Cost Recovery Framework
July 2010



1.INTRODUCTION

1.1 Background

In 2004 the Treasury Board Secretariat (TBS) requested a Review of Legal Services to examine, inter alia, the sustainability of funding and the management of legal services in the Government of Canada. The review was jointly undertaken by the Department of Justice and TBS, in consultation with selected government departments and agencies.

This review led to a better understanding of the relevant costs of providing legal services to the Government. Its findings supported the continued reliance on a “hybrid” model to fund the provision of legal services in the Department of Justice. This hybrid model entails a mix of A-Base funding and recoveries from departments and agencies Footnote 1, and recoveries from other organizations such as crown corporations, and non-federal and international organizations. Services provided over and above established levels would be charged to client departments, while levels of service provided without charge to these client departments would be reviewed and established annually by the Department of Justice.

The hybrid model is intended to balance the demand, supply, and oversight of legal services to the Government. It provides the Department with A-Base funding to meet a certain level of demand for legal services and allows client departments to fund demands for legal services beyond the resources available to the Department. The model also provides incentives for these client departments to manage their demand for legal services and recognize shared accountabilities with respect to government legal matters.

In October 2006, the TB approved Net Voting Authority Footnote 2 for the Department of $178 million (i.e. excluding Employee Benefit Plan contributions) for the provision of legal services. On April 1, 2007, Net Voting Authority came into effect and the Department of Justice began cost recovery of legal services based on a funding model that includes a mix of appropriation (A-Base) and recovery from client departments.

The Department of Justice has developed a single cost recovery model with various cost categories. These costs are used to establish uniform charge-out rates for the counsel and paralegals who provide legal services and for computer specialists (CSs). The model is based on the full cost of delivering services, and the charge-out rates are applied consistently for all types of legal services, including advisory, litigation, and legislation/regulatory drafting. Rates are reviewed annually, adjusted, and submitted to TB for approval.

Disbursements paid by the Department of Justice on behalf of client departments are recovered through a separate “disbursement recovery” process. In an effort to streamline this process, as of April 1, 2008, disbursements below $200 are recovered by incorporating these disbursement costs into the charge-out rates, as approved by TB. This was done in an effort to eliminate the cumbersome administration involved for both the Department and its clients.

Budgets are provided to departmental responsibility centres based on an A-Base allocation and revenues from Net Voting Authority. These revenues represent a significant funding source for the Department, with more than a third of its operating budget coming in the form of Net Voting Authority. In 2007–08, the Department of Justice collected $213.7 million from cost recovery including disbursements. As of December 8, 2008, the Department had collected $98 million (i.e. 44%) of the anticipated $225 million in revenue for 2008-09.

The following risk factors were considered in this audit: level of recovery of actual costs; adequacy of documentary support for cost recovery claims against clients; appropriate use or application of financial controls; clarity of accountabilities and expectations; compliance with policies or procedures related to cost recovery; adequacy of monitoring, guidance, and direction; appropriateness of rates; and consistency of reporting.

1.2 Audit Objectives

The main objectives of this audit were to review and assess the adequacy and appropriateness of the existing management control framework for cost recovery and the single cost recovery model for charging client departments.

The audit team reviewed and assessed:

  1. roles, responsibilities, and authorities for approving and initiating cost-recovered services to ensure they are appropriate and consistent with enhancing overall accountability;
  2. the policies and procedures that form part of the cost recovery framework, including:
    • accounting/charging procedures to determine consistency with TB policies;
    • internal reporting procedures aimed at providing the Department of Justice management and clients with timely and accurate information on services to departments/agencies and associated costs;
    • processes for consulting, communicating, and settling disputes with clients;
  3. the existing mechanisms to link cost recoveries appropriately with the budget allocation process;
  4. the appropriateness of generic, interdepartmental Memoranda of Understanding (MOUs);
  5. the efficiency and appropriateness of practices related to the recovery of disbursements.

Finally, the auditors reviewed and assessed whether the costing model and the rates for legal services were appropriate and consistent with applicable TB policies.

1.3 Audit Scope

The audit included activities at headquarters, four regional offices (British Columbia, Prairie, Quebec, and Ontario) and two departmental legal services units (Health Canada and Canada Border Services Agency DLSUs).

The audit focused on the management framework for cost recovery, but excluded extensive testing to ascertain the accuracy of costs recovered and the reliability of reporting this information. This will form the basis for a second audit to be undertaken at a later date.

The recovery of salary costs for Department of Justice counsel who participate in secondment or interchange agreements with other organizations falls outside the scope of the Net Voting Authority regime and was therefore excluded from the audit.

The planning and on-site examination phases for this audit were carried out between November 2008 and February 2009.

Details of the audit methodology employed are outlined in Appendix A.

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