Audit of Financial Commitments to International Financial Institutions: Internal Audit Report
Table of Contents
- Executive Summary
- Background
- Audit Objective, Scope, Criteria, and Approach
- Overall Opinion and Statement of Conformance
- Summary of Findings
- Appendix A – Compliance Testing Results
- Appendix B – Sampling Strategy
- Appendix C – Key Information Reviewed
Executive Summary
The Audit of Financial Commitments to International Financial Institutions was authorized as part of the Department of Finance Canada’s (the department) 2020–2023 Risk-based Audit Plan, which was approved by the Deputy Minister on August 12, 2020.
What we examined
The objective of this audit engagement was to provide reasonable assurance that the department’s management control framework for the financial commitments to the international financial institutions is effective. The focus of this audit was on the department’s financial commitments to the International Monetary Fund (IMF) and the Asian Infrastructure Investment Bank (AIIB).
Why it is important
Effective international engagement is one of the department’s priorities as stated in the 2021–22 Departmental Plan. Canada contributes to a number of international financial institutions by providing support to operations and activities, as well as funding, in order to help achieve Canada’s international assistance priorities. The department plays a lead role in managing Canada’s activities with these international financial institutions.
What we found
An effective management control framework is in place to support financial commitments to the IMF and AIIB. Roles, responsibilities, and accountabilities to support the management of these financial commitments have been clearly defined and disseminated. The department has established adequate controls to manage transactions related to these commitments, both before and after the transition to remote work due to the COVID-19 pandemic.
Financial transactions to the IMF and AIIB were processed, in all material respects, in compliance with legislative requirements and administrative agreements. The controls and processes established by the department are operating effectively.
Kari Swarbrick
Chief Audit Executive
Background
International Financial Institutions (IFIs) provide financial and technical assistance to developing country governments to support poverty reduction and long-term economic development. Canada contributes to a number of international financial institutions by providing support to operations and activities, as well as funding, in order to help achieve Canada’s international assistance priorities. The Department of Finance Canada (the department) plays a lead role in managing Canada’s activities with these IFIs, most notably the European Bank for Reconstruction and Development (EBRD), the World Bank Group (WBG), the International Monetary Fund (IMF), and the Asian Infrastructure Investment Bank (AIIB).
Transactions related to the EBRD have not been audited. Since its inception in 1991, the bank has not required any further injections of capital from its original member countries, due to its very profitable investments.
Transactions related to the WBG organizations were last audited in 2013. Since then no significant changes to the processes and controls were noted.
The department’s management control framework for processing transactions with the IMF and the AIIB have not been audited. In fiscal years 2019–20 and 2020–21, total contributions to the IMF were approximately $4 billion (CAD) and to the AIIB just over $100 million (CAD). Hence, these two organizations were the focus of our audit. Each institution is governed by a separate legal agreement: IMF by the Bretton Woods and Related Agreements Act (Bretton Woods Act); and, AIIB by the Asian Infrastructure Investment Bank Agreement Act (AIIB Act). The Minister of Finance is responsible for each of these Acts.
Multiple stakeholders within the department have a role to play in processing the financial commitments to these IFIs. The International Trade and Finance Branch provides overall policy advice and certification authority (Section 34 of the Financial Administration Act (FAA)) for transactions related to the IMF’s Poverty Reduction Growth Trust and the AIIB. The Funds Management Division of the Financial Sector Policy Branch provides certification authority (Section 34 of the FAA) for transactions related to the IMF’s General Resources Account. The Financial Management Directorate of the Corporate Services Branch provides payment authority (Section 33 of the FAA) and records the transaction in the financial management system.
Audit Objective, Scope, Criteria, and Approach
Audit Objective and Scope
Audit Objective:
- The objective of this audit engagement was to provide reasonable assurance that the Department of Finance Canada’s (the department) management control framework for the financial commitments to the international financial institutions is effective.
Audit Scope:
- The audit scope included the department’s financial commitments to the International Monetary Fund (IMF) and the Asian Infrastructure Investment Bank (AIIB) for fiscal years 2019–2020 and 2020–2021.
- The audit focused on the management control framework for processing transactions related to:
- IMF quota subscriptions;
- IMF New Arrangements to Borrow (NAB);
- IMF Poverty Reduction Growth Trust (PRGT); and
- AIIB capital subscriptions.
Audit Criteria
Criterion 1: An effective management control framework is in place to support the financial commitments to the International Monetary Fund and Asian Infrastructure Investment Bank.
Criterion 2: Financial transactions to the International Monetary Fund and Asian Infrastructure Investment Bank are processed in compliance with legislative requirements and administrative agreements.
Audit Approach
In conducting this audit we:
Reviewed relevant documentation such as legislation, policies and guidance, administrative agreements, and departmental guidance.
Interviewed personnel from the following groups to understand and document the department’s processes and controls in place for processing transactions related to financial commitments to the IMF and the AIIB:
- Financial Management Division, Corporate Services Branch (CSB);
- International Finance and Development Division (IFDD), International Trade and Finance Branch (ITF);
- International Policy and Analysis Division (IPAD), ITF; and
- Funds Management Division, Financial Sector Policy Branch (FSP).
Identified key controls and developed a process map.
Tested 33 out of the 78 transactions (payments and repayments to the IMF and AIIB) that occurred during the period examined, to assess compliance with relevant legislation, policies, and guidance.
Overall Opinion and Statement of Conformance
Overall Opinion
Sufficient and appropriate procedures were performed and evidence gathered to support the accuracy of the audit conclusion. The audit findings and conclusion are based on a comparison of the conditions that existed as of the date of the audit against established criteria that were agreed upon with management.
The findings and conclusion are only applicable to the entities examined and for the scope and time period covered by the audit.
Statement of Conformance
The audit was conducted in conformance with the International Standards for the Professional Practice of Internal Auditing, as supported by the results of the quality assurance and improvement program.
Summary of Findings
Key Findings by Audit Criteria
Criterion 1: An effective management control framework is in place to support the financial commitments to the International Monetary Fund and Asian Infrastructure Investment Bank.
Findings:
- All three (3) branches involved in supporting the financial commitments to the IMF and the AIIB have documented roles and responsibilities which are in line with the requirements set forth by legislation, administrative agreements and policy instruments.
- The audit team confirmed that adequate controls were in place to manage the transactions related to the IMF and the AIIB, both before and after the transition to remote work due to the COVID-19 pandemic. These controls ensure that the department processes the transactions appropriately, and in accordance with legislative and policy requirements.
- The audit team documented the controls in the form of process maps based on input from the three branches involved. The audit team confirmed that the controls and processes described in the process maps were functioning as intended.
Conclusion:
An effective management control framework is in place to support the financial commitments to the IMF and the AIIB. Roles, responsibilities, and accountabilities to support the management of these financial commitments have been clearly defined and disseminated. The department has established adequate controls to manage transactions related to these commitments, both before and after the transition to remote work due to the COVID-19 pandemic.
Criterion 2: Financial transactions to the International Monetary Fund and Asian Infrastructure Investment Bank are processed in compliance with legislative requirements and administrative agreements.
Findings:
Out of the 33 transactions tested to assess compliance with relevant legislation, policies and guidance, the audit team found that:
- All 33 transactions were fully compliant with FAA Section 33 requirements;
- All 33 transactions were correctly entered into the department’s financial management system; and
- All 33 transactions respected segregation of duties.
- For the 12 transactions requiring Section 34 approval, 11 were fully compliant with FAA requirements with the following exception:
- For one transaction, the audit team was provided with insufficient evidence to support the Section 34 approval. The relevant parties noted that this transaction occurred early in the COVID-19 pandemic, just after implementing the work from home order. As a result, the teams involved in processing this transaction were still adjusting to working remotely and the need to provide electronic approvals. Consequently, the documentation to support the Section 34 approval was not retained as required.
The audit team found that all branches pivoted rapidly to respond to the COVID-19 crisis in order to continue to process transactions in a timely manner. Branches updated their own internal processes in order to reflect the shift to remote work.
Conclusion:
Financial transactions to the IMF and the AIIB were processed, in all material respects, in compliance with legislative requirements and administrative agreements. The controls and processes established by the department are operating effectively.
No formal recommendations are being issued. However, the audit team would like to remind everyone of the importance of preserving adequate documentation of transactions and related approvals.
Overall Conclusion
The department has established an effective management control framework to support financial commitments to the IMF and the AIIB. Roles, responsibilities and accountabilities to support the management of these financial commitments have been clearly defined and disseminated. The department has established adequate controls to manage transactions related to these commitments, both before and after the transition to remote work due to the COVID-19 pandemic.
Financial transactions to the IMF and the AIIB were processed, in all material respects, in compliance with legislative requirements and administrative agreements. The controls and processes established by the department are operating effectively.
Appendix A – Compliance Testing Results
Test Criteria | Transactions tested | Compliance issues identified |
---|---|---|
Section 34 Approval for funding requests: | ||
The approved funding request is in accordance with the relevant legislative requirements, administrative agreements, and/or signed instruments with IMF and AIIB. |
131 | 0 (0%) |
Section 34 approval was provided. |
122 | 1 (8%) |
The individual approving the transaction had the appropriate delegated authority as per the delegation chart. |
122 | 0 (0%) |
The transaction amount is within the signing authority’s approval limit. |
122 | 0 (0%) |
The date of Section 34 approval is after the funding request was received. |
122 | 0 (0%) |
No Section 34 approval is obtained for funding requests whose purpose is to finance a country listed in the sanctions list. |
103 | 0 (0%) |
Section 33 Approval: | ||
Date of Section 33 approval is after Section 34 approval. |
122 | 0 (0%) |
The transaction is appropriately posted into SAP. |
33 | 0 (0%) |
Segregation of duties: | ||
Segregation of duties was respected when processing the payments. |
33 | 0 (0%) |
Notes: 1 For this step, 12 funding request transactions and 1 maintenance of value repayment transaction were tested. 2 Section 34 approval is not required on repayment (including interest) transactions (21 transactions). 3 This test step is not relevant to the AIIB capital subscriptions (2). |
Total number of transactions tested | Total number of transactions with compliance issues |
33 | 1 |
Test Criteria | Transactions tested | Compliance issues identified | Explanation |
---|---|---|---|
Section 34 Approval: | |||
Section 34 approval was provided. | 12 | 1 (8%) | For one (1) transaction tested (FY 2020–2021), the audit team was not provided with sufficient evidence of Section 34 approval.The evidence provided to the audit team was an email sent from an analyst to the Financial Management Directorate, CSB, informing them that the responsible Director General (DG) had approved the payment; however, the audit team could not obtain direct evidence of the DG’s approval. Upon request, neither the policy branch nor CSB could produce the actual approval email.The relevant parties noted that this transaction occurred early in the COVID-19 pandemic, just after implementing the work from home order. As a result, the teams involved in processing this transaction were still adjusting to working remotely and providing electronic approvals. Consequently, the documentation to support the Section 34 approval was not retained as required. |
Appendix B – Sampling Strategy
Sampling Strategy
The audit team identified a total of 33 transactions for FY 2019–2020 (CAD 1,624,175,991) and 45 transactions for FY 2020–2021 (CAD 3,475,122,797) that were related to financial commitments to the IMF and the AIIBFootnote 1.
For FY 2020–2021, out of the 45 transactions, 23 transactions were selected using a statistical sampling method.
For FY 2019–2020, out of the 33 transactions, 10 transactions were selected using a judgmental sampling methodFootnote 2.
The sample and population distribution is as follows:
Stratification | Sample Count (% of population) |
Population Count | Value of Sample (in CAD) |
Value of Population (in CAD) |
||
---|---|---|---|---|---|---|
FY 2019–2020 |
FY 2020–2021 |
FY 2019–2020 |
FY 2020–2021 |
|||
IMF Notes Payable Encashment (Draw from IMF reserve) | 1 (14%) | 3 (38%) | 7 | 8 | $ 1,030,008,300 | $ 2,810,131,029 |
IMF Notes Payable Issuance (Repayment to IMF reserve) | 1 (50%) | 4 (36%) | 2 | 11 | $ 456,732,429 | $ 602,487,330 |
IMF-PRGT Contributions | 1 (17%) | 5 (100%) | 6 | 5 | $ 859,313,359 | $ 1,195,634,352 |
IMF-PRGT Repayments | 2 (67%) | 5 (63%) | 3 | 8 | $ 30,838,746 | $ 38,249,401 |
IMF-PRGT Interests | 1 (25%) | 1 (25%) | 4 | 4 | $ 2,550,464 | $ 5,885,508 |
IMF-NAB Repayments | 2 (33%) | 3 (75%) | 6 | 4 | $ 259,807,573 | $ 336,766,433 |
IMF-NAB Interests | 1 (25%) | 1 (25%) | 4 | 4 | $ 1,588,797 | $ 5,178,419 |
AIIB Capital Subscriptions | 1 (100%) | 1 (100%) | 1 | 1 | $ 104,966,316 | $ 104,966,316 |
Sub-Total | 10 (30%) | 23 (51%) | 33 | 45 | ||
Total | 33 (42%) | 78 | Total (Payments Only) | |||
$ 1,994,287,975 | $ 4,110,731,697 | |||||
Total (Payments and Repayments) | ||||||
$ 2,745,805,984 | $ 5,099,298,788 |
Appendix C – Key Information Reviewed
Key Information Reviewed
The following is a non-exhaustive list of key information reviewed by the audit team:
Legislation, Policies and Guidelines
- Financial Administration Act (Last amended July 1, 2020)
- Bretton Woods and Related Agreements Act (Last amended June 23, 2019)
- Asian Infrastructure Investment Bank Agreement Act (2017)
- Treasury Board Policy on Financial Management (2017)
- Treasury Board Directive on Delegation of Spending on Financial Authorities (2017)
- Treasury Board Directive on Transfer Payments (2008)
- Treasury Board Guide to Delegating and Applying Spending and Financial Authorities (2018)
Documents Specific to Department of Finance
- Financial Signing Authorities Guide (2020)
- Delegation of Financial Signing Authorities Instrument (2021)
Other Documents
- Payment agreements between Canada and the International Monetary Fund
- Letter of application and letter of acceptance between Canada and the Asian Infrastructure Investment Bank
- Department of Finance internal process documentation
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