Compliance Audit of Guardian Trustees Conservatory Measures

April 2011
Recommended for Approval to the Deputy Minister by the
Departmental Audit Committee on

Approved by the Deputy Minister on


Table of Contents


1.0 Executive Summary

1.1 Introduction

The Office of the Superintendent of Bankruptcy Canada, an organization of Industry Canada, supervises the administration of insolvency estates for bankruptcy, proposals and other insolvency cases in Canada. Its powers and obligations stem from the BIA; according to paragraph 5 of the BIA, the Superintendent supervises the administration of all insolvency matters.

When a person or company is facing a financial crisis, the person or company may declare bankruptcy or submit a proposal to creditors. A trustee in bankruptcy is a person licensed by the OSB to administer bankruptcy and proposal estates. An officer of the Court, the trustee has an obligation to look after the rights of the creditors and to investigate the affairs of the debtor, as required. A bankruptcy estate administrator, not to be confused with an Administrator of Consumer Proposals, commonly refers in the industry to a person who works with the trustee to give administrative support.

When an insolvency estate is in need of protection, the Superintendent may, as stated in sub-paragraph 14.03 of the BIA, appoint a Guardian Trustee to administer the estate and hence, perform conservatory measures for the estate in question. When the appointment of a private trustee is not possible or practical, the Superintendent will appoint an OSB employee who is also a qualified trustee.

There are several circumstances in which the Superintendent may appoint a Guardian Trustee. One is trustee malfeasance; serious wrongdoing on the part of a trustee can put estate files at risk. In other cases, a trustee may become ill or die without a valid succession agreement. Finally, a trustee, for whatever reason, may have allowed the administration of his or her practice to become substandard.

According to OSB officials, in many if not all of the cases where an OSB employee is appointed a Guardian Trustee, the estates in question have suffered and are not easily managed. They may have long-standing overdrawn accounts, missing or faulty records including bank reconciliations, and serious aging issues, all of which present their own unique challenges. The Guardian Trustees' primary duty is to administer the estates as efficiently and effectively as possible until file closure.

The OSB Business Plan says 400,000 estates have been under BIA administration in 2008–2009, and that this represents a significant increase over previous years. The 14 OSB offices have approximately 300 employees in total. In Toronto only, two Guardian Trustees and two administrators administer more than 950 estates, with an average value per estate of less than $5,000.

In accordance with the approved Industry Canada (IC) 2010–2011 Multi-Year Risk-Based Audit Plan and as requested by OSB, the Audit and Evaluation Branch (AEB) undertook a compliance audit of the files under conservatory measures performed by Guardian Trustees.

1.2 Objective and Scope

The objective of this audit was to determine if the Guardian Trustees' internal control procedures for the files under conservatory measures allow for efficient and effective administration of estates, adequate safeguarding of assets, and compliance with the requirements of the Bankruptcy and Insolvency Act and OSB directives.

The audit scope covered all estates under administration by the Guardian Trustees in Toronto, in the fiscal year that began April 1st, 2010 and ended March 31st, 2011.

1.3 Main Findings

In Toronto, two Guardian Trustees and two administrators administer more than 950 estates, with more than $3 million worth of assets held in trust. Some good practices were observed, such as early preparation of a very detailed draft Statement of Receipts and Disbursements at or soon after nomination, adequate filing of most of the statutory reports, use of a stamp and initials to document receipt and review of some documents, and commitment of the Guardian Trustees and administrators to comply with laws and directives.

However, the audit found the following:

Accuracy and timeliness of financial information

Finding 1.0: More than 20% of audited estate files showed financial recording considered inaccurate, not timely, with some evidence of improper and ineffective review to ensure adequate accounting records.

Finding 2.0: Weaknesses were observed in the review and monitoring of financial transactions.

Safeguarding of assets

Finding 3.0: Segregation of duties is not in place to ensure tasks such as cheque preparation, deposits and journal entries are not performed by the same person. Sub-ledger journal entries are not always reviewed by the Guardian Trustee on a timely basis.

Finding 4.0: At the time of the audit, 10% of the bank accounts selected for examination and confirmation did not show the notation "in trust".

Finding 5.0: An OSB directive states that negative balances shall not arise in any estate administration. During the audit, eight negative account balances were observed in the July 31st, 2010 list of estate balances provided.

Finding 6.0: The audit observed that some bank reconciliations were not completed and recorded on a timely basis, while some bank reconciliations were not completed.

Finding 7.0: To monitor the completeness of monthly bank reconciliations, administrators instituted a control list. This control was not applied during the period under audit.

Documentation and File Management

Finding 8.0: Proofs of claims are reviewed by the administrator and Guardian Trustee, but not documented adequately.

Finding 9.0: The Guardian Trustees' file documentation system is not uniform, lacks evidence of review, and is missing statutory documents.

IT Systems

Finding 10.0: Password access limitations and exceptions reports are not used. These controls are meant to strengthen segregation of duties and supervisory controls in an IT environment.

1.4 Recommendations

Accuracy and timeliness of financial information

Recommendation 1.0: OSB should take immediate measures to ensure that the accounting records of all files under Guardian Trustees' supervision reflect, at all times, an accurate financial picture of the insolvency estates. OSB must ensure that corrections or amendments when applicable are done on a timely basis, to present reports that are reliable and in keeping with a fair financial presentation.

Recommendation 2.0: OSB should ensure guidance is provided for more rigorous application of internal controls to minimize risk and comply with applicable directives.

Safeguarding of assets

Recommendation 3.0: OSB should ensure good and efficient segregation of duties, and proper review of accounting record.

Recommendation 4.0: OSB should ensure that directions issued to banks when conservatory measures are introduced clearly state that bank accounts and term deposits must bear the proper name and must be held "in trust", and this should be reinforced by directions from the OSB to the legal affairs divisions of banks as needed.

Recommendation 5.0: OSB should institute stronger controls over cash management. This would minimize errors, bank transfers and transactions that lead to negative balances.

Recommendation 6.0: Bank reconciliations should be completed on a timely basis and properly recorded to ensure appropriate controls over cash on hand and banking operations.

Recommendation 7.0: OSB should ensure the list of all bank accounts and term deposits is used as an internal control and duly applied on a monthly basis.

Documentation and File Management

Recommendation 8.0: OSB should strengthen the documentation of Guardian Trustees' review of proofs of claims.

Recommendation 9.0: OSB should establish standards for file documentation and indexation to enhance managerial control of estates administration.

IT Systems

Recommendation 10.0: OSB should encourage the proper use of basic IT controls to enhance monitoring and managerial operations.

1.5 Audit Opinion

In my opinion, internal controls of the files under conservatory measures performed by the OSB Guardian Trustees in Toronto do not provide, on an overall basis, for efficient, effective and timely management of the administration of estates, or adequate safeguarding of assets. Major deficiencies observed in the overall control structure present a moderate to high risk of exposure and require improvement. Material financial adjustments will be required to the accounting records of the Guardian Trustees in Toronto to ensure that Guardian Trustee files are presented fairly.

1.6 Statement of Assurance

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided in this report. The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria agreed upon with management. The opinion is applicable only to the entity examined, which concerned the conservatory measures performed by Guardian Trustees of the Office of the Superintendent of Bankruptcy Canada located in Toronto. This audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada.

Susan Hart
Chief Audit Executive, Industry Canada


2.0 About the Audit

2.1 Introduction

The Office of the Superintendent of Bankruptcy Canada, an organization of Industry Canada, controls the administration of insolvency estates for bankruptcy, proposals and other insolvency cases in Canada. Its powers and obligations stem from the BIA; according to paragraph 5 of the BIA, the Superintendent supervises the administration of all insolvency matters.

The OSB's mission is to contribute to a fair and efficient marketplace by protecting the integrity of the bankruptcy and insolvency system for the benefit of investors, lenders, consumers and the public. The OSB's legislative mission is to ensure the BIA is well applied and to ensure compliance with related insolvency instruments. Trustees in the private sector and OSB Guardian Trustees are bound by the mandate under the BIA.

The OSB Business Plan emphasizes that the impartiality and professionalism of stakeholders in the insolvency system are paramount to ensure public trust in the system. These stakeholders, or key players, are the trustees, lawyers, court employees, registrars and judges, receivers, liquidators, auctioneers and legislators involved in the system. They all contribute to the fair distribution of insolvency estate proceeds to creditors and the rehabilitation of unfortunate debtors. Their actions support the main objectives of the BIA and the OSB.

When a person or company is facing a financial crisis, the person or company may declare bankruptcy or submit a proposal to creditors. A trustee in bankruptcy is a person licensed by the OSB to administer bankruptcy and proposal estates. An officer of the Court, the trustee has an obligation to look after the rights of the creditors and to investigate the affairs of the debtor, as required. The trustee also ensures that the rights of the debtor are not abused. A bankruptcy estate administrator, not to be confused with an Administrator of Consumer Proposals, commonly refers in the industry to a person who works with the trustee to give administrative support.

Official Receivers (OR), who are OSB employees, supervise trustees for compliance for every estate administered. Trustees are also subject to other reviews and interrogations, such as by registrars and judges. They must report on an ongoing basis, and respect their Code of Ethics.Footnote 1

Where an insolvency estate is in need of protection, the Superintendent may, as stated in sub-paragraph 14.03 of the BIA, appoint a Guardian Trustee to administer the estates and hence, perform conservatory measures for the estate in question. Where the appointment of a private Guardian Trustee is not possible or practical, an OSB employee who, is also a qualified trustee, will be appointed as Guardian Trustee. There have been 5 Guardian Trustees in different locations across Canada in recent years.

There are several circumstances in which the Superintendent may appoint a Guardian Trustee. One is trustee malfeasance; serious wrongdoing on the part of a trustee can put estate files at risk. In other cases, a trustee may become ill or die without a valid succession agreement. Finally, there are cases where a trustee, for whatever reason, has allowed the administration of their practice to become substandard.

According to OSB officials, in many if not all of the cases where an OSB employee is appointed as Guardian Trustee, the estates in question have suffered and are not easily managed. They may have long-standing overdrawn accounts, missing or faulty records including bank reconciliations, and serious aging issues, all of which present their own unique challenges. The OSB Guardian Trustees' primary duty is to administer the estates as efficiently and effectively as possible until file closure in spite of many file challenges and to work diligently on behalf of debtors and creditors who have been adversely affected through no fault of their own.

The OSB Business Plan says 400,000 estates were under BIA administration in 2008–2009, and that this represents a significant increase over previous years. The 14 OSB offices have approximately 300 employees in total. In Toronto, two Guardian Trustees and two administrators administer more than 950 estates, with an average value per estate of less than $5,000.

At present, approximately 1,000 professionals hold a Canadian trustee license.

In accordance with the approved Industry Canada (IC) 2010–2011 Multi-Year Risk-Based Audit Plan and as requested by the OSB, the Audit and Evaluation Branch undertook a compliance audit of the files under conservatory measures performed by Guardian Trustees.

2.2 Audit Objective

The objective of this audit was to determine if the Guardian Trustees' internal control procedures for the files under conservatory measures allow for efficient and effective administration of estates, adequate safeguarding of assets, and compliance with the requirements of the BIA and directives of the OSB.

2.3 Audit Scope

The audit scope covered all estates under administration by the Guardian Trustees in Toronto only, at the request of the OSB. Estates were selected for which the Guardian Trustees had not yet been discharged as of , and made the selection based on the balances. The audit included the last 18 months of estate administration. Some estates closed since the beginning of the 2010–2011 fiscal year were also subject to audit.

2.4 Audit Criteria

The audit criteria were based on the legislative requirements of the BIA, with consideration given to the Management Accountability Framework. The criteria were as follows (also see Appendix A):

  • Reliable and accurate information presented to oversight body
  • compliance with applicable laws, such as the Bankruptcy and Insolvency Act and its rules, directives and instructions for asset management and proper accounting
  • adequate safeguarding and management of assets
  • appropriate IT Systems application controls
  • management compared results and expectations periodically
  • financial and non-financial reports adequately reviewed, approved and reliable
  • independence maintained.

This audit complied with the Policy on Internal Audit of the Treasury Board of Canada Secretariat and followed Institute of Internal Auditors standards. In brief, the audit procedures entailed:

  • review of the conservatory measures carried out by the Guardian Trustees
  • compliance audit and review of estate files, and categorization of files with regard to risks, with regulatory procedures provided by the BIA, its rules and related directives
  • compliance audit of banking activities
  • compliance audit for unrealized assets, and realized assets, namely cash or cash equivalents, with bank operations and bank statement reconciliations reviews
  • compliance with instructions, if any, provided by the Official Receiver.

2.5 Audit Methodology

The audit strategy ensured maximum coverage for optimum assurance purposes. The statistical sampling strategy for the Guardian Trustee conservatory measures covered various types of estates: summary and ordinary bankruptcies, ordinary and consumer proposals, receiverships and insolvency consulting mandates, and administered from the OSB Toronto office. Sample selection was done by dollar unit sampling to eliminate bias.

The statistical methodology followed was attribute statistical sampling providing a confidence level of 95%. This was done with the aim of having a positive conclusion for the audit objective and meeting the population audit criteria. After interval calculation, a sample of 49 estate files were randomly selected. The basis of selection was a list showing total cash in bank accounts and investments per estate file, as of , which is similar to the Annual Banking Report filed by the Guardian Trustees as of April 30th of every year.

The total of assets under Guardian Trustee administration, as of , was $4,474,110, for 950 estates files. The sample tested amounted to $1,818,185, resulting in a 40.6% audit coverage; with confirmation of consolidated bank account balances, the audit coverage was as high as $2,362,190, i.e. 52.8 %.

The audit approach consisted of the following:

  • Planning phase—A risk assessment of the operations of Guardian Trustees was conducted, drawing on the management control framework with respect to governance, internal control and risk management processes. Evidence was gathered through document review and interviews with key stakeholders, and then areas of higher risk were identified in the administration of insolvency estates. The results of the risk assessment contributed to the development of audit criteria and the audit program used during the execution phase.
  • Document review — The BIA was reviewed, with its related rules, directives and insolvency circulars, as well as other OSB documents such as the three-year Business Plan and Directions concerning conservatory measures. Together, these represented more than 50 documents of importance to this audit engagement.
  • Interviews—Interviews were conducted, in person or by teleconference, with these key stakeholders: senior directors, an Official Receiver and five employees acting as administrators or trustees at the OSB.
  • Execution phase—49 estate files were selected for review and bank confirmation, along with bank confirmation of all the consolidated bank accounts for summary administrations. The estate files selected for review can be described as follows:
    • 24 summary bankruptcies
    • 14 ordinary bankruptcies
    • 5 consumer proposals
    • 4 ordinary proposals
    • 2 other insolvency files such as consulting and receivership
    • more than 50 bank confirmations
    • more than 100 bank reconciliations.

The audit phases were conducted according to the following timeframe:

  • the planning phase of this engagement was from August to mid-September 2010
  • the audit fieldwork was conducted from mid-September until the end of December 2010
  • debrief meetings to present the findings in this report were held with auditee management on and .

Footnotes

Footnote 1

"Code of Ethics for Trustees in Bankruptcy" is an integral part of the General Rules of the BIA.

Return to footnote 1 referrer


3.0 Findings and Recommendations

3.1 Introduction

OSB directives describe the monitoring and controls on estates administration, and especially on banking operations, in detail. The auditors noticed that the OSB personnel assigned to conservatory measures (Guardian Trustees and administrators alike) are committed to compliance with laws and directives from the OSB inasmuch as possible.

In addition to the findings presented below, other observations have been communicated to management for their consideration.

3.2 Accuracy and Timeliness of Financial Information

Finding 1.0 Recording of Financial Information

More than 20% of audited estate files showed financial recording considered not timely, inaccurate, with some evidence of improper and ineffective review to ensure adequate accounting records.

More than 20% of audited estate files showed financial recording considered not timely, inaccurate, with some evidence of improper and ineffective review to ensure adequate accounting records. For instance:

  • One case had no explanation for a non reconciled item.
  • A one-year old dividend (issued by the former trustee prior to conservatory measures) had not been recorded at the time of the audit.
  • Several accounting entries were not recorded as they should have been, in about 20% of estate files examined. For instance, accounting records did not document fairly and distinctively the transactions for GIC redemption and then re-investments, as proper accounting would suggest. Interest earned on term deposits was only recorded as of the maturity date.
  • The bank balances for investments and bank current operations accounts were not accurately recorded.
  • Review did not suffice, as accounting errors were uncovered by audit procedures.
  • Some estates are recorded or listed on the Report of balances twice, hence double record-keeping occurs or can occur. However, two mitigation controls prevail:
    • At the time of trustee discharge, the Statement of Receipts and Disbursements and accounting records are regularized;
    • The bank accounts are in fact "in trust" accounts, providing added protection for the assets.

Because of the above issues, the estate files do not present fairly the actual transactions in the accounting records, and do not assist follow-up and completion of record-keeping by staff.

Official Receivers and senior management at the OSB should receive complete and accurate information to support decision-making and operations. The audit revealed that this is not so. Errors were noted in the report that shows the balance of cash held in 'in trust' bank accounts and term deposits for each ordinary estate as of July 31st, 2010. This report was used as the basis of selection and testing. To best support operations, it should be accurate, or present fairly the assets under administration of the Guardian Trustees.

The auditors observed that due professional care is applied in the preparation of a detailed Statement of Receipts and Disbursements at the conclusion of the administration of an estate file. This document is prepared initially quite early in the conservatory measures process; this is a good practice and allows effectiveness in operations and understanding of the key events in the administration of a file.

As previously noted, in Toronto two Guardian Trustees and two administrators administer 950 files. These employees must conduct several hundred monthly bank reconciliations and follow up on numerous term deposits.

Recommendation 1.0

OSB should take immediate measures to ensure that the accounting records of all files under Guardian Trustees' supervision reflect, at all times, an accurate financial picture of the insolvency estates. OSB must ensure that corrections or amendments when applicable are done on a timely basis, to present reports that are reliable and in keeping with a fair financial presentation.

Finding 2.0 Review of Financial and Non-Financial Reports

Weaknesses were observed in the review and monitoring of financial transactions.

Weaknesses were observed in the follow-up and review of financial transactions documentation. For instance:

  • In one ordinary estate file, the bank account was closed by the bank. For about six months in 2009, there were no bank statements, hence no bank reconciliation and control for this particular insolvency estate file.
  • In approximately 15% of audited files, the receipt of bank statements was poorly controlled, which negatively impacted bank reconciliations being performed.
  • In another file, as a result of our audit query about an irreconcilable bank account balance, the administrator discovered that a GST refund had been improperly recorded.
  •  Review of entries in the ordinary course of administration was not effective for the above issues.

A lack of control lists and inefficient or inadequate documentation rendered monitoring untimely and ineffective, and provided evidence of non-compliance with applicable policies and directives.

Recommendation 2.0

OSB should ensure guidance is provided for more rigorous application of internal controls to minimize risk and comply with applicable directives.

3.3 Safeguarding of Assets

Finding 3.0 Review of Cash Management Operations

Segregation of duties is not in place to ensure tasks such as cheque preparation, deposits and journal entries are not performed by the same person. Sub-ledger journal entries are not always reviewed by the Guardian Trustee on a timely basis.

The consolidated bank accounts are prepared by the administrators, who are also in charge of deposits and cheque preparation. These banking operations are often reviewed and approved by the Guardian Trustee without adequate or complete supporting documents, especially copies of the term deposit documents.

The Guardian Trustee does not review sub-ledger journal entries for each estate upon entry. The entries are revised either at bank reconciliation review time, or at approval or finalization of the Statement of Receipts and Disbursements, prior to transmission to the Official Receiver.

The review of sub-ledger journal entries, though partially performed, is not a sufficiently strong control to mitigate against errors that could occur in situations of overwork or staff shortage.

Recommendation 3.0

OSB should ensure good and efficient segregation of duties and proper review of accounting records.

Finding 4.0 Compliance with Banking Operations Directives

At the time of the audit, 10% of the bank accounts selected for examination and confirmation did not show the notation "in trust".

As per OSB Directive, bank accounts names should read "Guardian Trustee Name in Trust for ABC Ltd or Individual Name-bankrupt". The bank account name should show a reference to the Guardian Trustee's name and the OSB, not only the OSB.

At the time of the audit, 10% of all bank accounts selected for examination and confirmation did not show the notation "in trust". In one case, the bank account name did not refer to the Guardian Trustee or the OSB; in another, the term deposit showed the name of a former Guardian Trustee now retired. This has a direct impact on the safeguarding of assets.

Recommendation 4.0

OSB should ensure that directions issued to banks when conservatory measures are introduced clearly state that bank accounts and term deposits must bear the proper name and must be held "in trust", and this should be reinforced by directions from the OSB to the legal affairs divisions of banks as needed.

Finding 5.0 Negative Estate Balances

An OSB directive states that negative balances shall not arise in any estate administration. During the audit, eight negative account balances were observed in the July 31st, 2010 list of estate balances provided.

An OSB directive states that negative balances shall not arise in any estate administration. During the audit eight negative estate balances were observed:

  • Four estate bank accounts were overdrawn as a result of actions by the previous trustee.
  • Four estates were at a negative balance as a result of accounting entries that had not been reversed.
  • Some accounts had investments that were not recorded on the list provided, so the accounts in fact had positive balances.

Individually and in total, the amount of the negative balances was not material.

Recommendation 5.0

OSB should institute stronger controls over cash management. This would minimize errors, bank transfers and transactions that lead to negative balances.

Finding 6.0 Bank Reconciliations

The audit observed that some bank reconciliations were not completed and recorded on a timely basis, while some bank reconciliations were not completed.

To comply with the directives concerning consolidated bank accounts, trustees must reconcile all bank statement balances with accounting records at each month end. Bank balances reported to the OSB annually, and internally for management decisions and knowledge, must present fairly and as accurately as possible the cash balances held in trust accounts.

The auditors requested bank reconciliations and bank statements for the last 18 months for selected estate files.

Based on the audit testing, the auditors observed the following:

  • Monthly bank reconciliations were not always performed; 7 of the 49 estates selected were missing. Some bank statement balances showed only nominal transactions such as monthly interest and bank charges.
  • Some bank reconciliations and statements as at July 31st were provided in September, some in November and the rest in late December 2010.
  • For one ordinary administration file, the bank statements and reconciliations for the months of June to December 2009 were not submitted for the audit, despite several attempts to obtain them.
  • An OSB directive requires that bank accounts be reconciled monthly, but this was not done for 10% of the estates selected.
  • All other consolidated bank accounts were well reconciled and confirmed by banks as reported.
  • Some bank statements were stamped and initialled as proof of receipt and preliminary review; this showed effectiveness, efficiency and timeliness in processing banking documents.

Recommendation 6.0

Bank reconciliations should be completed on a timely basis and properly recorded to ensure appropriate controls over cash on hand and banking operations.

Finding 7.0 Use of Control Lists for Completeness of Records

To monitor the completeness of monthly bank reconciliations, administrators instituted a control list. This control was not applied during the period under audit.

Administrators instituted a control list of all bank accounts and term deposits to ensure the receipt of all bank statements and the preparation of all bank reconciliations. However, this control was not applied during the period under audit. It was expected to be in force shortly thereafter.

Recommendation 7.0

OSB should ensure the list of all bank accounts and term deposits is used as an internal control and duly applied on a monthly basis.

3.4 Documentation and File Management

Finding 8.0 Review of Creditors' Proofs of Claims

Proofs of claims are reviewed by the administrator and Guardian Trustee, but not documented adequately.

Proofs of claims are reviewed by the administrator and Guardian Trustee, but not documented adequately. Trustees must document their review of a creditor's proof of claim by means of an initial, a date, an annotation as to acceptance or rejection, the reasons for acceptance or rejection, and amounts accepted and supported.

This is important in view of the OSB's responsibility to protect debtors and creditors located in Canada and abroad.

Recommendation 8.0

OSB should strengthen the documentation of Guardian Trustees' review of proofs of claims.

Finding 9.0 File Documentation and Indexing

The Guardian Trustees' file documentation system is not uniform, lacks evidence of review, and is missing statutory documents.

The Guardian Trustees' file documentation system is not uniform and lacks in certain aspects:

  • No checklist is in use to determine or document the control and statutory procedures performed before the Guardian Trustee appointment, or to be completed urgently or in the near future as a case unfolds.
  • No evidence exists of any review performed at the time of appointment, except for a preliminary Statement of Receipts and Disbursements.
  • Statutory documents were missing in 10% of files audited. For instance, despite evidence of bankrupt discharge, a copy of the discharge certificate was not always on file.

Poor file indexation and documentation undermines efficient and competent management, and could lead to increased risk of failure to notice important issues at the time of appointment or in the course of insolvency estate administration.

Recommendation 9.0

OSB should establish standards for file documentation and indexation to enhance managerial control of estates administration.

3.5 IT Systems

Finding 10.0 IT Controls

Password access limitations and exceptions reports are not used. These controls are meant to strengthen segregation of duties and supervisory controls in an IT environment.

In discussions with administrators and Guardian Trustees, the auditors were informed that password access limitations and exceptions reports are not used. These are meant to strengthen segregation of duties and supervisory controls in an IT environment. Lack of awareness and adequate training explain the absence of some standard IT controls.

Recommendation 10.0

OSB should encourage the proper use of basic IT controls to enhance monitoring and managerial operations.


4.0 Overall Conclusion

The deficiencies found in this audit and described in this report present a moderate to high risk of exposure. Material financial adjustments will be required to the accounting records of the Guardian Trustees in Toronto to ensure that Guardian Trustee files are presented fairly.

Even though some good practices were observed, internal controls over the conservatory measures performed at the Toronto office do not provide, on an overall basis, for efficient, effective and timely management of the administration of estates, or adequate safeguarding of assets.

In spite of these weaknesses, good practices were observed in the course of this audit:

  • commitment of the Guardian Trustees and administrators to comply with the BIA and related directives
  • preparation of very detailed draft Statements of Receipts and Disbursements at a very early stage after nomination
  • adequate filing of most of the statutory reports in a file
  • stamping and initialing of some bank statements to document receipt and review.

Appendix A: Audit Criteria

Appendix A: Audit Criteria
Audit Criteria Satisfactorily Met Partly Met Not Met
1. Reliable information presented to oversight body. x
2. Compliance with applicable laws, such as the Bankruptcy and Insolvency Act and its rules, directives and instructions. x
3. Adequate management of assets. x
4. Safeguarding of assets in compliance with laws and directives. x
5. Transactions properly recorded. x
6. Appropriate IT Systems application controls. x
7. Records and information kept in accordance with laws and regulations. x
8. Assets and records periodically reviewed. x
9. Management compared results and expectations periodically. x
10. Financial and non-financial reports adequately reviewed, approved and reliable. x
11. Independence maintained. x

Appendix B: Management Action Plan

As stated in the introduction of the Compliance Audit of Guardian Trustees Conservatory Measures Report, where insolvency estates are in need of protection, the Superintendent may appoint a Guardian Trustee to administer the estates. Where the appointment of a private Trustee is not possible or practical, an OSB employee who is also a qualified Trustee will be appointed. While cases of Trustee malfeasance are the exception in Canada, there are cases where serious wrongdoing on the part of a Trustee puts estate files at risk. In other cases, a Trustee may become ill and/or die without a valid succession agreement or, finally, there are cases where a Trustee, for whatever reason, has allowed the administration of their practice to become substandard. In many, if not all, of the cases where an OSB employee is appointed as a Guardian Trustee the estates in question have suffered and are not in a state that allows them to be easily managed. They may have long standing overdrawn accounts, missing or faulty records including bank reconciliations, and serious aging issues all of which present their own unique challenges. The OSB Guardian Trustees' primary duty is to administer the estates as efficiently and effectively as possible in spite of the many file challenges and to work diligently on behalf of debtors and creditors who have been adversely affected through no fault of their own.

OSB recognizes the importance and the sensitive nature of the in-house Guardian Trustee function.

It has started to put in place some additional measures that, without targeting any individual audit recommendation, go a long way on improving senior management risk control comfort towards the function. These include:

  • In general, files under the administration of a specific in-house Guardian Trustee will be supervised by one Senior OSB Analyst, even when the files originate from different trustees. This will enable a more efficient level of supervision of files under a Guardian Trustee with more frequent interactions and verifications, and thus keeping with the OSB's general approach to Trustee supervision using a risk-based model.
  • A reporting framework to OSB Senior management has been put in place to allow better management oversight.
Appendix B: Management Action Plan
Recommendation Planned Action or Justification for No Action on the Recommendation Responsible Official Target Completion Date Current Status
Recommendation 1.0:
OSB should take immediate measures to ensure that the accounting records of all files under Guardian Trustees' supervision reflect, at all times, an accurate financial picture of the insolvency estates. OSB must ensure that corrections or amendments when applicable are done on a timely basis, to present reports that are reliable and in keeping with a fair financial presentation.
All of the CBA (consolidated bank account) investments held pay interest monthly, and as required by the banking directive the interest is posted and distributed monthly.

Interest on other estates is recorded when it is paid on maturity or redemption. This is the correct treatment and no action is required.

Entries showing term deposits as disbursements are in the process of being reversed
Guardian
Trustee
Completed
Resources will be provided such that bank reconciliations can be completed and accounting errors identified and addressed in a timely manner. Director General, Program Policy and Regulatory Affairs Ongoing
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that the above action items have been completed. Senior OSB Analyst Ongoing
Recommendation 2.0:
OSB should ensure guidance is provided for more rigorous application of internal controls to minimize risk and comply with applicable directives.
Control lists are used by the Guardian Trustee. The importance of their use has been reinforced.

To improve documentation, date stamps that were formerly placed on the envelope of received bank statements are now placed on the statement itself upon receipt by the Guardian Trustee.

A diary system was created last year and is now in use to better track and document day to day actions in estates.
Guardian
Trustee
Completed
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that the above action items have been completed. Senior OSB Analyst Ongoing
Recommendation 3.0:
OSB should ensure good and efficient segregation of duties, and proper review of accounting record.
Segregation of duties is carried out to the extent possible given the size of the organization. As a stronger mitigating measure, the Guardian Trustee is implementing a procedure for the approval of cheque requisitions and journal entries such that cheques are able to be tracked numerically and reports can be run via the software management system on a monthly basis to confirm that all entries are appropriate and that all journal entries were pre-approved by the Guardian Trustee. Also, Term Deposit Certificates are being moved to a central filing system so they can be easily referenced for bank reconciliations. Guardian Trustee Underway
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that the above action items have been completed. Senior OSB Analyst Ongoing
Recommendation 4.0:
OSB should ensure that directions issued to banks when conservatory measures are introduced clearly state that bank accounts and term deposits must bear the proper name and must be held "in trust", and this should be reinforced by directions from the OSB to the legal affairs divisions of banks as needed.
The intent of the Superintendent's banking operations directives did not consider the extraordinary case of the Guardian Trustees.

OSB will develop a policy with regards to bank account names for the specific situation of Guardian Trustees.

Director General, Program Policy and Regulatory Affairs Underway
Efforts are underway to ensure that all accounts reflect the "in trust" designation. Guardian
Trustee
Underway
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that the above action items have been completed. Senior OSB Analyst Ongoing
Recommendation 5.0:
OSB should institute stronger controls over cash management. This would minimize errors, bank transfers and transactions that lead to negative balances.
It is important to recall that the estates under the administration of the Guardian Trustee are often fraught with issues including, in many cases, longstanding overdrawn accounts. Where negative bank balances are the result of actions of the former trustee, the Guardian Trustee is not in a position to replace the funds to bring the balance into a positive position.

Where the detail trial balance shows a negative balance, this is not necessarily a contravention of the banking directive. The negative balances shown on the detailed trial balances were the result of accounting entries made by the former trustee, which were not reversed for control reasons.

As a best practice, the entries will be now reversed in order to reflect an accurate estate balance and an alternate control method will be implemented.
Guardian Trustee Completed
The Guardian Trustees cash management procedure will be formalized and will include the receipt of cash deposits by two members of the Guardian Trustee team, whenever possible, the use of a three-part receipt book, the deposit by one member of the team and the entry into the insolvency management system by another member of the team with proper documentation to the file and to the posting report book. Guardian Trustee Completed
The Guardian Trustee will be supervised by a single OSB analyst who will verify that the above action items have been completed. Senior OSB Analyst Ongoing
Recommendation 6.0:
Bank reconciliations should be completed on a timely basis and properly recorded to ensure appropriate controls over cash on hand and banking operations.
OSB agrees with the recommendation and will be providing the resources necessary for timely completion and documentation of bank reconciliations. Director General, Program Policy and Regulatory Affairs Ongoing
Recommendation 7.0:
OSB should ensure the list of all bank accounts and term deposits is used as an internal control and duly applied on a monthly basis.
Control lists to monitor the receipt of bank statements and confirm the status of term deposits are in place. The importance of their use has been reinforced. Guardian Trustee Completed
Recommendation 8.0:
OSB should strengthen the documentation of Guardian Trustees' review of proofs of claims.
The estates under the administration of the Guardian Trustee are typically received at a very advanced stage and many major events in the file have already transpired.

After the initial review of proofs of claim, upon nomination, by the Estate Administrator, the trustee will typically review unsecured proofs of claim in detail when there is a triggering event:

  • prior to a meeting of creditors,
  • 45 days after the filing of a consumer proposal,
  • At the time of a distribution of a dividend.

At the time of the review, the trustee will also verify that the administrator has entered the amount of claims correctly on the system.

It has been the practice of the guardian to review all proofs of claims as noted above.
Guardian
Trustee
Completed
Ongoing
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that the review of the proof of claims is reflected in the file. Senior OSB Analyst Ongoing
Recommendation 9.0:
OSB should establish standards for file documentation and indexation to enhance managerial control of estates administration.
The Guardian Trustees have recently been given a segregated office space with sufficient room for adequate file organization to enhance managerial control. Director General, Program Policy and Regulatory Affairs Completed
Completed
Uniform standards for file documentation and indexation is not cost effective as the files under the Guardian Trustees' administration come from a variety of Trustee offices each with their own standards for file documentation and in many instances a substandard filing level with missing documentation. However, the Guardian Trustee will apply appropriate standards to the extent possible in order to maximize file organization and overall efficiency of the office. Guardian Trustee In place
Ongoing
The Guardian Trustee will be supervised by a Senior OSB Analyst who will verify that a standard for file documentation and indexation is applied to the extent possible. Senior OSB Analyst Ongoing
Recommendation 10.0:
OSB should encourage the proper use of basic IT controls to enhance monitoring and managerial operations.
The Guardian Trustee will review the use of password access limitation to achieve the best monitoring and management given the size of the organization. Guardian Trustee Underway