Audit of the Hydrogen Early Adopters Program
3.0 Detailed Audit Findings
The observations detailed below have been summarized by related audit objective in the following table:
|1.||Adequacy of program and financial controls to identify and assess risks over selection, approval payment and review of eligible projects or activities and the program's operations||Sections 3.1.1, 3.1.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.4.1|
|2.||Propriety of transactions||Section 3.2.5|
|3.||Economy, efficiency and administrative effectiveness of program operations and delivery systems||Sections 3.3.1, 3.3.2, 3.4.1|
|4.||Compliance with the Terms and Conditions of the program and Treasury Board Secretariat policies and procedures||Sections 3.2.5, 3.3.1|
The details of each observation, conclusion and recommendation resulting from our audit procedures are outlined below:top of page
3.1 Selection and Approval of h2EA Applicants
3.1.1 Review of Applications
Applicants seeking funding assistance from the h2EA program submit completed investment outlines to the program. A separate file is opened for each outline received by the program. These investment outlines are validated by a program Investment Officer or the Investment Manager for completeness of information and an initial screening of eligibility requirements. The tool used to ensure completeness of information is the 'Initial Proposal Checklist'. Once completed, the project is changed from "enquiry" to "outline" in the Contribution Management Information System (CMIS).
The investment outline is then forwarded to the Acting Program Director for redistribution of submitted outlines to program Investment Officers. After receiving a submitted investment outline, the Investment Officer or Investment Manager completes further follow-up and diligence work to ensure that any missing or incomplete information in the investment outline is obtained. The follow-up is completed via e-mail or telephone and additional information obtained is shared with other program officers to obtain a second opinion of eligibility at weekly staff meetings. The results of diligence work completed on submitted applications are discussed at the staff meetings attended by all program officers and the Acting Program Director.
The outline is returned by the Investment Officer to the Acting Program Director with one of the following recommendations:
- Further diligence should be performed to prepare the proposal for submission to the Project Assessment Committee (PAC) for recommendation of funding, or
- Inform the participant that the proposal submitted will not be processed further based on additional information gathered.
The Acting Program Director either verbally approves the Investment Officer/Investment Manager's recommendation to prepare the submission for presentation to the PAC; or if the proposal is rejected, a rejection letter is sent with an explanation of the reason why.
On average, this stage of the application review process should take between 1 and 3 months, however, it can take up to 6 months. The length of this phase of the process is due in part to the information and documentation gathering from the applicants.
Based on the work performed on the application process, documented assessment criteria, regarding the approval or rejection of applications, were being applied on a consistent basis.
3.1.2 Review and Processing of Investment Outlines
From our testing, we noted that the h2EA program does not formally document the application approval and rejection process prior to submission to PAC for consideration of funding approval. Although investment outlines submitted for approval by the PAC are discussed and agreed upon at the weekly program staff meetings, no minutes of these meetings are kept. Furthermore, during our audit testing we noted that the proposal checklist, which is required to accompany submitted outlines, was not always completed since four (4) of the eleven (11) samples tested did not have a completed proposal checklist.
Our testing indicated that the reasons for rejection were documented and in accordance with the assessment criteria. In addition, the reasons were appropriately communicated to the applicant.
During our audit, we noted that the process of approving and signing each contribution agreement is in place, as each contribution agreement was on file with appropriate signatures. We noted that the preliminary approval process is not formally documented. Appropriate documentation of decisions is needed to properly reflect the due diligence performed by the h2EA program staff and the decision reached by the Acting Program Director to present each project to the PAC.
Technology Partnerships Canada should:
- Ensure that the proposal checklist is completed on a consistent basis and that they are maintained on file for each submitted outline. In order to demonstrate program recommendations of submissions to the PAC, the proposal checklist should include a sign-off by the Acting Program Director; and
- Maintain minutes of staff meetings related to the evaluation process and relevant recommendations.
3.2 Payment Control
3.2.1 Monitoring Financial Stability of Recipient
We noted during our audit that the following steps are performed to identify and monitor the financial stability of an applicant/recipient:
- During the application stage, the program examines the candidate's financial statements and a Financial Data Outline is prepared — the Financial Data Outline is updated when there is a substantive amendment to the contribution agreement;
- Financial statements are reviewed at the scheduled annual meeting with the recipients;
- The Claims Verification Officer reviews financial statements submitted with annual claims, noting any significant changes and follows up with the recipients for additional information required; and
- If the recipient is a public corporation, program staff members listen in on quarterly meetings with shareholders and they monitor public news releases.
We also noted during our audit that the Investment Officer does maintain continuous communication with the recipients and does enquire of financial questions that arise. We did not find any documentation of ongoing monitoring of the financial stability of the recipient being completed by program staff. Without formal and ongoing monitoring of the financial stability of recipients, the program may not be aware of financial risks developing with a recipient which could impact their ability to complete the h2EA project.
The procedures listed above demonstrate that the h2EA program is proactive in its approach to determining the financial stability of applicants and recipients of program funding. Since many recipients are start-up companies, the risk of financial instability is higher and monitoring of financial stability on a more regular basis during the year will allow the program to be more proactive in its actions should a recipient become financially unstable. In addition, this financial information could be used to assess claims submitted by the recipients.
Technology Partnerships Canada should continue to monitor the financial stability of each recipient on a more regular basis (i.e., at a minimum on an annual basis and more often if appropriate) in order to be able to effectively monitor the financial stability of each recipient. This proactive monitoring of the financial stability of the recipients would assist in the program's ability to effectively forecast any changes in disbursements of the contribution budget in the event that the recipient is unable to continue the funded project and will support the reasonability of claims submitted.
3.2.2 Monitoring Recipients for Compliance with Stacking Rules
We noted during our audit that the program reviews stacking limits through the following procedures:
- At the annual recipient review meeting and when progress reports are received;
- The recipient reports the amount of other governmental funding received with each claim submission;
- TPC reports funding of approved projects to TBS on an annual basis;
- Information about funded recipient projects is shared at the Interdepartmental Coordination — Hydrogen and Fuel Cell Committee meetings which are attended by the Acting Program Director; and
- Non-disclosure of other government funding is expected to be detected at the time of recipient audits performed at the individual project level.
Section 10 of the program's Terms and Conditions states that the total government assistance should not exceed 75 percent for any one project. This section also requires potential recipients to identify other sources of government funding at the time of the application and throughout the life of the project. We noted during our audit that the Investment Officer maintains continuous communication with the recipients and does verify other sources of funding.
Based on information gathered during the course of our audit, we noted that the stacking provisions are not proactively monitored since it is the obligation of the recipient to disclose any other government funding received. Accordingly, we did not find any documentation of regular monitoring of the stacking provisions. Due to the nature of the industry in which recipients of contribution funding from the h2EA program operate and the possibility that they may receive funding from more than one government program, there is an increased risk that the stacking provisions may be violated.
While processes are in place to ensure that program staff are made aware of recipients' additional sources of funding, a process is required to monitor the status of each recipient to ensure they are in compliance with the stacking provisions outlined in the Terms and Conditions of the program.
Technology Partnerships Canada should conduct a stacking provision test as additional funding information is obtained for a particular recipient. This will allow the h2EA program to evaluate whether recipients are still in line with the stacking rules as required by the program's Terms and Conditions.
3.2.3 Receipt of Annual Reports and Completion of Annual Visits
Section 5.0 of the program RBAF requires that funding recipients provide an annual report on progress achieved during that fiscal year within one hundred and twenty (120) days following the end of each fiscal year. For the four ongoing projects requiring the submission of annual reports for fiscal 2005–06, one recipient with an October 31, 2005 year-end was required to submit their annual report by February 28, 2006. As of the time of the fieldwork of this program audit, no annual report had been received, which was past the 120 day deadline. In response to the delay in receiving the annual report from the recipient, program staff have been in constant communication with the recipient to remind them of the deadline and to follow-up on the status of receipt.
Section 11.5 "Information Requirements and Reporting/Monitoring" of the program's Terms and Conditions states that TPC officials will meet contribution recipients, at a minimum, once annually to report on project progress. During our audit we examined the program's "Annual Visits" schedule and noted that for two recipients who required an annual visit to date, they had been scheduled and completed. We noted that the annual visit for Fuel Cell Technologies Ltd. was required to be completed by August 3, 2005; however, the actual annual visit was only completed by the program on February 22, 2006. We understand this delay was by design insofar as TPC was informed that the fuel cells would not be in place until early 2006.
The h2EA program's Terms and Conditions specify reporting requirements by the recipients and monitoring activities by program staff in order to ensure that project progress continues to be in line with the strategic objectives and Terms and Conditions of the program. Processes are in place to ensure monitoring and follow-up activities take place to ensure these program requirements are being met.
Technology Partnerships Canada should continue to ensure that reporting requirements are being met by recipients and that annual site visits are scheduled with recipients and completed within the required timeframe.
3.2.4 Compliance with Applicable Legislation
The Lobbyist Registration Act (LRA) R.S., 1985, c.44 (4th Supp.) was assented on September 13, 1988. Depending on the type of lobbyist, the Act states that the applicant file a registration return no later than ten days or two months after undertaking to communicate with a public officer for the awarding of any grant, contribution or other financial benefit.
In response to amendments of the (LRA) in June 2005, TPC developed a process document entitled the "Lobbyist Registration and Contingency Fee Guidelines" dated September 8, 2005. This process document guides the program on TPC's processes and requirements related to lobbyists and contingency fees. In conjunction with this procedural update, in June 2005 the h2EA program began monitoring the registration of applicants with the Lobbyist Registration System and requesting certification letters stating that applicants are in compliance with LRA requirements.
We noted that contribution funding agreements were approved as early as August 3, 2004, while the monitoring of the registration of applicants and requesting certification letters did not start until June 2005. As the amendment came into effect in June 2005, TPC deemed it satisfactory that project proponents: (i) indicate lobbyist information in their project outlines and (ii) sign the Contribution Agreement in which article 6.10 of Schedule I General Conditions outlined their responsibilities as lobbyists.
Although the h2EA did not begin enforcing and monitoring applicants and recipients with the requirements of the LRA, once identified, the program addressed this area and designed appropriate procedures to monitor and communicate the requirements of the LRA to applicants and recipients on a proactive basis.
Technology Partnerships Canada should:
- In conjunction with the recently designed procedures, develop a process to ensure the operational effectiveness of the new guideline. This process should be documented and communicated to staff appropriately; and
- Continue to actively monitor the status of applicants' registration with the Lobbyist Registration System and continue to actively monitor changing requirements of the LRA to evaluate the impact of any changing requirements on program operations.
3.2.5 Claims Review
For testing purposes, we selected a sample of five paid expenditure claims (representing 63 percent of paid claims at the time of the audit fieldwork) submitted by recipients to obtain reasonable assurance that the claims were:
- Appropriately approved under Sections 33 and 34 of the Financial Administration Act (FAA);
- Complete and contained the required supporting documentation to verify that expenditures above $10,000 were incurred;
- In compliance with the terms and conditions of the contribution agreements; and
- Eligible in accordance with the signed contribution agreement based.
The results of our testing identified the following observations:
Section 34 Signing Authority
Each claim tested was approved by the Program Manager as the FAA Section 34 approval; however, it was discovered by TPC personnel on January 23, 2006, that the Program Manager did not have proper delegated FAA Section 34 signing authority.
Upon discovery of the inappropriate signing authority, TPC has taken appropriate actions to rectify the situation, as follows:
- The Director of Environment Technologies, who has FAA Section 34 authority, subsequently reviewed and approved each claim on January 30, 2006 to ensure appropriate use of public funds;
- TPC management performed follow-up procedures to assess the impact of the unauthorized Section 34 approval; and
- TPC management ensured appropriate communication to responsible parties on Section 34 authorized signatories.
Receipt of Claim Submissions
Three claims were received by h2EA later than 45 days after the end of the claim period, which represents a violation of the contribution agreements.
Supporting Documentation for Labour Costs
TPC's claim verification process is conducted consistent with departmental policy in terms of supporting documentation, which states that Program Managers need to determine the appropriate level of documentation required to support a claim. It was noted during testing that no source documentation was submitted to support labour costs included in the individual claims. The claim itself contains information on hours and rates per employee/subcontractor, however, time sheets and payroll reports are not required. Based on subsequent information gathering, it was noted that the Investment Officer will review the reasonability of the labour information presented on the claim and follow-up if necessary.
Since labour costs can be a significant percentage of any given claim submitted, without sufficient evidence to support the costs incurred, there is an increased risk that reimbursement will not be limited to eligible expenditures.
The h2EA program has an appropriate process in place to review invoices and supporting documentation prior to approval and payment of claims. From the testing performed, except for the items noted above, all claims paid contained the necessary supporting documentation and were in compliance with the requirements of the contribution agreements, to reimburse eligible expenses only.
Technology Partnerships Canada should:
- Continue to document the process related to Section 34 account verification and continue to ensure that the unit performing this verification has up-to-date signing authority cards;
- Continue to remind recipients of the requirements of their contribution agreements, including the requirement to submit claims no later than 45 days after the end of the claim period; and
- Continue to ensure that supporting documentation is provided where appropriate for labour costs. This could include timesheets or payroll reports from the recipient organizations.
3.3 Program Operations
3.3.1 Performance Indicators
Section 4.3 "Integrated Ongoing Performance Measurements and Evaluation Strategy" in the Results-Based Management and Accountability Framework (RMAF) details 45 Performance Indicators which should be measured by the program on an ongoing or periodic basis. Based on information provided, we noted the following:
- 9 of the 45 performance indicators were evaluated once since the start of the program;
- 2 of the 45 performance indicators were evaluated twice since the start of the program;
- 1 of the 45 performance indicators was evaluated on a periodic or ongoing basis since the start of the program; and
- 24 of the 45 performance indicators were evaluated once in the six month review completed by Performance Management Network Inc. on November 23, 2004.
In addition to the ongoing monitoring of performance indicators, the RMAF requires the completion of a Formative Evaluation currently scheduled for 2006–07. This evaluation is aimed at identifying the issues related to implementing early success and results-based management.
While several of the performance indicators outlined in the program's RMAF have not been evaluated on an ongoing basis, we understand that this is due to a lack of data available to perform the necessary measurement and monitoring.
Technology Partnership Canada should continue to put in place a process to monitor and measure required performance indicators as per the program's RMAF. This may include the introduction of a tool to support these monitoring activities such as an expanded utility function within the Contribution Management Information System (CMIS).
3.3.2 Annual Audit Risk Assessments
Section 4.2.2 "Recipient Audit" in the RBAF states that the audit risk of each contribution agreement will be assessed annually. Two of the four approved projects have passed the one year anniversary date of their contribution agreement; however, no evidence was provided that the audit risk of the contribution agreements had been assessed. We learned that risk assessments are performed at the end of the fiscal year subsequent to the signing of the contribution agreement. As of March 31, 2006, those projects requiring a risk assessment had not been completed.
We learned that the Audit and Special Review function of TPC conducts annual risk-based planning exercises during which projects under the h2EA program are considered. Recently, this risk assessment process has become more formal and better documented.
As required by the program RBAF, a formal audit risk assessment of each contribution agreement does not appear to have taken place.
Technology Partnerships Canada should continue to develop its annual recipient risk assessment process and criteria to ensure that recipients with high audit risks are identified, monitored and appropriate actions taken. There should be a coordinated effort (between program operations and Audit & Special Review) to ensure a risk assessment for each contribution agreement is performed on a timely basis.top of page
3.4 Program Delivery
3.4.1 Lapses in Program Budget
During the course of the program audit, we identified that there has been lapses in funding which could negatively impact the successful achievement of the program strategic objectives. At the end of 2005–06, only $7.32 million of the allocated $14.05 million had been disbursed by the program (see Table 1 below). Interviews indicated that there have been fewer than expected approved projects and have identified the following constraints:
- Potential applicants are being detracted from participating in a consortium that requires them to be joint and severally liable as required in Section 5.2 of the Terms and Conditions of this Program; and
- The hydrogen industry in Canada is continuously developing. While the program seeks out participants who require funding to demonstrate hydrogen and fuel cell technologies, it is noted that all companies involved in the sector are still in the research stage. However, under the Terms and Conditions of the h2EA program, demonstrations focus on existing technologies only thereby minimizing the technological aspect of project risk.
|Fiscal Year||Approved Contribution Budget||Committed Contributions||Contribution Funds Available for Commitment in Future Years||Lapses|
|2003–04||$1.70 M||-||-||$1.70 M|
|2004–05||$4.52 M||$2.81 M||-||$1.71 M|
|2005–06||$7.83 M Footnote *||$4.51 M||-||$3.32 M|
|2006–07 and 2007–08||$29.95 M||$12.70 M||$17.25 M||-|
|Total||$44.00 M||$20.02 M||$17.25 M Footnote **||$6.73 M|
While there is a process in place to identify, monitor and communicate the status of individual projects and the h2EA program overall, there continues to be lapses in funding. With the h2EA program approval ending March 31, 2008 delays in disbursing contribution budgets needs to be addressed by senior management.
Technology Partnerships Canada should consider escalating the communication and impact of lapses in approved funding and any identified barriers to the achievement of program strategic objectives to senior departmental management to ensure visibility and the development of an appropriate course of action.
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