Audit of the Canada Student Loans Program Sections 34 and 33 of the Financial Administration Act, November 2014

Audit objective

The objective of the audit is to assess whether the Canada Students Loans and Grants payment practices related to certification under Section 34 and approval under Section 33 of the Financial Administration Act (FAA) are compliant with relevant legislation.

Summary of key findings

The control framework for the authorization and issuance of disbursements processed by the Service Provider was found to be operating effectively. However, the audit identified certain areas where controls could be improved:

• An opportunity exists for the Chief Financial Officer Branch (CFOB) to periodically assess the control framework supporting the authorization and issuance of disbursements to ensure it continues to operate as intended.
• The processes for authorizing and issuing manual max grant edit disbursements can be streamlined.
• Controls around the account verification process for the authorization of manually issued Alberta grants can be improved.
• Existing data can be better used to assess provincial controls over students’ eligibility.

Audit conclusion

The audit concluded that the Canada Students Loans and Grants payment practices related to certification under Section 34 and approval under Section 33 of the FAA are compliant with relevant legislation. The control framework for managing loan and grant disbursement processes is in place. Opportunities to assess the mechanisms supporting Section 33 to ensure they continue to function as intended and to follow up on inconsistencies noted in the needs assessment data were identified in the audit.

Recommendations

• The Chief Financial Officer (CFO), in collaboration with the Assistant Deputy Minister (ADM) Learning Branch (LB), should assess the mechanisms used to demonstrate that the control framework and quality assurance activities supporting Section 33 authorization continue to function as intended.
• The ADM LB should strengthen its practices to follow-up on issues found in the needs assessment data when inconsistencies are detected.

1.1 Context

CSLP promotes accessibility to post-secondary education for students with a demonstrated financial need by lowering financial barriers through the provision of loans and grants in most provinces and territories. In 2012–13, the number and percentage of Canadians pursuing post-secondary education who were assisted by the CSLP continued to increase. In this period, 609,080 post-secondary full-time students in the participating provinces and territory benefited from federal student loans, grants or in-study interest subsidies compared to 581,280 students in 2011–12 ^{Footnote 2} . Other trends include:

• The issuance of $2.6 billion in loans to 478,630 students in 2012–13 compared to $2.4 billion issued to 452,180 students in 2011–12.
• The issuance of $680 million in grants to 357,048 students in 2012–13 compared to $649 million issued to 333,200 students in 2011–12.

Section 34 of the FAA pertains to account verification and certification prior to the authorization of payments from the Consolidated Revenue Fund. Compliance with Section 34 requires the establishment of account verification processes and controls that maintain sound stewardship of financial resources. Account verification provides a means to ensure that the payee is eligible for or entitled to the payment, the contract or agreement terms and conditions have been met, the transaction is accurate, and all legislative authorities have been complied with.

In accordance with Section 33 of the FAA, no requisition shall be made for a payment that:

• Is not a lawful charge against an appropriation.
• Will result in expenditures exceeding an appropriation.
• Will result in an insufficient balance in an appropriation to meet the commitments charged against it.

The Treasury Board (TB) Directive on Account Verification outlines the requirements to ensure that accounts for payment are verified in a cost-effective and efficient manner while maintaining the required level of control to ensure prudent management of financial resources.

1.2 Audit objective

The objective of the audit was to assess whether the Canada Students Loans and Grants payment practices related to certification under Section 34 and approval under Section 33 of the FAA are compliant with relevant legislation.

1.3 Scope

An audit of the management control framework of CSLP was completed in 2013. The audit concluded that the CSLP established a management control framework that is sufficient to manage the loan portfolio and oversight for the management of the loan portfolio is in place.

The current audit focused on the financial management of the CSLP, specifically, the payment certification practices under Section 34 and approval practices under Section 33. The scope considers disbursements for loans and grants that were paid to students in the ten participating jurisdictions during the current loan year which began in August 2013.

1.4 Methodology

This audit used a number of methodologies which included:

• Documentation review and data analysis; and
• Walkthrough and process observations to identify and assess the design effectiveness, and operating effectiveness of manual and automated key controls.

Representatives from LB, CFOB, the Service Provider, and external auditors conducting the attest audit of the Service Provider were interviewed. Travel to the Service Provider in Mississauga took place in February and May 2014, while travel to the CFOB National Payment Processing Centre in Montreal to observe the new SAP processes took place in June 2014.

Two samples of loan and grant disbursement files processed between August 2013 and January 2014 were selected for testing compliance of Section 34 and Section 33 practices. File review results are derived from statistically valid random samples of:

• 184 disbursements processed by the Service Provider; and
• 164 disbursements manually processed by the CSLP CO.

Each sample provides for a 95% confidence level, a presumed error rate of 2% and a precision interval of ± 2%.

The audit team performed sufficient testing of disbursement transactions, walkthroughs and process observations to satisfy itself that the external auditors’ findings were reasonable.

2.1 The control framework for the authorization of disbursements processed by the Service Provider is operating effectively

The CSLP relies on several organizations both inside and outside ESDC to verify eligibility prior to authorizing disbursements to students and their corresponding EIs. Participating provinces and territory assess students’ eligibility for federal loans and grants and the amounts to which they are entitled. EIs confirm that students are enrolled in study. The Service Provider, which processes 97% of disbursements to students and EIs (3% are processed manually by the CSLP CO), confirms students’ demographic information and the completeness of supporting documents before processing batch disbursement requisitions for Section 34 certification by the CSLP CO. The CSLP has an onsite PAV team which performs quality assurance work on the Service Provider’s processes by continuously testing samples of transactions, including disbursements. The CSLP CO engages an accounting firm to perform an annual attest audit and to provide an opinion as to the effectiveness of the Service Provider’s operations.

Based on the results of the audit work, the auditors concluded that Section 34 certification practices are compliant with relevant legislation. The sections below describe in more detail our assessment of the control framework elements around the authorization of disbursements.

2.2 There is a need to assess the evolving control framework supporting the issuance of disbursements processed by the Service Provider

The following activities supporting Section 33 responsibilities have to be performed to ensure loan and grant disbursements are properly issued:

• Payments have been properly authorized; and
• Processes have been established to enable reporting on the overall adequacy and reliability of the payment authorization process, which include quality assurance activities.

CFOB financial officers, upon receipt of batch requisitions from CSLP which have been certified under Section 34, transmit CSLP control files to the Receiver General containing the number of payments and total amount of disbursements to be paid. These control files are compared with the contents of CSLP batch files sent to the Receiver General from the Service Provider via the Innovation, Information and Technology Branch (IITB) which contain detailed payee and financial institution information. The audit team reviewed 30 regular disbursement batches issues by CFOB under Section 33 between August 2013 and January 2014. All 30 sample batches were approved by individuals with appropriate delegated authority and supported by sufficient requisition documents.

CFOB relies on the CSLP control framework, from the provincial assessments to the testing of the PAV team and annual attest audits, when it approves batch files for payment under Section 33. The audit team noted that CFOB does not sample and does not review individual disbursements, although the TB Directive on Account Verification stipulates that sufficient sampling needs to take place to demonstrate the overall adequacy and reliability of the account verification process.

Based on the results of the audit work, the auditors concluded that Section 33 authorization practices are compliant with relevant legislation. However, the auditors would expect that CFOB assess, on a periodic basis, CSLP’s account verification and quality assurance activities in order to ensure the control framework around the authorization and issuance of disbursements continue to function as intended.

2.3 The control framework for the authorization and issuance of manual disbursements can be streamlined

2.4 Existing data can be better used to assess provincial controls over students’ eligibility

As discussed in Section 2.1 of the report, the provinces and territory are responsible for the assessment of students’ needs information to determine the amounts of federal loans and grants to which students are entitled. ESDC pays the provinces and territory administration fees for each student that they assess on its behalf.

A 2007 Office of the Auditor General audit on federal student loans and grants contained findings about ESDC’s lack of assurance regarding provincial and territorial processes for assessing whether federal student loan and grant criteria were being met. As a result of its action plan from this audit, the CSLP now receives annual NARs data extracts from the provinces and territory which contain 114 fields of data for each student applicant. The CSLP has implemented a payment structure to calculate administrative and incentive fees paid to each jurisdiction based on completeness, validity, and consistency of the NARs data that it receives in December following the end of the loan year. The CSLP validates the data contained in these fields against “business rules” to assess the extent to which the data is reliable and has been properly used to assess student need. Where more than 50% of any of these fields have been assessed as being 95% accurate or higher, provinces and territory are eligible to receive the maximum incentive payment for having provided data of better quality.

The audit team considers the CSLP’s assessment of NARs data to be a good practice. The CSLP CO receives copies of the annual NARs data evaluation reports which allow it to feel comfortable that the provinces and territory have properly assessed students’ eligibility. In 2009, the CSLP brought to the attention of the provinces and territory some specific findings from its analysis of NARs data. The audit team understands that recently, the NARs data has been used mainly for analytical and research purposes. Follow-up with the provinces and territory about NARs data findings has been limited to situations where more than 50% of the data fields have not met the 95% standard.

The audit team reviewed the CSLP’s assessment of the 2012-13 NARs data. The audit team found that across the provinces and territory, 77% of the fields had met the 95% standard. Most of the fields that met the standard were considered 100% correct. Students from low-income families and who have dependants may be eligible for federal grants. However, across multiple provinces, the data field for assessing the federal grants for dependants had an accuracy rate of less than 62%. On the surface, it appears there may be integrity issues with the data reported in this field. At the time of the audit, the CSLP informed the audit team that they had not yet followed up with the provinces to learn about this situation.