procurement office to submit to PWGSC. PWGSC prepares the contracts and sends them for appropriate signatures within DRDC Ottawa. ii. CFIA During our site visits we learned that purchases under $5,000 are approved locally. Contracts over $5,000 are forwarded to the OGD s Procurement and Assets Service Centre to obtain approval. If a purchase is above the agency s $25,000 limit, the contract is sent to PWGSC who manages the bidding and selection, contract awards, disputes and administration in collaboration with the OGD s project manager and finance officer. 14 PricewaterhouseCoopers LLP

20 iii. DRDC Suffield Procurement at DRDC Suffield was similar to DRDC Ottawa. Specifically, DRDC Suffield follows the TBS contracting policy and seeks PWGSC s assistance for the complete tendering and contracting process. The contracts with non-government partners are administered by PWGSC. iv. HC The Material Management Division reviews the selection of industrial partners before a contract request is sent to PWGSC for preparation. PWGSC is responsible for formalizing contracts with non-government partners. v. EC Local purchase orders are processed by EC in accordance with the OGD s purchasing and payment processing policy. Requirements for goods or services above $10,000 are reviewed by EC s Procurement Review Board (PRB) before they are sent to PWGSC for any required negotiation, review and approval. Subsequent amendments and invoices relating to contracts approved by PWGSC are also sent to PWGSC for approval before being processed by EC. vi. PHAC PHAC is a relatively new organization within the CRTI initiative (previously part of HC). Accordingly we learned that its contracting policies are consistent with HC s. PHAC follows TBS contracting policy and has PWGSC generate the contracts with partners Comments While there are variations amongst the projects, the contracting process applied by the lead department at the locations visited was in line with that organization s contracting policies and consistent with TBS contracting policies. Contracting and procurement processes used for CRTI projects were the same as non-crti projects within the specific department visited. 4.3 Criteria 3 Matching funds are in accordance with TBS submission and/or MOU Observations Matching funds represent a significant portion of the total funding of the CRTI projects. Although non-monetary in value, the large amount justifies the importance of having proper procedures and guidelines surrounding the determination, the valuation and the reporting of matching funds from project participants. 15 PricewaterhouseCoopers LLP

21 To ensure compliance with the criteria, we obtained a list of projects by location for the two years ended March 31, 2005 and March 31, 2006, including: Amounts allocated to the project from the CRTI; Actual expenditures; and Roll-over amounts (amounts received from the CRTI not spent as of the end of the fiscal year). From the project list, a random sample of projects was selected. The selection was done with the objective of covering an adequate percentage of project spending, as well as to cover the various project types. The detailed list of projects selected is presented in Annex C. From the list of projects selected, we obtained the detailed listing of transactions recorded for matching funds from the quarterly reporting produced by the lead department and submitted to the CRTI Secretariat. The matching funds tracked by the lead department were compared to the matching funds per the project charter. The project charter outlines the contribution of the lead department and partners to the project. We also reviewed the valuation of in-kind contribution that included time from scientists, facility and overhead costs. It was observed that each OGD values and defines in-kind contributions differently, especially when considering costs included in in-kind and how costs are tracked. For example for DRDC Suffield, salaries and overhead are included in in-kind calculations. Salaries include those involved in the particular project (i.e., project managers, researchers and related support) and are tracked by monthly timesheets. Overhead is calculated as 2.4 times the in-kind salaries reported. As explained during the course of the audit, this overhead rate approximates the equipment and facility costs incurred on any given project and is consistent with DRDC Suffield s internal costing policy. In contrast, while PHAC s in-kind contributions represent a combination of salary costs and an overhead component similar to DRDC Suffield, the definition and valuation is very different. For salaries, an estimated percentage of level of effort is determined for project team members, including the project manager, researchers and administrative support; this is then applied to the individual employee s salary to arrive at a salary contribution. No actual time spent is tracked or monitored for in-kind purposes. For overhead, an allocation is determined (based on a standard rate) to represent the amount of lab space used for the specific project. No other overhead cost is included in the matching contribution. Consistent with the examples above, each additional OGD visited had its own definition and valuation of in-kind contributions. As such, comparison and analysis of in-kind contributions across all projects may be misleading. Based on the work performed, it was further observed consistently across OGDs visited that tracking of in-kind contributions is not performed for AP projects. 16 PricewaterhouseCoopers LLP

22 4.3.2 Comments In-kind contributions have not been tracked nor valued consistently across departments. Further, in-kind contributions for AP projects are not being tracked or reported on. Recommendation #1 Definition/valuation of in-kind contributions In order to provide a comparable basis of in-kind contributions by project participants, the CRTI Secretariat should develop a common definition of in-kind contributions. This definition could include time from researchers, administrative support, benefits, overhead and the use of equipment and facilities. Further, a consistent valuation methodology for in-kind contributions across departments for CRTI projects would increase comparability amongst the projects and improve the accuracy of financial reporting. Recommendation #2 Establishing an in-kind tracking system In order to comply with the terms of the MOU, each project manager and/or financial officer should implement a standard form of tracking for in-kind contributions (i.e., monthly timesheets) in order to better account for the actual contributions to the project. This tracking mechanism will consequently enable project managers to properly gauge if projects have reached the required amount that should be contributed over the lifespan of the project. Recommendation #3 Reporting of in-kind contributions for AP projects The CRTI Secretariat should enforce the reporting of in-kind contributions for AP projects, in order to demonstrate compliance with the MOU. Due to the short time horizon for AP projects (limited to equipment acquisitions), this reporting may only be required at the project close-out reporting stage. 4.4 Criteria 4 FAA requirements are met and documents are retained Observations To evaluate compliance with Sections 32, 34 and 33 of the FAA, we performed the following: Obtained a detailed listing of expenditure transactions from each location for the sample projects selected in Criteria 3; and Selected a sample of detailed expenditure transactions for each project and obtained the supporting documentation to: o Agree to the accounting entry; o Ensure documentation of Sections 32, 34 and 33 approvals; and o Agree Sections 32, 34 and 33 approvals to the matrix of delegation of signing authorities (obtained for Criteria 1). 17 PricewaterhouseCoopers LLP

23 Projects were selected for testing based on the items selected under Criteria 3, as noted above. All locations were able to provide a complete list of expenditure transactions for the sample projects selected. Due to the varying size of the projects (both dollar amount and number of transactions involved) a random sampling methodology was employed to select our test transactions in order to bring consistency to the sampling process. More specifically, for each project the largest dollar value transactions and random transactions were selected for testing from each fiscal year. Our sampling coverage included projects representing 44 percent of the total CRTI funds expended for the two years ended March 31, 2005 and March 31, From the sample projects, we selected and tested specific financial transactions, the total of which equated to 39 percent of the total funds expended on the sample projects. A detailed breakdown of the sampling and testing coverage is included in Annex B. Our findings at the locations visited were as follows: i. Section 32 Approval Among all locations visited, a total of 15 (5 percent) transactions tested were noted for missing evidence of Section 32 approvals. Further, 27 (9 percent) transactions tested were noted for missing evidence of Section 32 delegation of authority for the individual who approved as Section 32 signatory. Finally, a total of 34 (11 percent) transactions tested were identified where the delegation of authority of the signatory was either not for the proper cost center, the prescribed dollar limit allocation or the proper time period as compared to the Section 32 approval. ii. Section 34 Approval In all locations, Section 34 approval had been essentially split into two parts: 1. Confirmation of goods received and work completed to the satisfaction of the project manager/leader or appropriate technical authority; and 2. Stamping and signing of the invoice/progress claim with Section 34 approval prior to the invoice being processed by administrative staff. This approval is administered in two parts for the following reasons: The administrative staff may not be directly involved with the project; A high knowledge level may be required to determine the satisfactory receipt of goods; and The goods or services may have been received in different locations or provinces; therefore, only a person on site could confirm receipt of goods. During our testing we reviewed the initials/signatures on file for both the confirmation of the receipt of goods and the official Section 34 approval, based on the signing authorities obtained in Criteria PricewaterhouseCoopers LLP

24 For all locations visited, a total of four (1 percent) transactions tested were identified as missing Section 34 approval on the sampled expenditure. Further, 23 (8 percent) of the transactions tested were identified as missing evidence of Section 34 delegation of authority for the individual who approved as Section 34 signatory. Finally, a total of 11 (4 percent) of the transactions tested were identified where the delegation of authority of the signatory was either not for the proper cost center, the prescribed dollar limit allocation or the proper time period as compared to the Section 34 approval. iii. Section 33 Approval Unlike Sections 32 and 34, Section 33 approval is applied differently amongst the locations visited. Five out of six locations (DRDC Ottawa, DRDC Suffield, HC, EC and PHAC) subject 100 percent of their financial transactions to Section 33 approvals, whereas the CFIA use a gating and sampling technique that subjects transactions above certain threshold amounts to Section 33 approval. a. CFIA The gating and sampling technique employed by CFIA requires Section 33 approval for the following transactions: ISs above $100,000; High-risk transactions; and Individual transactions above $100,000. CFIA s gating and sampling technique does not require Section 33 approval for the following transactions: Internal journal vouchers; ISs under $100,000; Salary expenses allocations and up-loads from the Regional Pay System for employees who had their Section 33 put in place when they were hired; and Non-high-risk transactions under $100,000. For transactions that were below $100,000 and not subject to CFIA s gating and sampling technique, the sampled expenditures were traced to payment transactions numbers and cross-referenced to the Saturn-SAP interface with the Standard Payment System. We agreed this information to the Section 33 delegation of authority for the finance officer giving the section approval batch payment run containing the expenditure under audit. There was one purchase expenditure for which no evidence of section approval was available; therefore, we were not able to test for delegation of signature authority. b. DRDC Ottawa, DRDC Suffield, EC and PHAC These OGDs provided us with computer print-outs detailing all the transactions that received Section 33 approval on a particular day. From these print-outs the sampled expenditures were easily identified as well as the finance officer who gave an electronic Section 33 approval. We confirmed that the person granting Section 33 approval was authorized based on the documents obtained in Criteria PricewaterhouseCoopers LLP

25 c. HC HC provided us with a snapshot of the SAP transactions screen that had been stamped for Section 33 approval for the selected transactions under audit. From these printouts the sampled expenditures were easily identified as well as the finance officer who gave an electronic Section 33 approval. We confirmed that the person granting Section 33 approval was authorized based on the documents obtained in Criteria Comments To support CRTI and OGDs to provide evidence to demonstrate compliance with the FAA, the following recommendations have been presented: Recommendation #4 Demonstrated evidence of approval by delegated authority We recommend that each department ensure that all CRTI transactions demonstrate evidence of approval by an appropriately delegated authority as required by Sections 32, 33 and 34 of the FAA. The CRTI Secretariat should follow up regularly, through ongoing dialogue with project managers and program administrators, to support the OGDs in their efforts to improve overall documentation related to these key financial controls. Recommendation #5 Maintenance of evidence of appropriate delegation of authority We recommend that each department maintain original evidence of appropriate delegation of authority under Sections 32, 33 and 34 in order to demonstrate the appropriate delegated authority over specific transactions. The CRTI Secretariat should follow up regularly, through ongoing dialogue with project managers and program administrators, to support the OGDs in their efforts to improve overall documentation related to these key financial controls. 4.5 Criteria 5 Payments are accurate and timely Observations Using the sample of projects selected at Criteria 3 and the sample expenditure transactions selected at Criteria 4, we obtained supporting documentation for the payments issued and agreed the payments to the supporting documentation. As part of the work completed for Criteria 4, all supporting documentation (i.e., contracts, invoices, progress payments, etc.) for the tested financial transactions were reviewed and agreed to our list of financial transactions and the amounts that received Section 33 approval. We also compared the Section 33 payment date to the invoice date to ensure that payments were being made on a timely basis. 20 PricewaterhouseCoopers LLP

26 Our findings at the locations visited were as follows: Generally payments were made on a timely basis and agreed to the supporting documentation on file, which agreed with the financial transaction listing obtained from each location. However, for one transaction tested, an interest charge of $27,825 was incurred in 2006 by an OGD due to delays in the payment of an invoice for $86,683. The delay in paying the invoice was due to additional time required by the OGD s Procurement Board before granting approval to pay the invoice Comments Arising from the audit work for this criterion is the following recommendation: Recommendation #6 Timely payment of invoices We recommend that each OGD continue to ensure timely payment of invoices to avoid interest and penalty charges. Any interest charges should not be submitted to CRTI for reimbursement, consistent with the MOU. 4.6 Criteria 6 Expenditures are recorded accurately and consistently Observations The work required to address Criteria 6 was completed in conjunction with the work performed in Criteria 4. All of the tested transactions were recorded accurately and consistently and agreed to the supporting documentation on file Comments Overall, the tested transactions were recorded accurately and consistently and were agreed to the supporting documentation on file. For all locations visited and for the projects selected, we observed significant tangible assets present on site at the time of the audit without exception. 4.7 Criteria 7 Effective funds management processes and practices are in place to plan and monitor budget/funds Observations - Locations visited In order to ensure that there were effective and efficient funds management processes and practices in place to plan and monitor budget and funds, we obtained by discussion with the project managers and financial officers assigned to the projects a description of the budgeting process from each location visited. 21 PricewaterhouseCoopers LLP

27 The project charters present the budgeted amounts for the projects and constitute the benchmark used to monitor fund allocations and use. The CRTI Secretariat has established guidelines to assist the project managers in establishing the cash flows per annum on their projects. The guidelines permit a consistent approach to the determination of the planned budget. The budgeted funds section of the project charters is approved by the CRTI project selection committee and the charter constitutes an agreement between the various project participants on the project orientation, as well as the commitment by each participant (including in-kind contributions) to the project. The project charter also presents milestones of the project. The project charter can be amended if needed, for instance, modification to the timeline or level of contribution. The approved project charters for each of the projects sampled were examined (refer to Annex C for the list of sample projects tested). There are processes in place to manage CRTI project selection and fund allocation in each location visited. Although the process is not identical for all locations, each OGD did subject its projects to the following prior to being submitted to CRTI: Peer review/evaluation/screening process an evaluation of the projects merits to ensure that all projects selected clearly meet both the organizations and CRTI s mandate. Financial review to ensure that projects are economically feasible for the organization and also to ensure that CRTI funds are being fully utilized. Director approval and authorization to ensure that all projects have been subject to both a peer and financial review and that management is in agreement with the results from both reviews and supports the project. We learned that during the course of the project, various processes are in place at each location to monitor funding and budgets. A primary component of this is the preparation of the quarterly financial report, which is generally reviewed by the project manager prior to submission to the CRTI Secretariat. Other processes are in place at each OGD to monitor budgets on a more proactive and ongoing basis Comments - Locations visited Training sessions are held annually by the CRTI Secretariat for new project managers and financial officers. The objectives of the training sessions are, among others, to ensure a common methodology to the monitoring of funds. As a new feature to the training program, sessions specifically related to financial administration and reporting were created and directed primarily at finance officers, project administrators and project managers. 22 PricewaterhouseCoopers LLP