DEPARTMENT OF NATIONAL DEFENCE

Transcription

1 DEPARTMENT OF NATIONAL DEFENCE For the Years Ended 31 March 2003 and 31 March 2004 September 2004 Final May 2005 Conducted by PricewaterhouseCoopers LLP (CRS)

2 NOTICE OF CAVEAT TO THE READER 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.

3 SYNOPSIS This report presents the results of audit work, contracted to PricewaterhouseCoopers LLP, and initiated at the request of the Department of Defence (DND) Science and Technology Group. A financial management audit of the Chemical, Biological, Radiological and Nuclear (CBRN) Research and Technology Initiative (CRTI) has been completed for the two fiscal years (FY) ending 31 March 2004, as per the terms of Treasury Board funding approval. The main objectives were to ensure compliance with applicable legislation and departmental policies; availability of accurate and complete information for management-decision purposes; and, existence of sound efficient monitoring and oversight mechanisms for the management of CRTI funds in other participating organizations and at the CRTI Secretariat. The CRTI represents a $170 million five-year initiative to significantly enhance Canada s capacity to deal with potential CBRN threats to public security. The CRTI was launched in May Defence Research and Development Canada of the DND leads the CRTI on behalf of the federal science and technology community. There are 13 federal government organizations that have signed a memorandum of understanding to participate in the CRTI. The largest participating organizations for the period under review included Health Canada, Canadian Food Inspection Agency and DND. Based on the results of the PricewaterhouseCoopers LLP audit, the CRTI financial information used for monitoring and reporting purposes, and the financial management practices noted in the organizations reviewed and for the CRTI Secretariat appear reasonable and reliable. The recommendations focus on improvements in financial oversight with regard to the information provided for the matching funds component, timely reporting of project information and the management of rollover amounts occurring at year-end. It is important to note that the CRTI Secretariat had already recognized several of the issues and was eager to address all recommendations.

4 Table of Contents 1 Executive Summary Introduction and Background Objectives Summary of Principal Observations and Recommendations Management Action Plan Mandate Terms of Reference Background Audit Objectives Audit Criteria Methodology Summary of Observations and Recommendations Annex A CRTI Projects by Location... 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

5 1 Executive Summary 1.1 Introduction and Background PricewaterhouseCoopers LLP ( PwC ) has been 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 Research and Technology Initiative ( CRTI ) for the two years ended 31 March The CRTI represents a $170M five-year initiative to significantly enhance Canada s capacity to deal with potential chemical, biological, radiological and nuclear threats to public security. The CRTI was launched in May Defence Research & Development Canada ( DRDC ) of DND leads the CRTI on behalf of the federal science and technology community. There are 13 federal government organizations that have signed a memorandum of understanding to participate in the CRTI. The largest participating organizations include Health Canada, Canadian Food Inspection Agency and Defence R&D Canada. The CRTI is coordinated by an interdepartmental Steering Committee that is chaired by the Assistant Deputy Minister for the Science and Technology community in DND. Ultimately, DND is responsible and accountable for the management of the CRTI fund. There are three project categories: Technology acquisition ( AP ) 16 per cent of total funds; Technology acceleration ( TA ) a 22 per cent of total funds; and Research and technology development ( RD ) 55 per cent of total funds. 1.2 Objectives As set out in the Statement of Work from DND dated 7 May 2004, the objectives of the contribution program audit were to ensure: 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. Information to support reporting, performance monitoring and management decisionmaking 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 are effective and efficient. 1 PricewaterhouseCoopers LLP

6 The audit work was conducted at the CRTI Secretariat in July and August 2004 and at four major locations: # Locations Field Work Dates 1. Defence Research and Development Canada, Ottawa Week of 12 July 2004 ( DRDCO ) 2. Canadian Food Inspection Agency, Ottawa ( CFIA ) Week of 26 July Defence Research and Development Canada, Suffield Week of 9 August 2004 ( DRDCS ) 4. Health Canada, Winnipeg ( HC ) Week of 16 August Summary of Principal Observations and Recommendations Overall, the CRTI financial information used for monitoring and reporting purposes, and the financial management practices noted in the organizations reviewed and for the CRTI Secretariat appear reasonable and reliable. We observed that: 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 in the detailed report; The information used to support reporting, performance monitoring and management decision making should be improved, notably for the submission of all required financial reports on a timely basis and for consistent reporting on the in-kind contributions from project participants; The CRTI Secretariat Finance Officers adequately track the activities of the project participants, particularly the receipt of financial reports from the project participants, and the Interdepartmental Settlement ( IS ) transactions with lead departments and adequately monitors suspense accounts used to flow the fundings to and from lead departments; The IS transaction mechanism was examined as part of the audit process and we found that the system was 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 the year-end. We also ensured that the funds were properly received by the CRTI at the end of the year; and There are processes in place to support the project selection and fund allocation at the CRTI Secretariat. Project monitoring and financial oversight of the projects is carried out on a continuous basis and procedures were generally performed in a satisfactory manner. Opportunities for improvement in financial oversight are discussed in the three paragraphs below: 2 PricewaterhouseCoopers LLP

7 Matching funds, specifically the in-kind contributions, require improvements to the valuation, tracking and reporting systems to provide better information. These costs represent a significant portion of the total CRTI project costs (i.e., budgeted matching funds were estimated at 50 per cent in fiscal year (FY) 2002/03 and 48 per cent in FY 2003/04). The major concerns include: There is no common definition for comparability; There is no common valuation methodology for consistency; and A consistent tracking system/process has not been established across organizations to monitor and report on these elements and therefore, adequate/auditable supporting evidence is not available for audit purposes. Rollover amounts at year end were significant in both FY s $5.2M for FY 2002/03 and $12.5M for FY 2003/04. This represented a rollover percentage of 25 per cent and 35 per cent respectively, based on the budgeted committed funds. Monthly project performance monitoring at the participant organization level, and timely reporting of slippages to CRTI Secretariat, should be performed to prevent a similar situation from occurring in the future. This would also facilitate better management and reallocation of funds to other CRTI projects, especially when processed well in advance of year-end. The CRTI Secretariat has issued a new policy restricting the amounts allowed for carryforward purposes, which should provide a better control over rollover funds. However, this new process will need to be monitored by the CRTI Secretariat. Reporting of information to the CRTI Secretariat is not always done, is not necessarily timely for some situations and is not consistently applied for in-kind contributions. Additional training sessions during the life of projects would provide a better understanding of the reporting expectations and would be a vehicle for sharing best practices. The summary of observations and recommendations (shown below) has been grouped by specific audit criteria in accordance with the requirements of the Statement of Work. Annex B presents a summary of the coverage obtained during the audit. Criteria 1 Authorities are appropriately delegated, clearly defined and documented. Based on the documents reviewed we conclude that the locations visited had established authorities that were appropriately delegated and clearly defined. 3 PricewaterhouseCoopers LLP

8 Criteria 2 Contracting is in accordance with TBS policy and departmental/ organizational policies. Overall, while there are variations amongst the projects, we noted the contracting process applied by the lead department at the locations visited was in line with the organization s contracting policies. Contracting and procurement procedures used for CRTI projects were the same as for other projects within the location visited. Criteria 3 Matching Funds are in accordance with TBS submission and/or Memorandum of Understanding ( MOU ). Matching funds represent a significant portion of the costs of the CRTI projects (i.e., matching funds are budgeted at 50 per cent of total project costs in FY 2002/03 and 48 per cent in FY 2003/04), therefore proper procedures and guidelines surrounding the determination, the valuation and the reporting of matching funds from project participants should be in place. Recommendation #1 CRTI should establish a common definition of in-kind contribution elements to improve comparability of the projects. We noted inconsistencies in the determination of the matching funds across projects for some locations as well as across locations. Recommendation #2 CRTI should establish a common valuation methodology of their in-kind contributions to improve the comparability of the projects. We noted inconsistencies in the valuation of the matching funds across projects for some location as well as across locations. Recommendation #3 CRTI should establish a tracking system for in-kind contributions to be used in the quarterly reporting. This will improve the monitoring of the performance and costs of the projects as well as comply with the requirements of the MOU. Recommendation #4 The CRTI Secretariat should consider amending the MOU and the CRTI Project Implementation Guidebook to establish a common definition of in-kind contributions and a common valuation methodology. This would improve comparability across the projects in terms of costs of the projects, monitoring and reporting. 4 PricewaterhouseCoopers LLP

9 Criteria 4 FAA requirements are met and documents are retained. A sample of financial transactions from the projects was selected to test compliance with the FAA requirements. From these tests, it was concluded that: i. Section 32 Section 32 approvals were made in accordance with the matrix of delegation for signing authorities no exceptions. ii. Section 33 There was evidence of Section 33 approval no exceptions. iii. Section 34 Locations followed their respective procedures for Section 34 approvals no exceptions. Criteria 5 Payments are accurate and timely. Except for two transactions at DRDC Ottawa and three transactions at HC, our sample of transactions concluded that payments were accurate and timely. Four of these five exceptions related to Payable at Year End ( PAYE ) items. Recommendation #5 Project managers should include PAYE details as part of their quarterly reporting to evidence that PAYE s are properly reversed or adjusted upon receipt of the actual invoices. A misstated PAYE will impact the amount of rollover funds to return to the CRTI at the end of the fiscal year. Criteria 6 Expenditures are recorded accurately and consistently. Compliance with Criteria 6 was addressed in conjunction with the testing for Criteria 5. Criteria 7 Effective/efficient funds management processes and practices are in place to plan and monitor budget/funds. Compliance with Criteria 7 was addressed through a review of the financial forecast included in project charters for a sample of projects. The resulting recommendation is as follows: Recommendation #6 The CRTI Secretariat should consider developing additional training sessions to be held throughout the life of the projects (as opposed to only upon inception). These training sessions would formally communicate the expectations of the Secretariat in terms of monitoring and reporting as well as to share best practices. Finance service representatives and deputy project managers should actively participate in the training sessions. This should improve the forecast information and proactively assist in identifying and managing the significant rollover of funds at year-end. 5 PricewaterhouseCoopers LLP

10 Criteria 8 Adequate information exists for monitoring at the Other Government Department ( ODG ) level and at the CRTI Secretariat. Compliance with Criteria 8 was addressed through a review of the quarterly reporting and final reports for AP which are the main financial monitoring tools used for CRTI projects: i. Quarterly reporting We observed that in-kind contributions were not consistently reported. We also observed that quarterly reports were not always submitted (i.e., three omissions). Recommendation #7 Project managers should ensure that they provide the required quarterly reporting to the respective portfolio managers to ensure the continued governance of the projects. Portfolio managers should continue to track the receipt of quarterly reports and follow-up with the respective project managers for missing reports. ii. Final reports We observed that not all final project reports for AP were submitted (i.e., four instances of missing reports). Recommendation #8 AP project managers should ensure that they provide the required final completion report to the respective portfolio managers to ensure proper governance of the projects. Portfolio managers should continue to track receipts of final reports and follow-up with the respective project managers for missing reports. 1.4 Management Action Plan Management s action plan outlines how CRTI management intends to address the issues raised in this report both with respect to existing projects and also what changes it intends to make to the CRTI governance and project accountability structures to prevent recurrence of these issues. It is important to note that several of these issues have already been recognized by the CRTI Secretariat and resulted in recommendations to the CRTI Steering Committee ( SC ). Limits have been established for rollovers to ensure Project Managers manage project funds within each fiscal year to minimize the impact of the rollover. Further, when a project does not meet its obligations with respect to two consecutive quarterly reports, the issue will be referred to the Project Champion and a request for an extraordinary Project Review Committee meeting may be made. This could result in a recommendation to the SC for project termination. 6 PricewaterhouseCoopers LLP

11 Several recommendations will require either changes or amendments to the interdepartmental MOU. It is the CRTI s intent to re-examine the MOU to both include these changes and to also address recent changes in departmental structures and mandates. For example, the recent formation of Public Safety and Emergency Preparedness Canada ( PSEPC ) and the Public Health Agency of Canada ( PHAC ) require renewal of the MOU to reflect the representation and participation of these departments in the CRTI and in the MOU. The management action plan is presented in matrix format organized by audit criteria and linked to the eight recommendations, as shown in Annex D of the report. 7 PricewaterhouseCoopers LLP

12 2 Mandate 2.1 Terms of Reference PricewaterhouseCoopers LLP ( PwC ) has been 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 Research and Technology Initiative (CRTI) for the two years ended 31 March The audit work was conducted at the CRTI Secretariat in July and August 2004 and at four major locations: # Locations Field Work Dates 1. Defence Research and Development Canada, Ottawa Week of 12 July 2004 ( DRDCO ) 2. Canadian Food Inspection Agency, Ottawa ( CFIA ) Week of 26 July Defence Research and Development Canada, Suffield Week of 9 August 2004 ( DRDCS ) 4. Health Canada, Winnipeg ( HC ) Week of 16 August Background The CRTI represents a $170M five-year initiative to significantly enhance Canada s capacity to deal with potential chemical, biological, radiological and nuclear threats to public security. The CRTI was launched in May DRDC of DND leads the CRTI on behalf of the federal science and technology community. There are 13 federal government organizations that have signed a memorandum of understanding to participate in the CRTI. The largest participating organizations are HC, CFIA and DRDC. The CRTI is coordinated by an interdepartmental Steering Committee that is chaired by the Assistant Deputy Minister for the Science and Technology community in DND. Ultimately, DND is responsible and accountable for the management of the CRTI fund. There are 3 project categories: Technology acquisition ( AP ) 16 per cent of total funds; Technology acceleration ( TA ) 22 per cent of total funds; and Research and technology development ( RD ) 55 per cent of total funds. CRS requires an independent and objective assessment of the CRTI financial management in accordance with the terms of the TBS. 8 PricewaterhouseCoopers LLP

13 The financial management audit covered the two fiscal years ending 31 March For the fiscal year ending 31 March 2003, the CRTI had committed $20.5M (actual was $14.2M) while for the year ending 31 March 2004, the CRTI had committed $35.5M (actual was $27.5M). See Annex A for an analysis of CRTI Project expenditures by Location for the two year period ended 31 March The audit should provide a statement 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. TBS requires that the audit includes: An examination of the interdepartmental settlement ( IS ) mechanism; and An examination of the processes and mechanisms used to identify projects and allocate funds. Scope limitations: 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. Moreover, the following issues/topics were not part of the audit scope: Reliability of 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. 2.3 Audit Objectives As set out in the Statement of Work from DND dated 7 May 2004, the objectives of the contribution program audit were to ensure: i. CRTI funds are managed in accordance with the Financial Administration Act ( FAA ), TBS policies and guidelines, and departmental or other organizational resource management policies; ii. Information to support reporting, performance monitoring and management decisionmaking 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. 9 PricewaterhouseCoopers LLP

14 2.4 Audit Criteria In order to assess the three audit objectives defined by the CRS (see Section #2.3), the following criteria were reviewed during the audit for each recipient: 1) 2) 3) 4) 5) 6) 7) 8) Authorities appropriately delegated, clearly defined and documented; Contracting in accordance with TBS policy and departmental/organizational policies; Matching funds in accordance with TBS submission and/or MOU; FAA requirements are met (i.e., Sections 32, 34 and 33) and documents retained; Payments are accurate and timely; Expenditures are recorded accurately and consistently; Effective/efficient funds management processes and practices in place to plan and monitor budget/funds; and Adequate information exists for monitoring purposes at other government department (OGD) level and at CRTI Secretariat. 2.5 Methodology For the purposes of the audit, PwC applied the following methodology: i. Review of relevant background documentation; ii. Interviews with key personnel, notably portfolio managers, financial officers and project managers at: a. CRTI Secretariat b. DRDC Ottawa c. CFIA d. DRDC Suffield e. HC iii. Transactions testing for sampled projects and IS transactions; and iv. Observation of tangible assets for the projects sampled and located on site. 10 PricewaterhouseCoopers LLP

15 3 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 Chief Review Services. 3.1 Criteria 1 Authorities are appropriately delegated, clearly defined and documented Observations To ensure compliance with the first criteria, we obtained the delegation matrix for signing authorities for each of the locations visited. 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 (e.g., competitive or not, local purchases, travel); 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. Matrices of authorities were approved by the Minister of the DND (document released 12 August 2002) for DRDC in Ottawa and Suffield, while the President of the CFIA approved the CFIA matrix on 10 February For HC, we received a manual listing of the individuals present in Winnipeg with their various signing authorities under Section 32, 34 and 33 as extracted from the Health Canada Delegation of Authorities policies Comments Based on the documents reviewed, we concluded that the locations visited had established authorities that were appropriately delegated and clearly defined. Approval procedures used for the CRTI projects were the same as for other projects at the locations visited. 3.2 Criteria 2 Contracting in accordance with TBS policy and departmental/ organizational policies Observations As determined in the planning memorandum, a summary description of the contracting process was obtained at each location through discussion with the various project managers and finance officers responsible for the CRTI projects. 11 PricewaterhouseCoopers LLP

16 The key elements reviewed as part of the discussion were: Bidding and selection of partners (other government departments and industry partners); Contract administration; Definition of the project charter; and Timeline of the contracting process. Criteria 2 dealt with the contracting process and consequently was reviewed through discussion 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. Presented below are comments specific to the locations visited. i. DRDCO Several projects were sole-sourced due to the unique nature of the projects and lack of alternative providers, such as when the industrial partner held patented technology necessary for the research project. Sole-source justifications were documented on file supporting the procurement method. Public Works and Government Services Canada ( PWGSC ) procurement services were used as directed by DND procurement policies. Procurement was performed through the same process as other DRDC purchases. ii. CFIA The CFIA projects reviewed during the audit followed the contracting guidelines where purchases over $5,000 are processed by the Procurement and Assets Service Centre, while purchases over $25,000 are processed through PWGSC. Purchases under $5,000 are approved locally. We noted for projects BIO011AP and BIO012AP that CFIA used standing offers with preferred vendors to obtain the most competitive price. iii. DRDCS Procurement at DRDCS was similar to DRDCO. Sole-source justifications were documented on file when used. iv. HC PWGSC procurement services were used as directed by HC procurement policies. Procurement was performed through the same process as other HC purchases. 12 PricewaterhouseCoopers LLP

17 3.2.2 Comments Overall, we observed that while there are variations amongst the projects, the contracting process applied by the lead department at the locations visited was in line with the organization s contracting policies. Contracting and procurement procedures used for CRTI projects were the same as other projects within the location visited. 3.3 Criteria 3 Matching Funds are in accordance with TBS submission and/or MOU Observations Matching funds represent a significant portion of the costs of the CRTI projects justifying the significance of having proper procedures and guidelines surrounding the determination, the valuation and the reporting of matching funds from project participants. To ensure compliance with the criteria, we obtained a list of projects by location for the two years ended 31 March 2004 presenting: Amounts allocated to the project from the CRTI; Actual expenditures; and Rollover 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 a significant percentage of actual expenditures allocated to a project as well as to cover each type of project (AP, TA or RD). The detailed list of projects selected is presented in Annex C. From the detailed 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, much of which reflected the time contributed by scientists. As specified in the CRTI Project Implementation Guidebook, for in-kind contributions and overhead, federal departments and agencies should adhere to their respective departmental policies. In addition, as per article 7.15 of the MOU between DND and the participants concerning the CRTI, matching funds used to support CRTI projects will be included as part of the regular financial information reports to be filed pursuant to the CRTI reporting process outlined in the individual Project Arrangements and are subject to audit. Accordingly, for matching funds to be subject to audit they have to be tracked and supported. 13 PricewaterhouseCoopers LLP

18 Presented below are comments specific to the locations visited. i. DRDCO In-kind contributions (mostly time from scientists) were tracked in Excel spreadsheets for projects RD, 0100TA, TA and TA. These contributions were valued using direct salary costs with an overhead allocation (varying between 10 per cent and 60 per cent depending on the level and responsibilities of the employees) and were properly reported quarterly as project expenditures. The in-kind contribution for the use of facilities or equipment was not valued. As of the time of the audit, except for project TA, the cumulative in-kind contributions reported exceeded the amounts set out in the project charter. For the specific project noted, delays occurred in the contracting process which postponed expenditures and work into the fiscal year ending 31 March The project managers expect to contribute, at a minimum, the amount set out in the project charter before completion of the project. For projects 0131TA, RN004AP, RN007AP, in-kind contributions were not tracked nor reported. Matching funds included mostly time from technicians and scientists in the operation and maintenance of the equipment purchased partly with CRTI funds for the last two projects mentioned above, which are acquisition projects (RN004AP and RN007AP). The value of the in-kind contributions for the operation and maintenance of the equipment (over 5 years for projects RN004AP and RN007AP) was estimated by the project leader. The project leaders believe that in-kind contributions, principally the time of technicians and scientists involved on the projects, exceeded the contribution levels set in the project charters but these amounts were not tracked. ii. CFIA For project 0196TA, in-kind contributions were not tracked nor reported. The in-kind contributions set in the project charter were determined using estimates from the project manager assisted by a financial officer. Budgeted in-kind contributions related mostly to time from technicians and scientists excluding any overhead allocation. The value of facilities used was estimated based on assessed value of the equipment, however, the calculation is not supported. Project managers mentioned that there were few comparable laboratories in Canada that could provide relevant comparative value. It should be noted that time spent on the projects was estimated for the purpose of the audit by the project managers (i.e., retroactively) based on discussion with the various individuals involved. 14 PricewaterhouseCoopers LLP

19 For projects BIO011AP and BIO012AP, the in-kind contributions were originally determined based on estimates of time spent valued at the employees base salary with an allocation for employee benefits, as well as project costs absorbed by CFIA. Actual time spent on the projects were tracked in an Excel spreadsheet based on discussions with the individuals working on the project. In-kind contributions were not reported as part of the quarterly submission to the CRTI Secretariat. For project BIO013AP, in-kind contributions consisted of time for implementation, operation and maintenance of equipment over the next five years. The value in the project charter was based on the CFIA Program Costing Methodology for Recoverable Rate Analysis for the fiscal year ended 31 March The actual in-kind contribution was tracked by hour by individual, although it was not included as part of the quarterly reporting to the CRTI Secretariat. Finally for project BIO020AP, in-kind contributions consisted of time for implementation, operation and maintenance of equipment over the next five years. The value in the project charter was based on the annual salary of resources without overhead allocation and an estimate of the value of the equipment and property used for the project. Actual time spent on the project was tracked by individual but was not included as expenditure in the quarterly reporting to the CRTI Secretariat. iii. DRDCS Matching contributions for DRDCS were established under a common approach for all projects. Business Development Analyst and Financial Services representatives determined the valuation methodology based on the DND Costs Factors Manual which is issued annually. The manual presents annual cost by levels for direct costs, which are used to value the contributed amount, as per the scientists estimates. In January 2002, a study was released estimating overhead levels for DND locations ( Full Cost Study of the Services Provided by Defence Research and Development Canada Facilities Located throughout Canada submitted by the Cost and Price Analysis Group, PWGSC). The overhead determined for DRDC Suffield was per cent of direct costs. For the purposes of the CRTI funds, the overhead rate was estimated at 240 per cent which was deemed to be not significantly different from the calculated rate in the study. The overhead rate is meant to include support staff assisting the scientists. In addition to direct salary costs and overhead allocations, rates have been determined for use of facilities and equipment. For equipment, the rates were estimated based on the value of the equipment and then using ratios comparable to rental companies to estimate weekly rates of rentals. There was no sophisticated method used but rather estimates were based on the ratios of equipment rentals (i.e., purchase value compared to rental value). 15 PricewaterhouseCoopers LLP

20 For TA and RD projects, actual time spent by scientists, as well as use of equipment and laboratories, was tracked using time sheets which were summarized by the deputy project manager and incorporated as part of the quarterly reporting. For AP, actual time was not tracked as it was understood by the project managers that it was not required by the CRTI Secretariat. iv. HC The determination of the in-kind contributions for the project charters was done consistently for projects at HC. The contributions related mostly to professional time contributed to the project. Time was valued as a proportion of the annual base salary cost without allocation for overhead or benefits. There was no estimate performed for the use of equipment or facilities. Actual in-kind contributions were not formally tracked and were not included in the actual expenditures in the quarterly reporting process. The scientists responsible for the projects sampled believe the actual time spent on the projects exceeds the initial estimation in the project charter Comments Overall, we have observed that matching funds in the form of in-kind contributions were not tracked consistently nor valued consistently across locations visited and in some instances even within the locations visited. Recommendation #1 Determination of in-kind contributions to include in the matching funds. In order to provide a comparable basis of matching funds in the form of in-kind contribution by the project participants, we recommend that CRTI determines a common definition of in-kind contribution elements. As per the MOU, these elements could include time from technicians and scientists, benefits, overhead and the use of equipment and facilities. This would represent an approach comparable to what has been performed at DRDCS and to a lesser extent by the other locations. Recommendation #2 Valuation of in-kind contributions. In line with the recommendation #1 above, once the elements to include have been identified under a consistent and systematic approach, we recommend that the elements be valued under a systematic methodology. This will increase comparability amongst the projects and improve the accuracy of the financial reporting. Also, the valuation should be in line with departmental guidelines. 16 PricewaterhouseCoopers LLP

21 Recommendation #3 Tracking of in-kind contributions. As per the terms of the MOU, in-kind contributions need to be included in the required reporting, such as the quarterly reporting to the CRTI Secretariat, and should be auditable. For instance, there are no cumulative amounts for the in-kind contributions at the locations, only quarterly reporting for those projects that actually record the matching funds. In order to comply with those MOU terms, we recommend that a time-tracking system be developed for all projects, including AP. A simple system such as monthly time sheets used at DRDCS, should cover the elements identified as in-kind contribution elements; for example, time from professionals and the use of equipment and facilities. The timetracking system could then be used to value the in-kind contributions and consequently include them as actual expenditures in the quarterly reporting. The absence of tracking of actual in-kind contributions under-estimates the cost of the project as well as the level of matching funds provided by the project participants. Recommendation #4 Amending the MOU and CRTI Project Implementation Guidebook. It is recommended that the CRTI Secretariat consider amending the MOU and the CRTI Project Implementation Guidebook to establish a common definition of in-kind contributions and a common valuation methodology. This would improve comparability across the projects in terms of costs of the projects, monitoring and reporting. 3.4 Criteria 4 FAA requirements are met and documents are retained Observations To evaluate compliance with Sections 32, 34 and 33 of the FAA, we: 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. 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 three largest dollar value transactions and one random transaction were selected for testing from each fiscal year. 17 PricewaterhouseCoopers LLP

22 Our sampling coverage was per cent of the total CRTI funds expended for the two years ended 31 March 2003 and From the sample projects we selected and tested certain financial transactions, the total of which equated to per cent 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 Across all locations there was consistent application and sufficient documentation retention for Section 32 approval, as defined by the FAA. Some examples of the type of signed documentation on file at the various locations to support Section 32 approval are as follows: Requisition for Goods and Services; Call-up against a standing offer; Interdepartmental agreement for services; Task Authorization form; Departmental individual standing offer; Request for materials; Memorandum of Understanding between partners; PWGSC Service Agreement for Real Property Services; Defence Research Establishment Order Form; and DRES Travel Application and Authorization. In all instances the signatures on the documentation retained for Section 32 approval were identified as departmental staff and were verified to the delegation matrix of signing authorities obtained in Criteria 1. There were no exceptions noted from our testing. ii. Section 34 Approval All of the transactions tested had on file sufficient documentation to support 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 managers/leader ( Confirmation of receipt of goods ); and 2. Stamping and signing of the invoice/progress claim with Section 34 approval prior to the invoice being processed by administrative staff ( Official Section 34 Approval ). This approval has to be administered in two parts for the following reasons: The administrative staff may not be directly involved with the project; 18 PricewaterhouseCoopers LLP

23 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 evaluated 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 1. From our testing, we were able to successfully identify all initials/signatures for both the confirmation of receipt of goods and the official Section 34 approval. There were no exceptions noted from our testing. iii. Section 33 Approval Unlike Sections 32 and 34, Section 33 approval is applied differently amongst the locations visited. Three of our four locations (DRDCO, DRDCS and HC) subject 100 per cent of their financial transactions to Section 33 approvals, where as the CFIA use a gating and sampling technique that subjects only a percentage of its transactions to Section 33 approval. 1) CFIA The gating and sampling technique employed by CFIA is based on having two pools of transactions: High risk and large dollar value ( Pool A ); and Regular transactions ( Pool B ). The high risk and large dollar value transactions are directed or gated into Pool A and all other transactions go into Pool B. Pool A transactions are subject to the full Section 33 approval process. Pool B transactions receive a blanket Section 33 approval. A sample is then selected from Pool B, which is subjected to a full Section 33 approval. The end result is that 100 per cent of Pool A and only a percentage of Pool B is subject to a full Section 33 approval. Of the 17 transactions tested from this location, five were Pool A transactions and therefore subject to Section 33 review. None of the remaining twelve transactions were captured as part of Section 33 sampling from Pool B. There were no exceptions noted from the five transactions that were subject to Section 33 approval. CRTI projects followed the same procedures as other payments at CFIA. 19 PricewaterhouseCoopers LLP

24 2) DRDCO and DRDCS For these locations we were provided with computer printouts detailing all the transactions that received Section 33 approval on a particular day. From these printouts our sample transactions were easily identified as well as who electronically gave their Section 33 approval. We confirmed that the person granting Section 33 approval was authorized based on the documents obtained in Criteria 1. 3) HC This location had on file for all of the selected transactions a snap shot of the SAP transactions screen that had been stamped for Section 33 approval. The stamp provides an area for the approver to date and initial the document. Initials were confirmed with HC staff and verified to the delegation matrix of signing authorities obtained in Criteria Comments Overall, we have observed that the locations visited complied with Sections 32, 34 and 33 of the FAA. 3.5 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 and payment date to the invoice date to ensure that payments were being made on a timely basis. Our findings at the locations visited were as follows: i. DRDCS and CFIA At these locations, all 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. There were no exceptions to note from our testing. 20 PricewaterhouseCoopers LLP

25 ii. HC All payments were made on a timely basis and agreed to the supporting documentation on file, which agreed with the financial transaction listing, except for progress claim #1 from McMaster University for $137,500 for CRTI Project 0006 RD. This progress claim is dated 17 March 2004 and has been split between two PAYE amounts of $27,500 (2003 PAYE) and $110,000 (2004 PAYE). As of the time of the report this progress claim has not been paid and HC are now investigating this transaction. iii DRDCO All payments were made on a timely basis and agreed to the supporting documentation on file, which corresponded with the financial transaction listing, except for one 2004 financial transaction in the amount of $2,115 for which DRDCO staff could not provide supporting documentation. As a result, a determination on the accuracy and timeliness of payment for this transaction could not be made Comments Arising from the audit work for this criteria, there is one recommendation as follows: Recommendation #5 Reporting of Payable at Year End (PAYE). CRTI project managers should request PAYE listings as part of the quarterly reporting. PAYE amounts are expenditure estimates that can lead to misstatements if not monitored on a regular basis and this impacts the amount of rollover funds to return to the CRTI at the end of the fiscal year. Quarterly submission of PAYE listings would provide CRTI portfolio managers with knowledge of these estimates and allow for misstatements or overstatements to be easily identified, allowing for excess funds to be returned promptly to CRTI. Also if PAYE listings were available, a review of these listings could be included as part of the next scheduled. 3.6 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 PricewaterhouseCoopers LLP

26 Our findings at the locations visited were as follows: i. DRDCS and CFIA For both of these locations, all of the tested transactions were recorded accurately and consistently and agreed to the supporting documentation on file. No exceptions were noted from our testing. ii. HC Except as set out below, all of the tested transactions were recorded accurately and consistently and agreed to the supporting documentation on file: CRTI Project 0006 RD, a 31 March 2003 Payable at Year End ( PAYE ) for $10,000 accrued to the University of Saskatchewan, Veterinary Infectious Disease department. An invoice was never received from the vendor and, therefore, a payment was not made in the subsequent year. The $10,000 amount was not reversed as an expenditure for this CRTI project and upon further investigation by HC staff, it was determined that this amount was returned to the department s consolidated revenue fund as opposed to being returned to the CRTI as rollover amount. As a result the total CRTI expenditures on this project were overstated by $10,000. CRTI Project 0087 RD, a 31 March 2003 PAYE was recorded for $102,838 for the Cangene Corporation under contract #H for work completed prior to year-end. Subsequent to 31 March 2003 progress claim #1 was received, however it was only for $76,315. This left an accrued balance of $26,523 ($102,838 $76,315). The $26,523 balance was never reversed as an expenditure from this CRTI project and upon further investigation by HC staff, it was determined that it was returned to the department s consolidated revenue fund as opposed to being returned to the CRTI as a rollover amount. As a result the total CRTI expenditures for this project were overstated by $26,523. iii. DRDCO Except as set out below, all of the tested transactions were recorded accurately and consistently and agreed to the supporting documentation on file: CRTI Project 007 AP, a March 31, 2004 PAYE was recorded for $210,000 to the Department of Fisheries and Oceans ( DFO ). Upon request, DFO confirmed, on 15 July 2004, that the total value owing as of 31 March 2004 was $195,328. The difference represents an over accrual of $ 14,672 ($210,000 $195,328). Consequently the total CRTI expenditures for this project were overstated by $14, PricewaterhouseCoopers LLP