Report on the Audit of Cost Recovery (Phase 2) including the Impact of the New Funding Model

1. Executive Summary


The Department of Justice Canada (the Department), provides litigation and legal advisory services to federal government departments, agencies and crown corporations across Canada. The Department currently uses a hybrid model to fund its operations, relying on a mix of A-base funding and Net Voting Authority (NVA) to recover the costs of legal services from client organizations over and above this A-base funding. NVA (cost recovery) is an important source of funding for the Department, providing more than a third of the operating budget (the Department recovered legal service costs of $328M in 2014-2015). The Treasury Board (TB) Common Services Policy sets out a strategic direction and outlines key Departmental requirements with respect to cost recovery.

Cost Recovery Process Improvement, commonly referred to as CRPI, came into force on April 1, 2012. The objectives of CRPI included improving business processes and enhancing corporate systems with a view to reducing administrative effort, supporting timely cash collection, meeting central agency policies and directives as well as better leveraging established Government of Canada best practices to track and invoice professional services. In April 2009, the Department launched a standard template for Memoranda of Understanding (MOUs) related to the provision of legal services. In April 2012, the MOU template was updated to reflect new business standards introduced through CRPI, including a standard Planning and Forecasting Annex (Annex B) and the monthly invoicing process.

Given the growth in legal service costs across the Government over the past number of years, the Department undertook a Legal Services Review (LSR) in 2014. This review proposed a series of measures designed to improve the delivery of legal services government-wide and included cost-containment strategies intended to more effectively manage the growth of legal services costs.  Further to the implementation of the first phase of changes flowing from the LSR, and consistent with the objectives of Blueprint 2020 Footnote 1, the Department undertook a review of its cost recovery funding model in 2014-2015. This led to the development of a new Envelope Funding/Advance Payment funding model that is to be implemented on April 1, 2016. The new model focuses on simplifying the current model to reduce administrative costs and enhance its delivery across government via streamlined, more efficient administrative processes.

As part of the Department’s change agenda, many efficiencies have been, or are in the process of, being implemented to support various joint responsibilities of the Department and its client departments particularly with respect to the forecasting, planning and managing of legal services resources. For example, the number of legal service billing rates has been reduced and strategic standardized reports are being developed to provide client departments with the business intelligence needed to make informed decisions regarding the volume and nature of the legal work being provided.

Additionally, the Department is developing smart new business analytics tools to support more useful and meaningful reporting by drawing pertinent data for analysis from existing systems including Integrated Financial Management System (IFMS), iCase, the Salary Forecasting Tool (SFT) and PeopleSoft. The Department’s vision is to assist and inform decision-making across the Government of Canada on the management of legal services via improved analytics in such areas as legal service trends and drivers of legal costs.

While the scope of the audit focussed primarily on key business processes that form the basis for the current cost recovery model, the audit considered the nature and potential impact of the many progressive changes that are planned or are in the process of being developed with regards to the new funding model. 

By making available a range of “smart” tools to the legal services community and its clients, the new funding model will undoubtedly lead to more effective management of legal services as well as a renewed and stronger partnership between the Department and its clients. In relation to this, the audit highlighted some areas for improvement that will impact the new Envelope Funding/Advance Payment model and, as such may assist Management in its advancement of this important change management initiative.


With the introduction of CRPI in 2012, standardized and enhanced business processes were put in place to support the development and negotiation of legal service agreements. The utilization of interdepartmental settlements provides for the timely collection of amounts billed. As of April 1st, 2016, monthly billing process will be replaced by advance payments under the new funding model, which will further streamline the business processes by reducing administrative costs.

Areas for Improvement

There exists opportunities to enhance the timeliness of the development and negotiation of legal services agreements. Opportunities also exist to design controls over the new monitoring process that will support the recognition of revenues and the reconciliation of actual legal services costs against the advance payments. 

Audit Opinion and Conclusion

In my opinion, current business processes are streamlined and standardized to support cost recovery objectives. Going forward, planned changes for the new funding model will significantly contribute to stronger partnerships with client departments and will further enable the Department to assist and inform whole-of-government decision making on legal issues.

Opportunities exist to enhance the timely approval of legal service agreements and to design controls over the new monitoring process for the recognition of revenues and reconciliation of legal service costs against advance payments. 

Management Response

Management is in agreement with the audit findings, has accepted the recommendations included in this report, and has developed a management action plan to address them. The management action plan has been integrated in this report.

2. Statement of Conformance

In my professional judgment as Chief Audit Executive, the audit conforms to the Internal Auditing Standards for the Government of Canada, as supported by the results of the Quality Assurance and Improvement Program.

Submitted by:

Original signed by Inanc Yazar
October 7, 2015

Inanc Yazar, CPA CGA, CIA, CRMA
Chief Audit Executive
Department of Justice Canada

3. Acknowledgement

The Chief Audit Executive would like to thank the audit team and those individuals who contributed to this engagement and particularly, employees who provided insights and comments as part of this audit.

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