Annex to the Statement of Management Responsibility Including Internal Control Over Financial Management – Fiscal year 2020-21

Financial Policies and Internal Controls
Chief Financial Officer Branch
August 2021

Message from the Deputy Minister and Chief Financial Officer

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2021, and all information contained in these statements rests with the senior management of the Department of Canadian Heritage (PCH). These financial statements have been prepared using the Canadian public sector accounting standards.

Some of the information in these financial statements is based on management’s best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of PCH’s financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in PCH’s Departmental Results Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial management (ICFM), including internal control over financial reporting (ICFR), which is designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards and managerial authorities are understood throughout PCH. The monitoring of PCH internal controls is performed on an ongoing basis and identified deficiencies are remediated to mitigate risks to an acceptable level.

In accordance with the Treasury Board Policy on Financial Management, a risk-based assessment of the system of ICFM was completed, for the fiscal year that ended March 31, 2021. The results and action plans, along with the COVID-19 pandemic impacts on the department’s financial business processes are presented in this annex for FY 2020-21.

The effectiveness and adequacy of PCH’s system of internal control is reviewed by the work of internal control and internal audit staff, who conduct periodic reviews and audits of different areas of PCH’s operations. Additionally, the Departmental Audit Committee (DAC) oversees management responsibilities for maintaining adequate control systems and the quality of financial reporting.

The financial statements of PCH have not been audited.

Isabelle Mondou
Deputy Minister

Eric Doiron
Chief Financial Officer

On this page

• 1. Introduction
• 2.internal control over financial management
  • 2.1 Internal control governance
  • 2.2 Service arrangements relevant to financial statements
    • 2.2.1 Common Arrangements
    • 2.2.2 Specific Arrangements
• 3. Ongoing monitoring of key controls
  • 3.1 Assessment results during fiscal year 2020-21
    • 3.1.1 Investment Planning
    • 3.1.2 Salaries
    • 3.1.3 Fraud Management
    • 3.1.4 Planning, Budgeting and Forecasting
    • 3.1.5 Purchases and Payables
  • 3.2 COVID-19 considerations
    • Acquisition Cards
    • Electronic approvals
    • Emergency support funds
    • Employee Guidelines
  • 3.3 Three-year action plan

1. Introduction

This annex provides information on the measures taken by Canadian Heritage (PCH) to maintain an effective system of Internal Control over Financial Management (ICFM), including Internal Control over Financial Reporting (ICFR), assessment results and related action plans.

Information on PCH’s authority, mandate and program activities can be found in the Departmental Results Report and the Departmental Plan.

2.internal control over financial management

The Policy on Financial Management came into effect on April 1, 2017 and requires the establishment and maintenance of a risk-based system of ICFM.

In this context, PCH must perform the ongoing monitoring of the design and operation of its internal controls and remediate identified deficiencies. This also provides reasonable assurance that public resources are used prudently and that financial legislation, regulations and policies are being complied with.

2.1 Internal control governance

PCH has a well-established governance structure to support departmental assessment efforts and oversight of its system of internal control. A departmental internal control management framework, approved by the Deputy Minister (DM) and the Chief Financial Officer (CFO), is in place and includes:

• The Internal controls division under the CFO monitors the effectiveness of ICFR and ICFM across the department and develops recommendations on identified deficiencies;
• The provision of regular updates on internal control assessment results and action plans to the Departmental Audit Committee (DAC), in order to provide advice to the DM on the adequacy and functioning of the department’s risk management, control and governance frameworks and processes;
• An annual risk-based ongoing monitoring plan is developed in consultation with senior management across the Department to address areas of higher risk and significance. In order to maximize the efficiency within the department, the ongoing monitoring plan is developed in consultation with the Office of the Chief Audit Executive (CAE) to coordinate the planning activities related to internal control assessments;
• Organizational accountability structures that defines clear roles and responsibilities for senior management to support sound financial management within the department;
• Strong Entity Level Controls, including a “Tone from the top” organizational culture and a department-wide Code of Conduct, which is supported by management and by the Office of Values and Ethics (OVE). The OVE provides confidential, independent, impartial and informal assistance to employees and groups of employees who are experiencing conflicts affecting their work;
• A fraud governance process that creates a transparent and sound anti-fraud culture within the department. This process includes periodic fraud risk assessments and a departmental fraud awareness strategy for all employees; and
• On-going communication and training on statutory requirements, policies and procedures for sound financial management and control.

2.2 Service arrangements relevant to financial statements

PCH relies on other organizations for the processing of certain transactions that are recorded in its financial statements.

2.2.1 Common Arrangements

• Public Services and Procurement Canada (PSPC) centrally administers the payment of salaries and the procurement of some goods and services in accordance with PCH’s Delegation of Authority, and provides accommodation services;
• Treasury Board of Canada Secretariat (TBS) provides PCH with information used to calculate various accruals and allowances, such as the accrued severance liability. It also provides policy guidance and interpretation on matters of financial management;
• The Department of Justice provides legal services to PCH; and
• Shared Services Canada (SSC) provides information technology (IT) infrastructure services to PCH in the areas of data centre and network services.

2.2.2 Specific Arrangements

• Parks Canada Agency provides PCH with the PeopleSoft system platform to capture and report on human resources data;
• Agriculture and Agri-Food Canada provides hosting services to PCH for the SAP financial system servers.

3. Ongoing monitoring of key controls

Ongoing monitoring is intended to ensure that Internal Control over Financial Management (ICFM), including Internal Control over Financial Reporting (ICFR), continues to operate effectively and as designed, following the guidance received from the Office of the Comptroller General.

3.1 Assessment results during fiscal year 2020-21

In Fiscal Year 2020-21, PCH continued the ongoing monitoring of the key financial management business processes. The following table presents PCH’s progress as at March 31, 2021, based on the previous year action plan.

Table 1. PCH's progress with regards to its previous year action plan

Key business process	2020-21
Investment Planning	Deferred to FY 2021-22
Salaries	Completed
Salaries fraud risk assessment	Completed
Salary Forecasting Tool Review	Completed
Acquisition Cards (COVID-19)	Completed
Grants & Contributions (COVID-19)	Completed

3.1.1 Investment Planning

During FY 2019-20, a new TB Policy Suite was developed for the management of assets and acquired services, including the Policy on the Planning and Management of Investments and the Directive on the Management of Projects and Programmes. The objective is to ensure that the Government of Canada makes informed investment decisions and implements them through well managed projects and procurement, leading to better delivery of programs and services to Canadians.

In 2020-21, PCH performed an assessment of the existing governance structure in place and recommended changes to be compliant with the model proposed by TBS. As a result, terms of references were created for the establishment of a new Project Investment Review Committee to provide a forum for effective consultation, provision of strategic advice and vetting of PCH project investment proposals.

This process will be documented in FY 2021-22 following the implementation of the Investment Planning Framework.

3.1.2 Salaries

A Salary Management Control Framework was developed to outline the different roles and responsibilities of all the key stakeholders. This document was endorsed by the Executive Committee (ExCom) in April 2021 and was communicated to PCH stakeholders. Control documentation and testing for the following salaries sub-processes were also completed during fiscal year 2020-21:

Emergency Salary Advance

The Emergency Salary Advance (ESA) narrative process was updated to add the new pilot project which has now been fully implemented. PCH is now responsible to record all ESAs in Phoenix. The operating effectiveness of the key controls were tested and recommendations for improvement were sent to the Accounting Operations division for their consideration.

Performance Pay

Control documentation, design effectiveness and operating effectiveness were completed for this sub-process. The objective of the assessment was to confirm that the amounts were properly calculated and paid to eligible employees. It was determined that proper controls were in place and no control gap was identified through the testing.

Leave cash-out

Operating effectiveness testing was completed for the voluntary Leave cash-out to validate that the amounts paid were supported by appropriate documentation. A recommendation was made as part of the Salaries Fraud Risk Assessment to better support FAA section 34 certification by managers, when approving leave-cash-outs, especially in situations of employee transfer between other government departments (OGD).

3.1.3 Fraud Management

The Policy on Financial Management requires that financial resources be safeguarded against material loss due to waste, abuse, mismanagement, errors, fraud, omissions and other irregularities. The combination of effective fraud risk governance, a thorough fraud risk assessment, a strong fraud prevention and detection controls, along with a coordinated and timely investigation process, can significantly mitigate fraud risks.

Fraud Framework

In 2020-21, a departmental Fraud Risk Management Framework was developed in collaboration with relevant functional experts. This document is a combination of departmental best practices that provides a cohesive and integrated approach to prevent, detect, respond to and report on fraud instances within PCH. It also outlines roles and responsibilities with respect to fraud for all stakeholders and provides a description of all fraud management activities within PCH. The framework aims at addressing three primary categories of fraud: corruption, asset misappropriation, and financial statement fraud.

The Fraud Risk Management Framework will be presented to governance for approval in Fall 2021.

Salaries Fraud Risk Assessment

In 2019-2020, a salary fraud risk assessment was conducted with functional experts to evaluate the risk of fraud in the payroll process and to provide recommendations to address potential weaknesses/gaps. Fraud scenarios were shared with key stakeholders to determine their impact and likelihood.

In 2020-21, after considering existing processes and controls, a Management Action Plan was developed to mitigate the inherent risks related to fraudulent reporting of vacation balances upon transferring between Federal Government Departments. The plan was presented to ExCom and senior management was committed to addressing identified deficiencies.

Data Analytics

In 2020-21, a data analytics strategy was implemented to reinforce the testing of internal controls, monitoring of financial operations, and the continuous detection of fraud, waste and abuse. The analytics covered the areas of accounts payable, vendor management, financial operations (includes receivables), acquisition cards, travel and expenses, and contracting, using the 2019-20 data from SAP. A comparative analysis will be performed in 2021-22 and an action plan will be developed based on the findings.

3.1.4 Planning, Budgeting and Forecasting

Planning, Budgeting and Forecasting is a key business process that supports the prudent use of public resources and helps the department achieve its objectives. Effective budgeting and forecasting activities provide timely and accurate financial information to senior management for decision making.

In 2020-21, the controls for the Salary Forecasting Tool (SFT) Review sub-process were documented (design effectiveness) to create a standardized approach across PCH and to ensure managers have accurate reports for resource management purposes. SAP functionalities used to perform the salary reconciliation process were closely examined. Additionally, financial and HR authorities were documented in relation to the hiring sub process. As a result, it was determined that monitoring activities are in place to ensure that salary forecasts are accurate and staffing actions are properly documented.

3.1.5 Purchases and Payables

The Purchases and Payables key business process is comprised of a series of sub-processes, involving many different activities (Operating expenditures, Contracting, Travel, Acquisition cards, Interdepartmental Settlements, etc.).

Training

In 2020-21, the control documentation for training where costs exceed $15,000 was completed, as these transactions must be reviewed by the Talent Management Board. This sub-process can be complex to monitor, since total training costs over multiple fiscal years must be considered to determine the appropriate approval authority level.

Following this assessment, the PCH Educational Assistance and Education Leave Guidelines was updated accordingly and communicated to PCH functional experts.

3.2 COVID-19 considerations

The COVID-19 pandemic had major impacts on PCH’s financial business processes and brought operating challenges that needed a rapid shift in business practices. At the request of the Deputy Minister, the Office of the Chief Audit Executive (OCAE) performed an advisory engagement to assist in documenting all key decisions related to the response to COVID-19 and the measures taken by PCH. The purpose of this engagement was to provide support for accountability and to create a central compendium of all key decisions made by the Department because of the pandemic.

The Financial Policies and Internal Controls division was the lead for documenting all key decisions under CFO’s responsibility. Here is a list of the major changes:

Acquisition Cards

As part of the COVID-19 pandemic, PCH had to adapt its acquisition card reconciliation process, as it was still a very manual, paper-based process. The combination of the new e-signature (MyKey) process and the digitalization of the supporting documentation in SAP has allowed PCH to modernize the approval and processing of acquisition card transactions. PCH is still aiming to improve the FAA Section 34 approval process for its acquisition card transactions, so that managers apply their approval in SAP (I2P). The process will be re-assessed once modernization efforts are finalized.

Electronic approvals

When not processed through I2P/P2P, PCH has implemented a new electronic approval process to replace the wet, paper-based signature using the ‘’MyKey’’ digital signature. This allowed PCH to have a stronger assurance around signature authentication that enabled the electronic application of financial authorities.

Emergency support funds

In 2020, a $500 million COVID-19 Emergency Support Fund was created to support cultural, heritage and sport organizations. The Fund was administered by PCH and divided among selected programs to help maintain jobs and support business continuity for organizations whose viability had been negatively impacted by the COVID-19 pandemic.

In this context, a new batch payment process was documented to ensure the proper application of financial authorities, the quick release of payments and an easy tracking of the supporting documentation for audit purposes.

Employee Guidelines

As a result of COVID-19, PCH has adopted new remote-work arrangements for its employees in order to continue to provide valuable services to Canadians. During FY 2020-21, the following guidance was issued:

• Guidelines for remote work and employee equipment to ensure all PCH employees have the necessary tools to carry out their work remotely. Post-payment verification was performed on a sample of employee reimbursements, and all transactions were made in accordance with the guidelines.
• Tax information on how employees could choose whether to use the temporary flat rate method or detailed method to claim the new deduction for home office expenses for the 2020 tax year, aligned with the direction received from the Canadian Revenue Agency.

3.3 Three-year action plan

Based on the results of PCH’s annual risk assessment exercise, the three-year ongoing monitoring plan was revised:

Table 2. Three-year Ongoing Monitoring Plan
The X indicates the year in which the monitoring for each key control area will take place.

Key Business Processes	2021-22	2022-23	2023-24
Investment Planning	x	-	-
Fraud Management	-	-	-
G&Cs fraud risk assessment	-	-	x
Contracting fraud risk assessment	x	-	-
Planning, Budgeting and Forecasting	-	-	x
Purchases and Payables	-	-	-
Contracting	x	-	-
Revenues (CAVCO)	x	-	-
Financial Reporting	x	-	-
IT General Controls	-	x	-
Costing	-	x	-
IT Application Controls	-	x	-
Entity Level Controls	-	-	-
Capital Assets	-	-	x