Audit of ESDC Passport Revolving Fund Cost Recovery

1.1 Context

Employment and Social Development Canada (ESDC) is responsible for delivering the Passport Program within Canada on behalf of Immigration, Refugees and Citizenship Canada (IRCC). IRCC has overall authority and responsibility for the Passport Program. The Service Delivery Agreement (SDA) signed in April 2023 (and formerly the Memorandum of Understanding on Financial Agreements from 2013) outlines the roles and responsibilities of both departments. The SDA authorizes ESDC, via Service Canada, to deliver passport services across Canada.

Passport Revolving Fund

The Passport Program (the Program) operates on a cost-recovery basis through the Passport Revolving Fund (PRF) that is managed by IRCC. The PRF uses passport processing fees to finance costs associated with the delivery of the Passport Program. If the fund were to enter a deficit, the Minister of IRCC would no longer have the authority to make any expenditures for passport operations.

Passport Crisis

The demand for passports significantly decreased during the COVID-19 pandemic in 2020 to 2021 (the pandemic) due to public-health enacted travel restrictions. A significant backlog in passport applications quickly accumulated (the passport crisis) when travel restrictions were lifted at the end of the pandemic in 2021 to 2022. There was an accumulated surplus in the PRF that was initially sufficient to absorb the lost revenues and costs incurred during the pandemic and ensuing crisis. However, these events had a significant impact on the free balance of the PRF. The projected surplus decreased from $1.17 billion in 2019 to 2020 to $295.5 million as of March 31, 2023.

Treasury Board Secretariat - Audit Request

Due the significant reduction of the PRF over a relatively short time period, the Treasury Board Secretariat requested that Internal Audit from ESDC and IRCC work together to audit the Program's governance and financial controls, with a view to putting forward options to strengthen the Program oversight.

1.2 Audit objective

The objective of the audit was to assess whether the Department had adequate governance and financial controls for Passport Program costs charged to the PRF.

1.3 Scope

The scope of this audit included passport costs charged by the Department to the PRF from the 2018 to 2019 fiscal year until August 2024, including the passport crisis after the pandemic. The audit scope did not include testing the accuracy of costs charged by ESDC to the PRF nor their eligibility.

1.4 Methodology

The audit was conducted using a number of methodologies including:

• Documentation review and analysis
• Data analysis
• Interviews with management and staff

2.1 Oversight committees focused on service delivery

Governance committees

ESDC and IRCC have joint oversight operational and Deputy Minister-level committees in place. However, the meeting discussions focused on service delivery and operational priorities with a limited focus on cost impact. Including regular discussions on costs would foster more shared awareness of cost implications and strengthen oversight by senior management and joint governance.

Passport crisis committees

Management indicated that joint ESDC and IRCC crisis committees and working groups were established during the passport crisis in 2021 to 2022 and 2022 to 2023. However, the Terms of Reference or Records of Decisions for these committees were not documented.

2.2 Monitoring mechanisms limited to forecasted Passport Program costs

The previous IRCC-ESDC Memorandum of Understanding (2013) and the new Service Delivery Agreement (SDA) (2023) and related annex/appendices do not provide detailed requirements on establishing monitoring mechanisms over the actual passport costs charged to the PRF.

The Chief Financial Officer Branch (CFOB) challenged internal passport cost forecasts submitted by the business lines, that are responsible for submitting accurate and eligible passport costs to the CFOB.

While department-level monitoring of the actual costs charged to the PRF included comparisons to internal forecasted costs, budget authorities and financial coding verifications, there was no monitoring of the actual costs charged to the PRF to verify eligibility and accuracy.

2.3 Enhanced collaboration led to improved costing

While the Department has implemented oversight and financial controls over internal passport forecasts, the audit team had the following observations.

ESDC internal forecasting

The CFOB and ISSOB have an established corporate callout process that provides guidance for identifying internal passport cost forecasts.

Costing model

The new jointly ESDC-IRCC developed costing model (2024 to 2025) allows for ESDC's input, addresses the old model's weaknesses, is based on reasonable key assumptions and uses relevant and flexible cost drivers to establish forecasted costs. ESDC now has increased input into the new costing model and as a result, the Program can more accurately assess the cost impact of changes in the passport service delivery activities.

Costing methodology

While there is a costing approach that the ESDC business lines follow to charge passport costs to the PRF, a detailed costing methodology was not documented prior to 2024 to 2025.

Invoicing of actual costs and fee transfers to IRCC

The CFOB has an adequate reconciliation of the passport costs incurred and recorded by the Department to ensure they are accurately invoiced to IRCC. The audit also confirmed that passport fees collected by ESDC were transferred to IRCC on a monthly basis during 2021 to 2022, 2022 to 2023 and 2023 to 2024.