Audit of Reg t gional Operati O ions S Saskatc chewan Regio n on

WESTE ERN ECO ONOMIC DIVERSIF D FICATION CANAD N DA Audit & Evaluat tion Bran nch Novem mber 2010

Western Economic Diversification Canada

Table of Contents

1.0 Executive Summary Findings Statement of Assurance 2.0 Introduction Background Audit Objectives Key Risks Scope and Methodology 3.0 Findings and Recommendations 3.1 Governance structure and strategic directions 3.2 Planning, Budgeting, Forecasting and Reporting 3.3 Results and Performance Reporting 3.4 Transaction Processing and Coding 3.5 Delegation of Authorities 4.0 Conclusion 5.0 Audit Approach Standards and Methodology Sampling Audit Team

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1.0
1.1

Executive Summary
The audit of Saskatchewan regional operations was identified in Western Economic Diversification Canadas (WD) approved 2010-2013 Risk-Based Audit Plan. The objective of the audit was to provide reasonable assurance to the Deputy Minister that the Saskatchewan Region has in place sound governance, planning, budgeting, forecasting, and reporting processes to support effective decision-making. The audit covered the period from April 1, 2009 to March 31, 2010. The audit focused on management controls, processes and practices in the areas of: a) b) c) d) e) governance structure and strategic directions; planning, budgeting, forecasting, and reporting; results and performance reporting; transaction processing and coding; and Delegation of authorities.

1.2

The auditors used the Government of Canada internal auditing standards throughout the planning, conducting and reporting phases of the audit. The auditors interviewed key personnel in the Saskatchewan Region and examined records, reports, and sample transactions. Findings 1.3 The Saskatchewan Region has an appropriate and coherent governance framework. The new Strategic Management Committee and the Regional Management Committee provide strong leadership and support to the Assistant Deputy Minister in effective decision-making, management and oversight of regional activities. Active involvement of regional managers, various regional operational committees and working groups, and staff in the day-to-day operations increases regional effectiveness in program delivery. Good management controls and practices exist to provide effective regional governance. Management and operational committee members, regional managers and staff actively participate in setting regional goals and strategies, establishing plans, priorities and performance targets, and performance reporting on results. WD strategic objectives, regional business plans, and performance targets are adequately communicated to staff and other stakeholders. Regional business plans, Assistant Deputy Minister strategic outcome updates, financial, performance and service standard reports, as well as, minutes of meetings, records of decisions and follow-up items are periodically prepared. The auditors found that the Saskatchewan Region did not have documented terms of reference for the new Strategic Management Committee and two other regional committees. The terms of reference for the Regional Management Committee has not been updated although significant changes in responsibilities occurred as a result of
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1.4

1.5

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change in governance. In addition, the regional performance reports did not contain the explanation for reasons of not achieving goals, strategies, performance targets, and management actions to address the gaps. Development and communication of regional committee, and working group terms of reference, and performance reporting needs improvement. 1. 6 Strong financial planning, budgeting, forecasting and reporting are in place. Appropriate financial reports are prepared for senior and regional management, and Headquarters. Ongoing review of financial information occurs, and informal approval processes are in place. Although this review process was adequate, the process needed to be formalized to include documented approval by the Finance Manager. Subsequent to the audit the Saskatchewan regional Finance initiated changes to their month-end process of review in collaboration with Corporate Finance. The auditors reviewed the regions new monthend process for approval and sign- off of financial reporting and found it to be satisfactory.

Statement of Assurance 1.7 In my professional judgement as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the conclusion that the Saskatchewan Region has a sound governance, planning, budgeting, forecasting and reporting processes in place, subject to the implementation of the recommendations in the report. The assurance is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with management. The assurance is applicable to the policies and processes examined. The evidence was gathered in accordance with Treasury Board policies, directives, and standards on internal audit for the Government of Canada. The evidence has been gathered to be sufficient to provide senior management with the proof of the conclusions derived from this audit.

1.8

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2.0

Introduction

Background 2.1 WD operates in an environment of four regions, each with a degree of regional diversity and flexibility. A coherent alignment to corporate goals and priorities is required in order to achieve overall corporate objectives. Regional Assistant Deputy Ministers are responsible for the controls and processes within their respective regions. Regional Assistant Deputy Ministers are being asked to provide regular assurance as to the adequacy of controls in their respective regions. In fiscal year 2009-2010, the Saskatchewan Regions Assistant Deputy Minister managed a budget of $78 million with the support of regional management and staff. The region expended $72 million to deliver and/or administer various federal programs in Saskatchewan. As at March 31, 2010, the Saskatchewan Region had 78.8 full-time equivalent positions.

2.2

Audit Objectives 2.3 The overall objective of the audit was to provide reasonable assurance to the Deputy Minister that the Saskatchewan Region has in place sound governance, planning, budgeting, forecasting, and reporting processes to support effective decision-making. The sub-objectives were: a) to assess that an appropriate governance structure exists in the region; b) to ensure that regional performance results are reported and monitored; c) to assess regional budgeting and forecasting processes and ensure they reflect corporate priorities and financial requirements; and d) to assess the adequacy of the financial monitoring process in the region. Key Risks 2.4 Management designs controls to mitigate risks. The audit is intended to provide assurance on the existence and effectiveness of managements controls to mitigate the following risks: a) the regions governance structure and framework are inappropriate, incoherent and ineffective; b) regional and WD strategic objectives, plans and priorities are not effectively communicated to staff and other stakeholders; c) no formal process is in place to challenge the assumptions and related resource allocations within the budget; d) inaccurate budget and forecast information is provided to management, resulting in flawed decision-making; e) no formal process of reporting to management exists in the region;
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f) g) h) i) j)

complete, accurate, relevant and timely reports are not produced; performance results are not accurately measured or communicated; transactions are not accurately coded; unauthorized individuals approve transactions; and non-compliance with Treasury Board and WD policies, directives and guidelines for delegation of authorities.

Scope and Methodology 2.5 The audit covered the period from April 1, 2009 to March 31, 2010. The audit focused on management controls, processes and practices in the areas of: a) b) c) d) e) governance structure and strategic directions; planning, budgeting, forecasting, and reporting; results and performance reporting; transaction processing and coding; and delegation of authorities.

The auditors interviewed key personnel in the Saskatchewan Region, examined records, reports, and sample transactions. Acknowledgements 2.6 The auditors would like to thank the management and staff of the Saskatchewan Region for the timely cooperation and assistance provided to the audit team throughout the engagement.

3.0
3.1

Findings and Recommendations

Governance structure and strategic directions

Criteria: An appropriate governance framework exists in the region to ensure fulfillment of their mandate aligned with WD strategic objectives, plans and priorities. Policies and procedures are in place, consistent with Treasury Board policies and communicated to staff with financial management responsibility. Regional oversight bodies have clearly defined mandates including a terms of reference, which is well documented and appropriately communicated. The oversight bodies perform their responsibilities as required by the Terms of Reference. Regional and WD strategic objectives, plans and priorities are effectively communicated to staff and other stakeholders.

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3.1.1

An appropriate and coherent governance framework exists in the region. To increase effectiveness in management and decision-making, the region created the Strategic Management Committee (SMC) in late 2009-2010. The SMC has assumed the responsibilities for decision-making and overall oversight to regional activities from the pre-existing Regional Management Committee (RMC). The SMC is chaired by the Assistant Deputy Minister and includes all the senior regional managers. As a result of this change in governance, the SMC can focus more on regional strategic goals and objectives while the RMC can focus more on operational issues. The SMC, RMC and other committees and working groups provide support to the Assistant Deputy Minister in planning and delivering on regional goals and objectives. Good management controls and practices exist to provide effective regional governance. Management committees, regional managers and staff actively participate in business planning, establishing strategies and performance targets, and monitoring and reporting performance results. Regular meetings are conducted to discuss regional management and operational activities, including planning sessions, cash flow forecasts, project assessments, and grants and contributions. Weekly updates on strategic outcomes, targets, results, and business plans are provided to the Assistant Deputy Minister. Regional business plans, targets, results, management decisions, policies and operational activities are appropriately communicated to employees. The region maintains minutes of meetings, records of decisions and follow-up items. Documented regional administrative and financial control procedures are in place. Terms of reference were found for five committees; however, three were yet to be developed. The regional management practices in place promote strong and effective governance and accountability, management excellence, good communication and transparency. At the time of the audit, the terms of reference for the new Strategic Management Committee had not been formally established and that for the Regional Management Committee had not been updated. Only five of eight regional management and operational committees have terms of reference. It is a good practice to formally establish or regularly update the terms of reference of a committee or working group.

3.1.2

3.1.3

Recommendation #1. The Saskatchewan Region should formally establish or update the terms of reference of all existing regional committees and working groups. 3.2 Planning, Budgeting, Forecasting and Reporting

Criteria: Financial planning processes are in place to identify financial resource requirements and to develop annual budgets consistent with priorities. Financial policies, comprehensive monitoring and internal financial reporting that provides senior management with timely information, analysis, and options on resource utilization exist. Compliance with both Treasury Board and WD policies is monitored in the region.

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3.2.1

The region has processes to identify financial resource requirements for delivering on departmental priorities. Each January and February, the Regional Finance Manager requests managers to identify their units resource requirements. Regional requests are consolidated and presented to Executive Committee for consideration and Deputy Ministers approval. Corporate Finance notifies the regions in writing of their budgets for core and non-core grants and contributions, salaries, and operating and maintenance. The responsibility of the region is to determine how to allocate their regional budget within those basic categories given the particular priorities and programs of the region. Input was solicited from all managers, and budgets and allocations were discussed by Finance and Operations at regional management meetings. The final budget allocations are approved by the Assistant Deputy Minister of the Saskatchewan Region.

Criteria: Guidelines, tools, systems and data are available and adequate to support the allocation of resources in a consistent and transparent manner. 3.2.2 The region follows the departmental requirements and guidelines for reporting of financial information and forecasts. Corporate Finance communicates guidelines to the regions for preparing headquarters reports, and a standardized reporting template is used. Saskatchewan Regions financial results, budgeting and forecasting reports are prepared in accordance with these guidelines using the standardized template. Regions are required to report in accordance with the financial planning cycle requirements outlined in the management framework guidelines. Saskatchewan Region prepared the required reports in accordance with the financial planning cycle. Corporate Finance coordinates regional reporting to ensure receipt of the required information on a timely basis for completion of financial reports for WD Executive Committee approval.

3.2.3

Criteria: Financial monitoring reports are prepared on a periodic and timely basis and supported by sufficient evidence. 3.2.4 Regional Finance prepares monthly financial monitoring reports for regional management. The reporting format is similar to that used for submission to Corporate Finance, although the regional report is more detailed. The region follows Treasury Board and departmental policies to ensure that transactions entered are valid and accurate. Financial reports are prepared using the departmental financial information system data. The regional Finance Manager verifies and reviews to ensure the accuracy of the reports. However, this review is not documented. In addition, on a regular basis Regional Finance solicits input from Operations for current forecasting data. The auditors observed that variances were analysed, explained and communicated throughout the regional office by the Regional Finance team. Subsequent to the audit, Saskatchewan regional Finance initiated changes in collaboration with Corporate Finance and has formalized the month-end process for review, approval and signoff of financial reports.
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Criteria: A process is in place to review financial monitoring reports to reallocate resources as needed and to take corrective actions. 3.2.5 The auditors found that the Saskatchewan Regional office has an active and effective process in place to review financial monitoring reports in order to reallocate resources as needed and to take corrective action. Monthly regional financial reports are presented to the Strategic Management Committee and Regional Management Committee for discussion, review and decision- making. Regional operations managers and finance officers are actively involved in monitoring forecasts and reviewing responsibility center financial information. Analysis is timely to support decision making, and financial opportunities within the region or department are identified in a timely fashion to support reallocation. There is active, ongoing coordination between regional Finance and Corporate Finance for identifying and responding to resource needs. Based on regional forecasts, needs or surpluses may be identified or anticipated, and are discussed at Executive Committee, with opportunities for re-allocation to regions, based on need or regional opportunities. Results and Performance Reporting

3.2.6

3.3

Criteria: Performance measurement results in the region are documented, reported corporately and factored into decision making. Monitoring to assess the success of regional operations in contributing to overall corporate strategies is undertaken and appropriate steps are taken in response to variances or deviations from goals and objectives. 3.3.1 The region has a process in place to effectively monitor and report results against regional business plans and performance targets. With guidelines and directions from Corporate Policy, Planning and Performance Measurement, Regional Management Committee members set Management Resources and Results Structure targets, which are submitted to Headquarters for corporate performance measurement. The regional business plan outlines departmental and regional goals and strategies, plans and priorities, regional targets, planned spending, and strategies. The regional Policy, Planning and External Relations unit provides guidelines to business officers to ensure data is accurately entered for performance measurement. Managers accountable for results provide information for the regional performance report. Regional management monitors performance results throughout the year. The regional Policy, Planning and External Relations unit prepares monthly, mid-year and year-end performance reports. Performance results are discussed at regular management and town hall meetings. Midyear and year-end performance reports are communicated to employees. The regional Policy, Planning and External Relations unit specifies the planned strategies, number and status of strategies, targets and results in the performance report.
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3.3.2

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The auditors examined the regional performance reports for 2009-2010 and found that goals, strategies, and targets achieved/exceeded and not achieved were identified in the report. However, the reports did not contain the reasons for not achieving goals, strategies and performance targets, and management actions to address the gaps. Although regional managers address goals, strategies and targets not achieved at their meetings, inclusion of reasons and management actions in the report would add more value to management, employees and other stakeholders. 3.3.3 Regions are not required to submit regional performance reports to Headquarters; however, they supply information for the corporate performance report when needed. Corporate Planning and Programs prepares departmental performance reports with input from the regions. In addition to providing support for the corporate performance reporting, the Saskatchewan Region had shared their results and performance reporting framework with other regions and Headquarters, this is a good practice. Corporate Planning and Programs established departmental service standards related to project development, assessment, payments, and monitoring to improve client-service. Regions are required to comply with those standards and regional management is expected to monitor their results. In the review of service standards results reporting, the auditors noted that Corporate Planning and Programs monitors the results against departmental service standards and generates both quarterly corporate and regional reports and distributes them to the regions. It is not mandatory for the regions to generate individual reports and submit to Headquarters. In Saskatchewan Region, internal quarterly reports are prepared and results against service standards are actively monitored. Regional managers address variances from standards at their meetings and take necessary action to improve performance and client-service.

3.3.4

Recommendation #2. Although the Saskatchewan Region reviews financial and performance reports on a monthly basis, the region should document explanations of any significant variances from established targets as a means to identify and record management actions planned to address any gaps.

3.4

Transaction Processing and Coding

Criteria: Financial transactions are coded correctly and processed in an efficient and timely manner. 3.4.1 Internal Audit selected a judgemental sample of 20 transactions from all grants and contributions programs and five transactions from operations and maintenance for review of transaction processing and coding. The coding for the individual sample payments examined was accurate. No exceptions were identified. In addition to the sample selected, auditors performed an analytical review of coding for all third party grants and contributions payments for fiscal year 2009-2010.
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3.4.2

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The auditors noted that coding was not compliant with Corporate Finance guidelines for activity coding for three of the five identified third party programs (Community Futures Program, Francophone Economic Development Organization and Womens Enterprise Initiative). Allocation guidelines only apply to third party programs. Unlike other grants and contributions programs, coding for third party programs is entered manually into the departmental financial information system, so programs can have more than one subactivity. However, such payments often result in several lines of coding which requires some rigor to ensure accurate allocations. Recognizing the inherent difficulty in checking for errors, Regional Finance included an automatic calculation in their Payment Approval Request form template, which automatically calculates how much to allocate to each activity code for these program payments, to prevent errors and allow the allocation to be checked at the point of data entry. The region has taken appropriate steps to address the issue. 3.5 Delegation of Authorities

Criteria: Authorized individuals approve transactions in compliance with Treasury Board and departmental policies, directives and guidelines. 3.5.1 The sample payments examined had the approval of regional staff with proper financial signing authority. The training requirements of Treasury Board policy for delegation of authorities have been met. Regional Finance actively monitors compliance with Treasury Board and departmental policies, directives and guidelines related to financial controls.

4.0
4.1

Conclusion
Overall, the Saskatchewan Region has a sound governance framework that provides effective decision making, strong leadership and oversight. Except for the opportunities for improvement identified in this report, the Saskatchewan Region has good and effective management controls, practices, and processes exist in the areas of planning, budgeting, forecasting, and results and performance reporting, coding and delegation of authorities. Audit criteria were used to assess the identified key risks, management control framework and practices. The following is a summary of results.

4.2

Assessed Area Governance structure and strategic directions Planning, budgeting, forecasting and reporting Results and performance reporting Transaction processing and coding Delegation of authorities
Audit of Regional Operations Saskatchewan Region Final Report

Result Criteria mostly met Criteria met Criteria met Criteria met Criteria met
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5.0

Audit Approach

Planning 5.1 Audit planning started in June 2010 and fieldwork was completed in August 2010. Preengagement meetings and preliminary survey were conducted to facilitate identification of key risks, audit criteria, control elements and audit strategies. WD staff were involved as necessary throughout the audit process.

Standards and Methodology 5.2 Government of Canada internal auditing standards were used throughout the planning, conducting and reporting phases of the audit. The audit was evidence-based in order to ensure the audit assurance is fully supported. All available evidence has been examined and analyzed against the audit criteria in order to recap the results. Sources of evidence included: interviews and document reviews at the region, review and analysis of policies, background literature and management practices, review of previous audits or reviews by other assurance providers, analytical reviews, and elaboration on cause and effect of conditions, and follow-up on previous internal audits.

Sampling
5.3 The identified key risks were considered in selecting transactions for examination. As part of the audit evidence, the auditors judgementally selected 25 representative sample payments (20 grants and contribution transactions and 5 operating expenditures) processed by the region in 2009-2010. A risk based sample methodology was used to determine the appropriate sample size. The sample selected represented 31% of the grants and contributions dollars in the population for the audit period, and 2% of the operating expenditure dollars for the audit period. The auditors conclude that the sampling methodology and the sample size are adequate upon which to form conclusions.

Audit Team Donald MacDonald Kathy Locke Wilfredo Dimailig Christine Kasianiuk Chief Audit Executive Audit Manager Project Leader Internal Auditor

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