Audit of capital and attractive assets  

Roles and Responsibilities

The Department has in place a suite of policies, standards and guidelines for asset management, where roles and responsibilities are clearly defined for all personnel involved. Specifically, cost centre managers are required to manage assets under their control so these are used appropriately, and in case of any movement or transfer of tracked assets, report to CFOB Regional Asset Management Services so that myEMS can be updated accordingly^{Footnote 1}. However, in practice, many cost centre managers are not aware that they have any assets under their care or feel unclear about which assets are under their care, let alone reporting the movement or transfer of tracked assets. Due to this disconnect at the working level, asset movement is not well tracked, resulting in errors in asset recording. For example, a printer plotter in good condition in the Western Region was found to be disposed of in myEMS with its location in Gatineau.

According to ESDC iService IntraWeb, a list of all assets in myEMS under a specific cost centre can be obtained by contacting Regional Materiel Management Services. The audit team was however informed, through interviews, that myEMS does not roll up its report at the cost centre level. Audit tried to retrieve, on a sample basis, the list of assets for a few cost centres and it appears this is possible for some but not for others.

For effective asset management, it is important that cost centre managers have access to the list of assets under their care, so that the location and movement of assets can be tracked and reflected in myEMS in a timely manner.

MyEMS Asset Information

The audit encountered many challenges during physical inventory observation due to inaccurate asset information recorded in myEMS. For physical inventory count, the audit selected capital and attractive assets based on location information in myEMS. It happened multiple times that the asset supposedly in one location turned out to be in a different location (for example, a tablet recorded in myEMS as located in St John's, is actually in Montreal; one mobile printer observed in Edmonton is recorded in myEMS as located in Vancouver ).

Also, asset description is not always accurate, this includes asset status and asset feature, for example:

• Many tablets in active use are marked as ESTO-ACT (i.e. "in the warehouse")
• Cameras observed on-site are recorded as INAC-DIS (i.e. disposed)
• Two iPads recorded in myEMS as active turned out to be 'not found' when included as part of inventory count
• One photography and studio equipment is recorded as tablet in myEMS

There is an opportunity for cost centre managers to conduct regular reviews of asset information, including asset status, in myEMS for their respective cost centre, to identify anomalies and make corrections in a timely manner.

Tracked and Attractive Assets

TB Policy on Management of Materiel^{Footnote 2} requires deputy heads be responsible for "ensuring that the overall extent to which their materiel assets meet program requirements is measured by an ongoing and systematic assessment of the physical condition, functionality, use and financial performance of these assets against established targets based on appropriate benchmarks"^{Footnote 3}.

ESDC SMTA provides a definition of what are tracked assets and attractive assets. However, interviews confirmed there is confusion at the working level on what an attractive asset is and what needs to be tracked. This is evidenced by the fact that many times, when attractive assets were purchased through the acquisition cards, the transactions were not flagged in myEMS by 'tracked asset' checkbox. As a result, many TVs and cameras ended up not being tracked in the system. When attractive items are not tracked, it increases the risk of misuse and asset misappropriation as they are portable and can be easily transported out.

In order to clarify what is an attractive asset and what needs to be tracked, SMTA and other relevant procedures will need to be updated to explicitly list all individual items that are attractive assets, by asset type and value. The list of individual items that need to be tracked will also have to be maintained. In addition, information that is required to be captured in myEMS (e.g. location details) will have to be clearly identified and communicated to the employees.

Segregation of Duties

Segregation of duties is well designed, so that no one person can go through a transaction from initiation to completion without involving other personnel. As a result of this effective design, risk of asset misappropriation is significantly reduced.

The audit team reviewed the report of lost, stolen and misused items, provided by the Departmental Security Officer. Out of 61 incidents reported for the audit period, none was related to a capital asset and 2 were related to attractive assets (tablets). Inquiry made to the Departmental Senior Disclosure Officer also indicated there has been no reported or suspected case related to asset management for the audit period.

Annual Asset Validation

The Department has started conducting the Annual Asset Validation in 2014-15. Capital assets are counted every year, while other types of tracked assets are counted every three years.

Each year, the following steps are followed:

• A call letter is issued in early September to all responsible directors (CFOB regions and IITB)
• Inventory count is conducted during September to December
• Inventory results are analysed and compiled from December to February, including management level update
• Results review meetings are conducted from February to May with final report generated at the end of this process
• Actions and updates are prepared from May to June
• Process review and process/documentation update are conducted from June to August

While recognizing that the annual validation process is a useful mechanism for good asset management and stewardship, we found that some improvement is needed for better asset tracking and custody.

Existence of Physical Inventory

As part of the audit procedures, we selected 198 assets from the National Headquarters and the four regions to verify their existence.

• 87% of the capital assets were found (out of 30 capital assets); and
• 49% of attractive assets were found (out of 168 attractive assets).

The audit team believes that simply adding more location details in the annual inventory count may significantly improve these results. Currently, most asset records in myEMS indicate in which building the asset is located, however, it was a challenge for the audit team to physically observe some selected assets on site due to this lack of detailed physical location information (i.e. room or floor).

In the Ontario Region, the asset management team maintains an asset spreadsheet outside of myEMS where they keep track of detailed location information for every asset (e.g. custodian name, floor information, etc.). Their success in locating 100% of the assets selected by the audit team is attributed to this good practice.

Completeness of Physical Inventory

As part of the audit procedures, we selected 205 items on site while conducting physical inventory count to verify if all assets belonging to ESDC are recorded in myEMS, this included both National Headquarters and the four regions.

• 65 out of 205 samples had no asset tags, which means they were not tracked and recorded in myEMS;
• Assets without tags included TVs, artwork, cameras and iPads; and
• 140 out of 205 samples had asset tags.-

Additional details broken down between Capital and Attractive Assets are presented below:

Recommendation 1

The Chief Financial Officer (CFO), in collaboration with all branches, should strengthen asset management practices to ensure asset movement is properly tracked and asset information is accurate and up-to-date.

Recommendation 2

The CFO should review the annual validation process to improve the tracking and recording of attractive assets.

Asset Acquisition

Different mechanisms are in place for asset acquisition, such as call-ups against standing offers, supply arrangements or use of acquisition cards. The value for money principle is respected through purchasing from designated vendors. When purchases are made using acquisition cards, we noted inconsistent practices across the Department as there is no clear guideline on how this should be conducted. For example, some acquisition card holders choose to obtain three quotes and go with the lowest bid, while others may just do a research and go with the lowest price.

We found one instance where the approver approved the purchase transaction prior to the effective date of her delegation of authority.

92% ($48.5 million) of the capital asset acquisitions during the audit period was IT assets, mainly internally developed software; 7% ($3.5 million) was leasehold improvement and the remaining 1% was other types of capital assets (vehicles and equipment).

Purchases of attractive assets were also reviewed, these included artwork, cameras, portable printers, tablets and TVs. For financial statement reporting, these purchases were expensed in the period when the items were bought.

Asset Disposal

92% ($21 million) of the capital assets disposed during the audit period was IT assets, mainly internally developed software (87%), these were assets transferred to Shared Services Canada (SSC) or assets no longer in use. The remaining capital assets disposed of ($1.9 million) were vehicles, office furniture, equipment, etc.

Disposal of attractive assets was also reviewed, these included cameras, tablets and TVs. We identified a few instances where someone continued to approve disposal transactions when the person was no longer in that role.

Throughout the audit, we found that the rationales to support the disposal decisions were not always documented. In each region, disposal requests go to the authorized approver for approval, this can be verified by an electronic signature in myEMS. Since one approver usually grants disposal authorization for the entire region, it is important to properly document the rationale as this is the only effective way to manage the authorization process.

During physical inventory count, we observed obsolete items such as cameras and portable printers still kept in stock even though no longer in service, we also observed one damaged TV left on the warehouse floor.

Access to Asset Recording

Only a limited number of CFOB employees have access to asset recording in myEMS and only authorized employees are allowed to modify asset records in myEMS. In addition, the list of authorized users is reviewed on a yearly basis. The audit team only found one instance where access was not removed in a timely manner due to human error.

Confusion about Ownership of Servers

Some confusion exists with regard to the ownership of servers. The audit team received a list of servers from AMPP and was informed by IITB that all servers are managed by SSC and are not owned by ESDC. We were also informed by other employees that certain servers still belong to ESDC, as SSC does not want to manage them due to confidentiality concerns over their sensitive content or transfer cannot be done due to technical issues. The audit team physically observed a few servers that are currently managed by ESDC, one server managed by the Skills and Employment Branch was found in myEMS with a status ‘disposed’, which implies it is treated the same way as the other servers (transferred and managed by SSC).

A clear understanding is required on who has the ownership of all servers so that relevant asset records in myEMS are complete and accurate.

Vehicle Information

ESDC had a fleet of 110 vehicles recorded in myEMS during the audit period. ARI Insights (ARI) is used by the Department to manage fleet information and it is an effective tool to manage departmental vehicles. Users can find billing information, odometer history, replacement scheduling, etc. on the website, and they can also extract various reports for analysis. The audit compared vehicle information in both ARI and myEMS to verify if all departmental vehicles are accurately recorded in myEMS.

The audit team found one active and in use vehicle was incorrectly recorded in myEMS at zero value with status ‘in the warehouse’. In addition, one vehicle was never amortized and two forklifts were not recorded in myEMS, possibly due to system conversion issues from the previous system to myEMS.  

Capitalization of Internally Developed Software

On a sampling basis, file review results indicated that 7 out of 10 projects^{Footnote 5} capitalized during the audit period were not properly capitalized and recorded in accordance with the departmental guideline on Accounting for Capital Assets. For amortization, we identified instances where the departmental guideline was not followed. For example, amortization did not start the month following the ‘in service’ date, the useful life was modified during the amortization period or the amortization was not calculated on a straight-line basis over the life of the asset.

Amortization expense is automatically calculated by myEMS. Corporate Accounting does not make manual changes to this system calculation, unless there was an error in setting up the amortization or they notice myEMS does not appear to calculate correctly. Currently, they perform a monthly analysis of amortization expense by asset class. We recognize it is not practical for Corporate Accounting to analyse each asset on a regular basis, however, as amortization calculation may become significantly complex when involving subassets and/or changes in assets, we recommend they work with In Service Support Organization within CFOB to get a better understanding of how myEMS calculates amortization so potential errors may be identified and corrected accordingly.

Capitalization of Betterments and Leasehold Improvements

Once a capitalizable leasehold improvement project is put in service, all the accumulated capitalizable costs are settled to an asset and amortization starts from the month following the month that the asset was placed in service.

Currently CFOB maintains a spreadsheet for all leasehold improvement projects. This spreadsheet includes details such as project description, capitalizable or non capitalizable, in service date, the internal order number, etc. The audit team identified 23 projects from this spreadsheet that have passed the ‘in service date’ but no cost has been transferred to an asset at the time of our file review. Upon further validation with CFOB, we were informed that ‘in service date’ on this spreadsheet cannot be relied upon as they are not updated due to resource and time constraints in IPPM within CFOB.

As Corporate Accounting relies on receiving “in service” confirmation from the project to settle the capitalized costs, it is important to obtain accurate and timely updates of the ‘in service dates’ from IPPM for reliable financial information on leasehold improvements.

On a sampling basis, 14 out of 20 samples had incorrectly capitalized costs despite clear instructions from Corporate Accounting that these expenditures should not be capitalized. We were informed that these errors may have been caused by incorrectly running the settlement rules in myEMS at year end. 

Write Off of Disposed Capital Assets

Currently, the practice is to allow up to the end of the fiscal year for the disposal entries to be entered in myEMS. For example, for an asset disposed of on April 1, 2017, Corporate Accounting has up until the final posting period to input the entry and back-dates the disposal to adjust for any current-year amortization that should be reflected. The audit team identified two instances where vehicles sold in 2014 and 2015 were written off in 2017. Due to this time lag, any GCSurplus sale income can no longer be attributed to the disposed asset and they were written off without revenue. CFOB indicated these two instances were caused by system issues and conversion problems.

We recognize the current practice may have been caused by resource constraints, however, as myEMS is often used as a financial information reporting tool, we believe a timely update of all asset information is important for accuracy of financial reporting.

Monitoring Activities

CFOB has monitoring procedures in place to oversee the proper capitalization of expenses:

• Quarterly review of certain general ledger accounts to make sure no capitalizable cost has been expensed
• Monthly review of all assets under construction (AUC), i.e. software developed internally and leasehold improvement^{Footnote 6}, to make sure settlements from AUCs to capitalized assets are done on a timely basis (including review of in service date, zero balance and no recent activity projects)
• Quarterly review of internally developed software to make sure all eligible capitalizable costs are captured in the appropriate AUC projects. This review also verifies that the AUC projects are still valid (i.e. not abandoned) and properly settled and transferred to their final assets on a timely basis.

Our file review identified errors in capitalization of expenses, which impacted the areas of maintenance and repairs, internally developed software as well as leasehold improvement.

Maintenance and Repairs

• As per the TB Directive on Accounting Standards, significant upgrades to create permanent offices should be capitalized. In our file reviews, we found conversion costs incurred (above capital asset threshold of $10,000) for meeting rooms and quiet rooms being expensed.

Internally Developed Software

• Errors were identified where eligible costs were not capitalized and vice versa (non capitalizable costs being capitalized). Further validation with CFOB indicated these were caused by incorrect settlement rules and by human error.

Leasehold Improvement

• We found certain ineligible leasehold improvement expenditures were capitalized despite clear instructions from Corporate Accounting that these were not eligible expenses.

These errors are valued in the millions of dollars and we believe a review of current departmental monitoring procedures may assist in improving the accuracy of financial reporting. For example, for internally developed software, Corporate Accounting currently reviews at an overall project level whether only eligible costs incurred during the project execution phase are being capitalized, as all costs associated with the justification, initiation, planning or close phases of projects are expensed. However, the errors we identified were caused by incorrect settlement rules manually maintained by Financial Management Advisors at the individual project level. These settlement rules determine what expenses made by ESDC, are transferred (settled) from general ledger expense accounts, to the applicable AUC stages, from where costs are eventually capitalized when projects are put into service. There is an opportunity for Corporate Accounting to conduct more in-depth reviews, on a sampling basis, in order to improve the accuracy of financial reporting of items like “internally developed software”.

Recommendation 3

The CFO should improve accuracy of asset information in myEMS, to ascertain that:

• All assets belonging to ESDC are recorded in myEMS.