Audit of the Automotive Innovation Fund Program—Phase I

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Audit of the
Automotive Innovation Fund Program—Phase I
January 2011

Recommended for Approval to the Deputy Minister by Departmental Audit Committee on
January 25, 2011

Approved by the Deputy Minister on January 31, 2011

Table of Contents


1.0 Executive Summary

1.1 Introduction

The Automotive Innovation Fund (AIF) was established on May 6, 2008 to provide automotive firms $250 million over five years to support strategic, large-scale research and development (R&D) projects to build innovative, greener, more fuel-efficient vehicles. The AIF is administered by the AIF Directorate of the Automotive and Transportation Industries Branch (ATIB) of Industry Canada (IC).

The AIF supports Canada's environmental agenda by advancing Canadian capabilities in fuel-efficient automotive technologies and greenhouse gas reduction. The AIF demonstrates the government's commitment to implementing Mobilizing Science and Technology to Canada's Advantage, Canada's Science and Technology Strategy, in an automotive context and provides an important complement to the government's agenda to support industry competitiveness.

Under the AIF, Industry Canada considers proposals that provide for private sector investment in Canada of more than $75 million over five years. When the AIF was launched, the required private sector investment was $300 million over five years. The investment threshold was reduced in October 2009 following consultation with the industry, during which it was determined that the parts side of the industry was excluded from the AIF because of the large dollar value threshold and the global downturn in the automotive industry.

AIF Management indicated that about 10 companies could be eligible for funding from the AIF.

Because of the nature of the AIF, the level of private sector investment required and the limited number of companies operating in this industry, the AIF Program anticipated only one or two applications per year. Two contribution agreements have been signed, one on March 31, 2009 and the other on March 31, 2010.

The audit was originally scheduled for the fourth quarter of 2009–2010 but was delayed to allow time for payments to be issued. By July of 2010, it became apparent that no payments would be made in the short term as a result of incomplete claims. Therefore, the audit of AIF is being conducted in two phases.

Phase I focuses on four Program Delivery Life Cycle key processes, from Application Submission to Contribution Agreement Development (see Figure 1 in section 2.2).

Phase II will focus on the Payment Processing, Recipient Monitoring, Program Reporting and Program Monitoring processes.

The audit objective for Phase I was to provide assurance that governance, risk management and internal controls relating to the Grants and Contributions Program Life Cycle processes from Application Submission through to Contribution Agreement Development are in place and functioning as intended.

The scope covered AIF Directorate activities from application submission to the signed contribution agreement including seeking and receiving all necessary approvals. Approval processes conducted outside the AIF Directorate, such as those by Program Service Board, Treasury Board and Cabinet, were excluded from this audit.

The audit covered the period May 2008 to September 2010. As of September 13, 2010, the AIF Directorate had two signed contribution agreements. The audit examined three files, two related to the signed contribution agreements and one that is in the process of negotiation.

1.2 Overall Conclusion

Overall, AIF Directorate's governance, risk management and internal controls relating to the Grants and Contributions Program Life Cycle processes from Application Submission to Contribution Agreement Development are in place and functioning as intended. However, opportunities exist to improve risk management processes and internal controls.

1.3 Main Findings

Governance

The AIF governance framework has been established.

Risk Management

AIF Management identified key risks during the development of the program and developed mitigation strategies, as outlined in the Results-Based Management Accountability Framework (RMAF)/ Risk-Based Audit Framework (RBAF).

AIF Management demonstrated that it was aware of new and changing program risks that could impact on operations during program delivery. AIF Management adjusted its Terms and Conditions to take advantage of unanticipated opportunities within the automotive industry and to react to economic conditions.

AIF Management conducts an initial risk assessment of each proposed project during the due diligence portion of the application evaluation.

Finding 1.0: AIF Directorate does not have a formal documented process for ongoing risk assessments/management at the program level and has not finalized the post-approval formal risk assessment process at the project level.

Internal Controls

The AIF Directorate has established sound information management procedures and guidelines.

The approval process is conducted in accordance with the financial signing authority for contribution agreements as evidenced in such documents as the Project Summary Form, the Treasury Board Submission and the Memorandum to Cabinet.

Finding 2.0: With regard to the assessment and evaluation of applications/proposals, the project files lack evidence to demonstrate adherence to established internal procedures and guidelines and to support the decision-making process.

1.4 Recommendations

Risk Management

Recommendation 1.0: The Director General, ATIB should ensure that an ongoing risk assessment process is implemented at both the program and project levels of AIF that will result in the preparation of a formal documented risk assessment on a regular basis.

Internal Controls

Recommendation 2.0: The Director General, ATIB should ensure that the internal procedures guide clearly reflects which documents are mandatory.

Recommendation 2.1: The Director General, ATIB should ensure that project files contain all the documentation to support decisions made.

1.5 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 and contained in this report. The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed on with management. The opinion is applicable only to the entities examined and within the scope described herein. This audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada.

1.6 Audit Opinion

In my opinion, ATIB's administration of the AIF Program has no material weaknesses related to the governance process. However, there are risk exposures related to risk management and internal control processes where improvements are required.

Susan Hart
Chief Audit Executive, Industry Canada

2.0 About the Audit

2.1 AIF Background

The Program

The Automotive Innovation Fund (AIF) was established on May 6, 2008 to provide automotive firms $250 million over five years to support strategic, large-scale research and development projects to build innovative, greener, more fuel-efficient vehicles.

The AIF supports Canada's environmental agenda by advancing Canadian capabilities in fuel-efficient automotive technologies and greenhouse gas reduction. The AIF demonstrates the government's commitment to implementing Mobilizing Science and Technology to Canada's Advantage, Canada's Science and Technology Strategy, in an automotive context and provides an important complement to the government's agenda to support industry competitiveness.

Under the AIF, Industry Canada considers funding proposals that provide for private sector investment in Canada of more than $75 million over five years. When the AIF was launched, the required private sector investment was $300 million over 5 years. The investment threshold was reduced in October 2009 following consultation with the industry, during which it was determined that the parts side of the industry was excluded from applying to the program because of the large dollar value threshold and the global downturn in the automotive industry.

Eligible AIF projects can include vehicle and power train assembly operations associated with significant automotive innovation and R&D initiatives. Other large-scale automotive innovation and R&D initiatives can also be considered, provided they meet the $75 million threshold.

The types of major automotive innovations and R&D initiatives that can be funded through AIF include:

  • new product development (e.g., advanced emissions technologies, energy-efficient engines and transmissions, advanced materials, including engineered plastics, and lightweight components and materials);
  • leading-edge engineering and design, and prototype development;
  • advanced product testing that ensures cleaner, more efficient automotive performance, and reduces greenhouse gases;
  • the development of new production methods and process technologies, including advanced flexible manufacturing techniques;
  • new or expanded facilities to produce leading-edge and more energy efficient vehicles and powertrains;
  • substantive investments in new flexible manufacturing processes; and
  • the introduction of other new transformative production technologies to substantially increase productivity and efficiency (e.g., robotics and advanced IT systems).

Individual proposals are evaluated on the strength of the business case including, with respect to R&D and innovation, environmental and economic benefits.

AIF Management indicated that about ten companies could be eligible for funding from the AIF. Because of the nature of the AIF, the level of private sector investment required and the limited number of companies operating in this industry, AIF Management only anticipated 1 – 2 applications per year.

Current Status

The AIF Program has two signed contribution agreements, as of September 13, 2010.

  • One contribution agreement in the amount of $80 million supports the development of new advanced flexible manufacturing techniques and the building of an advanced powertrain research centre.
  • The other contribution agreement in the amount of $54.8 million supports new product development and green and fuel efficient powertrains.

AIF Management was working with a few other companies on possible applications/proposals. Distribution of funds has been slower than expected, with no funds distributed as of September 13, 2010 because the claims submitted were incomplete.

Program Delivery

The key stages in the AIF process, from initial interest in the AIF to a signed contribution agreement, are as follows:

  • The potential applicant enters into discussion with the Director General (DG) ATIB, generally to obtain further information about the type of funding available.
  • An AIF officer reviews the applicant's proposal for funding for:
    • Compliance
    • Applicability, and
    • Completeness (if incomplete, the officer seeks and obtains information from the applicant ).
  • The DG of ATIB attends an initial meeting with the applicant to discuss the proposal.
  • An AIF officer conducts a detailed review to ensure the proposal is complete and meets AIF requirements.
  • A third party conducts due diligence (technical feasibility, financial viability and a full risk assessment).
  • The DG of ATIB and the AIF officer negotiate the Terms Sheet, which includes such items as level of funding, cost sharing ratios and level of repayment.
  • A Program Summary Form (PSF), prepared and signed by the DG of ATIB, is submitted to the Program Services Board (PSB) for review and approval. The PSF is further approved by the Senior Assistant Deputy Minister, the Deputy Minister and the Minister.
  • A Treasury Board Submission is prepared for contribution agreements over $10 million and a Memorandum to Cabinet is prepared for contribution agreements over $20 million.
  • On behalf of Industry Canada, the contribution agreement is then signed by the Assistant Deputy Minister, Industry Sector or the Associate Assistant Deputy Minister. The applicant's signature concludes the development of the contribution agreement.

2.2 Audit Context

In accordance with the approved Industry Canada 2009–2010 Multi-Year Risk-Based Audit Plan, the Audit and Evaluation Branch was to undertake an audit of the AIF.

The table below lists the commonly used stages of the Grants and Contributions Life Cycle along with the key processes of relevance to each stage.

Figure 1—Grants & Contributions Program Delivery Life Cycle
Stage Key Processes
Design Program Design
Delivery Application Solicitation
Application Submission—Phase I
Eligibility Assessment and Recommendation—Phase I
Funding Approval—Phase I
Contribution Agreement Development—Phase I
Payment Processing—Phase I
Recipient Monitoring—Phase II
Program Reporting
and Monitoring
Program Reporting—Phase II
Program Monitoring—Phase II

For each of the above life cycle processes, there are a number of relevant Core Management Controls (CMCs) defined by Treasury Board that, if effectively designed and implemented, support the effective management of the program.

A risk assessment of the AIF Directorate's management control framework was carried out in the planning phase of the audit (December 2009 to August 2010) using the CMCs.

The risk assessment identified a number of high risk and medium/high risk CMCs; these formed the basis of the detailed audit testing. CMCs that were risk ranked low or medium/low were not incorporated into the audit program for further testing. The audit criteria selected for testing are presented in Appendix A.

While planning the audit, the audit team observed that the AIF Program had not issued any payments up to July 31, 2010. As a result of the risk assessment and the fact that no payments had been issued, the audit of AIF is being conducted in two phases.

Phase I focuses on four processes in the Delivery stage of the Life Cycle, from Application Submission to Contribution Agreement Development.

Phase II will focus on the on Payment Processing and Recipient Monitoring processes of the Delivery stage as well as the Program Reporting and Program Monitoring processes.

Audit Objective—Phase I

The audit objective for Phase I was to provide assurance that governance, risk management and internal controls relating to the Grants and Contributions Program Life Cycle processes from Application Submission through to Contribution Agreement Development are in place and functioning as intended.

2.3 Audit Scope

The scope covered AIF Directorate activities from application submission to the signed contribution agreement including seeking and receiving all necessary approvals. Approval processes conducted outside the AIF Directorate, such as those by PSB, Treasury Board and Cabinet, were excluded from this audit. The audit covered the period May 2008 to September 2010.

2.4 Methodology

This internal audit was conducted in accordance with Treasury Board's Policy on Internal Audit and its Internal Auditing Standards for the Government of Canada. The audit approach consisted of the following:

  • Planning phase: The planning phase was conducted during the December 2009 to August 2010 period. It included a thorough risk assessment of the AIF management control framework based on Treasury Board's CMCs (as defined in November 2007), from which audit criteria were developed for Phase I and Phase II of the audit. Phase I audit criteria, Appendix A, were presented to AIF management. Audit fieldwork was conducted in August and early September 2010.
  • Documentation review: Over 20 key documents, including Evaluation's Implementation Review, were reviewed to gain an understanding of the AIF Program's governance, processes and procedures, and the supporting analysis and documentation.
  • Interviews: 7 interviews were conducted with senior AIF managers, senior AIF officers and AIF staff, for inquiry and corroboration.
  • File review: 3 AIF project files (2 completed to the contribution agreement stage and one still in the application/proposal vetting stage) were examined to test compliance and consistency for risk management processes and internal AIF Program-related practices. This represented 100% of the files available at the time.

3.0 Findings and Recommendations

3.1 Introduction

This section presents detailed findings from Phase I of the audit of the AIF. Findings are based on the evidence and analysis from both the initial risk analysis and the detailed audit.

In addition to the findings presented below, we communicated our observations of conditions that were non-systemic and of low materiality and risk to management, verbally and in a management letter, for consideration.

3.2 Governance

The AIF governance framework has been established.>

The governance framework has all expected essential elements. The framework includes various oversight committees, including departmental ones, such as the ATIB Management Committee.

AIF Directorate has developed a procedures manual that clearly defines the roles and responsibilities of officers within the directorate, the policies, guidelines and processes to be used and the decision-making process.

Operating objectives and priorities exist for all key activities of the AIF Program and are documented and linked to the strategic objectives and priorities in the business plan.

3.3 Risk Management

Changing environment

AIF Management demonstrated that it was aware of risks that could impact on operations.

AIF Management adjusted its Terms and Conditions to take advantage of unanticipated opportunities within the automotive industry and to react to economic conditions.

Shortly after the launch of the AIF in 2008, the economy started to show signs of weakness, followed by a significant downturn in the automotive industry in 2009. As a result, AIF Management found that the willingness and ability of the automotive manufacturers to invest the required $300 million was reduced. AIF Management also became more aware of the extent to which parts suppliers are integrated with auto manufacturers. AIF Management recognized the opportunity to have some of the funding go to parts companies to develop better, greener parts.

To take advantage of this opportunity and address the economic downturn, AIF Management put forward a Treasury Board Submission in October 2009 requesting a decrease in the required private sector investment from $300 million to $75 million.

As a result of these decisions there was a continued interest in the AIF and some parts makers submitted applications, despite the economic downturn.

Finding 1.0: Risk assessment process

The AIF Program does not have a formal documented process for ongoing risk assessments/management at the program level and has not finalized the formal post-approval risk assessment process at the project level.

We expected that the AIF Program would have formal documented risk assessment/management processes for both project and program risks and that these risks would be reviewed and updated on a regular basis.

Based on the interviews we conducted, we concluded the AIF Program does not have a formal documented program-level risk management process. AIF Management identified the program's key risks during the development of the program and developed mitigation strategies, as outlined in the Results-Based Management Accountability Framework (RMAF)/Risk-Based Audit Framework (RBAF). However, AIF Management has not updated the risks and mitigation strategies identified in the RMAF/RBAF. AIF has informally monitored risks at the program level and reacted accordingly, such as the reduction to the required threshold investment level.

The AIF Directorate expressed the view that it is premature to update the original risk assessment and mitigation strategy.  In interviews they indicated that the changes to risks and development of new risks were not significant enough to warrant new or updated risk assessments.

However, interviewees identified a number of new risks, such as the discontinuation by the Ontario Government of its equivalent program, the Next Generation Jobs Fund (a five-year program announced in 2008), and the fact that the AIF is likely to have all its funds fully committed within the next year.

AIF Management is developing a formal risk assessment process for risks at the project level. At the time of the audit fieldwork, we saw no evidence of any updates to the initial risk assessment conducted during the due diligence for the two contribution agreements in place, one of which has been in place for more than one year.

Without an updated RBAF risk framework and finalized monitoring phase risk assessment process, there remains a residual risk that increased costs, loss of opportunities, lapsing of funds and possibly damage to the reputation of the Department could occur.

Recommendation 1.0:

The Director General, ATIB should ensure that an ongoing risk assessment process is implemented at both the program and project levels of AIF that will result in the preparation of a formal documented risk assessment on a regular basis.

3.4 Internal Control

The AIF Program is in compliance with the Treasury Board Policy on Transfer Payments and AIF Management has established sound information management procedures and guidelines.

We expected to find compliance with relevant policies, guidelines and procedures of the government, the Department and the AIF Program. Specifically, we expected to find that the program's Terms and Conditions, along with its Contribution Agreements, were in line with Treasury Board Secretariat policies and guidelines.

During the course of the audit, we found that the AIF's Terms and Conditions and Contribution Agreements were fully compliant with Treasury Board Secretariat requirements. Also, the AIF Program has controls over approval of projects and co-ordination with other programs.

AIF Management has established and documented formal and well-understood mechanisms for information management, retention and sharing. Furthermore, these mechanisms are well communicated and available to all employees.

Finding 2.0: Documentation

With regard to the assessment and evaluation of applications/proposals, the project files lack evidence to demonstrate adherence to established internal procedures and guidelines and to support the decision-making process.

We expected to see on file documents that support the process and documents identified in the AIF's Information Management mechanism. However, during file testing, evidence that these mechanisms are regularly adhered to was not available.

The AIF Program manual, which is available to all staff, contains the program's required internal procedures and guidelines. We found that the procedures and guidelines were not always clear concerning what is required to be documented on the project files and what is optional.

The project files examined contained key documents such as the Project Summary Form, PSB meeting minutes and a copy of the Treasury Board Submission, all with the appropriate approvals. However, documents required by the AIF Program internal procedures and guidelines, such as the final Project Assessment, Eligibility Screening Checklist, Completeness Screening Checklist, QA Checklist, and meeting reports, were not in the files. There was no evidence as to who prepared and who approved the proposal assessment and the rationale for decisions made.

Without complete file documentation, ATIB risks being unable to fully demonstrate accountability and support for decisions made on project files.

Recommendation 2.0:

The Director General, ATIB should ensure that the internal procedures guide clearly reflects which documents are mandatory.

Recommendation 2.1:

The Director General, ATIB should ensure that project files contain all the documentation to support the decisions made.

4.0 Overall Conclusion

Overall, the AIF Program's governance, risk management and internal controls relating to the Grants and Contributions Program Life Cycle processes from Application Submission to Contribution Agreement Development are in place and functioning as intended. However, opportunities exist to improve risk management processes and internal controls.

5.0 Appendix A

5.0 Appendix A
Core Management Control Criteria Criteria Met or Not Met
Governance
Governance and Strategic Directions Operating objectives and priorities exist for all key activities, are documented and linked to strategic objectives and priorities. Met
Objectives are effectively communicated via the intranet, communiqués, town hall sessions, etc. to staff, independent oversight body / bodies and external stakeholders. Met
Risk Management
Risk Management Management has a documented approach with respect to risk management. Not met
All types of risks are identified, including but not limited to legal risk, operational risk, financial risk and reputation risk. Met
The risk identification process is rigorous and considers both internal and external sources. Not Met
Management identifies and assesses the existing controls which are in place to manage its risks. Not Met
The risk assessment process considers the results of the control and includes an analysis of the risks' residual impact and likelihood of occurrence. Not Met
Action plans are put in place to manage or treat risks that are deemed by management to be unacceptable. Action plans include specific mitigation measures, the timeline during which the measures will be applied and the owner of each action. Not Met
Risk information is used to support investment decisions. Met
Internal Controls
Stewardship—Planning and Budgeting Assumptions and related resource allocations and costing practices used to prepare the budget are challenged and decisions resulting from this challenge process are documented. Met
Senior Program management ensures compliance with financial management laws, policies, and authorities through regular monitoring. Met
Stewardship—Asset Management Records, data and information, and access to information, are appropriately secured in compliance with privacy legislation.

Appropriate system application controls exist.

Records and information are maintained in accordance with laws and regulations.

Met
Learning, Innovation and Change Management Succession planning is conducted on a regular basis and considers short- and long-term organizational needs and goals as well as individuals' career development goals. Met
Formal and well-understood mechanisms for information management, retention and sharing exist, are well documented and communicated, and are adhered to. Not Met
IC Policy Program Program is in compliance with related governmental policies. Met

Appendix B: Management Action Plan

Appendix B: Management Action Plan
Recommendation (Page/Section) Planned Action or Justification for No Action on the Recommendation Responsible Official Target Completion Date Current Status
Recommendation 1.0: 

The Director General, ATIB should ensure that an ongoing risk assessment process is implemented at both the program and project levels of AIF that will result in the preparation of a formal and documented risk assessment on a regular basis.

Finalize AIF's governance and accountability framework to assess and monitor both program and project risks. Director General, ATIB Dec. 20, 2010 Completed—AIF Risk Management Approach Overview document has been developed; it sets out the framework for assessing both program and project risks.
Review and reassess the risks identified in the AIF's integrated RMAF-RBAF on an annual basis using the Risk Matrix as set out in the AIF Risk Management Approach. Director General, ATIB Dec. 20, 2010 Completed—The risks identified in the AIF's integrated RMAF-RBAF have been reviewed and reassessed.
Review and reassess project risks identified in the Project Summary Form for each project at least annually (more frequently for a project where significant risks or events have been identified) Director General, ATIB Jan. 15, 2011 In progress
Recommendation 2.0:  

The Director General, Automotive and Transportation Industries Branch should ensure that the internal procedures guide clearly reflects which documents are mandatory.

Revise AIF Project File Management Guidelines to indicate mandatory documents to be retained in project files.

Documents such as Eligibility Screening Checklist, QA Checklist and Completeness Checklist form part of the Project Assessment Form, which is a mandatory document to be retained on file.

The Director General, ATIB Dec. 15, 2010 Completed
Recommendation 2.1:

The Director General, Automotive and Transportation Industries Branch should ensure that project files contain all the documentation to support the decisions made.

Bring project files into compliance with revised AIF File Management Guidelines. The Director General, ATIB Jan. 15, 2011 In progress