Oversight of Transfer Payments: AANDC s Risk-Based Approach FMI Workshop Presentation June 4, 2013 Toronto
Purpose/Background Purpose of presentation: To describe Aboriginal Affairs and Northern Development Canada s existing framework for governing transfer payments. Background: 2008 Treasury Board Policy on Transfer Payments (PTP) requires all federal departments to apply recipient-specific, risk-based approach to managing transfer payments. Following release of PTP, developed the Management Control Framework for Grants and Contributions to lay out how to manage grants and contributions transfer payments. The Management Control Framework takes into account 5 Treasury Board Secretariat guiding principles: Grants and Contributions Risk Management; Service Standards; Recipient Engagement; Standardization; and Harmonization. The Management Control Framework implementation supported by suite of policies, directives and guidance for managing transfer payments. 2
Funding Agreements at AANDC In 2013-2014, AANDC has six (6) National Funding Agreement models available for the creation of funding agreements: First Nations And Tribal Councils National Funding Agreement Model; Canada Common Funding Agreement Model (Health and Aboriginal Affairs and Northern Development Canada common agreement with First Nations and Tribal Councils); Funding Agreement Nation Model - Other; Funding Agreement - Projects - DIAND Funding Only; Plain/Simplified Funding Agreement model for low risk recipient receiving project funding under $150,000; Provincial/Territorial Funding Agreement Model. In 2012-2013 AANDC spent over $6.8 billion in Grants and Contributions (to approximately 2,900 recipients) and 3,082 funding agreements were managed by AANDC: 732 for First Nations; 83 for Tribal Councils; 39 for Inuit; 28 for Provincial/Territorial Organizations; and 2 200 for other type of recipients. AANDC is working towards the Government of Canada vision to have funding agreements which: Establish the basis for the movement toward a single, multi-year, Government of Canada financial arrangement for First Nations with highperforming governance systems as agreed to at the January 2012 Crown-First Nations Gathering; Are simplified and use plain language that is easily understood by all; and Reduce the reporting and administrative burden for recipients. 3
Reducing the Reporting Burden Arising from a commitment made at the Crown-First Nations Gathering in January 2012, a Joint Working Group on Financial Arrangements was launched. This Working Group is reviewing the structure of financial arrangements between the federal government and First Nations, in order to reduce red tape and increase accountability mechanisms. Over the past few years, we have been working with willing partners to decrease the reporting burden for First Nations. A number of Reduced Reporting pilot projects are underway, whereby recipients produce a single report for their membership and AANDC extracts the information it needs. In fiscal year 2011-12, there were 142 Data Collection Instruments (DCIs) across the department. BY the end of 2012-13 it had been reduced to 111. For 2013-14, the number of DCIs has been further reduced to 39. The frequency of reports is also decreasing; currently 72% of reports are produced annually, compared to 61% in 2012-13. Bill C-27, the First Nations Financial Transparency Act, received royal assent in March 2013. It changes the landscape of reporting and will possibly have downstream impacts for reduced reporting. 4
AANDC s Approach to Risk Assessment: The General Assessment (GA) Tool At AANDC, the risk approach mandated by the PTP is supported in part by the General Assessment (GA), which was phased-in as part of the Policy on Transfer Payments implementation, in consultation with recipients. The General Assessment is completed annually by AANDC staff (in regions and headquarters) and is then shared and discussed with recipients. The GA is conducted on all recipients and/or applicants. The tool includes 3 workbooks that are applied dependent on the client, their relationship with AANDC and the type of funding sought. 5
General Assessment: Approach and Benefits A standard approach is used for all recipients, to ensure that policy requirements are met and due diligence is exercised. Through the identification of risks, the GA helps to: support the success of individual funding agreements by assessing the performance and capacity of the recipient to maintain continuity and sustainability in the delivery of programs and services; identify and prevent problems before they reach the point where Default Prevention and Management actions are required; inform the allocation of capacity development resources to correct problems and support continuous improvement; and Enable opportunities for dialogue between the department and recipients. Benefits of the GA: Helps the department to assess if a recipient may be eligible for a flexible or block contribution funding approach and the duration of the funding agreement. Helps inform monitoring activities undertaken by AANDC staff (e.g., follow-up conversations with the recipient) and program compliance activities; the need for other types of assessments (e.g., recipient audits); and allocation of capacity development resources to address problems and support continuous improvement. Management risks are rated as low, medium and high, based on an examination of Risk Factors and Components the aim is to avoid surprises during the lifespan of the agreement and manage responsibly. 6
GA Risk Factors, Components and Risk Weightings Organization Name: Risk Factor Consideration Consideration Score Risk Factor Score Weight Weighted Risk Factor Score Column (1) (2) (3) (4) (5) (6) 1. Governance 1.1 Capacity of Council/Board to 2 1.25 x 4 = 5.0 Transact Business 1 1.2 Familiarity with Agreement 2 1.3 Management Framework for 0 Program Management 1.4 Accountability to Service Population 2. Planning 2.1 Strategic Plan 2.2 Operational Plan and Budget 2.3 Business Continuity Plan 3. Financial Management 4. Program Management 3.1 Financial Position 3.2 Financial Records and Reporting 3.3 Finance Function 4.1 Service / Project Delivery 4.2 Service / Project Policies and Plans 4.3 Staff Capacity 2 1.33 x 2 = 2.67 2 0 3 2.0 x 3 = 6.0 0 3 0.7 1.2 x 5= 6.0 0.3 0 3.8 4.4 Reporting Total 19.67 Rating (Low 0 to 18.5 ) (Medium >18.5 to 37.5 ) (High >37.5 to 56) (1/3,1/3,1/3) Medium 7
Use of GA Results 8
Default Prevention and Management Policy A Default Prevention and Management Policy was developed by AANDC in June 2011 to: support community capacity development so that communities continue to increase their ability to self-manage and prevent default and default recurrence; assist recipients, where possible, in preventing defaults of funding agreements; assist recipients, where possible, in their timely management and remediation of defaults; maintain continuity in the delivery of departmentally funded programs and services to Aboriginal communities while the recipient is in default; and meet the requirements for accountability, transparency, and effective internal control in the management of departmental transfer payment programs. 9
Three-Part Approach to Managing Default 10
Default Prevention and Management Policy When deciding what measures to take to prevent and manage defaults, the department carefully weighs the risk and circumstances associated with the default, the degree of co-operation between the recipient and the department, and the willingness and ability of the recipient to address the default. Different actions can be taken to address defaults. Types of default management actions on a scale of involvement from lowest to highest are: Recipient Managed under a Management Action Plan (MAP): The First Nation develops and implements a plan (acceptable to AANDC) that reflects measures they will take to remedy and recover from the default, to address its causes and to prevent a recurrence. Recipient-Appointed Advisor - MAP: The Recipient Appointed Advisor is a specialist contracted by the First Nation as part of their Management Action Plan to assist the First Nation to address the specific default situation and prevent its recurrence. Third-Party Funding Agreement Management: A default management action applied by the department in high risk situations, where the department contracts a Third Party to manage a recipient s funding agreement for a period during which the recipient works to remedy the underlying causes of the default and reassume responsibility for the funding agreement. The decision to intervene is not taken lightly. Initiation of Third-Party Funding Agreement Management is used as a last resort to ensure the continued delivery of programs and services to community members. 11
Using the Default Assessment Tool (DAT) The DAT is a structured business process used to determine: the risk to the service population; the risk to (successful) remediation; the overall default management (DM) risk rating; and recommended default management (DM) action(s) - informed by the overall DM risk rating process. Once an issue has been identified, the Default Assessment tool may be used to assess / identify the level of risk associated with a default and aid the department in deciding on the appropriate default management action. Default Assessment triggers: A high risk GA rating (in some cases medium); A disclaimer of opinion or an adverse opinion of the Audited Consolidated Financial Statements; A Corporation (being the recipient) has become bankrupt, insolvent or has ceased to be in good standing; Information gathered during monitoring activities or that has come to the department s attention indicating a concern; Monitoring of plans put in place to allow a recipient to enter into a more flexible funding arrangement reveals that plans are not being followed. 12
Default Assessment Tool Default Management Action Guidance Overall Risk Rating For Multi-Program Recipients For Project and Specific Service Recipients Low Risk Monitored self- correction / withholding of funds for non-essential services Monitored self correction / withholding of funds for non-essential services Medium Risk Management Action Plan Management Action Plan High Risk Hiring of Third Party Manager Terminate Agreement 13
Management Action Plan (MAP) The MAP is a tool used in risk situations where default is more frequent and serious in nature, suggesting underlying problems that the recipient needs to resolve to avoid further default. The MAP is the recipient s responsibility and so is developed by the recipient and reviewed by AANDC to determine if it is sufficient to address the default(s). Where the recipient uses external expertise to help manage their situation, the MAP should outline the expected deliverables of the expert advisor well as define timelines and performance measures that would allow determination of completion. 6 steps in MAP process: Department notifies recipient of the need to prepare a MAP; Recipient organizes to prepare MAP; Recipient develops MAP; Department reviews MAP; Funding Agreement is amended (if necessary); and MAP is monitored by recipient and Department. The MAP should aim for SMART goals. Two additional types of plans may be required to address issues: Financial Management Plan: completed for those recipients that need to correct a financial situation. Capacity Development Plan: completed where building the human resource capacity of the recipient will help address immediate needs and may support the longer-term sustainability and success of the organization. 14
Assessing Completion of a MAP Periodically the department assesses whether the objectives of the management action plan have been attained and the plan is no longer required. The criteria for determining if a MAP can be terminated are: High and medium priority items have been met; The recipient has a plan of action for resolving lower priority issues (the department devises a monitoring plan for outstanding items); and The recipient has plans to continue with capacity development, as required, to avoid recurrence of these problems. 15
Management Action Plan (MAP) FINANCIAL MANAGEMENT - Problem Identification Global Financial Goal(s) Global Performance Measures 1. Cash flow difficulties which have lead to unpaid suppliers and employees, nonsufficient funds cheques, and the inability to obtain credit from banks and goods and services from local businesses. Risk Rating: High 2. A cumulative deficit of $3,500,000.00 1. Restore credit worthiness with financial institutions and suppliers. Related Problem(s): 1,2 Goal Priority: High 2. Recover the existing cumulative deficit over a 3 year period. Related Problem(s): 1 which arose due to lapses in Goal Priority: High accounting/budgeting procedures and a 3. Establish a sound fiscal framework that failure to follow the existing financial will ensure compliance with funding control framework. Risk Rating: Medium 3. Financial pressures on Chief, Council members and band administration due to a lack of understanding by band members, employees and managers of resource limitations versus program requirements. Risk Rating: Low agreements and prevent future cash flow problems. Related Problem(s): 3 Goal Priority: Low 4. Educate/inform managers, employees on band finances. Related Problem(s): 3 Goal Priority: High 1. Interest payments for late invoices reduced to less that $500.00 per fiscal year 2. Monthly aged accounts payable listings showing all payments are within agreed payment terms 2. Complaints by creditors and band members to the Department and Chief & Council are reduced to zero within 180 days 4. Creditors extend credit and suppliers will provide goods and services without certified cheques 5. Quarterly internal Financial statements/ Audited Consolidated Financial Statements show deficit is being recovered as per Form B 6. Audited Consolidated Financial Statements confirm funding is expended in compliance with the Department funding agreement. Milestones can be verified and documents are available for review. Objective Task/subtasks Time Line Person(s) Assigned Results/ Performance Measure Terms of reference available for review Confirmation from the bank of new signing authorities. Review Frequency Review of Terms of reference by the Funding Services Officer 07/01/2013 Establish a Finance Committee consisting of the financial controller, band manager and 2 council members to sign cheques and approve all financial transactions Related Goal(s): 2,3 Objective Priority: High 1. Determine Financial Management Board members based on competency 2. Establish a terms of reference for Financial Management Board 3. Band Council Resolution to bank to change signing authorities. Immediately Completion by 07/15/2013 Band Manager in conjunction with Chief & Council 16
Capacity Development In 2012-2013, the department prioritized Professional and Institutional Development (P&ID) program funds to assist recipients in addressing the root causes of their defaults: $3 million was earmarked specifically for Default Prevention and Management Policy pilot projects, either for activities that would prevent a default or to fund activities identified in a recipient s Management Action Plan (MAP). Remaining P&ID funds were used on a priority basis for funding of governance-related activities identified in MAPs. The P&ID program also supported capacity development by funding projects that would lead to: Development of the First Nation s ability to plan; Implementation of existing plans; and Addressing governance-related issues identified in a recipient s General Assessment. 17
Recipient Audits Recipient audits are another element on the continuum of default prevention and management activities undertaken by the department. As indicated in all its funding agreements, AANDC has the ability to conduct audits of funding recipients in order to provide assurance that a recipient is not in default of the terms and conditions of the funding agreement, and to provide information that can help the recipient improve their management practices. To ensure transparency and accountability, audits and other oversight activities are designed to confirm compliance with the terms and conditions of funding agreements, specifically: that there was no misappropriation of public funds; and that funds were used for the intended purposes. Recipient audits also look at the management practices of recipients and can help to identify areas that need improvement as well as best practices that can be shared. Positive recipient audit findings can result in a beneficial impact on recipient risk scores and can help to respond to MAP requirements or other actions required as part of a default prevention or management strategy. Results of recipient audits can impact the default status of a recipient. For example, if an audit finds that the terms and conditions of funding agreements are not being respected, these findings could trigger a default action. 18
Recipient Audits (continued) AANDC s new Recipient Audit Policy and Directive came into effect in late 2011. That year (2011-12), 8 recipient audits were initiated as part of a pilot project. In order to reduce the administrative burden on recipients, 3 of those were joint exercises with Health Canada (HC). In 2012-13, 25 recipient audits were initiated; 6 were joint AANDC-HC audits. 24 have concluded. The scope of one was expanded and is still underway. AANDC s Recipient Audit planning process involves selecting a variable number of recipients for audit, based on risk. Part of this risk assessment involves consideration of GA scores, default status and the factors that led to the default. A small percentage of lower-risk recipients are randomly selected to form a control group. Recipient audits for 2013-14 have not yet been confirmed. Planning is now underway. 19
Questions & Answers Thank you / Merci / Meegwetch 20