Audit of capital assets management: chapter 2

1. Introduction

This audit was included in the departmental Risk-Based Audit Plan as approved by the Deputy Minister in 2012 upon recommendation of the External Audit Advisory Committee.

1.1 Background

Environment Canada (EC) manages its diverse capital asset base through a wide variety of accountabilities, responsibilities and processes. According to the department’s financial systems, the cost for these capital assets is over $800M. The main custodians of EC’s capital assets are the Corporate Services Branch (CSB), the Science and Technology Branch (STB), the Environmental Stewardship Branch (ESB) and the Meteorological Services of Canada Branch (MSC). Each of these branches plan, acquire, operate, maintain and dispose of capital assets with assistance from the enabling branches, such as the CSB and the Finance Branch (FB).

As a science-based department and the primary provider of weather and environmental services in Canada, EC’s capital assets are crucial to its mandate and to the delivery of its mission-critical services. Departmental capital assets include scientific laboratory and field equipment; real property facilities; fleet and off-road specialty vehicles; and the extensive capital infrastructure used for monitoring meteorological, hydrological and climate networks.^Footnote1Ownership and responsibility for most of the department’s information technology assets were transferred to Shared Services Canada in 2012.

The Treasury Board policy on Investment Planning requires departments to submit a Capital Investment Plan each 3 years that meets the department’s needs. For the past six years, EC has been using the Integrated Investment Planning (IIP) approach to do so. This annual multi-IIP process is led by the Investment Planning Secretariat in the Finance Branch and is being applied to all classes of capital assets. EC was one of the five government pilots for the Office of the Comptroller General launch of the Investment Planning Process and was recognized as being a leader in investment planning. The final output from the yearly IIP process is a three-year Integrated Investment Plan that is approved by the Deputy Minister.

The state of EC’s capital assets, and its ability to report these assets have been brought into question by a number of earlier reports, including EC’s Financial Statement Audit Readiness Assessment carried out by Ernst and Young in 2009 and in the chapter on the Management of Severe Weather Warnings Report by the Commissioner of the Environment and Sustainable Development (CESD) of December 2008. As a result of the findings in these reports over the past years, EC has made a number of requests to Treasury Board (TB) for additional capital allocations to address issues surrounding aging capital assets and infrastructure.

One management commitment arising from the CESD report was to “develop a fully-costed business case that incorporates a monitoring strategy and long-term capital plan within the Treasury Board's new integrated investment planning process.” To support this initiative, the department began the implementation of the Asset Lifecycle Management (ALM) module in its Merlin^Footnote2 financial system. The project to install and implement this module began in 2010. Considering the significant investment and potential risks associated with the implementation of this module, Internal Audit conducted a system under development (SUD) audit during the implementation of the project’s lifecycle. Internal audit presented an interim report to the External Audit Advisory Committee in 2010. The report contained one recommendation pertaining to the approval of the project funding. Subsequently, the expected decision by the Government of Canada to convert all departmental financial systems to SAP impacted the project implementation before all of the department’s capital assets were captured or ALM was fully implemented. While ALM is still operating, and used to manage those assets that were captured in the system, no additional asset classes have been entered since then, and further work on the implementation of the project has been halted completely. The SUD audit was therefore also not finalized. Given these circumstances and in order to properly close the ALM SUD audit, Internal Audit has identified the “Lessons Learned” from this SUD audit and included the results in Annex 4.

Going forward and in keeping with the government’s direction for financial systems, EC is now moving to a SAP implementation. This financial system which is hosted in a “shared” service environment should be implemented in 2015. EC’s intention is to develop and implement the asset module within the SAP environment to replace the current ALM module.

1.2 Objective and Scope

Objective

To assess whether EC 's capital assets are managed in such a way that supports effective and efficient delivery of the department's strategic outcomes and objectives over time.

Scope

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The following asset categories and organizations were included in the scope of this audit

Asset Category:

• Science and Technology :
  • MSC monitoring equipment
  • Laboratory and field equipment
• Real Property
  • Centrally managed portfolio of properties
• Transportation
  • On-road fleet

Organizations

• Meteorological Services of Canada
• Science and Technology Branch
• Corporate Service Branch
• Environmental Services Branch
• Finance (IIP only)

The following asset categories and organizations were excluded from the scope of this audit:

Asset Category:

• Real Property
  • Land
  • Regionally managed portfolio properties
• Transportations
  • Off-road fleet
• IT Equipment Software

Organizations

• All other branches

This audit engagement had a very broad scope to assess the effectiveness of all of the major capital asset management lifecycle stages: acquisition, use, maintenance, and renewal or disposal. The table to the right shows the scoping decisions that were taken for this audit.

Audit fieldwork began in April 2013 and focused primarily on the management of assets considered for acquisition in the IIP process for 2011.2012 and any existing assets. Fieldwork ended in September 2013.

The audit was national in scope but focused on the four branches that are the main users of capital assets^Footnote3 :

The assessment included assets in three of the four existing asset classes,

• science and technology (considered in two groups, those assets supporting MSC’s monitoring networks and those used in laboratories and field work);
• on-road transportation vehicles; and
• real property (buildings, works and infrastructure, including leasehold improvements).

We specifically excluded land holdings, off-road vehicles, furniture, fixtures and appliances from the audit as management of these assets was not considered to pose a high risk.

The fourth asset class, capital IT assets (both hardware and software) was excluded from the audit as the bulk of the hardware has been recently transferred to Shared Services Canada.

From a functional perspective, the audit specifically excluded the actual procurement of, and financial reporting for capital assets, as these functions are the subject of other planned assurance work.

The audit also included a follow-up on outstanding capital assets related to recommendations contained in the 2008 report of the CESD (Annex 3), and a review of the lessons that could be learned from an earlier SUD audit on the implementation of an Asset Lifecycle Management module (Annex 4). These two documents were used as background information in the conduct of this audit.

Annexes 1 and 2, describe the audit methodology, definitions and criteria used to assess the management of capital assets. The four key criteria arise from the TB Policy Framework for the Management of Assets and Acquired Services and the TB Policy on Management of Materiel.

1.3 Statement of Conformance

This audit conforms to the Internal Auditing Standards for the Government of Canada as supported by the results of the quality assurance and improvement program.

In our professional judgement, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions were based on a comparison of the situations, as they existed at the end of the fieldwork (September 2013), against the audit criteria.