Follow-up to the 2006 Audit of Departmental Financial Controls

Executive Summary

The Follow-up to the Audit of Departmental Financial Controls, which was tabled and approved at the Audit and Evaluation Committee in September 2006, was conducted during the period from May 2007 to February 2008. The follow-up assessed the extent of implementation of the management actions identified in the Management Action Plan for the 2006 audit and was conducted in accordance with the 2007–2008 Audit Plan approved by the Departmental Audit and Evaluation Committee.

The 2006 audit could not provide assurance that financial processes were being carried out in a consistent manner and that all required financial controls were in place and operating as intended. This placed the Deputy Minister and the Chief Financial Officer at risk of not being able to assess the design, implementation and maintenance of internal controls at a departmental level. The 2006 Audit Report contained 15 recommendations, the most critical of which addressed issues related to the exercising of departmental functional authority as well as those related to account verification and monitoring practices.

The results of the follow-up indicate that responsible officials have, for the most part, implemented the proposed actions to address the recommendations contained in the 2006 Audit Report. The Management Action Plan was prepared on the understanding that there would be no organizational changes or changes to reporting relationships with respect to the financial management function in the department. As a result, responsibility for those functions in the regions and autonomous units would continue to reside in the former Operations Sector and not with the Chief Financial Officer. As such, the Action Plan included the development of a Financial Control Framework to support a decentralized reporting structure wherein the ADMs of the new Regional Operations and Small Business and Marketplace Services sectors would be accountable for the financial activities within their respective sectors, but which did not apply to other organizational units in the department. The Framework outlined financial roles, responsibilities and accountabilities, with an increased focus on financial monitoring across the Sector, including liaising and reporting to the Comptrollership and Administration Sector (CAS) and sector heads. At the time of the follow-up, the Regional Operations and Small Business and Marketplace Services sectors, and the autonomous organizations reporting through these sectors, accounted for approximately 50 percent of all departmental financial officers exercising S.33 payment authority.

Subsequent to the Action Plan, in order to strengthen financial control practices from a departmental perspective, CAS entered into MOUs with the Regional Executive Directors and the heads of discrete organizations (Measurement Canada (MC), Canadian Intellectual Property Organization (CIPO), and FedNor) to provide CAS oversight of the account verification processes within regions/discrete organizations. These organizations were required to provide CAS with a detailed work plan of their account verification and monitoring activities and provide assurance, in the form of an annual sign-off, that the operation of financial processes and controls for which they are responsible are effective and reliable. In turn, CAS established an increased functional role over departmental financial control activities by creating a Functional Relationship Model and reorganizing CAS-FMMD to support such a model. Key features of this model included: having CAS as the single point of contact for questions related to account verification issues, coordinating monitoring and reporting requirements with regions and discrete units, performing regional visits, establishing a quality assurance unit to audit the quality of account verification processes and confirming compliance to the framework developed by the regional offices.

Further, since the approval of the Action Plan, other events have occurred which will impact on internal financial control systems in the Department. In 2006, CAS initiated a readiness assessment exercise to determine whether financial controls and capacities are in place to sustain ongoing audits by the Office of the Auditor General, the second phase of which includes the documentation of financial processes and internal controls which are key to support the preparation of departmental financial statements. It is CAS' intention to keep the documentation of these processes and controls evergreen. Also, in 2006, through the Federal Accountability Act, deputy ministers were designated as departmental accounting officers, which will impact how financial functional authority is exercised in the department. Specific responsibilities include ensuring that resources are organized to deliver departmental objectives in compliance with government policy and procedures and ensuring that there are effective systems of internal control.

The challenge remaining however is the absence of a financial control framework for the department as a whole. Audit testing of transactions during the follow-up noted significantly lower error rates for those organizations governed by the Financial Control Framework as compared to those organizations not governed by a framework. Approximately one-half of all officers exercising Section 33 FAA payment authority are still not bound by the requirements of the Regional Operations/SBMS framework. It is noted that CAS has indicated that a department-wide framework, to be modelled on the Regional Operations/SBMS framework, will be implemented early in 2008–09.

In light of the follow-up results, and given the absence of a department-wide financial control framework, it is recommended that a departmental audit of departmental financial controls be carried out during FY 2009–10 to assess the adequacy of the department's financial control framework. The purpose of such an audit would be to ensure that allocated funds are spent for their intended purposes within approved limits, and that appropriate controls are maintained over expenditures in compliance with applicable authorities.

Further, since the approval of the Action Plan, other events have occurred which will impact on internal financial control systems in the Department. In 2006, CAS initiated a readiness assessment exercise to determine whether financial controls and capacities are in place to sustain ongoing audits by the Office of the Auditor General, the second phase of which includes the documentation of financial processes and internal controls which are key to support the preparation of departmental financial statements. It is CAS' intention to keep the documentation of these processes and controls evergreen. Also, in 2006, through the Federal Accountability Act, deputy ministers were designated as departmental accounting officers, which will impact how financial functional authority is exercised in the department. Specific responsibilities include ensuring that resources are organized to deliver departmental objectives in compliance with government policy and procedures and ensuring that there are effective systems of internal control.

The challenge remaining however is the absence of a financial control framework for the department as a whole. Audit testing of transactions during the follow-up noted significantly lower error rates for those organizations governed by the Financial Control Framework as compared to those organizations not governed by a framework. Approximately one-half of all officers exercising Section 33 FAA payment authority are still not bound by the requirements of the Regional Operations/SBMS framework. It is noted that CAS has indicated that a department-wide framework, to be modelled on the Regional Operations/SBMS framework, will be implemented early in 2008–09.

In light of the follow-up results, and given the absence of a department-wide financial control framework, it is recommended that a departmental audit of departmental financial controls be carried out during FY 2009–10 to assess the adequacy of the department's financial control framework. The purpose of such an audit would be to ensure that allocated funds are spent for their intended purposes within approved limits, and that appropriate controls are maintained over expenditures in compliance with applicable authorities.