Audit of the Leadership for Environmental Advantage in Forestry Program Project AU 1203

Reports 2011


Executive Summary

INTRODUCTION

In order to help Canada’s forest sector adjust to many challenges in recent years, the government introduced the Leadership for Environmental Advantage in Forestry (LEAF) program in 2008. This $20M four-year contribution program is designed to protect and enhance the international environmental reputation of Canada’s forest industry. Under this Program, the Forest Products Association of Canada (FPAC), a not-for-profit organization and the sole contribution recipient of $16M, conducts market outreach activities such as web sites, tours, trade shows and strategic advertising in the United States, Asia and Europe on behalf of NRCan. FPAC also monitors and reports on market trends by environmental scanning, including tracking market perceptions through surveys and focus groups.

NRCan received $4M of operating funds in order to conduct research and address key science and information gaps, enabling the forest sector to better respond to environmental non-governmental organizations’ claims. NRCan also provided technical support to Canadian missions abroad.

The LEAF contribution program will end March 31, 2012.

INTERNAL AUDIT CONCLUSION

The audit assessed the effectiveness of the management control framework in place to support NRCan’s activities related to the LEAF program. Specifically, the audit results provide reasonable assurance that:

  • The LEAF contribution agreements are managed through a management control framework that is risk sensitive and designed to address government priorities; and
  • The Program is in compliance with the Treasury Board (TB) Policy on Transfer Payments (2008), and in compliance with the payment provisions governed by the Financial Administration Act..

TABLE OF CONTENTS

INTRODUCTION

The forestry sector has faced a number of challenges in recent years, including the prolonged softwood lumber dispute with the United States, the stronger Canadian dollar, and competition from low-cost foreign producers. As a result, Canada’s forest sector is at risk of losing access to existing and new export markets. In order to help Canada’s forest sector adjust to these challenges, the government introduced the Leadership for Environmental Advantage in Forestry (LEAF) program in 2008.

This $20M four-year contribution program is designed to protect and enhance the international environmental reputation of Canada’s forest industry. LEAF accomplishes this by having the Forest Products Association of Canada (FPAC), a not-for-profit organization and the sole contribution recipient of $16M, conduct market outreach activities such as web sites, tours, trade shows and strategic advertising in the United States, Asia and Europe on behalf of NRCan. FPAC also monitors and reports on market trends by environmental scanning, including tracking market perceptions through surveys and focus groups.

Under the LEAF initiative, NRCan received $4M of operating funds in order to conduct research and address key science and information gaps, enabling the forest sector to better respond to environmental non-governmental organizations’ claims. NRCan also provided technical support to missions abroad.

The LEAF contribution program will end March 31, 2012.

AUDIT PURPOSE AND OBJECTIVES

The audit assessed the effectiveness of the management control framework in place to support NRCan’s activities related to the LEAF program. Specifically, the audit was conducted in order to determine if there was reasonable assurance that:

  • The LEAF contribution agreements are managed through a management control framework that is risk sensitive and designed to address government priorities; and
  • The Program is in compliance with the new Policy on Transfer Payments (2008), and in compliance with the payment provisions governed by the Financial Administration Act.

DEPARTMENTAL RISKS

The 2011-2014 Risk-Based Audit Plan risk assessment identified this audit as a “Very High Audit Priority” for the Department.

SCOPE AND METHODOLOGY

The scope of the audit covered the major aspects of the internal control framework with respect to the LEAF program. The audit also examined contribution transactions from fiscal years 2008-2009 to 2010-2011, but excluded departmental operations and maintenance, and salary transactions as these were deemed low risk transactions.

The audit approach was based on Treasury Board’s Policy on Internal Audit and the Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors and included:

  • a review of relevant background documentation;
  • interviews with key corporate and program personnel; and
  • an examination of program records and other supporting documentation (to determine if financial and program controls have been designed and implemented).

CRITERIA

Audit criteria used by the Audit Branch to assess the adequacy of NRCan’s management control framework for G&Cs was based on the Office of the Comptroller General’s criteria for its Horizontal Internal Audit of the Grants and Contributions Management Control Framework in Large Departments and Agencies – Phase 1 conducted in 2010-2011; however, some minor changes were made to specifically address the LEAF program. The list of criteria is included in Appendix B.

FINDINGS AND RECOMMENDATIONS

FUNDING ADJUSTMENT

SUMMARY FINDING

An increase of NRCan’s contribution to total project costs from 50% to 80% was approved by the Minister and documented in correspondence to Treasury Board Secretariat (TBS).

SUPPORTING OBSERVATIONS

At the inception of the LEAF program in 2008, NRCan’s annual contribution was not to exceed 50% of total project costs for any given year and that total government assistance was not to exceed 100% of total project costs as defined in each agreement.

In the summer of 2009, the Minister of Natural Resources received a request from the Program Proponent (Forest Products Association of Canada) to reduce the amount of cost shared funding from 50% to 20%, due to the extreme economic downturn of the forest industry at that time. The Program subsequently sought the advice of the Department’s Financial Management Branch’s (FMB) Centre of Expertise (COE), to determine whether a change in the funding ratio constituted a major or minor amendment.

The reduction of FPAC’s contribution from 50% to 20% was approved by the Minister on October 6, 2009. A letter informing TBS of NRCan’s exercise of authority was sent on October 27, 2009.

Recommendation:

None

IDENTIFICATION OF THIRD PARTY CONTRACTS

SUMMARY FINDING

Although subcontracting is permitted under the LEAF program, the audit found that management has not established a process for identifying third party contracts.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Monitoring Minor Lack of transparency with respect to third party contracts may lead to potential issues with subcontractors not being addressed in a timely manner.

SUPPORTING OBSERVATIONS

One of the goals of the Federal Accountability Action Plan is to “increase the transparency of appointments, contracts, and auditing within government and crown corporations.”Footnote 1

According to Article 14 of the contribution agreements, “the Proponent shall not subcontract all or any part of the Project funded by Canada unless the Proponent has obtained the prior written consent of the Minister, or except as provided in the Proposal.” The audit team found that the use of subcontracts was provided for in both of the Proponent’s proposals and that the Proponent has spent approximately $8.9M out of $11.9M (75.6%) of G&C funding to date on third party contracts. The third party contract expenditures consisted of services such as professional (59.9%), production and distribution of promotional material (10.5%), facility rentals for meetings and workshops (2.7%), translation (1.9%) and website development (0.6%). The remaining 24.4% was spent on the following costs: Salary and benefits, overhead, travel, hospitality, rental of office space in international markets and office furnishings, equipment and supplies.

The audit team found one instance where a third party arrangement was disclosed. A contract with a third party supplier was identified on February 1, 2010, prior to the signing of the Proponent’s second contribution agreement on June 4, 2010. In this case, the Proponent reviewed the supplier’s proposal in order to verify that the proposed activities were eligible under the LEAF program and provided a detailed response to the supplier. At this point the Proponent notified LEAF program management. Although third party disclosure occurred in this case, the audit team found that no other third party contracts were disclosed to the Program.

While it is not a mandatory, compliance requirement, disclosure of 3rd party contracting would contribute to greater transparency and facilitate greater accountability for the use of the contribution agreement funds which, in this case, represents over 75% of the LEAF program G&C funding to date (approx. $11.9M). It could also assist in identifying potential issues with subcontracts. In this regard, the Program could move beyond minimal compliance to improved practices, perhaps even a preferred practice example of contribution agreement management regarding third party contracts.

Program management has since provided to the audit team a listing of 53 larger third party contracts being funded through LEAF.

Recommendation:

  1. Program management should consider implementing as a preferred practice a process for identifying third party contracts.

Management Action Plan

Management agrees.

Program management has requested and has obtained a list of third party contracts from the recipient.

Complete

In the future, the recipient will provide the list as a part of their annual report to program management.

Ongoing

PROGRAM ADMINISTRATION

SUMMARY FINDING

The LEAF work plans are prepared as per the Program’s terms and conditions, and contribution payments are made in accordance with the Financial Administration Act.

SUPPORTING OBSERVATIONS

Program Work Plans

The Proponent’s work plans were aligned with the criteria set out in the Program’s terms and conditions and were reflected in the contribution agreements. The audit team did not assess the quality of the work plan. This will be addressed in an evaluation of the Program which is to be completed by December 2011. The Proponent submitted a two year work plan rather than the required one year work plan as stipulated in the terms and conditions of the LEAF program.

The Program exercised due diligence in the work plan assessment. The review of LEAF program documentation indicated that there is ongoing communication with the Proponent to provide guidance and feedback relating to development of work plans. In addition, the audit team learned that, prior to the final approval of the work plan, the Program works together with other similar programs to make sure that there are no overlaps of LEAF activities with other NRCan program activities (e.g. Canada Wood) and to identify synergies with other NRCan programs.

Through review of LEAF program documentation, the audit team found that there was appropriate segregation of duties with respect to receiving, assessing and approving the work plan. However, final approval of the work plan was not formalized. There is no official sign-off of the final work plan by the Director of the Program. As a preferred practice, it is suggested that approval of the final work plan be formalized and include a signature by the appropriate delegated authority. This formalization will further strengthen the approval process.

Payments in Compliance with Sections 32, 34, and 33 of the FAA

Two contribution agreements and one amendment were drafted with the guidance of the COE and Legal Services, and these complied with the Treasury Board Transfer Payment Policy (2008). These documents were signed by the appropriate delegated authority.

Schedule C of the contribution agreements require that the Proponent submit with each claim for payment, quarterly financial reports which outline eligible costs incurred by task and cash flow forecasts for eligible costs for subsequent quarters. Both reports must be signed by the Chief Financial Officer or a duly Authorized Officer of the Proponent. In addition, the Proponent is required to submit quarterly progress reports that provide an update on project progress and explain any deviations from the approved work plan activities and budgets. The audit team found that these reports were received by the Program as required in Schedule C of the contribution agreement.

All G&C payments (4 claims for reimbursements, 6 claims for advance payments and one reversal of a holdback) issued by the Program were reviewed as part of the audit. These complied with sections 34 and 33 of the Financial Administration Act. Advance payments were made on approved work plans and were based on quarterly cash flow forecasts submitted by the Proponent. Advances take into consideration the accounting of the eligible costs incurred in the previous period. Variances were analysed between forecasted and actual costs, and adjustments were made to subsequent advance payments.

Approximately $11.9M was spent out of the $12M (99.2%) of contribution funds, and $2.8M was spent out of the $3M (97.6%) of operating funds as budgeted for the first three fiscal years of the LEAF program.

Audit Services Canada conducted a financial audit of the LEAF Proponent for fiscal year
2010-2011 and the report released on July 21, 2011 did not identify any adjustments to funding.

Recommendation:

None

APPENDIX A – STANDARD INTERNAL AUDIT RISK TYPES AND RATINGS

STANDARD RISK TYPES

Our standard risk types are classified based on the COSOFootnote 2 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

Audit findings are rated as follows:

Major: A key control does not exist, is poorly designed or is not operating as intended 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 does not exist, is poorly designed or is not operating as intended 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 – AUDIT CRITERIA

The following audit criteria were used to conduct the audit:

LINES OF INQUIRY

Objective 1: The LEAF contributions are managed through a management control framework that is risk sensitive and designed to address Government priorities.

Sub-objective 1: The Department has in place effective and efficient governance processes for grant and contribution programs.

Criterion 1: Management has an effective control framework for the design and delivery of grant and contribution programs.

  1. Program objectives reflect the approved direction from Cabinet.
  2. Any program amendments are approved by the appropriate authority.
  3. There is a program risk management strategy.
  4. Lines of communication exist between the organization, users and other external stakeholders.
  5. Feedback from users and other stakeholders drives strategic and operational planning.
  6. An analysis is conducted to determine how the program can leverage IM\IT systems to ensure efficient and effective processes. (Controls are automated to the extent possible)
  7. There is a documented performance measurement strategy, including performance indicators and measures, tied to program objectives.
  8. There is an oversight body to allow for effective monitoring of management’s objectives, strategies and results.
  9. Management has established processes to identify third-party contracts.

Criterion 2: Roles, responsibilities and accountabilities are clearly defined and communicated.

  1. A human resources (HR) plan is developed to address capacity and meet the requirements of the program.
  2. Training is provided that addresses the needs of the program.
  3. Program guidance and guidelines are communicated to ensure the program is applied consistently.

Objective 2: The Program is in compliance with the TB Policy on Transfer Payments (2008), and in compliance with the payment provisions governed by the Financial Administration Act (FAA).

Sub-Objective 2: Programs are administered with due diligence and transparency in accordance with the approved terms and conditions.

Criterion 1: There are transparent control processes to ensure the consistent assessment and approval of projects to meet the objectives of the program.

  1. There is a segregation of duties between individuals responsible for work plan receipt, work plan evaluation and work plan approval.
  2. Work plan assessments are conducted in accordance with the approved program eligibility criteria.

Criterion 2: Recipient agreements are consistently developed through a process that is tailored to address risk and recipient requirements.

  1. Standard funding agreement templates are developed and aligned with TB approved terms and conditions as well as the Transfer Payment Directive.
  2. Changes to agreements or funding levels are documented.
  3. The contribution agreement is certified under FAA S.32

Criterion 3: Grants and contribution over $25,000 are disclosed in accordance with proactive disclosure requirements.

  1. The amount of grants and contributions awarded over $25,000 to a single recipient is disclosed on the departmental website.

Sub-Objective 3: The department exercises risk-based control, monitoring and oversight activities over grant and contribution programs. Monitoring of policy and program design options occurs in a regular and timely manner.

Criterion 1: Recipient payments are made in compliance with the requirements of the Financial Administration Act (FAA) and the Directive on Transfer Payments.

  1. Payments made comply with Financial Administration Act (FAA) requirements (S.33, S.34) and the Treasury Board Directive on Account Verification.
    1. S.34 - Terms and conditions of the funding agreement have been met and documented before funds are released.
    2. S.33 - Payments are made for eligible expenses.
  2. Problems with recipient performance and non-compliance are addressed and resolved in accordance with the terms and conditions of the recipient funding agreement.
  3. Payment schedules are developed in accordance with the Directive on Transfer Payments and the terms and conditions of the program.
  4. A process is in place to ensure that the total amount of funding provided does not exceed eligible expenditures.

Criterion 2: Monitoring, reporting and auditing of individual recipients are performed proportionately to their risk level and in accordance with the terms and conditions of the program.

  1. The department conducts risk-based monitoring of recipient performance reporting.
  2. Recipient audits are coordinated within the department and, to the extent possible, with other departments.

Criterion 3: There are monitoring and reporting processes in place to support program review and the departmental performance measurement strategy.

  1. A summary of the three year transfer payment program plan is submitted to TBS and included in the department’s RPP & DPR.
  2. Program results are reported to senior management.
  3. Actions are taken to address identified program performance issues and emerging risks.
  4. Financial information is collected and analyzed; and results are consolidated to demonstrate the financial performance of the program to senior management.
  5. There is an evaluation plan for the program, and the evaluation plan is conducted as planned.

Note: These criteria were adopted from the Office of the Comptroller General (OCG), and adapted for purposes of this audit.