Joint Audit and Evaluation of Budgetary Controls – Vote 1

March 2017

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© Her Majesty the Queen in Right of Canada, 2017.
Catalogue No. CH6-57/2017E-PDF
ISBN: 978-0-660-08344-5

Audit and evaluation opinion and conclusion

Based on the joint engagement findings, it is the opinion of the Chief Audit Executive and the Director, Evaluation Services Directorate that PCH has an established process for the yearly allocation and reallocation of budgets for vote 1 and forecasts are updated on a monthly basis. The Executive and Finance Committees provide oversight on budgets and forecasts. Directors, Directors General and Assistant Deputy Ministers are accountable for budgets and the accuracy of forecast.

There are opportunities to optimize vote 1 budgeting and forecasting processes, to better enable Deputy Minister and Senior Management decision-making and increase the maturity of the financial management framework. The recommended improvements relate to:

• Strengthening the effectiveness of the oversight committees by having in-depth budgeting and forecasting discussions at the Finance Committee, reviewing the committee membership; and ensuring that committee discussions are based on integrated financial and non-financial information and covering multi-year plans.
• Increasing the empowerment and objectivity of the financial management and the challenge function by streamlining the forecasting process and reviewing roles and responsibilities.
• Bringing a greater focus on responsibility centre managers at all levels of the organization to align the budgeting and forecasting process with delegated financial authorities.

Statement of conformance

In my professional judgment as Chief Audit Executive, the audit components of this joint engagement were conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing and with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. Sufficient and appropriate audit procedures were conducted, and evidence gathered, to support the accuracy of the findings and conclusion in this report. The findings and conclusion are based on a comparison of the conditions, as they existed at the time, against pre-established review elements that were agreed with management and are only applicable to the entity examined and for the scope and time period covered by the joint engagement.

The evaluation components of this project have been conducted in compliance with the Policy on Results and related Standard on Evaluation.

Original signed by

Natalie M. Lalonde
Chief Audit Executive
Department of Canadian Heritage

Marie-Josée Dionne
Director, Evaluation Services Directorate
Department of Canadian Heritage

Joint Audit and Evaluation Team:

• Sophie Frenette, Audit Manager
• Kossi Agbogbe, Team Leader
• Chrystianne Pilon, Senior Auditor
• Gurkiran Jassy, Auditor
• Trisha Laul, Auditor
• Silviya Dragolova, Manager, Evaluation, Professional Practice Unit
• Rose Magdala Coriolan, Evaluation Officer

With the assistance of external resources

Figure 1. Budgeting and forecasting process

The Deputy Minister provides leadership by demonstrating financial responsibility, transparency, accountability, and ethical conduct in financial and resources management. He is supported by the Chief Financial Officer, the lead departmental executive for all aspects of financial management, as well as Financial Management Advisors. He is also supported by two senior committees involved in budgeting and forecasting activities, namely the Executive Committee (EXCOM) and Finance Committee (FINCOM).

Assistant Deputy Ministers (sector heads) and Direct Reports (Directors General, Executive Directors and other corporate responsibilities such as the Chief Audit Executive) are responsible for exercising financial management authorities, responsibilities, and accountabilities, managing financial resources demonstrating prudent stewardship of public funds. Assistant Deputy Ministers and Direct Reports receive various administrative corporate services from Resource Management Directorates, including financial support.

PCH’s vote 1 reference levels were approximately $220 Million in 2016-2017 and the accuracy of the October (P7) forecasts has been within 4% of year end expenditures (three year average). The management of salary have been at the forefront of senior management attention, including the absorption of salary increases within existing reference levels and the impacts of delays in staffing processes. The budgeting and forecasting process is therefore key for sound stewardship and the prudent and efficient use of public funds.

Figure 2. PCH vote 1 reference levels (2016-2017)

The Government of Canada financial management model is evolving, placing a greater emphasis on the integration of budgets, operations and plans. At the core of this evolution is a financial management community that collaborates with program branches to embrace a more results-oriented culture. This evolution will also support PCH in the delivery of its mandate and priorities, and pursue a modern, nimble, agile and resilient organization.

2.1 Project authority

In accordance with the 2016–2017 to 2018–2019 Risk-Based Audit Plan and the 2016–2017 to 2020–2021 Departmental Evaluation Plan, the Office of the Chief Audit Executive and the Evaluation Services Directorate carried out a joint audit and evaluation of budgetary controls. The goal of this joint engagement – a first for these two directorates – was to provide a comprehensive view of PCH budgetary controls. Moreover, this joint project helped increase the effectiveness of the assessment, thus maximizing the value for the Department.

2.2 Objective and scope

The objective was to provide assurance with respect to:

• the effectiveness of governance;
• the efficiency and effectiveness of budgetary and financial forecasting processes and controls; and
• the relevance, reliability and timeliness of financial data for resource allocation/reallocation and decision-making.

The engagement covered the period from April 1, 2013 to January 13, 2017 for processes associated with vote 1 (Operations and maintenance and salary).

Given their different nature, the processes associated with Vote 5 (Grants and contributions) were excluded from the current engagement. Even though the materiality of Vote 5 is considerable, the operational environment is very different. However, some of the recommendations in this report will also have a positive impact on the vote 5 budgetary controls.

2.3 Approach and methodology

The joint engagement allowed for an integration of the respective approaches, practices and methodologies specific to audit and to evaluation.

This engagement was conducted in accordance with the requirements of the Treasury Board Internal Audit policy suite, the Treasury Board Policy on Evaluation (2009) and the Treasury Board Policy on Results (2016). It was carried out in a manner that ensures the team's neutrality and objectivity, as per respective professional requirements and standards, and ensures that observations and conclusions are evidence-based.

An overview of the joint methodology is presented in Appendix A.

3.1 Governance, information and monitoring

Oversight for budgets and forecasts

Deputy Heads are accountable for establishing adequate governance and oversight for financial management. Departments have the flexibility to establish governance committee models in support of sound financial management and in accordance with their needs. At PCH, the oversight model for financial management includes two senior committees.

Figure 3. PCH Governance model

EXCOM: The decision-making body for   all significant financial and other matters affecting the Department. Members include Assistant Deputy Ministers and Direct Reports to the Deputy Minister of PCH. EXCOM is chaired by the Deputy Minister.

FINCOM: An advisory and decision-making body reporting to EXCOM, responsible for the planning, management and providing advice on the allocation of financial resources (among other financial-related roles) with a core agenda item of reviewing the departmental long term financial strategy, financial plans, forecasts, trends, and risks. Membership is at the Director or Director General levels. The Chair is at the Assistant Deputy Minister level and the Chief Financial Officer plays a functional lead role.

Departmental governance mechanisms are established. Mandates for both committees are reviewed, approved and communicated on a yearly basis. FINCOM endorses the information it receives, which is then forwarded to EXCOM for approval.

Evidence gathered through interviews, surveys and focus groups indicate that, although oversight committees are well established, FINCOM could be more effective by having substantial discussions on aspects of budgeting, forecasting and long term financial planning at key periods of time. Based on the review of records of decisions, there was little evidence of a challenge function or discussions on financial risks, impacts, mitigation strategies, and long term planning at FINCOM are taking place. In addition, some interviewees noted a difference between FINCOM’s formal mandate and its current functioning, noting that it may be viewed as a forum for sharing information. FINCOM is not entirely fulfilling its role of oversight related to budgeting and forecasting as described in its mandate.

According to interviews, FINCOM members are, at least in part, determined by the Talent Management Board. Best practices recommend to consider the membership of finance committees from the perspective of having a sufficient number of members with appropriate financial background and knowledge. Therefore, it is not clear that the current membership selection criteria allows FINCOM to play an enhanced oversight role and provide value-added advice to EXCOM.

The Chief Financial Officer as functional lead for FINCOM holds the key responsibility for integrating financial and non-financial information to be tabled at the governance committees. Although FINCOM’s mandate defines its role, authority, agenda items, and expected outcomes, the specific distinction between roles and responsibilities of functional leads and of committee members is unclear.

With respect to EXCOM, the findings were similar, as the committee documentation that was reviewed did not allow the team to validate if the committee was having substantial discussions on financial plans, forecasts, trends and risks. Interviews indicated that the essence of EXCOM discussions are not communicated effectively to FINCOM members. Overall, the monthly financial discussions did not appear to yield the strategic oversight, risk identification, and early detection of financial issues that were expected from such an oversight body.

Quality of information for decision-making

FINCOM receives a considerable volume of financial information, including financial forecasts on a monthly basis. The majority of stakeholders viewed the information as sufficient, complete, timely and accurate. Testing confirmed that monthly forecasting presentations included financial information which accurately reflected the financial data in the departmental financial system (SAP) for September (P6), October (P7) and December (P9); limited discrepancies were noted, however relevant explanations were included in the presentations. Forecasting discussions were also held based on timely financial information.

To support the in-depth discussions in line with their mandates and respective oversight roles, the information provided to FINCOM and EXCOM should include relevant non-financial information on context, operations, plans, priorities, risks, impact, and performance. This would lead to more informed and effective decision-making. While this information may exist and be available to senior management outside of the committee structure, governance documentation suggests that discussions are not based on integrated financial and non-financial information. This would help improve the relevance and reliability of information for decision-making.

Resource allocations and reallocations

Document review suggests that FINCOM and EXCOM discussions about resource allocations at the beginning of the fiscal year did not include in-depth discussions on underlying options, benefits, risks, multi-year planning and mitigation strategies. Interviewees also expressed a concern that budgets were based on historical allocations more than expenditures or needs/priorities. The review of documents supported this observation, while this may be due to records of decisions being very high-level.

Interviewees were satisfied with the quality of information and discussion for in-year reallocation and pressures exercises, however the process was perceived as somewhat ad-hoc. Quantitative analysis demonstrated a consistent approach to pressures management.

In summary, improving the quality of the information provided to FINCOM and EXCOM, and reviewing FINCOM’s membership as well as clarifying responsibilities of functional leads, will allow the committees to systematically and effectively play their oversight roles as outlined in their respective mandates. A more in-depth challenge function and discussions of budget allocations would also strengthen the oversight role of committees.

Recommendations

To strengthen the effectiveness of the existing governance structure’s oversight and to support evidence-based decision making:

1. The Chief Financial Officer, in collaboration with the Chair of the Finance Committee, should ensure that Finance and Executive Committees receive financial and non-financial information and that there are in-depth discussions at both committees at the beginning of the fiscal year on long term financial strategy as well as on forecasting at key periods of the year, including ongoing discussions on risk management and the allocation of resources based on multi-year plans and priorities.
2. The Corporate Secretary, in collaboration with the Director General of Human Resources, should clarify roles and responsibilities of functional leads and review the membership of the Finance Committee for a balanced approach between talent management and managers with financial experience.

Supporting sound budgeting and forecasting

Efficient financial management includes roles and responsibilities that are clear, aligned with operational needs, and support the stewardship of funds. Responsibility Centre Managers are delegated with spending authority as per Financial Administration Act and have the responsibility for budget management. In addition, the Treasury Board Policy on Financial Management Governance sets the tone by assigning key responsibilities to the Deputy Minister and the Chief Financial Officer.

The Deputy Minister is responsible for assuming overall stewardship responsibilities and for the integrity of the department's financial management. The Deputy Minister in consultation with the Comptroller General appoints the Chief Financial Officer to support him through his mandate.

The Chief Financial Officer leads financial management at PCH and confirms having unfettered access to the Deputy Minister. He is a functional lead on FINCOM and a member of EXCOM. The Chief Financial Officer relies on the challenge and advisory function of Financial Management Advisors, to raise issues and financial risks as required to senior management.

The following three groups have financial responsibilities in PCH:

• Resource Management Directorates provide administrative services and report to Assistant Deputy Ministers and Direct Reports. Across PCH, there are 44 employees in AS (Administrative Services) and CR (Clerical and Regulatory) positions who provide various financial services at the sector level. Resource Management Directorates are also the main point of contact for financial advice for Responsibility Centre Managers.
• Regional Financial Advisors provide the same kind of support as Resource Management Directorates in the PCH regional offices and have a functional reporting relationship to the Chief Financial Officer. There are eleven regional financial advisors in FI (Financial Management) positions, reporting to Regional Directors General. The majority of these positions have a minimum qualification standard of eligibility for recognized professional accounting designations (except at the entry level).The Citizenship, Heritage and Regions Sector’s Resource Management Directorate (responsible for Regions) consolidates regional forecasts with the ones from its national headquarters branches, for a complete Sector forecast.
• Financial Management Advisors report to the Chief Financial Officer and provide budget and forecasting expertise to Assistant Deputy Ministers and Direct Reports. There are five Financial Management Advisors in FI positions responsible for budgeting, forecasting and other activities (e.g. Treasury Board Submissions), in addition to a manager and a director who perform a challenge function at the aggregate level. These positions have a minimum qualification standard of eligibility for recognized professional accounting designations (there are no entry-level positions). These advisors have limited time to engage with Responsibility Centre Managers directly and limited access to non-financial (e.g. operational) information. The Financial Management Advisor challenge of forecasts is therefore limited to the level of Assistant Deputy Ministers and Direct Reports.

When combining the three financial functions, there are approximately 60 departmental officials who support budgets and forecasts at various levels, among other financial management responsibilities. There is an opportunity to better define the role for challenging budgets and forecasts from a departmental perspective, which would be more appropriate for positions which require accounting designations, namely Financial Management Advisors. It is understood that this change would require a clarification of the financial role and responsibilities of Resource Management Directorates with regard to sector budgets and forecasts.

A direct participation of the Financial Management Advisors in the monthly forecasting process with Responsibility Centre Managers will give them regular access to operational (i.e. non-financial) information. This will enable Financial Management Advisors to systematically challenge key financial assumptions underlying plans, multi-year impacts and proactively support budgets and forecasts based on departmental priorities, at all levels of the organization.

Ultimately, a greater participation of the Financial Management Advisors will support the Chief Financial Officer’s capacity to provide strategic and objective financial advice as per the upcoming Policy on Financial Management. It will also contribute to enterprise-wide financial management that will allow the Department to deliver on its modernization and innovation agendas.

Recommendation

3. The Chief Financial Officer should facilitate a greater participation of the Financial Management Advisors in the financial management process, so they may provide a more informed, robust and standard support, advice and challenge of budgets and forecasts.

3.2 Processes and controls

Enabling budget and forecast accuracy

Budgeting and forecasting are key processes to enable stewardship for public funds. Through monitoring and forecasting, risks and funding pressures can be brought forward to senior management. This leads to the development of mitigation strategies, updates to plans, internal budget reallocations, or external requests for departmental funding.

General expectations for budgeting and forecasting roles and responsibilities are outlined in the Treasury Board Secretariat financial management policy suite. There is also a Common Business Process with the “should be” model of budget and forecast management. Forecasting should be completed quarterly as a minimum and at the centre of this process is the Responsibility Centre Manager with delegated financial responsibilities as per the Financial Administration Act.

The PCH budgeting and forecasting process was mapped (see Appendix C), including the activities of all relevant stakeholders. PCH has a two-level budget allocation structure comprised of 65 fund centres and 557 cost centres. Financial Management Advisors are mostly involved with the establishment of budget allocations and the challenge of financial information at the fund centre level, whereas Resource Management Directorates are more present at the cost centre level.

PCH issues a budget management guideline each year which includes principles and outlines the roles of the Financial Management Branch, Assistant Deputy Ministers, Directors General and Directors. A more complete guideline should include the roles and responsibilities of all stakeholders (such as Resource Management Directorates and Regional Financial Advisors), reflect the two-level allocation structure (fund and cost centre), and include Responsibility Centre Managers at all levels.

Timeliness of budget allocations

As part of the Treasury Board Directive on Results, there is a mandatory indicator on the number of days elapsed before managers at the lowest levels of the organization obtain access to their budgets. This indicator is a measure of operational planning where the earlier access to the budget allows managers to plan their activities more effectively. PCH has good practices for the timeliness of budgeting, as Financial Management Advisors completed fund centre allocations prior to the start of the fiscal year. However, there is an opportunity to improve the process for budget allocations at the lowest levels of the organization (i.e. cost centre).

The majority of cost centre budgets were allocated by April 30 for the past three fiscal years. Cost centre allocations are left to the discretion of Assistant Deputy Ministers or Direct Reports and entered in SAP by Resource Management Directorates. As a result, practices vary as illustrated in Table A. It is not possible to measure performance for the indicator outlined above as there is no single allocation. PCH should strive to reduce the number of cost centre allocation transactions and set a date by which all Assistant Deputy Ministers or Direct Reports allocate their budgets. This would support financial planning by Responsibility Centre Managers across the organization.

Note: The total number of allocation transactions exceeds the number of cost centres, as there were multiple transactions per cost centres.

Overall, consultations with Responsibility Centre Managers and other stakeholders indicated a desire for greater consistency and predictability in the budgeting and forecasting process. These opportunities for systematic improvements, in addition with a greater standardization to promote efficiencies, could be addressed with a departmental policy. As part of the new Policy on Financial Management, departments have been instructed to avoid re-creating rules internally that are already outlined in Treasury Board policy instruments. The departmental policy could focus on PCH-specific responsibilities and include a target date for cost centre allocations, which would allow to report on results of the mandatory timeliness indicator.

Recommendation

4. The Chief Financial Officer should develop and implement a policy instrument for budgeting and forecasting which includes PCH-specific controls and processes, and a target date for cost centre resource allocations.

Measuring forecasting accuracy

As part of the Treasury Board Directive on Results, PCH will be expected to report on the variance between the department’s September (P6) and December (P9) lapse forecasts and Public Account lapses. This is to encourage increased discipline and forecasting accuracy, and guide effective and timely expenditure management decisions.

PCH measures the forecasting accuracy of Assistant Deputy Ministers and Direct Reports based on October (P7) forecasts, with a 4% target. Results are reported to FINCOM and EXCOM. In 2015-2016, most Assistant Deputy Ministers and Direct Reports met the target and global results were also positive for June (P6, 4% accuracy) and September (P9, 2%). A granular analysis of PCH forecasting identified the following relevant trends:

• Salary forecasting is accurate (within a 2% range) in part due to the use of a standard Salary Forecasting Tool. Salaries account for a larger proportion of Vote 1 expenditures overall, and as a result has a large impact on the accuracy of global forecasts.
• Forecasting accuracy for goods and services varied between 9% and 12% and year-end expenditures were high, indicating an opportunity for better planning.
• Forecasting accuracy for travel, hospitality and conferences varied between 10% and 24%.

PCH has a corporate forecasting accuracy indicator in executive performance management agreements; this good practice was introduced in 2015-2016. A review of a sample of 25 agreements confirmed the indicator was included in a majority of agreements (96% in 2015-2016 and 92% in 2016-2017). Half of the sampled agreements measured forecasting accuracy in accordance with the indicator. Of those, 67% reported on results accurately. A potential cause of inaccurate reporting would be the absence of an independent validation of results by the Financial Management Branch.

Overall, forecasting accuracy targets are set and reported on at level of Assistant Deputy Ministers and Direct Reports. Efforts have been made to complement organizational targets with indicators to hold executives accountable for forecasting accuracy. However the executive performance management process was not applied consistently and excluded 272 non-executives, which represents approximately 75% of the Responsibility Centre Managers population. There is an opportunity for PCH to extend the good practice and include a mandatory indicator for forecasting accuracy at the lowest levels of the organization. Understanding that a transition will be beneficial for these new measures, it will help support the Deputy Minister’s accountability related to accuracy of financial information.

Recommendation

5. The Chief Financial Officer in collaboration with the Director General of Human Resources, should develop indicators to measure forecasting accuracy that are aligned to expectations, included in performance management agreements of all Responsibility Centre Managers and report on results.

Tools to support Responsibility centre manager forecasting and accountability

Resource Management Directorates extract financial information from SAP and format it in excel worksheets for greater ease of use by Responsibility Centre Managers. These tools have evolved over time as a result of SAP reports not being user friendly, and in an effort to provide customized forecasting support. The variety of tools increases the risk of errors due to the manipulation of data.

There is no standard requirement to have Responsibility Centre Managers attest to their monthly forecasts, which would help reinforce delegated financial authorities. Templates with a more formal validation of the accuracy of forecasts, would also clarify any potential confusion between the accuracy of forecasts and the responsibilities for data entry.

There is a Business Intelligence system in place at PCH which has the potential for more user-friendly and standard reporting to support the monthly forecasting process. However consultations revealed very little use of this tool as a result of low awareness, training and support. In order to capitalize on the use of this existing tool, a successful implementation of this system will require user-friendly templates and training prior to implementation; this can be developed in collaboration Resource Management Directorates. A standard template will also increase the efficiency of monthly forecasting.

Recommendation

6. The Chief Financial Officer should continue to develop standard reporting templates for forecasting which should include Responsibility Centre Manager attestation and provide training on the use of the Business Intelligence tool.