Audit of the Industrial and Regional Benefits Management Control Framework

2.0 About the Audit

2.1 Background

The objective of the Contracting Policy of the Government of Canada is to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people. In support of its objective, the Contracting Policy states that government contracting shall be conducted in a manner that will, among other things, support long-term industrial and regional development and other appropriate national objectives, including aboriginal economic development.

The Industrial and Regional Benefits (IRB) Policy was established in 1986 to lever large government procurement for industrial development. The Policy was created to ensure that Canadian companies can derive benefits from procurements, such as new business or investments in new technologies. The majority of procurements subject to the IRB Policy are Defence procurements.

The IRB Policy requires that prime contractors (Canadian and foreign) work with Canadian firms or make investments in advanced technology sectors of the Canadian economy, in an amount usually equal to the contract value. The investments can be either directly related (goods, services and/or long-term service support directly for the items being procured by the government) to the procured item, or indirectly related (i.e. investments, technology cooperation, and product mandates) to it.

Industry Canada (IC) is responsible for the administration of the IRB Policy. The Regional Development Agencies perform an advocacy role for their respective regional stakeholders. IC works in partnership with Public Works and Government Services Canada (PWGSC), which oversees the procurement process, and with the Department of National Defence (DND), which establishes the technical requirements.

The IRB Directorate, which is responsible for the design and implementation of the IRB Policy, resides within the Aerospace, Defence and Marine Branch (ADMB) of the Industry Sector. The Directorate has a budget of approximately $2.5M and comprises 25 Full Time Equivalents (FTEs). The Regional Directors in the Quebec, Ontario and Pacific regions support the IRB Directorate by allocating one FTE (at 10% of their time) to provide input and advice regarding economic activity in their region. The Directorate indicates that its portfolio currently has 57 separate Defence procurements with a value of approximately $20B.

The IRB Directorate discharges its responsibilities through four key functions:

• Negotiate and approve IRB requirements with regard to new military procurements;
• Manage and monitor the specific corporate IRB obligations achieved through a series of "IRB transactions";
• Verify that the companies actually deliver on their agreed-upon commitments; and,
• Communicate, disseminate, and promote the IRB Policy and ongoing portfolio of commitment opportunities for Canadian business.

In 2006, the Government of Canada announced the Canada First Defence Strategy (CFDS), which will see substantial increases in defence spending. The CFDS is estimated to double IRB obligations owed to Canada from their current level of approximately $20B.

In September 2009, the Minister of Industry announced a series of enhancements to the IRB Policy. This was the first major change to the Policy since its implementation in 1986. The enhancements are to be implemented in 3 phases:

• Phase 1 involves the phasing in of the requirement to identify 60% of the IRBs upfront (30% at contract signing, and 30% within one year), and the incentive for the creation of Public-Private Consortia.
• Phase 2 involves improving the recognition of the value of Canadian firms' participation in Global Value Chains, and firm-level research and development and commercialization.
• Phase 3 involves enhancing the priority technology list, the requirement for strategic plans from prime contractors with major IRB obligations, and the banking of industrial and regional benefit credits.

All 3 phases are to have been implemented by Fall 2010.

As a result of the changes to the IRB Policy and the projected increase in procurements in the CFDS, the IRB Directorate is undertaking significant changes to its management control framework, guided by its first three-year Business Plan 2010–13. The development of the plan was accompanied by an organizational review and an exercise to verify internal processes. The Business Plan (currently in draft) is intended to ensure that the Directorate can continue to meet its mandate and achieve its strategic objectives as the CFDS is rolled out.

The draft IRB Business Plan identifies seven areas as critical in enabling the IRB Directorate to continue to meet its mandate, achieve its vision and address the risks and challenges facing it in the future. The seven critical areas are, in no specific order of importance:

• Strengthened Industrial Advocacy Over the Entire Procurement Cycle
• Improved Stakeholder Relations
• Standardized Operational & Business Processes
• Enhanced Data/Information Management
• Effective Communication of IRB Success and Opportunities
• Improved Human Resources Management
• Strengthened Policy Capacity.

This audit of IRB was included in the 2010–11 departmental Risk-Based Audit Plan at the request of IRB management, who were seeking early feedback on the changes being made to the management control framework (MCF).

2.2 Audit Objective

The objective of this audit is to provide senior management with an assessment of the governance and risk management aspects of the IRB management control framework.

The IRB Directorate is currently completing the documentation of operational processes, controls and procedures in support of the MCF. Because this initiative will not be completed until fiscal 2011–12, AEB will be conducting advisory services in this area in the context of proposed controls and opportunities for improvement.

2.3 Audit Scope

The scope of the audit included comparing the newly revised management control framework for IRB to applicable controls outlined in the draft OCG Core Management Controls. These draft November 2007 Core Management Controls are aligned with the Treasury Board Secretariat's Management Accountability Framework, which contains a set of management expectations.

The IRB Directorate is undertaking significant changes to its MCF, guided by its draft three-year Business Plan. This audit focused on changes made to the MCF since 2009, to provide management with early feedback.

2.4 Audit Methodology

This internal audit was conducted in accordance with the Treasury Board Policy on Internal Audit and Internal Auditing Standards for the Government of Canada. The audit utilized criteria based on the Core Management Controls and the Management Accountability Framework. Appendix A provides a summary of these criteria.

The audit approach consisted of the following:

• a planning phase, including audit risk assessment, and preparation of an audit planning memorandum with audit criteria that were presented to IRB Directorate management;
• interviews with IRB management and staff members;
• review of IRB documentation, including past audit and evaluation reports; and
• review of key documents related to the changes in the IRB MCF, including the IRB Directorate's draft Strategic Plan dated July 2010(now renamed the Business Plan), the IRB HR Workload Review Report, and the IRB verification report.

The audit was conducted from May 2010to August 2010.

Recognizing that the IRB MCF is in the process of being implemented, our assessment of the IRB MCF uses a three-stage development scale to determine overall status by MAF element and provide an assessment, where appropriate, of progress made on the IRB MCF. Table 2 below describes expectations associated with each stage of development.

Table 2: Definition of the Three Phases of MCF Development

Stage of Development	Audit Criteria	Indicator of Progress
Start-up Phase	Most criteria have not yet been met.	Applying the MCF has recently begun.
In Process	Many criteria have not been met, but progress is being made.	Actively and demonstrably moving toward application of the MCF.
Implemented	All criteria have been substantially met.	Applying the MCF.

2.5 Reporting Strategy

Our report provides an overview of the IRB MCF's implementation status by MAF elements and describes the key initiatives implemented and planned under each element, grouped by the two audit lines of enquiry of Governance, and Risk Management. Recommendations are provided at a high level where moderate issues are noted.