AUDIT OF ASSET MANAGEMENT (MACHINERY & EQUIPMENT)

 

Reports 2010


Project AU0910

EXECUTIVE SUMMARY

Introduction

The Natural Resources Canada (NRCan) Audit Plan for 2008-09 included an audit of Asset Management. Per Departmental policy, assets are to be managed in a sustainable and financially responsible manner that supports the cost-effective and efficient delivery of programs. Assets of machinery and equipment, excluding real property and vehicles, represent 42,000 assets with a historical cost of $322M, and a net book value of $38M, as reported on the financial statements for fiscal year 2008-09. 

Departmental Risk

Management of the Department’s capital asset portfolio (both real and non-real property) has been identified in the Department’s Corporate Risk Profile as having the following risk:

  • The possibility of capital assets rusting-out or becoming obsolete was identified as a high1 risk to the Department.
Audit Objective and Scope

The annual Management Accountability Framework initiative led by the Treasury Board Secretariat has focused on having an Asset Management framework and policies in place and NRCan achieved a strong rating in management area 14.2-Materiel Management from 2007-2009. The purpose of this audit was to assess and determine whether the life-cycle management practices regarding Departmental assets (excluding real property and vehicles), including records, valuations, betterments, maintenance and replacement strategies, rationalizations and disposals, are in compliance with Treasury Board policies and NRCan procedures. The audit examined a statistically valid sample of data related to all machinery and equipment and related adjustments (betterments and disposals) recorded in the Fixed Asset Module (FAM) and expenditures in the Departmental Financial System (GFS) for fiscal years 2006-07, 2007-08 and 2008-09.

Internal Audit Conclusion

The audit found that the Department has a control framework in place for the management of assets. However, opportunities exist to improve2 the Department’s compliance with its directives. Areas that need to be strengthened include the accuracy of data within the financial system and monitoring of performance. In addition, a training regime should be developed to provide guidance to unit manager and asset custodians.

Management agrees and action has started and will be completed by January 2011.

A summary of audit findings, recommendations, management responses and timing appear in the following textbox.

Audit Findings Pg Recommendations Audit Risk Rating Management Response Timing

Effectiveness of the Department’s Asset Management Process

The effectiveness of the Department’s Asset Management System is dependent upon the accuracy and completeness of the data collected and reported. The audit found inaccuracies between the Expenditure and the Fixed Asset Modules of the Departmental Financial System (GFS)

5

1. In the context of the new financial management system, the Department should evaluate its asset management process with the aim of ensuring that the efficiency and effectiveness of life cycle asset management is maintained. In achieving this, it is recommended that SSO and FMB with custodial managers:

  • ensure that all asset data is accurate and complete within the system;
  • ensure that acquired assets are tracked according to the policy directive; and
  • enhance the reconciliation process to support the accuracy and completeness of asset data recorded on the financial statements.

Moderate

Management agrees.

1. The department is committed to the proper management of its capital assets as demonstrated by its strong MAF 2009 rating for MAF Indicator 14.2 Material Management framework and policies. NRCan has addressed/will take measures to address the remaining elements of life cycle management, e.g.:

  • Tools:
    In March 2010, SSO and FMB developed an assets count multi-year plan (Plan) for physical inventory counts and for maintaining data integrity for all categories of capital assets (lands and buildings, vehicles and machinery and equipment). Templates and instructions have been developed to support the physical inventory counts.

    As per the Plan, all capital assets will be subject to a physical count by March 31, 2011, and data adjusted accordingly in the financial system. In subsequent years, in order to maintain data integrity, physical counts will be performed on a rotational basis over a three-year period, combined with confirmations by custodial managers of asset acquisitions and disposals (machinery and equipment) and with reconciliations of assets sub-ledgers (lands and buildings and vehicles). In line with this Plan, physical inventory counts for the land and buildings and vehicles, representing 48% of the total net book value of the total capital assets, have been performed and reconciled with sub ledgers.

Completed


 

 

 

 





Completed

  • Training:
    see Recommendation No. 2’s Management Action Plan response’s 2nd and 3rd paragraphs (p. 12)
Completed
  • Monitoring:
    In April 2010, FMB and SSO performed a physical inventory count of machinery and equipment in the Central region (current value of capital assets: $6,301,146, original value of assets: $9,544,703; original value of non-capital assets: $5,510,163). The findings and results from this count will be used as a model to follow for physical counts in other regions. Timing: First inventory count completed, adjustment of data to be completed in May 2010; all remaining physical counts in regions to be completed by December 31, 2010 and adjustment of data by February 2011.
May 31, 2010 and December 31, 2010
  • Accurate data in financial system (GFS to SAP):
    See Recommendation No. 2’s Management Action Plan response’s last paragraph (p. 13)
December 31, 2010
  • Accurate financial reporting:
    In the context of the Felix/SAP implementation, FMB, in cooperation with SSO, will also review and update the departmental asset management policy requirements to align with any new requirements.

Management has developed the above action plan taking into consideration that in the Fixed Asset Module the net book value had been calculated correctly,  that approximately 66% of the  machinery and equipment (of which 11% are assets under $10k) have a net book life (i.e. remaining useful life) of zero. SAP will offer the department a better integration of the capital asset information to expenditures than is currently available in GFS.  This will ensure an improvement to the quality of capital asset information recorded.



December 31, 2010

Compliance with Treasury Board & Departmental Policies

Instances of non-compliance with Treasury Board policies and Department procedures were identified during the audit. Specifically, discrepancies related to: the safeguarding of assets, tracking of transfers, inventory counts and retention of assets ready for disposal.

9 2. It is recommended that SSO provide additional guidance to sectors responsible for managing assets, specifically for the safeguarding of assets, asset transfers, physical inventory counts and asset disposal procedures. Standardized processes and templates should be created. Moderate


2. SSO will continue to provide procedure guidance to sectors in the form of regular messages on the Source (last message posted Jan 2010) as a central point for information. A communication from the ADM of CMSS to all NRCan ADMs will be issued in May 2010 to highlight the policy and to provide links to business process maps.

Completed
Process maps such as the new standardized process map for asset transfer and disposal—see Appendix C—(posted on ConneXus in February 2010) are currently available to supplement our intranet procedures. Process maps contain hyperlinks to associated policies, procedures and forms (such as form RES 1548 required for asset management). Also the standardized process maps for procurement with the assistance of SSO and without the assistance of SSO (Appendices D and E respectively) were updated to better reflect the requirements for tracking inventory and capital assets. Completed
SSO will support clients with asset management-related guidance when carrying out—in collaboration with clients—the assets count multi-year plan to ensure efficient use of existing resources for physical inventory counts. December 31, 2010
The strategy for the plan is currently being developed as mentioned in recommendation 1. The inventory count requirements will be communicated to all sectors at that time and a written response (sign off) from all managers will be part of the process. Also, an inventory for 2009-2010 is currently underway as mentioned in recommendation 1. December 31, 2010
FMB and SSO will put in place a quarterly capital asset review and reconciliation exercise for machinery and equipment by managers. January 31, 2011

FMB and SSO will also incorporate in their year-end procedures (to be carried out in March-April 2011), specific procedures in relation to assets and ensure manager attestation is acquired. Timing: January 31, 2011.

FMB and SSO will automate the taking of inventory where and when possible to reduce the amount of manual work involved in the visual inspection and accounting of asset inventory, e.g. tracking of computers using their logon information on the NRCan network.

FMB and SSO are actively engaged in the review, correction and addition of key asset information (where required) for all asset records to ensure that the conversion of these records to SAP will be complete and that accurate data will be reflected in the new financial system on April 4, 2011.

Management has developed the above action plan taking into consideration that in the Fixed Asset Module the net book value had been calculated correctly, that approximately 66% of the machinery and equipment (of which 11% are assets under $10k) have a net book life (i.e. remaining useful life) of zero.



December 31, 2010
  12 3. It is recommended that FMB develop and implement a monitoring regime to ensure that units are complying with Departmental policies and procedures on asset management.  

3. On a quarterly basis, the Financial Policy, Training and Monitoring Unit within FMB will extract information from the financial system to review the appropriateness of the recording of assets (expensed versus capitalized), and take immediate corrective actions as discrepancies are found.

Subsequent to the various adjustments to the asset information resulting from the inventory currently underway, the Financial Policy, Training and Monitoring Unit within FMB will monitor compliance with policy instruments related to assets. Timing: January 31, 2011.

FMB and SSO will continue to ensure that managers are aware of their obligations related to the management of Assets and will use the result of the monitoring to do specific follow-up action where warranted.

January 31, 2011

Table of Contents


INTRODUCTION

Departmental assets are segregated between real property (being buildings and land) and non-real property (being machinery and equipment and vehicles).  The Departmental Asset Management Policy3The Department's Policy is consistent with the directives outlined within the Treasury Board Materiel Management Policy and the Treasury Board Disposal of Surplus Moveable Crown Assets Policy. provides the direction and procedures that unit managers are required to follow in managing their individual asset portfolios. Managers are responsible for managing their unit assets by using the life-cycle approach which incorporates assessment and planning, acquisition, operation/use, maintenance, safeguarding and disposal. Corporate Management and Services Sector (CMSS) has the responsibility for supporting and monitoring the Department’s asset management activities.

The Departmental financial system (GFS) contains a fixed asset module4 (FAM) used for recording and tracking of Departmental assets.  FAM tracks information relating to the asset’s location, its value, the custodian manager responsible for the asset and an individual asset identification number.  All tangible assets that have a value of $1,000 or more (not including GST) and have a useful life of one year or more must be individually recorded within FAM. In addition, capital assets5 are reported in the Department’s financial statements.

Machinery and equipment within the Department represents 42,000 assets. The historical cost associated with these assets is $322M while the net book value of these, as reported in the Department’s 2008-09 financial statements, is $38M. NRCan’s machinery and equipment are dispersed across the country with 57% being in the National Capital Region (NCR).    

The Departmental Audit Plan for 2009-10 included an audit of Asset Management for Non Real Property (machinery and equipment) as a carry-forward audit from 2008-09. This audit was identified on NRCan’s Risk Based Audit Plan in 2008-09 because of the significant net book value reported in the financial statements, the results of a management control framework audit of 2006-07, the varied types of assets in the Department, and the decentralized nature of the Department’s asset management practices.

Audit Objectives

The objectives of this audit were to provide assurance that the Department's:

  • asset management (machinery and equipment) life-cycle processes are operating efficiently and effectively; and
  • asset management (machinery and equipment) procedures and processes are compliant with Treasury Board and Departmental policies.
Scope and Timing

The audit reviewed all machinery and equipment expenditures for fiscal years 2006-07, 2007-08 and 2008-09 and all machinery and equipment recorded in FAM. The audit did not review activities related to machinery and equipment transactions incurred by the Regional Offices. The financial cost to review these transactions was not commensurate with the impact on the overall findings. Also, during the planning phase of the audit it was determined that items purchased via acquisition cards represented a relatively insignificant portion of the population and would not have a material impact on the findings of the audit. As a result, these transactions were excluded from our review.

The audit began in November 2008 and the conduct phase was completed in August 2009.

Scope Limitation

Since the audit of the Department’s fleet of vehicles will be part of another audit, it was excluded from the scope of this audit.

Also, the audit was not able to perform the necessary audit procedures to verify the completeness and accuracy of assets held at one location within the NCR (historical cost of $206K, net book value of $25K). These assets were either in sealed storage containers, in storage at the building location or in use at various sites across the country and required location specific staff to assist the audit team in reviewing the items. Due to other work obligations, local staff were not able to provide this assistance. The staff did provide the Audit Team with confirmations attesting to the use of the assets. Since we were not able to physically view the items in question, the audit findings do not include the results from this location.

Criteria

Audit criteria are reasonable standards of performance and control that were used by the Audit Branch to assess the adequacy of the Department’s asset management (non-real property) management practices. The audit criteria were derived from the Treasury Board (TB) Policy Framework for the Management of Assets and Acquired Services and NRCan’s Asset Management Policy, Departmental Security Policy and Security Classification Standards and related procedures.  The following general criteria were used to conduct the audit:

  • compliance with TB Policies and Departmental directives and procedures;
  • management control framework is in place and operating efficiently and effectively;
  • accurate and reliable information is provided for performance monitoring and reporting; and
  • accurate and reliable information is generated and reported.
Methodology

The audit was conducted in accordance with Treasury Board Policy on Internal Audit and the prescribed standards of the Institute of Internal Auditors (IIA).

The audit methodology consisted of an analysis of relevant documentation, process reviews and asset verifications. Individual interviews were held with staff from the Shared Services Office (SSO), Financial Management Branch (FMB), Responsibility Centers (RC) and Asset Custodian Managers. 

Detailed supporting documentation for a sample6 of machinery and equipment assets was reviewed to support the procedures followed by unit management for the various stages of the life cycle.

FINDINGS AND RECOMMENDATIONS

Effectiveness of the Department’s Machinery and Equipment Asset Management Process
Finding

The effectiveness of the Department’s Asset Management System is dependent upon the accuracy and completeness of the data collected and reported. The audit found inaccuracies between data recorded within Fixed Asset Module and data entered in expenditure Module of Departmental Financial System (GFS) .  Although the net book value of these assets is relatively immaterial to the Department’s budget, the issues identified by the audit raise questions regarding the usefulness of the data captured for management’s decision making purposes.

Also, the Audit was not able to quantify the exact dollar impact of this finding and the impact on the Department’s financial statements. Based on the evidence that was on hand during the fieldwork, it would appear that the impact at the point of audit is relatively immaterial to the Department’s budget. However, it is important to note that the weaknesses identified during the audit could, under certain circumstances (such as the purchase of several new assets), increase the potential error to an amount that is material.

Risk and Impact
Risk Type Audit Risk Rating Impact
Operations Risk Moderate Inaccurate and incomplete asset information may lead to ineffective life-cycle asset management decisions, which may ultimately lead to inefficient use of resources and possibly extra costs to the Department.
Reporting Risk Moderate Assets may not be accurately or completely recorded within FAM, which may lead to misrepresentation of the amounts reported in the financial statements.
Observations

The effectiveness of the asset management process is dependent on the accuracy and completeness of the data collected and the extent to which analysis is performed to support decisions. To assess the effectiveness of the processes, the audit reviewed (refer to Appendix B), two different populations. The first included information from the expenditure module- payment voucher within GFS to determine the recording within FAM of all machinery and equipment purchased with a value of $1K or over, and the second from FAM to assess the existence of the assets.

Payment Voucher Acquisition and Recording of Assets

When machinery and equipment assets are acquired by the Department, they are recorded in GFS via a Payment Voucher (PV) and posted in the general ledger.  To track the asset over its life cycle, asset information such as location, custodian manager, description, value, etc. is recorded in the Fixed Asset Module (FAM) of GFS and assigned a unique asset number.  In summary, two different components of GFS are being used to track and record assets. A sample of asset purchases of machinery and equipment - see Appendix B Table 3 - was reviewed to determine if assets purchased are being tracked in FAM.
The following gaps were identified:

  • 70% of the machinery and equipment purchases sampled, with a historical value of $2.5M, could not be linked to FAM. This linkage could not be made because there is no common identifying field between the payment voucher data and the data contained within FAM. Notwithstanding the fact that the assets could be somewhere in the Department, we were not able to conclude that all assets being purchased are in fact being tracked in FAM.
  • A control was instituted by management in May 2008 requiring that an asset tag number be included on the purchase voucher for all payments of assets, identified as capital assets, in order for the payment to be processed. However, based on our review, the results of this control are not identifying what was intended because an asset entry can be (and has been in some cases) assigned a non-capital line object code and therefore may not be captured as a capital asset. The audit noted that 9 of 24 capital assets with a historical value of $287,635 that were purchased after May 2008 did not have an asset number recorded on the payment voucher.
  • The Line Object code 7selected for the transaction did not reflect the actual nature of the expenditure.  32% of the machinery and equipment purchases sampled, with a historical value of $1.3M had an incorrect Line Object code.  Capital assets (assets greater than $10K) were coded as non-capital assets (assets less than $10K) and vice versa.  Also, items that were not assets, such as maintenance, were coded as assets. Incorrect coding of acquisitions as either expenses or capital assets will directly affect the accuracy and completeness of amounts reported in the financial statements.

As previously indicated, the audit was not able to quantify the exact dollar amount of the above findings and the impact on the Department’s financial statements. 

Fixed Asset Module – Asset Inventory Count

The audit team performed a physical inventory count of selected assets to assess their existence.  The following gaps were identified:

  • 34% of assets sampled within FAM, with a historical cost of $2.1M, and a net book value of $370.5K, could not be physically located as per the location8 indicated in FAM.
  • Custodian Managers responsible for these assets explained that 10% (with a historical value of $439K and a net book value of $40.8K) had been disposed of or should not have been entered into FAM as a capital asset (8% capital and 2% non-capital).
  •  24% (with a historical value of $1.7M and a net book value of $329.7K) could not be located as per the information in FAM by the custodian manager responsible for the asset as identified in FAM (17% capital and 7% non-capital).  

Based on our review, it appears that in the majority of cases, this is a result of incorrect information recorded in FAM (relating to who the custodian is, the asset serial number, the description of the asset and its location). Since the information is incomplete, the audit could not quantify the financial reporting impact on the Department’s financial statements.

It should also be noted that of the assets recorded in FAM the net book value had been calculated correctly. It is also important to note that approximately 66% machinery and equipment (of which 11% are assets under $10k) have a net book life (i.e. remaining useful life) of zero. Management is addressing this issue with the Department's Strategic Plan for Assets.

Implementation of the New Financial Management System

NRCan’s Departmental Management Committee (DMC) approved a new business transformation initiative to replace the Department’s financial system (GFS) with an SAP enterprise resource planning tool that will address business improvements and include an asset management module. The conversion to the new financial system is expected to be in effect on April 1, 2011. 

In order for the new financial system to be effective for asset management, existing asset data must be reviewed and corrected.  This would require, a complete Departmental wide physical inventory count of assets, which would identify asset locations, current custodians and assets that have been disposed.  This information would then have to be updated within the current financial system, prior to the launch and data conversion to the new system.  Plans regarding to how the physical count will be conducted, who will be responsible and involved in the process and the associated costs with this task need to be identified and formalized.  A risk based approach or prioritization of asset review will be required.

Recommendation

1. In the context of the new financial management system, the Department should evaluate its asset management process with the aim of ensuring that the efficiency and effectiveness of life cycle asset management is maintained. In achieving this, it is recommended that SSO and FMB with custodial managers:

  • ensure that all asset data is accurate and complete within the system;
  • that acquired assets are tracked according to the policy directive; and
  • enhance the reconciliation process to validate the accuracy and completeness of asset data recorded on the financial statements
Management Action Plan & Time Frame

Management agrees.

1. The department is committed to the proper management of its capital assets as demonstrated by its strong MAF 2009 rating for MAF Indicator 14.2 Material Management framework and policies. NRCan has addressed/will take measures to address the remaining elements of life cycle management, e.g.:

– Tools:
In March 2010, SSO and FMB developed an assets count multi-year plan (Plan) for physical inventory counts and for maintaining data integrity for all categories of capital assets (lands and buildings, vehicles and machinery and equipment). Templates and instructions have been developed to support the physical inventory counts.

Timing: Completed.

As per the Plan, all capital assets will be subject to a physical count by March 31, 2011, and data adjusted accordingly in the financial system. In subsequent years, in order to maintain data integrity, physical counts will be performed on a rotational basis over a three-year period, combined with confirmations by custodial managers of asset acquisitions and disposals (machinery and equipment) and with reconciliations of assets sub-ledgers (lands and buildings and vehicles). In line with this Plan, physical inventory counts for the land and buildings and vehicles, representing 48% of the total net book value of the total capital assets, have been performed and reconciled with sub ledgers.

Timing: Completed.

– training: see Recommendation No. 2’s Management Action Plan response’s 2nd and 3rd paragraphs (p. 12)

– monitoring:
In April 2010, FMB and SSO performed a physical inventory count of machinery and equipment in the Central region (current value of capital assets: $6,301,146, original value of assets: $9,544,703; original value of non-capital assets: $5,510,163). The findings and results from this count will be used as a model to follow for physical counts in other regions. Timing: First inventory count completed, adjustment of data to be completed in May 2010; all remaining physical counts in regions to be completed by December 31, 2010 and adjustment of data by February 2011.

– accurate data in financial system (GFS to SAP):
See Recommendation No. 2’s Management Action Plan response’s last paragraph (p. 13)
Timing: December 31, 2010

– accurate financial reporting:
In the context of the Felix/SAP implementation, FMB, in cooperation with SSO, will also review and update the departmental asset management policy requirements to align with any new requirements.  
Timing: December 31, 2010.

Management has developed the above action plan taking into consideration that in the Fixed Asset Module the net book value had been calculated correctly,  that approximately 66% of the  machinery and equipment (of which 11% are assets under $10k) have a net book life (i.e. remaining useful life) of zero.  SAP will offer the department a better integration of the capital asset information to expenditures than is currently available in GFS.  This will ensure an improvement to the quality of capital asset information recorded.

Compliance with Treasury Board & Departmental Policies
Finding

Examples of non-compliance with Treasury Board policies and Department policies and procedures were identified during the detailed file review. Specifically, discrepancies related to: the safeguarding of assets, tracking of transfers, inventory counts and retention of select assets ready for disposal.

Risk and Impact
Risk Type Audit Risk Rating Impact
Compliance Risk Moderate Depending on the information being requested, non-compliance with Treasury Board policies and procedures may have an impact on the Department’s Management Accountability Framework rating by Treasury Board Secretariat. Non-compliance with Departmental asset management procedures increases the chance that assets are unsecure, damaged, misplaced, or potentially stolen.
Observations

The asset management policy provides an outline of the responsibilities for custodian managers, sector support staff and corporate staff.  The roles and responsibilities of staff involved in the process were examined and although the roles have been defined, it appears that they may not fully understand all aspects of the processes, given inaccurate and missing information.  Each branch appears to be managing assets independently and there is little coordination between them. 

Discrepancies identified during the audit fieldwork related to: the safeguarding of assets, tracking of transfers, inventory counts and disposal of assets.

Maintaining Information in FAM

Maintaining accurate information will promote ongoing asset condition assessments and improved financial planning related to maintenance and replacement needs.

  • 2% of the assets in FAM with a historical cost of $6.3 M5 were incorrectly coded9; capital assets3 were coded as non-capital assets and vice versa.  $4.7M of non capital assets were recorded as capital and $1.6 M of capital assets were recorded as non-capital.
  • Based on our discussions with custodial managers, it is relatively common practice that units are not relying on the information contained within FAM, but are using supplementary methods to track information related to the assets that they are responsible for. Tracking methods include the use of Microsoft Word, Excel, developing or acquiring a database, email and or personal memory.
  • Although the auditors were still able to locate many assets, and therefore assess their existence, it was not as a result of the information contained within FAM but through multiple correspondences with different staff. 
Safeguarding of Assets

The Departmental Security Policy and Security Classification Standards require certain physical security measures and access limitations for particular assets. The audit team physically examined a sample of assets to ensure they were secured, properly stored and that access was appropriate as defined by the policy. Of the assets that were located by audit testing (being 2/3 of the sample as previously defined), it was determined that 94% of the assets met the criteria required by the policy.  The remaining 6% of assets, with a historical value of $316K were located in rooms that either were without locks or were left unlocked when the custodian was not available.   

Asset Transfers

The Department’s Asset Management Policy requires that assets transferred to a different custodian be approved by both the original custodian and the acquiring custodian and that the changes be recorded in FAM. Information within FAM is not consistently updated to reflect assets that are transferred to new custodians or that change locations. The audit identified from the assets sampled in FAM that 49% of the assets’ location information was incorrect (but as previously stated was able in many cases to assess their existence through multiple correspondences) and 20% of the information related to custodian, assets description or asset serial number was incorrect.

Inventory Counts

The Department’s Asset Management Policy requires that custodial managers perform a physical inventory count of assets under their control at least once every five years. The policy also requires an inventory count when there is a move, reorganization or when there is a change of the custodial manager responsible for the asset.  The policy requires that in each case, a discrepancy report is required to be completed and approved by the custodial manager involved.

The Department’s policy provides direction to custodial managers in completing the inventory counts. Each unit is responsible for setting its own schedule, conducting the count and updating the information in FAM; however there are no standard processes or specific guidelines identified in the policy. 

SSO Asset Management confirmed that only a portion of the Department has completed an inventory count in the past five years. For instance, some regions do conduct regular inventory counts. Of those units that have completed the required count, the summary results were not all reported to SSO. In addition, no monitoring efforts, such as spot checks, have been implemented by SSO.  There was also no indication that inventory counts are being completed after a move, reorganization or change in custodial manager as required by the policy.

Asset Disposals

The audit examined the process for asset disposal and determined that common assets are disposed of on an on-going basis. However there are certain assets that have not been disposed of to date; these include heavy or specialized equipment not being used.  As part of the audit, a tour was taken of one of the Department’s facilities that housed some of this specialized equipment that had not been disposed of.  Many of these assets had been ready for disposal and occupying building space for a long period of time.  Some of the reasons why they have not been disposed of include: the costs of disposal have not been budgeted, the equipment must be dismantled, or difficulties exist around physically removing the asset from the building.  Although it is reasonable that the disposal of specialized equipment would result in some delays, some of these assets have been ready for disposal for many years. 

Management explained that environmental and building decommissioning concerns could be one of the reasons. Meanwhile, it remains that prolonged retention of idle assets can unnecessarily increase operating costs, including maintenance and utilities, inefficient use of facilities and potentially give rise to safety issues (although no specific cases/immediate danger was identified at the time of the audit).

Recommendation

It is recommended that SSO and FMB:

  1. Provide additional guidance to sectors responsible for managing assets, specifically for the safeguarding of assets, asset transfers, physical inventory counts and asset disposal procedures. Standardized processes and templates should be created.
  2. Develop and implement a monitoring regime to ensure that units are complying with Departmental policies and procedures on asset management. (FMB)
Management Action Plan & Time Frame

2. SSO will continue to provide procedure guidance to sectors in the form of regular messages on the Source (last message posted Jan 2010) as a central point for information.  A communication from the ADM of CMSS to all NRCan ADMs will be issued in May 2010 to highlight the policy and to provide links to business process maps. 
Timing: Completed.

 Process maps such as the new standardized process map for asset transfer and disposal—see Appendix C—(posted on ConneXus in February 2010) are currently available to supplement our intranet procedures. Process maps contain hyperlinks to associated policies, procedures and forms (such as form RES 1548 required for asset management).   Also, the standardized process maps for procurement with the assistance of SSO and without the assistance of SSO (Appendices D and E respectively) were updated to better reflect the requirements for tracking inventory and capital assets.  Timing: Completed.

SSO will support clients with asset management-related guidance when carrying out—in collaboration with clients— the assets count multi-year plan (Plan) to ensure efficient use of existing resources for physical inventory counts.
 Timing: December 31, 2010.

The strategy for the Plan is currently being developed as mentioned in recommendation 1. The inventory count requirements will be communicated to all sectors at that time and a written response (sign off) from all managers will be part of the process. Also, a full inventory count or 2010-2011 is currently underway as mentioned in recommendation 1. Timing: December 31, 2010.

FMB and SSO will put in place a quarterly capital asset review and reconciliation exercise for machinery and equipment; by managers.

FMB and SSO will also incorporate in their year-end procedures (to be carried out in March-April 2011), specific procedures in relation to assets and ensure manager attestation is acquired.    Timing: January 31, 2011.

FMB and SSO will automate the taking of inventory where and when possible to reduce the amount of manual work involved in the visual inspection and accounting of asset inventory, e.g. tracking of computers using their logon information on the NRCan network.

FMB and SSO are actively engaged in the review, correction and addition of key asset information (where required) for all asset records to ensure that the conversion of these records to SAP will be complete and that accurate data will be reflected in the new financial system on April 4, 2011.  Timing: December 31, 2010.

Management has developed its action plan taking into consideration that in the Fixed Asset Module the net book value had been calculated correctly,  that approximately 66% of the  machinery and equipment (of which 11% are assets under $10k) have a net book life (i.e. remaining useful life) of zero.

3. On a quarterly basis, the Financial Policy, Training and Monitoring Unit within FMB will extract information from the financial system to review the appropriateness of the recording of assets (expensed versus captialized), and take immediate corrective actions as discrepancies are found.

Subsequent to the various adjustments to the asset information resulting from the inventory currently underway, the Financial Policy, Training and Monitoring Unit within FMB will monitor compliance with policy instruments related to assets. Timing: January 31, 2011.

FMB and SSO will continue to ensure that managers and employees are aware of their obligations related to the management of Assets and will use the result of the monitoring to do specific follow-up action where warranted.

Appendix A

Standard Internal Audit Conclusions

Our standard audit conclusions are as follows:

Well Controlled: Key controls are effectively designed and operating as intended. Objectives of the audited process are likely to be achieved.

Opportunities Exist to Improve Controls: One or more key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process may not be achieved. The financial/reputation impact to the audited process is more than inconsequential. Timely action is required.

Not Controlled: Multiple key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process are unlikely to be achieved. The financial/reputation impact to the audited process is material. Action must follow immediately.

Standard Risk Types

Our standard risk types are classified based on the COSO Internal Control-Integrated Framework as follows:

Strategy - High-level goals, aligned with and supporting the Department's mission.

Operations - Effective and efficient use of resources.

Monitoring - Accurate assessments or evaluation of activities.

Reporting - Reliability of operational and financial reporting.

Compliance - Compliance with applicable laws, regulations, policies and procedures.

Standard Audit Risk Ratings

Major:  A key control is not operating as intended, is poorly designed or does not exist and the related risk is potentially significant. The objective to which the control relates is unlikely to be achieved. Corrective action is needed to ensure controls are cost effective and/or objectives are achieved.

Moderate: A key control is not operating as intended, is poorly designed or does not exist and the related risk is more than inconsequential. However, a compensating control exists. Corrective action is needed to avoid sole reliance on compensating controls and/or ensure controls are cost effective.

Minor: A weakness in the design and/or operation of a non-key process control. Ability to achieve process objectives is unlikely to be impacted. Corrective action is suggested to ensure controls are cost effective.

Appendix B

Departmental Machinery and Equipment - Population and Sample
As of April 2009:
Table 1
Asset Value Count Asset Value Depreciation Net Book Value10
0.00 - 999.99 (e.g. Desk chairs, filing cabinets, etc.) 7,394 4,342,747 0 4,342,747(1)_
1,000.00 - 9,999.99 (e.g. Office furniture, computers, microscopes, etc.) 29,646 82,997,155 550,117 82,447,037(1)
10,000.00 - 49,999.99 (e.g. equipment, servers, etc.) 4,707 92,497,032 78,182,879 14,314,154
50,000.00 - 100,000.00 (e.g. Small pieces of lab equipment) 561 39,231,526 31,561,684 7,669,842
>100,000.00 (e.g. large pieces of lab equipment) 384 102,436,702 85,898,156 16,538,546
Totals 42,692 321,505,162 196,192,836 125,312,326
 
Capital assets (>10K) 5,652 234,165,260 195,642,718 38,522,542

 

 

Table 2
Sample for Physical Counts Perc Count Asset Value Net book
Value
Total Population   42,297 321,505,162 $125,312,326
Total Population NCR 57% 24,073 168,471,035 $65,584,845
Sample for NCR   187 10,812,295  
Could not be located 34% 64 2,134,501 $370,504
Managers confirmed that disposed (3NC +16C) 10% 19 439,579 -
Balance that could not be located (32C+13NC) 24% 45 1,694,922 -

 

 

 

 

Table 3
Sample for Testing recording Perc Count Asset Value Net book
Value
Total Population NCR   11,659 48,752,264 -
Total Sample NCR   184 5,932,891 -
Wrong financial coding 32% 51 1,337,991 -
Recorded accurately in FAM 30% 37 1,534,028 -
Not required to be in FAM ($<1000) N/A 38 908,112 -
could not be linked in FAM 70% 86 2,453,888 -
PV for capital assets purchased after May 2008 with wrong Line Object (Lobj)   9 of 24 287,635 -

 

 

(1) In compliance with TB policy, all assets under $10k (except for the Revolving fund) are not depreciated, and therefore their asset and net book values are the same

Appendix C

Assets Management (Disposal and Transfer Process) Business Process Map

Assets Management (Disposal and Transfer Process) Business Process Map

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Appendix D

Purchasing Goods and Services (Including IT) With SSO Assistance Business Process Map

Purchasing Goods and Services (Including IT) With SSO Assistance Business Process Map

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Appendix E

Purchasing Acquisition Card Purchases by Sector Client Business Process Map

Purchasing Acquisition Card Purchases by Sector Client Business Process Map

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1 The CRP defines a high risk as “critical event, with proper management can be endured”.

2 Refer to Appendix A for standard internal audit conclusion classifications.

3The Department’s Policy is consistent with the directives outlined within the Treasury Board Materiel Management Policy and the Treasury Board Disposal of Surplus Moveable Crown Assets Policy.

4All asset purchases are initiated via the payment voucher module of GFS. They are then recorded in FAM.

5 Capital assets are tangible or intangible assets that are purchased, constructed, developed or otherwise acquired, and have an initial cost per unit of $10,000 or more ($1,000 or more for the Geomatics Canada revolving fund) – NRCan Accounting Standards/Capital assets

6 Two statistical samples were drawn, both using a stratified random sampling method, with 95% confidence level, expected error rate of 5% and a precision of (+/- 3%) .  The first sample included 187 machinery and equipment assets recorded in FAM with a historical value of $11M. While the second sample included 184 assets purchased through a payment voucher recorded in GFS with a historical value of $6M. gust 2008.  In addition, Annex A of the Supply Arrangement provides the details of this requirement.

7The Line Object, lowest level of the object of expenditure structure, identifies the type of goods or services consumed. There are two types of line object for assets. Line Object for assets with a value less that 10k and Line Object for assets equal or over 10K

8Location means the combination of Building and Floor and Room.

9 Financial Line Object code.

10 Net book value applied only for capital or revolving assets.