Public Services and Procurement Canada
Assurance Report: Audit of Accrual Budgeting

Importance

This audit is important because accrual budgeting is a new and different way of managing capital assets, which shifts emphasis from planning within annual expenditures limits to planning the expense profile of capital investments using a long term envelope of accrual space.

Accrual budgeting presents a significant, complex and wide reaching change for the department, and was identified as a high-risk area.

Objective

The objective of this assurance engagement was to provide assurance on the design, implementation and adequacy of the accrual budgeting project’s governance and change management practices, as well as the accrual budgeting initiative’s key processes, including accrual space allocation, within PSPC branches and regions. In addition, the objective was to provide assurance on the data integrity of the accrual budgeting project.

Scope

A risk-based approach was used to establish the scope and approach for this audit engagement. This engagement assessed key activities taken by teams within the Finance Branch associated with defining and implementing the governance structure, and the development and implementation of processes related to this departmental-wide transformation. The audit also reviewed:

• the change management strategy in regards to stakeholder (branches and regions) engagement in the project
• the adequacy of the key processes of the accrual budgeting initiative, specifically with regards to the allocation of the accrual space across, and within portfolios
• data integrity of the accrual budgeting project

In order to carry out this engagement, we validated findings through an examination supporting documentation and conducted interviews with key employees within the branches and the regions. We did not do compliance testing of the implementation of the change management strategy and processes being applied.

The period covered in this audit was from October 1, 2020 to March 31, 2022. The scope period start date was determined based on the date that the Accrual Budgeting Project Management Office was officially created. Relevant information obtained before and subsequent to the audit scope period was also considered, as deemed necessary by the audit team.

Audit criteria and methodology

The audit criteria and methodology can be found in Appendix B: Audit criteria and methodology.

The examination phase of the audit took place from June 2022 to August 2022. Relevant information obtained subsequent to our examination phase was considered.

The internal audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing, as supported by the results of the quality assurance and improvement program.

Governance

Adequate governance was in place to ensure oversight of the delivery of the accrual budgeting project. Committees were established with appropriate membership and timely information was provided to and discussed at committee meetings. For the project level committees, we noted and advised Finance Branch of opportunities to update and approve the Terms of References to ensure that they reflect current expectations.

Change management

A change management strategy was in place and being executed. As well, tools and training were in place to assist accrual budgeting implementation. PSPC is the first department to apply accrual budgeting to all its asset portfolios, necessitating the department to design and implement significant changes to the entrenched government processes. In addition, the department had to make these significant changes while simultaneously operating under the accrual budgeting framework. Such a large-scale change proved difficult for some employees to adopt. The challenge in implementing this change is evidenced by mediocre scores received by the change management activities based on assessments conducted by Finance Branch’s Change Management Office. Change management is important as it drives the successful adoption and usage of change within an organization. It allows employees to understand and commit to the shift and work effectively during it. Without effective change management, organization transitions can be rocky and expensive in terms of both time and resources.

Processes

Overall, we found that processes to allocate accrual space across and within portfolios existed. However, the audit team noted that relevant guidance documents existed in different forms and they were spread across different branches. This made it difficult for employees to understand the full accrual budgeting process and what components applied to their context. It would be beneficial for Finance Branch to establish a summary document listing the key activities in accrual budgeting, linking the relevant guidance, as well as clearly delineating roles and responsibilities associated with these activities. This will help stakeholders in the branches and regions to better understand the inter-connectivity of different accrual budgeting related activities and processes, potentially increasing efficiency in these processes.

We found that cash expenditures forecasting needs improvement as the June 2021 cash forecast for the fiscal year 2021 to 2022 was $1.8 billion, while the actual spending for that fiscal year was $1.2 billion (a forecast variance of $600 million). As the cash forecast is the basis for accrual budgeting, over-forecasting may lead to excessive or unnecessary accrual space being tied up for certain projects, which may prevent other priority projects from accessing the accrual funding needed.

Data Integrity

Data integrity management processes were not defined and implemented. However, Finance Branch implemented data quality checks in the interim. A Data Integrity and Stewardship sub-project, which should be completed by March 2023, is currently underway to establish appropriate data quality requirements.

Governance and oversight

Overall, we found that adequate governance was in place to ensure oversight of the delivery of the accrual budgeting project. Governance is important as it can improve the performance of the organization, and help it become more stable and productive, and unlock new opportunities. It can also reduce risks and enable faster, safer growth.

We expected governance committees to be in place to oversee the accrual budgeting project, and include members from branches and regions. We also expected the governance bodies to provide leadership and oversight over the accrual budgeting project. This would include receiving regular information on performance and progress for discussion and approval.

We found this to be the case. 2 project level governance committees (Director General Consultation Committee, and Director Cross Functional Network Committee) and 3 sponsor group governance committees (Investment Management Board, Finance Management Committee, and Strategic Operations Committee) were in place to oversee the delivery of the accrual budgeting project. The committees had members from various branches and regions involved in accrual budgeting. For example, the Director Cross Functional Network Committee was made up of members in key positions in branches such as Finance Branch, Real Property Services and Digital Services Branch, as well as regions such as Pacific, Ontario and Quebec. See Appendix C: Governance structures’ mandate, and membership for details of the mandates and membership of each governance committee.

The 5 governance committees do not directly report to one another. However, information is communicated through committee members such as the Project Owner who are members of various committees. For example, the link between the Project Group Committees and Sponsor Group Committees is the Project Owner (Director General, Budget and Cost Management), who is the chair of the Director General Consultation Committee. The Project Owner reports to the Chief Financial Officer, who chairs the Finance Management Committee, and is a member of the Investment Management Board and Strategic Operations Committee. See Appendix D: Accrual budgeting governance for a diagram of the governance structure and committee members who communicate information on the accrual budgeting project. It should be noted that the 3 sponsor group governance committees are not accrual budgeting specific and discuss other PSPC topics. All of the committees had developed Terms of References that covered mandate, scope, membership and meeting frequency. However, for the project level committees (Director General Consultation Committee, and Director Cross Functional Network Committee), we noted and advised Finance Branch of opportunities to update and approve the Terms of References to ensure that they reflect current expectations.

The 2 project level committees served as consultative committees to support the work of the accrual budgeting project, and the Investment Management Board served as the decision making authority. Timely information was provided to these committees via the project owner and project management office staff. A review of the committees’ agendas records of decision during the audit period (October 2020 to March 2022) indicated that accrual budgeting related information was presented to and discussed at all 5 governance committee meetings. The committees received dashboards, presentations, and updates, and made decisions when required. These dashboards included information on Risk Indicators and Mitigation Strategies, Issue Indicators and Mitigation Strategies, Project Status and Health, Key Milestones and Scope of Work, and Financial Indicators.

Change management

Overall, a change management strategy was in place and being executed. In addition, tools and training were in place to assist accrual budgeting implementation. However, the change management activities did not achieve adequate scores based on assessments conducted by Finance Branch’s Change Management Office. Change management is important as it drives the successful adoption and usage of change within an organization.

We expected a change management strategy to be in place and executed for the accrual budgeting project. We also expected tools and training to be in place to allow stakeholders to implement the project and apply the accrual budgeting requirements. Finally, we expected that change management activities would achieve adequate scores based on assessments conducted.

In March 2020, a Change Management Strategy for the accrual budgeting project was developed and approved. The audit confirmed that an Accrual Budgeting Project Change Management Plan included in the strategy was developed and approved in June 2021. This plan was based on principles of Prosci, which is the change management methodology formally adopted enterprise-wide by PSPC. The plan outlined key change management activities to prepare for, manage and reinforce changes.

The audit verified that certain change-management activities were undertaken such as defining roles and responsibilities of Accrual Budgeting Project team members, the development of change management operational plans, creation of a training plan framework, and the development of a communications and stakeholder engagement plan. Based on our review of the Accrual Budgeting project charter, and the communications and stakeholder engagement plan, we noted that key Accrual Budgeting Project stakeholders were identified as well as the roles and responsibilities of project members.

A Change Management Office was also established in October 2020, demonstrating a commitment to support employees’ buy-in of the change to accrual budgeting. Communication channels including an Accrual Budgeting Project intranet page, a Microsoft Teams site and a Change Agent Network were established to communicate key developments of the accrual budgeting project, and address stakeholders’ questions and concerns. In addition, the audit confirmed that change management activities and milestones were tracked in project dashboards and presented to the 2 project level governance committees (Director General Consultation Committee, and Director Cross Functional Network Committee) on a timely basis.

Although change management activities were taking place, the scores obtained on 2 assessments conducted fell below the threshold for an adequate ratings. The Change Management Office conducted 2 Awareness Desire Knowledge Ability and Reinforcement assessments (December 2021 and March 2022), and 2 Prosci Change Triangle assessments (March 2021 and March 2022). These assessments requested survey responses from various stakeholders and, as such, fostered stakeholder engagement to support individuals in the changes that were taking place. The Awareness Desire Knowledge Ability and Reinforcement assessments were used to identify barriers to change, and the Prosci Change Triangle assessments were used to assess project health across critical aspects (such as Leadership/Sponsorship, Project Management, Change Management). See Appendix E: Change management assessments for details of the dates and respondents of the above mentioned assessments.

We reviewed documentation for the Awareness Desire Knowledge Ability and Reinforcement assessment performed in December 2021 which noted that there were no perceived barrier points to adopting change.

We also examined the documentation for the 2 Prosci Change Triangle assessments that were conducted. For the purposes of this audit, we focused on the scores pertaining to the change management segment of the assessments. The scores achieved fell below the threshold for an adequate rating in both Prosci Change Triangle assessments.

Of note, the Prosci Change Triangle assessment conducted in March 2021 identified that processes were not well understood. We noted the same issue during our interviews with some stakeholders, which is discussed in the Processes section. Some employees we interviewed between February 2022 and June 2022 noted confusion or lack of clarity in regards to roles and responsibilities or accrual budgeting impacted processes. Subsequent to the 2021 assessment, Finance Branch identified actions to address the assessment results, and the audit team obtained and reviewed evidence in relation to various actions. For instance, the audit team observed that a website and awareness video were created, and briefing toolkits were created, such as a Talking Points document for senior leaders and an Introducing the Accrual Budgeting Project presentation deck. The Project Leader acknowledged that more work could be done on analyzing results of assessments.

We noted that training material and tools on accrual budgeting were developed, and training sessions were delivered. Guidance material was in the form of PowerPoint decks, management instructions, and other types of documentation. Training was primarily in the form of awareness sessions also known as Accrual Budgeting 101 sessions. This training covered basics of accrual budgeting, the Capital Investment Fund and the associated baseline accrual space, some historical background information, some example scenarios, and frequently asked questions.

Finance Branch provided the audit team with a spreadsheet, which listed various awareness sessions organized and delivered to stakeholders across PSPC in the past few months. The May 2022 spreadsheet showed that almost 20 sessions were held, which were presented to a wide variety of stakeholders such as staff in the Pay Solutions Branch, Science and Parliamentary Infrastructure Branch, and Finance Branch and to groups such as the Accommodation, Infrastructure, Portfolio and Financial Management Committee and the Comité de gestion de la région du Québec.

A tool was developed for the department to report data on accrual profiles of PSPC’s asset portfolios. This tool was developed to help stakeholders understand the current status of the accrual budget on a monthly basis. Another tool was also in use to enable stakeholders to visualize the impacts of different scenarios such as adjustments to existing projects on accrual space allocation. Finally, in March 2022, Finance Branch prepared a flowchart of steps involved in the monthly consolidation and reporting of departmental accrual budgeting information.

Although we noted that there are many change-management activities that have been completed, such as training and awareness sessions, based on our review of the results of the assessments conducted as well as our interviews with some employees, there remains some work to be done in clarifying the accrual budgeting processes. We also expect that clarification of processes would help to improve the results of the assessments, so that the resulting scores would be above the threshold for an adequate rating as identified by the Prosci change management methodology that is being used. Clarifying the process would allow employees to understand and commit to the shift to accrual budgeting, and work effectively during it.

Processes

Overall, we found that processes to allocate accrual space across and within portfolios existed. However, relevant guidance documents existed in different forms, and they were spread across different branches. It would be beneficial for Finance Branch to establish a summary document listing the key activities in accrual budgeting, linking the relevant guidance, as well as clearly delineating roles and responsibilities associated with these activities. This will help stakeholders in the branches and regions to better understand the inter-connectivity of different accrual budgeting related activities and processes, potentially increasing efficiency in these processes.

Prioritization processes existed but could be clarified.

We expected key processes of the accrual budgeting initiative to be established with clear objectives, defined accountabilities, roles and responsibilities, as well as clearly described steps to perform accrual budgeting related activities.

During our review, we found that each of the 6 portfolios was allocated a portion of the overall Capital Investment Fund for their own portfolio-level investment planning in March 2020, which was called the initial notional allocation. The audit team obtained and reviewed the evidence including Investment Management Board’s Record of Decisions and a supporting spreadsheet showing notional space by portfolio, to verify that the initial notional allocation process was completed. While Finance Branch was able to describe the process followed in the initial notional allocation, they recognized that the process was not formally defined, documented and adequately communicated during implementation, as it was the first time for PSPC to allocate accrual space across portfolios.

We selected 2 out of 6 portfolios (Office and Digital) to review their prioritization processes for adequacy. We examined relevant supporting documentation and conducted interviews with key employees involved in the processes to allocate accrual space across and within these portfolios. However, we did not independently re-perform the processes to verify that they are operating effectively.

At the onset of our examination phase, we expected that all of the portfolios would use the same prioritization criteria, which would be similar to the departmental prioritization model. We were advised that after the initial notional allocation, each portfolio had the flexibility to develop their own processes to rearrange capital projects and reallocate corresponding accrual space within their respective allocated portion. As a result, Office portfolio set up their own prioritization criteria, and Digital portfolio used the same departmental prioritization criteria with different weightings. Both portfolios developed their processes to prioritize capital projects and reallocate accrual space within their portfolios, as there was no requirement for portfolios to all have the same allocation process.

We reviewed the Office and Digital prioritization processes, which included key steps and criteria for prioritization. The existing guidance documents that impact accrual budgeting currently take various forms, including but not limited to instruction documents, departmental policies and directives, various slides decks, email communication, records of decisions and flowcharts. Since these documents and related tools are stored in different locations and maintained by different teams across PSPC, it may be challenging for employees to understand the whole picture of accrual budgeting, its impact to existing business processes as well as the interconnectivity of existing processes to support accrual budgeting transition. Some employees in both the Quebec and Ontario regions informed us that they experienced confusion and potential duplication of efforts in the 2021 prioritization exercises.

We reviewed the Real Property - Services Funding Confirmation Process (Office portfolio) and noted that roles and responsibilities for the process owner and teams completing activities within the funding process were clearly identified and defined. The Digital Investment Playbook (Digital portfolio) outlined at a high level the roles and responsibilities of the Digital Service Branch as well as Finance Branch related to investment management. High-level roles and responsibilities were clear in both documents, but they did not articulate the entire accrual budgeting process. Although Finance Branch is not responsible for all these processes, there were many process documents, and Finance Branch is in charge of the implementation of accrual budgeting at PSPC. As such, it would be beneficial for Finance Branch to develop a summary document explaining key linkages of accrual budgeting to existing departmental and portfolio level activities, as well as clearly delineating roles and responsibilities. Confusion around process requirements or roles and responsibilities could lead to increased errors, overlooked process steps or potential duplication of efforts.

In addition to the above, Finance Branch has been working on a Departmental Prioritization Model and a repeatable process to prioritize capital projects across all portfolios. The model was presented and approved by the Finance Management Committee in June 2022 and was in the process of being implemented. The concept of the model and high-level prioritization criteria outlined link portfolio prioritization (look within) and departmental prioritization (look across) to the PSPC’s Investment Plan. A Departmental Prioritization Tool was also developed to support the implementation of the departmental prioritization process. Once the model and the tool are implemented, the current portfolio processes are expected to be adjusted to align with the new approach. Based on our review of the presentation of the model, if it is successfully implemented, it could promote portfolio-level investment planning decisions that support enterprise-wide priorities.

Cash expenditures forecasting needs improvement.

During the engagement, it was brought to our attention that PSPC was over-forecasting cash expenditures needed for scheduled capital projects. The audit team then reviewed relevant documentation and noted that the June 2021 cash forecast for the fiscal year 2021 to 2022 was $1.8 billion, while the actual spending for that fiscal year was $1.2 billion (a forecast variance of $600 million). This confirmed the assertion that over-forecasting of cash expenditures occurred around the beginning of a fiscal year, leaving large amounts of cash unused at year end. As a cash forecast is the basis for accrual forecast, this practice may lead to excessive or unnecessary accrual space being tied up for certain projects, which will prevent other priority projects from accessing the accrual funding needed.

We reviewed the Records of Decisions of the Finance Management Committee (June 27, 2022) and the Executive Committee (July 7, 2022), and noted that Finance Branch presented the 2021-to-2022 Year-End Departmental Management Report to both committees and poor forecasting was discussed.

Also, Finance Branch proposed forecast related commitment and performance measures to be included in executive’s performance management agreement. Accurate forecasting is important as it will help PSPC to set reasonable and measurable goals based on current and historical data, which will have an impact on the department’s accrual budgeting allocation and space. Having accurate data and statistics to analyze will help PSPC to decide what amount of change, growth or improvements will be determined as a success.

Data integrity

Data integrity management processes have not yet been completely defined and implemented. In the interim, Finance Branch implemented data quality checks. A Data Integrity and Stewardship sub-project, which should be completed by March 2023 is currently underway to establish appropriate data quality requirements.

We expected the data integrity management processes to be clearly defined and implemented. The processes were also expected to define data quality requirements to ensure accuracy, completeness and consistency of data required to support accrual budgeting activities.

Although a data integrity management process has yet to be defined, in the interim, some data integrity activities such as data quality checks to improve the completeness and adequacy of critical fields data were implemented by Finance Branch. Manual inputting of data in spreadsheets was part of the monthly forecasting process. Thus there was a risk of human errors as spreadsheets were used in process. In order to mitigate this risk, Finance Branch established some data quality checks on the data extracted from SIGMA, as well as the data manually prepared and submitted by portfolios. These data-quality checks on completeness and adequacy of critical fields data enabled the Finance Branch to carry out the monthly forecasting and other related activities that relied on the data.

We reviewed documentation on a sample basis that supported various data quality checks performed by Finance Branch. These included completeness and adequacy checks on critical fields such as project status, estimated useful life, total project cost and total approval amount. Based on our review of data quality checks performed and documents from governance committee meetings, we found that these checks were appropriately in place as we did not find any evidence to support that there have been issues with the data used in accrual budgeting.

It should be noted that our scope did not include any project management testing in the branches and regions. Hence we did not verify the accuracy of project information inputted into SIGMA. Also, we did not examine the controls at the portfolio level to ensure that the data transferred to Finance Branch had appropriate supporting documentation and was reviewed.

In order to reach a more robust future state, a Data Integrity and Stewardship sub-project is currently underway to establish a Data Stewardship model and related data integrity management processes to address the data required to support accrual budget related business functions. This sub-project plans to assess existing capabilities, design and implement new capabilities that enhance data management to enable long-term asset performance, as well as address data required to support accrual budget related business functions. Detailed objectives include the following:

• identifying the data required for management to make investment decisions
• designing the Data Stewardship model and processes to monitor data standardization and to address integrity issues
• driving data standardization and sustain data quality practices, allowing data to be collected, stored, used and monitored efficiently across project planning, portfolio planning, investment planning and prioritization and treasury management under an accrual budgeting approach
• implementing consistent, repeatable, and transparent data management processes and procedures to support investment decisions
• assessing the impact of changes on stakeholders, establish stakeholder expectations and monitor the adoption changes

The sub-project is still in design phase. Thus the data integrity management processes have not yet been designed, implemented and communicated to branches and regions. We were advised that this sub-project should be completed by March 2023.

Based on our review of the sub-project’s documentation, the sub-project objectives noted above appear reasonable and would help to ensure that relevant data quality requirements to support accrual budgeting related activities are implemented. Data integrity management processes should be a high priority in order to ensure that foundational data information used for accrual budgeting is accurate and complete. Without the data integrity management processes and the data quality requirements being finalized and implemented, the data required to manage the Capital Investment Fund may not be complete or accurate, and investment decisions may be made based on unreliable project data, leading to investment decisions not being aligned with the departmental objectives. In the interim, Finance Branch implemented some data integrity activities such as data-quality checks to improve the completeness and adequacy of critical fields data.

Appendix A: Portfolio, responsible branch and allocated amount based on the December 2019 data

The amounts were provided by the Finance Branch.

Appendix B: Audit criteria and methodology

Based on the Office of the Chief Audit, Evaluation and Risk Executive risk assessment, the following lines of enquiry were identified:

Appendix C: Governance structures’ mandate, and membership

Appendix D: Accrual budgeting governance

Image description

This diagram presents the governance structure and committee members who communicate information on the accrual budgeting project. The Deputy Minister, who communicates information to the Investment Management Board and the Strategic Operations Committee, has a bilateral communication relationship with the Project Sponsor – Chief Financial Officer. The Project Sponsor – Chief Financial Officer, who communicates information to the Finance Management Committee, has a bilateral communication relationship with both the Deputy Minister and the Project Owner – Director General, Budget and Cost Management. The Project Owner – Director General, Budget and Cost Management, who communicates information to the Director General Consultation Committee, has a bilateral communication relationship with both the Project Sponsor – Chief Financial Officer, and the Project Management Office. The Project Management Office, who communicates information to the Director Cross Functional Network Committee, has a bilateral communication relationship with the Project Owner – Director General, Budget and Cost Management.

Appendix E: Change management assessments