FOLLOW-UP AUDIT OF REPAYABLE CONTRIBUTIONS PROJECT SP1202

Reports 2011


EXECUTIVE SUMMARY

INTRODUCTION

Repayable contributions are contributions, all or part of which, are repayable or conditionally repayable according to the terms of the contribution agreement. 

There are two types of repayable contributions:

  • Unconditional repayable contributions must be repaid without qualification. The repayment terms are established in the agreement; and
  • Conditional repayable contributions are repaid in entirety or in part if certain conditions specified in the agreement materialize.

Two sectors, Energy Sector (ES) and Innovation and Energy Technology Sector (IETS), have repayable contributions.

In December 2008, the Audit Branch completed an Audit of Repayable ContributionsFootnote 1. The audit determined that:

  • Natural Resources Canada (NRCan) did not collect the pertinent data that would allow it to ensure that the appropriate corporate oversight is in place to manage the risk associated with the repayments of repayable contributions;
  • Staff were monitoring less than half of the agreements in the repayment stage; and
  • Financial information associated with the agreements in the financial statements was not compliant with Treasury Board (TB) policies.

This subsequent follow-up audit was conducted at the request of the Office of the Auditor General and was not part of the original 2011-2012 Risk-Based Audit Plan.

DEPARTMENTAL RISKS

A detailed risk analysis was completed for the Follow-up Audit of Repayable Contributions. Staff in two sectors and in the Centre of Expertise of the Financial Management Branch (FMB), were asked to identify the controls in place to mitigate these risks. The audit team examined those controls and was able to conclude that the residual risk was low after most controls were considered.

INTERNAL AUDIT CONCLUSION

Overall, the audit results provide reasonable assurance that repayable contributions are being monitored appropriately with the exception of one branch within one sector. There are now more tools and training available to staff to support the monitoring and management of repayable contributions than in 2008. The reporting tool used by one sector was not working as intended and as a result, there were situations where monitoring was not happening as required. Information in the agreement module of the financial system has improved significantly from the previous audit, however further review is required by the program staff to ensure accuracy for monitoring purposes.

TABLE OF CONTENTS

INTRODUCTION

Repayable contributions are contributions, all or part of which, are repayable or conditionally repayable according to the terms of the contribution agreement. Natural Resources Canada (NRCan) Policy on Transfer Payments provides the following information:

“Where a contribution is made to a business and is intended to allow the business to generate profits or to increase the value of the business, the business is required to repay the contribution or to share the resulting financial benefits with the government commensurate with its sharing of the risks. All repayable contributions shall be reviewed and pre-approved by the Departmental Centre of Expertise on Grants and Contributions with the support of Legal Services.”

There are two types of repayable contributions:

  • Unconditional repayable contributions must be repaid without qualification. The repayment terms are established in the agreement; and
  • Conditional repayable contributions are repaid in entirety or in part if certain conditions specified in the agreement materialize.

Two sectors, Energy Sector (ES) and Innovation and Energy Technology Sector (IETS), have repayable contributions.

In December 2008, the Audit Branch completed an Audit of Repayable ContributionsFootnote 2. This audit determined that:

  • NRCan did not collect the pertinent data that would allow it to ensure that the appropriate corporate oversight is in place to manage the risk associated with the repayments of repayable contributions;
  • Staff were monitoring less than half of the agreements in the repayment stage; and
  • Financial information associated with the agreements in the financial statements was not compliant with Treasury Board (TB) policies.

This subsequent follow-up audit was conducted at the request of the Office of the Auditor General (OAG) and was not part of the original 2011-2012 Risk-Based Audit Plan.

NRCan has a database that stores all information with respect to grant and contribution agreements. Payments cannot be made unless the agreement is first input into this database. The Department refers to this database as the agreement module. As at March 31, 2011, the agreement module for NRCan indicated that there were 427 repayable contribution agreements.

Start Date Of Agreement # of Agreements
Prior to April 1, 2008 287
2008-2009 29
2009-2010 44
2010-2011 67

The total amount collected from repayable contributions since Fiscal Year 2008-2009 is as follows:

Fiscal year Amount Collected
2008-2009 $44,823,220Footnote 3
2009-2010 $12,920,298
2010-2011 $6,503,688

AUDIT PURPOSE AND OBJECTIVES

The overall purpose of this follow-up audit was to provide reasonable assurance that the management actions plans submitted in 2008 were implemented and have resolved the issues identified in the original audit. Specifically that:

  • NRCan is collecting the data that is necessary for corporate oversight;
  • Staff are monitoring all agreements in the repayment stage; and
  • Financial information is compliant with TB policies.

SCOPE AND METHODOLOGY

The scope of the audit included all repayable contributions in the repayment stage and the associated information as reflected in the 2010-2011 Departmental Financial Statements. The scope only included files in the repayment stage because this was the OAG’s area of concern.

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

  1. review of key documents and relevant background documentation including policies, directives and standards;
  2. interviews with key personnel with respect to monitoring repayable contributions; and
  3. sampling techniques to examine repayable contribution files (62 files were included in the sample, of which statistical sampling was used to select 49 randomly and another 13 were specifically selected).

CRITERIA

The criteria were developed from the recommendations of the previous audit, risks identified and relevant policies, procedures and directives associated with repayable contributions. The criteria guided the audit fieldwork and formed the basis for the overall audit conclusion. Refer to Appendix A for a listing of the audit criteria.

FINDINGS AND RECOMMENDATIONS

CORPORATE OVERSIGHT

Summary Finding

Corporate oversight has improved significantly since the 2008 audit. There are now additional tools available for oversight and the Centre of Expertise is providing training on a regular basis. In order to use these new tools, it is important that the information in the agreement module is accurate.

RISK AND IMPACTFootnote 4
Risk Type Audit Risk Rating Impact
Reporting Minor

If accurate information is not entered into the agreement module, the reporting tools will be ineffective.

Without a standardized reporting tool, sectors will continue to be required to establish their own reports that may not be effective when monitoring repayable contributions.

Supporting Findings

TRAINING AND SUPPORT

The Centre of Expertise is currently providing training to staff on a regular basis. This training includes a section on repayable contributions. One sector has implemented a requirement that all staff dealing with grants and contributions take the Centre of Expertise training every two years.

A new repayment schedule has been added to the agreement module. This will capture all information associated with repayable contributions including due dates and receipt dates of revenue reports, as well as amounts receivable and collected. The repayment tab was introduced in January 2011. While the Centre of Expertise initially requested that the sectors populate the required information by February 28, 2011, this was not possible to complete. With the implementation of the new departmental financial system in April 2011, staff were not available to complete this task. It was postponed to June 2011 and training was provided over two days to clearly articulate what was required. At the time of the audit, sectors were in the process of completing this work.

One program person was making full use of the repayment schedule and his files that were included in the sample were able to be reviewed completely online. This program manager included his revenue due dates and receipt dates and also used the attachment feature to included copies of all revenue reports and correspondence.

The Centre of Expertise has also worked with a program consultation team to develop a Directive on Repayable Contributions. This Directive addresses issues for consideration when establishing a repayable contribution as well as monitoring the agreement once it enters the repayment phase. The Guidelines were approved in August 2011 and posted on the Department’s intranet site in September 2011.

IETS developed a “Tips” sheet after the 2008 audit in consultation with the Centre of Expertise and Legal Services. This sheet provides staff with direction on what to do in situations that are common to repayable contributions; for example, the organization has ceased operations or the item will not be commercialized. The Centre of Expertise is using this “Tips” sheet to provide staff in other sectors guidance on closing repayable contributions in advance of the end of the repayment phase. The Centre of Expertise will incorporate the “Tips” sheet into the Guidelines on Repayable Contributions that are expected to be posted on the intranet site in November 2011.

INFORMATION IN THE AGREEMENT MODULE

The 2008 audit concluded that 70% of the repayable contribution agreements listed in the agreement module had information that was inaccurate. This included agreements that were coded as repayable when they were not, and agreements that were coded as non-repayable when they were repayable. In the current audit, 28% of the agreements listed had information that was inaccurate. Errors were only considered if there was an impact on monitoring data. For example, an incorrect project manager name was not considered an error and not included in the 28%; however, an incorrect end date was viewed as an error because it impacted when a program should start monitoring revenue reports. It should be noted that while the agreement module did have some information errors, the paper files were complete and had the most current information included in them.

STANDARD REPORTS

Sectors have used a variety of methods to monitor repayable contributions. One branch had developed a detailed database, while other branches used a manual system. One sector was using the contingent gainsFootnote 5 report for corporate oversight. While the contingent gains report does provide a listing of all repayable contributions, it does not indicate whether or not revenue reports have been received or if they are overdue. In addition, the requirement to report contingent gains has changed significantly and now only expected repayments greater than $1,000,000 are reported. Since less than 25% of NRCan repayable contributions are greater than $1,000,000, continuing to rely on this report could give the impression that the remaining 75% are not important and do not require monitoring. This is not the case; all repayable contributions should be monitored regularly in fulfilling stewardship responsibilities for public funds.

There is now a corporate tool available to collect information on repayable contributions. The information in the agreement module has improved and is expected to continue to improve. This will facilitate the monitoring of repayable contribution by both program staff and the Centre of Expertise.

Prior to the release of this tool there was no central database to capture information with respect to the repayment component of repayable contributions and as a result each program/sector was required to have its own individual reports to track repayable contribution information. While the new tool collects the information required for monitoring, there is no report available to program managers/directors/sectors to review to ensure that repayable contribution agreements are being monitored. Since the information is already in the agreement module, this report would not only be a tool to identify the status of revenue reports, it would also highlight inaccurate information as the monitoring data would not be correct.

NRCan implemented a new financial system in April 2011. An interface with the financial system and the existing agreement module has been developed. The agreement module sends commitment information to the financial system, which in turn sends payment information to the agreement module. There has been some discussion with respect to changing to a different agreement module. In considering a new agreement module, monitoring requirements for repayable contributions would have to be considered.

RECOMMENDATIONS

  1. ES and IETS should review the information in the agreement module for repayable contributions to ensure that it is accurate.
  2. CMSS should create a report in the agreement module that can be generated by Program Managers, Directors, Sectors and/or the COE that tracks outstanding revenue reports.

Management Action Plan and Time Frame

  1. IETS Management Agrees.

    All existing repayable contributions have been verified and updated in GUFI as of the second quarter of 2011 - COMPLETED

    On a monthly basis, IETS now updates the Contingent Gains Report (CGR) and, where applicable, updates the data in the GUFI – Repayment Module.    Although the requirement, for the department, is to receive the CGR on a quarterly basis and for repayables at $1M or more, IETS has requested and now obtains the CGR on a monthly basis and for all repayables. - ONGOING

    For cases of file closures, IETS regularly updates the GUFI – Repayment Module. – ONGOING

    ES Management Agrees.

    When a repayment is due or when closing a file the program manager will sign-off that the information is up-to-date and that they have reviewed the information in the agreement module for Repayable Contributions.

    Process in place as of November 1, 2011

  2. Management agrees with this recommendation.

    FMB’s COE will continue to further strengthen the Department’s management of repayable contributions.  The COE will continue to monitor the Agreements Module to ensure programs are diligent in following-up with Proponents on outstanding revenue reports.

    Further, the FMB-COE has confirmed with the FMB Financial Systems team that the reporting requirements to track outstanding revenue reports in the Agreements Module remains on the System’s Work Plan for 2011-2012.  The completion date of this requirement is March 31, 2012.

STAFF MONITORING

Monitoring of repayable contributions has improved significantly from the previous audit. Sectors are closing files earlier when proponents have ceased operating or when there is proof that items will not be commercialized. One sector continues to struggle with monitoring requirements.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Monitoring Moderate Failure to monitor repayable contributions could result in not collecting money owing to the government or unnecessarily keeping files open that could be closed.

Supporting Findings

In the previous audit, 58% of the files were not being monitored as required. In the current audit, 14% of the files were not being monitored. These belonged to one sector. While the sector was using the contingent gains report as a monitoring tool, the report did not identify overdue revenue reports. After the 2008 audit, this sector did a significant amount of work in organizing files and clearly identifying repayable dates. This information did not get transferred to any report that would identify the outstanding revenue reports.

Both sectors with repayable contributions are doing better at closing files when recipient operations have ceased or when the item has not been commercialized. This is important as it reduces administrative burden within the Department and for the funding recipients.  From the sample, 17% of the files reviewed had been closed appropriately due to non-commercialization or because the recipient had ceased operations.  These files included the appropriate documentation required from legal services to close the files. Only 6% of the files reviewed should have been closed but action had not yet been taken to complete this activity.

RECOMMENDATIONS

  1. IETS should review all repayable contributions to identify additional files that require monitoring and follow up.

Management Action Plan and Time Frame

Management Agrees.

Although there were still a few gaps (one Division) in proper monitoring and follow up at IETS, these officers have been reminded of the procedures for follow-up on repayable contributions as of the second quarter of 2011 - COMPLETED

IETS continues to monitor and follow-up, on an on-going basis, with proponents by emails and formal letters for status updates and revenue reports. - ONGOING

FINANCIAL INFORMATION

Financial information is compliant with TB Policies.

Supporting Findings

When the 2008 audit was completed, the Department was not accurately reporting unconditional repayable contributions. Processes were changed and NRCan subsequently came into compliance with reporting requirements. At the time of the current audit, NRCan did not have any unconditional repayable contributions.

The conditional repayable contributions have been reported in the contingent gains report that is submitted to Treasury Board Secretariat on a quarterly basis. In 2010-2011, the Receiver General changed the requirements for reporting contingent gains so that only those in excess of $1,000,000 had to be reportedFootnote 6NRCan is compliant with this requirement.

APPENDIX A – AUDIT CRITERIA

Objectives Audit Criteria
1. NRCan is performing the necessary corporate oversight, including providing training and direction, for repayable contributions; (R1 &2 previous audit)
  • 1.1 NRCan reviews information with respect to repayable contributions to ensure accuracy.
  • 1.2 Corporate oversight takes place to ensure that repayables are being reviewed and actioned.
  • 1.3 Staff are provided with the necessary training and direction to manage repayable contributions.
2. Staff are monitoring all agreements in the repayment stage; and (R3 and R5 previous Audit)
  • 2.1 Staff are doing site visits/receiving reports that provide information on the status of repayable contributions.
  • 2.2 Staff are using the information collected to update GUFI.
  • 2.3 Staff are taking the appropriate action to stop monitoring when it has been confirmed that a repayment will not be made.
  • 2.4 Managers/Directors are reviewing repayable information on a regular basis.

3. Information with respect to repayables is accurate and compliant with TB policies. (R4 previous Audit)

  • 3.1 Financial Statements accurately reflect information for conditional and unconditional repayable contributions.
  • 3.2 Information in GUFI is accurate.

APPENDIX B – STANDARD AUDIT RISK RATING

STANDARD RISK TYPES

Our standard risk types are classified based on the COSOFootnote 7 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.