Report on the Audit of Compliance with Financial Policy in Departmental Legal Services Units - September 2014

6. Findings, Recommendations and Management Action Plan

This section provides the observations and recommendations resulting from the audit work carried out. While the audit was conducted based on the lines of enquiry and audit criteria identified in the planning phase, this report is structured along the following main themes:

  • Governance;
  • Transaction Compliance;
  • Financial Oversight; and,
  • Budget Management.

For conclusions by audit criterion, please refer to Appendix A.

Based on the audit work performed and our professional judgment, the risk associated with each observation was rated using a three-point scale. The risk ranking (high, moderate, and low) is based on the level of potential risk exposure we feel may have an impact on the achievement of the Department’s objectives, and is indicative of the priority Management should give to the recommendations associated with that observation. The following criteria were used in determining the risk exposure level:

High

Controls are not in place or are inadequate.

Compliance with legislation and regulations is inadequate.

Important issues are identified that could negatively impact the achievement of program/operational objectives.

Moderate

Controls are in place but are not being sufficiently complied with.

Compliance with central agency/departmental policies and established procedures is inadequate.

Issues are identified that could negatively impact the efficiency and effectiveness of operations.

Low

Controls are in place but the level of compliance varies.

Compliance with central agency/departmental policies and established procedures varies.

Issues identified are less significant but opportunities that could enhance operations exist.

6.1 Governance

The establishment of effective governance relies on clearly defined roles and responsibilities. Sections 5.4.9 and 5.4.13 of the Treasury Board Secretariat (TBS) Policy on Financial Management Governance require the establishment of clear roles and responsibilities and provision of functional guidance on financial management matters in support of appropriate stewardship of public resources and effective decision-making.

Finding 1: Roles and Responsibilities

Linkage to:
Governance
Low

MOUs are in place with all client departments included in the sample and they clearly define financial management responsibilities and accountabilities for both the client departments and the Department.

Roles and responsibilities related to the financial management of DLSUs operations are defined in MOUs. These MOUs establish governance, rates and performance regimes that guide the relationship between client departments and the Department with respect to the demand for and provision of legal services. The MOUs formally define the scope of the work, roles and responsibilities of the Department and the client department, deliverables and expected results. A review and comparison of a sample of MOUs as well as interviews confirmed that roles and responsibilities are clearly defined and consistent in all of the reviewed agreements. DLSU Heads and staff’s understanding of their financial management responsibilities was consistent with the responsibilities described in the MOUs.

6.2 Transaction Compliance

The Financial Administration Act (FAA) legislates the implementation of financial controls such as those described in Section 32 and 34 of the Act to strengthen financial expenditure controls in government. It was expected that interdepartmental settlements, travel, training, conference and acquisition card transactions were in compliance with the FAA and applicable policy requirements including the TBS Directive on Account Verification and Directive on Expenditure Initiation and Commitment Control.

Finding 2: Compliance – Interdepartmental Settlement Transactions

Linkage to:

Risk Management

Control

Moderate

A number of IS transactions reviewed were not in compliance with applicable legislation and policy requirements. The most common non-compliance issues relate to expenditure initiation authority and FAA Section 34 certification.

We reviewed a sample of IS transactions from the BRLP, CAP, PSDI, and TLS portfolios and identified the following compliance issues.

Section 32 & Expenditure Initiation

The most critical step of the expenditure pre-approval process is comprised of two elements under the federal spending authority: expenditure initiation authority and fund commitment authority. Both elements must be performed prior to making a purchasing decision:

  • Expenditure initiation authority is the authority to incur an expenditure or make an obligation to obtain goods or services that will result in the eventual expenditure of funds. This includes the decision to hire staff, to order supplies or services, to authorize travel, relocation or hospitality or to enter into some other arrangement for program purposes.
  • Fund Commitment Authority (Section 32 of the FAA) is the authority to carry out one or more specific functions related to the control of financial commitments as required in the TBS Directive on Expenditure Initiation and Commitment Control. Another element of this authority is to ensure that there is a sufficient unencumbered balance available before entering into a contract or other arrangement.

The results of the file testing demonstrated that all IS transaction commitments were in place, in line with Section 32 requirements of the FAA. However, there was no evidence of expenditure initiation authority by a delegated individual of the Department in 50 of the 100 transactions reviewed.

Section 34

Section 34 of the FAA requires delegated individuals to confirm and certify that work has been performed, goods supplied, or services rendered; the payee information is accurate and complete; contract or agreement terms and conditions have been met; financial coding is complete and accurate; supporting documentation is complete; and all relevant statutes, regulations, orders in council, policies and directives and other legal obligations have been complied with. The results of our file testing demonstrated that 19 of the 100 transactions did not contain a properly certified Section 34. The most frequent types of Section 34 certification errors related to not having a Section 34 certification on file or incorrect financial coding on the certification. The financial coding issues were primarily found in transactions where the travel expenses related to training were coded to a training general ledger account, instead of the travel general ledger account.

Initially the sample of IS transactions was requested through Finance and Planning Branch (FPB). A review of the files provided revealed that there was insufficient documentation to support expenditure initiation and Section 34 in the majority of the transactions. As a result, the portfolios to whom the DLSUs report were asked by FPB to provide additional documentation related to these files. IAS also provided all portfolios with a detailed itemization of outstanding items for each IS transaction sampled to allow for any available supplementary documentation to be submitted and considered for the audit. Through this review it became evident that rarely were all of the documents related to one transaction held in the same location. Various parts of the transactions were in some or all of the following locations: the Department’s FPB, the portfolio ADM/ADAG’s office, the DLSU or the client department’s finance branch. In particular, the file review found that in 37 of the 100 transactions, there was insufficient supporting documentation (e.g., invoices) available on the IS transaction file to fully demonstrate that the work had been performed, goods supplied, or the services rendered, in accordance with Section 34.

The audit found that one of the main reasons for the non-compliance is a lack of clarity regarding processing of IS transactions. Specifically, the Department does not have procedures concerning documentation requirements and proper evidence of approval for IS transactions. The lack of procedures contributed to inconsistent processing of IS transactions by DLSU staff. Furthermore, a lack of oversight by FPB has prevented the identification of non-compliance issues with respect to IS transactions.

Errors related to non-compliance with expenditure initiation, certification of Section 34 and coding errors result in non-compliance with the FAA, and central agency and departmental policies, directives and guidelines. When expenditure initiation authority and Section 34 certification are not applied there is an increased risk of paying for goods or services that the Department should not be paying for or that were not received.

Recommendation 1 Management Action Plan
The Deputy Chief Financial Officer should develop and communicate a policy instrument to standardize the way interdepartmental settlement transactions are processed, addressing requirements such as expenditure initiation, Sections 32 and 34 of the Financial Administration Act and supporting documentation. Following the implementation of the risk-based verification and post-payment quality assurance program in December 2014, we will be in a position to determine the extent and types of procedures needed to fully meet the requirements of Expenditure Initiation and of Sections 32 and 34 of the Financial Administration Act for IS transactions. The policy instrument will be developed and communicated by the fall of 2015 after several quarters of data from the program have been examined. In the interim, the Expenditure Initiation and Sections 32 and 34 communiqué outlined in the management response to Recommendation 2 will be sent by October 31, 2014.
Office of Primary Interest: Finance and Planning Branch
Due Date: October 31, 2015

Finding 3: Compliance – Other Transactions

Linkage to:
Control
Low

Overall, travel, conference, training, and acquisition card transactions complied with applicable legislation and policy instruments; however, opportunities for improvement exist with respect to the application of expenditure initiation for acquisition card and training transactions.

A review of travel, conference, training and acquisition card transactions from the AAP, BRLP, CAP, PSDI and TLS portfolios as well as the LSB revealed that travel and conference transactions generally complied with applicable legislative and policy requirements. That being said, legislative and policy requirements related to Expenditure Initiation and Section 34 certification were partially met for training and acquisition card transactions.

Section 32 & Expenditure Initiation

The review of training and acquisition card transactions provided evidence that the application of expenditure initiation could be improved. All of the training and acquisition card transactions were committed in the Integrated Financial and Materiel System in advance of the payment being made, in line with Section 32 of the FAA. However, in a significant number of training transactions, 4 of 19 (21%), and half of the acquisition card transactions, 7 of 14 (50%), expenditure initiation authority was not exercised in accordance with the TBS Directive on Expenditure Initiation and Commitment Control.

Interviews indicated the acquisition card transactions that did not have proper expenditure initiation authority are due to a lack of understanding of Departmental and Treasury Board Policy Instruments. For example, a blanket approval authority, using the Department form (JUS804), can be established in addition to establishing soft commitments using the Department form (JUS795e). The blanket authority is a form of expenditure initiation, as it provides an authorization by the delegated manager to continuously purchase specific commodities within an authorized price range.

The application of expenditure initiation and commitment authority is critical to ensure that total expenses for an activity do not exceed the approved budget and that the proper expenditure initiation authority has been applied in advance of program activity and related expenditures.

With respect to expenditure initiation exceptions related to training transactions, while there was evidence of approval, the approval was made after the fact or it was not dated.

Section 34 Certification

The review of training transactions indicated that in a few instances, 3 of 19 (16%), Section 34 of the FAA was not properly certified or there was no evidence of certification.

Certification of Section 34 is required to adequately certify that the work was performed or that the goods were supplied or services rendered in accordance with terms and conditions of an agreement or contract. The submission of invoices for payment without adequate supporting documentation could lead to payments for ineligible expenses, time delays or additional effort in determining the correctness of the payment.

Recommendation 2 Management Action Plan
The Deputy Chief Financial Officer should re-communicate the requirements of expenditure initiation authority for both training and acquisition cards, to the delegated managers including the use of blanket pre-approvals and soft commitments for acquisition cards. A communiqué regarding the requirements for Expenditure Initiation and Sections 32 and 34 for all types of transactions will be sent by October 31, 2014.
Office of Primary Interest: Finance and Planning Branch
Due Date: October 31, 2014

6.3 Financial Oversight

Financial oversight helps to strengthen public sector financial management and its leadership, thereby contributing to appropriate stewardship of public resources, effective decision-making, and efficient policy and program delivery. The TBS Directive on Account Verification (2009) requires that low and medium risk transactions be sampled for review and that all high risk transactions be reviewed.

Section 6.3.1.3 of the revised TBS Directive on Account Verification (2014) requires risk-based monitoring and statistical sampling of interdepartmental settlements that are used by the Department to reimburse or pay a client department.

Finding 4: Financial Oversight (Compliance with Section 33 of the FAA)

Linkage to:

Governance

Risk Management

Control

Moderate

There is insufficient oversight of DLSUs expenditures from the FPB, with respect to interdepartmental settlements. Specifically, Section 33 verification of the FAA is not being performed on IS to ensure payments are made in accordance with the applicable legislation and policies.

The FPB is expected to implement oversight mechanisms to ensure DLSUs expenditures are in compliance with Section 33 of the FAA and the TBS Directive on Account Verification. The previous version of the Directive (2009) did not clearly identify the account verification requirements for IS transactions, and they were specifically excluded from the Department’s Annual Account Verification Plan. The revised version of the Directive on Account Verification (2014) contains specific requirements for Section 33 of the FAA related to ISs.

By excluding interdepartmental settlement transactions from the Annual Account Verification Plan, the Department lacks transactional procedures and oversight to ensure that ISs have been correctly certified pursuant to Sections 32 and 34 of the FAA. This lack of oversight has resulted in immaterial inconsistencies amongst the client departments with respect to the recovery of expenditures from the Department, such as books, rental of space, office supplies and office equipment. Furthermore, FPB may not be able to identify and correct errors related to IS transactions such as coding errors, and/or non-delegated individuals exercising financial authority. This lack of detection and identification of errors may place the Department at risk of not complying with the TBS Directive on Account Verification and the FAA.

Recommendation 3 Management Action Plan
The Deputy Chief Financial Officer should ensure effective oversight mechanisms are in place by revising the Annual Account Verification Plan to include interdepartmental settlement transactions in the appropriate risk category. The Annual Account Verification Plan has been revised to include interdepartmental settlement transactions as low risk transactions. Implementation of the Annual Account Verification Plan for risk-based verification and post-payment quality assurance of transactions is planned for December 2014.
Office of Primary Interest: Finance and Planning Branch
Due Date: N/A (Completed)

6.4 Budget Management

Expenditure monitoring against established budgets and financial forecasting are key processes that further support the stewardship of public funds in delivery of the organization’s mandate. Section 6.2.4 of the Department’s Directive on Forecasting and Variance Analysis requires Direct Reports to the Deputy Minister to provide the Chief Financial Officer with complete, accurate and timely financial and non-financial forecast information.

Finding 5: Budget Management Practices

Linkage to:

Governance

Risk Management

Control

Low

Overall, budget management practices are in place to provide timely and accurate financial information for decision-making.

Forecasting and variance analysis information on expenditures is presented in the Financial Situation Report (FSR) to ensure the Department operates within its financial authorities. The FSR process is repeated nine times per fiscal year: June, August and every month thereafter.

A review of period 6 (September 2013), period 9 (December 2013) and period 12 (March 2014) FSRs for the portfolios identified in Appendix B determined that all FSRs were certified by the appropriate Direct Report. All portfolios did submit their required FSRs on time with the exception of two portfolios that were late in supplying their information for one FSR period.

In 2013-14, the Departmental variance target was set to 4% for period 6 in September (period 6 to period 12), and 2% for period 9 in December (period 9 to period 12). All portfolios, except one, achieved the target of 2% at period 9 for the salary and O&M combined.

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