AUDIT OF THE ECOENERGY TECHNOLOGY INITIATIVE AU1201

Reports 2011


EXECUTIVE SUMMARY

INTRODUCTION

The ecoENERGY Technology Initiative (ecoETI) introduced in 2007, contributes to the Government of Canada’s Clean Air Agenda through the development and dissemination of new knowledge and technologies.  The ecoETI supports the Government’s commitment in the April 2006 Speech from the Throne to “… take measures to achieve tangible improvements in our environment, including reductions in pollution and greenhouse gas emissions.”

The ecoETI Program has provided funds for research, development and demonstrations to support the development of next generation energy technologies needed to achieve emissions-free fossil fuel production and use.  The Program also provided funding to develop technologies for producing and using energy from other clean sources, such as renewable and bio-energy.  The new knowledge will facilitate the development of a set of rigorous regulations, codes and standards in support of the Government’s Clean Air Agenda.

The Program was scheduled to end on March 31, 2011, but a one year extension to March 31, 2012 was approved.  An additional extension of one year to March 31, 2013 was approved prior to the conclusion of the audit.  Natural Resources Canada (NRCan) will not expend any additional funds to recipients in this final year of the Program; however the extension will allow two key projects to be completed under the terms and conditions of the Program.

INTERNAL AUDIT CONCLUSION

It is management's responsibility to define an effective governance structure to aid decision-making, to ensure that effective control systems are in place to mitigate risks, and to monitor program compliance and results.

The ecoETI Program complied with the original approved terms and conditions as well as the approved amendments. However, elements of the terms and conditions were not well defined, leading to increased levels of subjectivity and inconsistency that resulted in a perception of a lack of transparency. These elements included the eligibility of certain expenditures such as overhead costs and retroactive expenditures.

Improvements are required in the Program's management controls. More robust risk-based monitoring of contribution agreements such as the earlier performance of recipient audits and improved oversight of the payment of claims would lessen the Program's exposure to risk. There were also concerns regarding training and the communication of roles, responsibilities and accountabilities.

Internal controls within the ecoETI Program were partially effective in supporting compliance with the Treasury Board's Transfer Payment Policy. Specifically, there were concerns pertaining to the Program's compliance with account verification procedures.

In conclusion, the audit can provide reasonable assurance that the Program complied with the originally approved terms and conditions. Clearer definitions of terms and conditions and consistent communication with recipients are recommended for future programs. Finally, prompt performance of an appropriate number of recipient audits is required to ensure that management can take the appropriate remedial action prior to the end of the Program on March 31, 2013.

Table of Contents


INTRODUCTION

The ecoENERGY Technology Initiative (ecoETI) contributes to the Government of Canada’s Clean Air Agenda through the development and dissemination of new knowledge and technologies. 

The ecoETI Program has provided funds for research, development and demonstrations to support the development of next generation energy technologies needed to break through to emissions-free fossil fuel production and use.  The Program also provided funding to develop technologies for producing and using energy from other clean sources, such as renewable and bio-energy.  The new knowledge will facilitate the development of a set of rigorous regulations, codes and standards in support of the Government’s Clean Air Agenda.

The ecoETI focuses on six clean energy priority areas:

  • Clean Fossil Fuels
  • Clean Integrated Electricity – with three sub-components:
    • Clean coal and carbon capture and storage
    • Distributed power generation
    • Next generation nuclear energy technologies
  • Bio-based Energy Systems
  • Low Emission Industrial Systems
  • Clean Transportation Systems
  • Built Environment

The Program was scheduled to end on March 31, 2011 but a one year extension to March 31, 2012 was approved.  During the audit, an additional one year extension of the program to March 31, 2013 was approved.  Natural Resources Canada (NRCan) will not expend any additional funds to recipients in the last year of the Program; however this extension will allow two key projects to be completed under the terms and conditions of the Program.

During the life of the Program, the June 2000 TB Policy on Transfer Payments was replaced by an updated version in October 2008.  Transitional considerations allowed a Program’s terms and conditions approved prior to October 2008 to remain in effect.  The NRCan Policy on Transfer Payments was updated on September 8, 2009.  Supporting strengthened accountability for public monies and better results for Canadians, this new TB policy requires that transfer payments be managed in a manner that is sensitive to risks, that strikes an appropriate balance between control and flexibility, and that establishes the right combination of good practices, streamlined administration and clear requirements for performance. 

Departmental Risks

In 2011-2012 the planned spending for ecoETI is $53.3 million, which is one of the top ten Grant and Contribution (G&C) allocations for NRCan. The 2011-2014 Risk Based Audit Plan, approved by the Deputy Minister, identified this audit as a “High Audit Priority”. 

Audit Purpose and Objectives

The overall purpose of this audit was to provide reasonable assurance that key elements of management control are in place. Specifically, the objectives of the audit included determining the extent to which:

  • The ecoETI Program complied with the Program’s originally approved terms and conditions as well as the approved amendments to the Program terms and conditions;
  • The ecoETI Program is managed with integrity, transparency, and accountability through a management control framework that is risk sensitive and designed to efficiently address government priorities in achieving results for Canadians; and,
  • Internal controls within the ecoETI Program are effective and adequate to support compliance with the Treasury Board Transfer Payment Policy.

Scope and Methodology

The scope of the audit covered the major aspects of the internal control framework with respect to the ecoETI Contribution Program. 

The audit approach was based on Treasury Board guidelines on internal auditing and standards defined by the Institute of Internal Auditors (IIA) and included:

  • A review of relevant background documentation;
  • Interviews with key corporate and program personnel; and,
  • An examination of corporate and program records and other supporting documentation (to determine if effective financial and program controls had been designed and implemented).

More specifically, the audit included an examination of 100% of contribution agreements under the Program and a statistical sample of related operating expenditures. 

Audit standards

The audit was conducted in accordance with the Internal Auditing Standards of the Government of Canada, as it incorporates the Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors.

Criteria

Audit criteria used by the Audit Branch to assess the adequacy of the ecoETI Program management control framework originated from the Office of the Comptroller General’s 2011 Horizontal Audit of Transfer Payments. The audit criteria were derived from Departmental and Treasury Board (TB) policies and procedures, applicable regulations and standards, including, but not limited to:

  • TB policies and directives on Transfer Payments in effect at the date of approved terms and conditions of the Program;  
  • TB Guide on Grants, Contributions and Other Transfer Payments  in effect at the date of approved terms and conditions of the Program;  
  • TB Guide to Preparing TB Submissions;
  • NRCan Departmental Policy on Transfer Payments (currently posted on Department website and last updated in 2009); and,
  • TB policy on Account Verification.

The audit criteria were approved by Program management prior to the commencement of the audit. Please refer to Appendix B for the audit criteria.

Findings and Recommendations

Program Administration

Summary Finding

The program was administered well with respect to:

  • Potential recipients had access to information about the Program;
  • Segregation of duties between receipt, evaluation and approval of project applications;
  • Project evaluations were conducted in accordance with approved eligibility criteria;
  • Standard agreement templates were developed, aligned with terms and conditions of the Program;
  • Changes to Contribution Agreements (CAs) and funding levels were documented;
  • CAs were certified under the Financial Administration Act (FAA) section 32 (i.e. that funds were available); and,
  • All contributions awarded over $25K awarded were disclosed.

In contrast, the audit noted a potential lack of transparency regarding retroactive expenditures and overhead payments.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Compliance Moderate Non compliance with TB Policy requirements regarding transparency may result in reputational damage to NRCAN pertaining to the treatment of retroactive expenditures and overhead costs.
Supporting Findings
Compliance With Existing Policies

Retroactive ExpendituresFootnote 1

Programs should manage their CAs “in a manner that respects sound stewardship and the highest level of integrity, transparency, and accountability”.  Programs should also be “designed, delivered and managed in a manner that is fair, accessible and effective for all involved” in accordance with the Treasury Board of Canada Policy on Transfer Payments;and should be applied in a manner that is consistent with the current NRCan Departmental Policy on Transfer PaymentsFootnote 2.

The audit team observed that the Program, with Centre of Expertise concurrence, approved the reimbursement of eligible expenses incurred by recipients prior to the signing of all 34 CAs reviewed.  The current Departmental Policy defines such expenses as “retroactive expenditures” which should only be made in “exceptional circumstances”. The Program’s terms and conditions (Ts & Cs) stated the eligibility period of April 1, 2008 to March 31, 2011. All retroactive expenditures were incurred inside this period; therefore, payments were compliant with the approved Ts & Cs.

The audit team observed that there was inconsistent guidance provided to applicants and recipients relating to retroactive expenditures in the Program Applicants Guide or in the Offer Letters.  Including clear information as to the applicability or availability of retroactive payments would help to ensure all applicants are informed about how and when this can be applied. The audit team also noted that when awarding retroactive expenditures, there was insufficient documentation to support the rationale of each recipient’s entitlement.

CAs are expected to be signed for future work intended to support the Program objective of “accelerating the development and market readiness of technology solutions in clean energy”,Footnote 3 not as a rebate for work that has already been completed.  There were 3 instances where CAs were signed on the last day of the fiscal year, which coincided with the completion date of the work performed. Two of these agreements were with the same recipient for a long-term project that had been separated into four separate CAs; the third related to a separate stand alone project with a different recipient.  

Overhead Costs

Eligible costs for the Program included the following item: “overhead expenses considered on a case-by-case basis”.  The “case-by-case” negotiation of overhead expenses lends itself to a high level of subjectivity and makes it difficult to apply the principles of “transparency”.  Given the level of subjectivity, a framework should have been developed, documented and followed when negotiating overhead expenses for all recipients.

There was no framework used for the negotiation of overhead expenses.  As a result, there was a wide variance in the overhead rates allowed to the recipients as per the signed CAs with no clear rationale for acceptance.  The audit team found overhead rates varied from 0% to 125% of salary expenses.  In the one extreme case of a 125% overhead rate paid, the rate was questioned by the Corporate Management and Services Sector at the time of payment of the claim; the claim was subsequently paid in full because the CA had been approved by the CoE.

As a best practice, a framework for the negotiation of overhead expenses should be “sensitive to risk” and consider the following potential impacts:

  • Negotiation on a “case-by-case basis” may be time consuming and may cause delays in the process of developing and approving CAs;
  • Overhead costs may be difficult to audit if the elements included are not clearly defined;
  • Overhead costs may include a profit component, which is inconsistent with the purpose of transfer payment programs;
  • May result in duplicate payments of expenses that are included both in the general overhead category and again as a separate eligible expense; and
  • May result in an inconsistent treatment of recipients.
Management Initiative

Service Standards were not required for this project, as the Treasury Board of Canada Secretariat issued a Guideline on Service Standards in September 2010, subsequent to the implementation of the ecoETI Program.  The management team of the Program recognizes the usefulness regarding service standards and is helping to develop Department-wide standards.  The audit team would like to take the opportunity to recognize the Program as a key player in the development of a service standard pilot project for the Department.  The efforts and contributions of this group have been recognized by the Treasury Board, and will provide a strong platform for future programs.

Recommendation
  1. The CoE, in conjunction with the Program, should ensure that retroactive expenditures and overhead costs are detailed in the Program Terms and Conditions and guidance documents to applicants and applied in a consistent manner.
  2. The CoE in conjunction with Programs should develop a departmental policy to clarify NRCan’s eligibility criteria for allowing retroactive expenditures in addition to defining what constitutes allowable overhead expenditures. 

Management Action Plan and Time Frame

1.   The Program agrees. The Program requires the use of the mechanism of retroactive expenditures for a large number of G&C agreements, in order to effectively deliver clean energy technology R&D and demonstration projects, which are often unique, large, and complex.

Retroactive expenditures which can be considered as a risk management tool are needed to meet both recipient and program budgetary & operational constraints, particularly in the first few years of a program, when multi-stage call-for-proposal processes are implemented.

From a recipient’s perspective, CAs can take a long time to negotiate depending on the project complexity.  The retroactivity option allows the recipient (at his own risk) to commence a number of tasks that have a long lead time, such as large equipment procurement, engineering studies, etc.   Once the CA is negotiated and signed, the project can get off the ground very quickly.

For this reason, the Sector is amending this and other program’s Terms & Conditions to obtain formal approval to apply retroactive payments for other contribution programs. The Sector is also better defining the eligibility of retroactive expenditures and overhead expenses in future program Terms & Conditions, Applicants’ Guides, and in other information provided to program applicants.

Timing:  December 9, 2011

1. & 2.
CMSS Management agrees. The CoE  continues to play a lead role in providing guidance on compliance with Treasury Board and NRCan Transfer Payment Policies, through, for example, its review of funding agreements and Terms and Conditions of Transfer Payments, and the resulting guidance to Programs.

In December, 2011, the CoE published a Bulletin on retroactive expenditures, which was followed by the posting of a Bulletin on overhead expenditures. 

Timing: December 9, 2011

Recent clarification of TB guidance issued April 2012 requires that G&C programs desiring the use of Retroactivity need to demonstrate a compelling rationale within their TB submission and contain details of this design feature within their Terms and Conditions. 

NRCan has ensured that new Programs comply with this recent clarification. The Department is actively ensuring that current G&C programs have a compelling rationale in cases where they seek to reimburse retroactive expenditures.  Corresponding amendments to Program Terms and Conditions will be actioned accordingly.

Timing: June 2012

The CoE, in consultation with Legal Services, Programs and TBS, has compiled a set of common and consistent Departmental criteria to be considered in the development of a Program’s case for Retroactivity.  Further, the CoE will update existing Departmental guidance.

Risk Based Control, Monitoring and Oversight

Summary Finding

The Program performed well with respect to:

  • Payment schedules were developed in accordance with approved terms and conditions, and the Directive on Transfer Payments;
  • Process ensuring that total funding amounts did not exceed expenditures;
  • Summary of the 3 year Transfer Payment Program was submitted to Treasury Board and included with Report on Plans and Priorities (RPP) and Departmental Performance Reports (DPR);
  • Program results communicated to senior management;
  • Program performance issues related to recipient reporting were identified and actions taken; and,
  • Program evaluations were conducted as planned, on various components of ecoETI.

The audit noted opportunities for improvement on:

  • Compliance with the requirements of the Financial Administration Act and the Policy on Transfer Payments;
  • Monitoring and auditing of individual recipients proportionate to their risk level and in accordance with the terms and conditions of the Program; and,
  • Reporting processes to support program review and the departmental performance measurement strategy for financial information.
RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Compliance Moderate Non-compliance with the TB Policy regarding risk management may result in the reimbursement of ineligible expenses.
Monitoring Moderate Not performing recipient audits on a timely basis results in the lost opportunity for early identification and correction of issues particularly with respect to overhead costs and retroactive expenditures.
Reporting Moderate Not reporting audit adjustments to CMSS on a timely basis leads to the misstatement of the Department Financial statements.
Supporting Findings
Supporting Documentation for Payment Approval

Programs are expected to manage transfer payments according to the Treasury Board of Canada Policy on Transfer Payments “in a manner that is sensitive to risk, that strikes an appropriate balance between control and flexibility, and that establishes the right combination of good management practices, streamlined administration and clear requirements for performance”.  The management of the Program should be sensitive to the risks associated with the subjective nature of overhead costs, and the reimbursement of retroactive expenditures.  An appropriate balance of risk management tools and methodologies should be used throughout life of Program such as detailed claims reviews, site visits and recipient audits. 

The audit team reviewed 100% of the CA files, and determined that 13 of the 34 signed CAs had claims submitted that included supporting documentation to allow for verification of eligible expenditures; the remaining 21 CAs did not.  Although allowable in the terms and conditions of the CAs, the Program did not ask recipients to submit any supporting documentation for incurred expenses, other than the certification by the recipient, to demonstrate the eligibility of the submitted claims.  The intent was to avoid the administrative burden to both recipients and program staff.  

Additionally, the recipient audit report from Audit Services Canada for one of the recipients noted that “The Recipient did not have sufficient procedures in place to verify that the amounts charged were incurred by the subcontractor and that they were eligible under the Agreement.  Contractor invoices were approved for payment by the recipient without sufficient knowledge of the details of the amounts being billed.”  This reinforces the need for supporting documentation review and timeliness of recipient audits.

Recipient Audit Plan

Programs are required to plan recipient audits according to the Treasury Board of Canada Policy on Transfer Payments, and more specifically “in a manner that is sensitive to risks, that strikes an appropriate balance between control and flexibility, and that establishes the right combination of good management practices, streamlined administration and clear requirements for performance”.

The Program’s recipient audit plan was: “to include a small sample audit of recipients receiving a low risk score, a moderate sample audit of recipients receiving a medium risk score, and a large sample audit of recipients receiving a high score”.  The Program’s funding also included a budget of 2% of the total contribution budget (i.e. approximately $1.5M based on the original allocation) that would have permitted between 30 and 60 recipient audits over the life of the Program.

At the time of the audit of the ecoETI Program, 2 recipient audits had been completed (one interim and one final audit) of the 34 signed CAs in place at June 2011.  Of the 34 CAs signed, 25 had reached completion. A further 15 recipient audits are planned, but due to supplier issues significant delays were experienced.  The Program has launched a Request for Proposal (RFP) process to find an external auditor to complete the recipient audits as planned. 

A greater reliance upon recipient audits, completed earlier in the life of the projects, would have provided greater assurance as part of a risk-based monitoring plan; particularly as there was minimal review of supporting documentation of recipient claims for the Program.

Recipient Audit Adjustment

The audit team found that:

  • The Program does not have a process in place to track and monitor potential recoveries after recipient audits are completed;
  • Recoveries are not being managed in accordance with the NRCan Accounts Receivable policy; and, 
  • There is a lack of understanding by Program staff of the difference between the terms “recoveries” and “overpayments”.

One of the two completed recipient audits identified an overpayment by NRCan in the amount of $200K on $900K claimed.  This amount has not been disbursed to the recipient, as they have been subject to a 100% holdback pending completion of an environmental assessment. Nevertheless, the $900K amount is still credited as a liability and should be offset with a $200K receivable to reflect NRCan’s net liability of $700K. 

The overpayment related primarily to risks identified above, specifically:

  • Expenditures incurred before the eligible period specified in the signed CA; and,
  • Expenditures deemed ineligible per the signed CA.

Recoveries should be credited either to the Vote or to the Receiver General in accordance with the Transfer Payments Policy.  Program staff planned to adjust for the overpayment through an amendment to the original CA; at the time of the audit the amendment had not been finalized.  No adjustment was recorded in the Department’s financial statements even though the recipient audit was completed in January, months before the deadline for year-end reporting. 

It is noted that there were cases where recoveries have been properly handled; nevertheless, the aforementioned example indicates improvements are required.

Management Initiative

The Program has initiated an action plan to review a sample of invoices and supporting claims for each recipient for which an audit report has not been received, for a total of 18 recipient audits.  The objective is to test whether there are material errors, whether there is sufficient data to support the claim, and whether the expenses claimed are eligible from a timing and eligibility criteria point of view.  The Program plans to select invoices for review either randomly or judgementally depending on the dollar amount or timeframe submitted (period before the CA was signed or after).  The Program has commissioned three Audit Readiness Reports for three of the larger Carbon Capture & Storage (CCS) projects.  These reports identified potential audit issues, presenting the opportunity for quick resolution, pending the completion of formal recipient audits, expected by March 31, 2012.

The Program has launched a RFP process to select a new auditor for CCS projects funded under the ecoETI & Clean Energy Fund (CEF) programs.  It is requesting quotations on a plan to complete seven ecoETI recipient audits by March 31, 2012.  There are 18 recipient audits planned in total for this program, over a multi-year period.  The Program hopes to continue to work with the auditor selected in future years, based on the quality of work completed and quality of working relationship developed with the auditor over this period of time.

Recommendations
  1. For all projects still in progress, a risk-based monitoring plan, with emphasis on recipients and claims that are of higher dollar value and risk, should be developed immediately and implemented by the Program to:
    1. review supporting documentation for claims on a sample basis; and,
    2. ensure that recipient audits are completed in a timely fashion to identify and address issues and adjustments promptly.
  2. The Program should ensure that all financial adjustments are recorded in a timely manner.  Guidance on how to account for adjustments resulting from recipient audits should be included as part of the standard G&C training provided by the CoE.
Management Action Plan and Time Frame

3.   The Program agrees. As part of a CoE-led initiative to reform the management of G&C agreements, the Program put in place a streamlined invoicing process, which includes measures to review supporting documentation via a Recipient Audit Plan that stipulated that all large projects and some of the smaller projects would be audited. As part of phase 1, the Program has completed 3 audits and 3 audit readiness reports. However, 8 audits planned under phase 2 were delayed when our auditors announced they could not complete these as planned. The Program has launched an RFP process to replace its auditors and plans to complete the 8 recipient audits over the next 6-9 months.

Regarding the need for a more detailed review of supporting documentation for claims submitted for reimbursement,  the Program is implementing a process to screen claims on a more regular and detailed  basis. The Program is implementing sample claims screening (an acceptable audit practice) and recipient audits on a more timely basis for new programs.

Timing:  December 9, 2011

4.   The Program agrees and is implementing internal procedures to track and monitor potential recoveries after a recipient audit, in accordance with the NRCan Accounts Receivable Policy.

Timing:  December 9, 2011

Governance Process

Summary Finding

Overall, the Program has an effective governance process for the design of the contribution program, particularly with respect to the following:

  • Objectives of the program reflect direction from the Government of Canada;
  • Documented rationale used in selection of transfer payment instrument (i.e. repayable vs. non-repayable contributions);
  • Program amendments were approved by the appropriate authority;
  • There is an evaluation plan for the program;
  • There is an appropriately designed communication plan through use of a website and applicants’ guide on objectives and eligibility criteria;
  • There is an oversight body for effective monitoring of objectives, strategies and results of the program; and,
  • Information Management/Information Technology controls are automated to the extent possible.

The audit team found that there is an opportunity to improve on the alignment of the governance process with internal and external communications.  There were specific opportunities to improve on the delivery and communication of the Program to external recipients, internal communication of roles, responsibilities and accountabilities, and to develop a consistent approach in providing G&C training.

RISK AND IMPACT
Risk Type Audit Risk Rating Impact
Reporting Minor Financial information not readily available for Program decision making or evaluation.
Compliance Moderate Communication to recipients is not transparent and may result in decisions that are inconsistent.
Operations Minor In the absence of better co-ordinated communication and training strategies, the Program is at risk of being unaware of applicable policies and directives in the management of Gs&Cs.
Supporting Findings
Financial Information

Total expenditures by vote must agree with the Treasury Board approved funding or, if any changes are necessary to meet program objectives, the appropriate process must be followed to make a vote transfer.  “Authority is required when an organization wants to do internal vote transfers or to transfer funds to another organization”Footnote 4; this authority is obtained via a Treasury Board Submission.

It was observed that approximately $84M of multi-year funds had been reallocated from Vote 1 (operating) to Vote 10 (G&C) via the Annual Reference Level Update (ARLU) process.  This transfer was done to reflect the changes in priorities but did not impact the total amount allocated to the Program.  The audit team noted that there was no documentation to support the changes made to the salaries and operating funding, even though the process followed to make these changes was appropriate.  This may create some uncertainty in committing funds for full time employees (FTEs) to support the effective management of the remaining life of the Program as the Program has received approval for a one year extension, with no discernable change in FTEs.  This will also impact the commitment of funds for scheduled recipient audits.

COMMUNICATION TO RECIPIENTS

An appropriate communication plan is essential for ensuring recipient awareness of objectives, eligibility criteria, and means of application and receiving, processing and decision-making with respect to funding applications.

The audit team observed an appropriately designed communication plan that included the use of a website and applicant’s guide.  However, the expenditure eligibility criteria, specifically regarding ‘retroactive expenditures’ and ‘overhead costs’, were not clearly communicated to all potential recipients through either the website or the applicants’ guide. 

Where retroactive expenditures are to be specifically allowed, it should be managed in a manner that is transparent for all recipients, and as such should be included as a Program feature in the Program documentation.  The ecoETI Program’s terms and conditions were silent on the topic of retroactive expenditures, as was the Applicants’ Guide previously posted on the Department’s website.  However, the Program intended that the “eligible period” implied that retroactive expenditures were allowable. Potential applicants to this Program may not have known that retroactive expenditures would be permitted, or to what extent, and what period would be covered, until the signing of a formal CA. 

Overhead costs were also not clearly communicated through the Applicants’ Guide or the Department’s website.  As noted previously, eligible costs for this program included “overhead expenses considered on a case-by-case basis”.  There was no further guidance/framework as to what rates would be acceptable or what costs could be included. 

COMMUNICATION AND TRAINING TO PROGRAM STAFF

The Program lacked a structured training program regarding G&C management and this led to inconsistencies in the way that staff understood their roles, responsibilities and accountabilities in the negotiation, monitoring and application of core CA components. To ensure program consistency, the Department would benefit from guidance provided by the CoE regarding clearly defined and communicated roles and responsibilities, training and guidelines, which can be met through a formally structured training program.

It was observed that there was no formal training program in place and that staff received information informally and at the discretion of individual program staff.  Although supplementary information is available on the Departmental website, it provides very basic information and does not always reflect the most current Treasury Board policies on Transfer Payments.  This increases the risk that the Program staff may not be aware of key components surrounding negotiation and application of policies and directives.

The audit team noted also that on several occasions, advice provided by the CoE to the ecoETI Program was not documented. This included guidance on allowing retroactive expenditures. Although it was confirmed by both parties that the advice was provided verbally, it was impossible to support this with documentary evidence.

Management Initiative

The Program has decided that the costs to administer the ecoETI Program in the additional year (2012-13) will be borne by other programs managed by OERD (PERD, CEF, ecoEII), and this would include the completion of activities that cannot be finished in 2011-12.  Program management will attempt to complete recipient audits as well as site visits in 2011-12.  In those cases where they cannot be completed in 2011-12, then they will complete these activities in 2012-13 with the incremental costs being covered by other programs.

Recommendations
  1. The Program should ensure that both program staff and potential recipients receive clear and consistent communication regarding the eligibility of expenditures.
  2. The CoE should provide advice and guidance in writing in order to maintain documentary evidence of its context and provision.
  3. The Program should ensure that G&C staff have completed the appropriate, formal training on:
    • the consistent application of policies; and
    • the accountabilities, roles and responsibilities within the context of grant and contribution programs.
Management Action Plan and Time Frame

5.   The Program agrees and will clearly communicate eligibility of retroactive expenditures and overhead costs, as applicable in the case of new and existing G&C agreements.

Timing:  December 9, 2011

CMSS Management agrees. As per the CoE’s implementation of its 3-year Gs & Cs Action Plan, a series of Departmental Directives and Guidelines were implemented and posted, in November 2011.  In December 2011, to further strengthen the Department’s management of transfer payments, the CoE published a Bulletin on retroactive expenditures, which was followed by the posting of a Bulletin on overhead expenditures. Guidance will be updated as required.

Timing: November 30, 2011

6.   Management agrees.  Effective November 30, 2011, the CoE had created a central repository of advice provided to ensure a consistent approach to maintaining advice and guidance for the following categories:

  •  Fundamental changes to Program design; and
  •  Policy interpretations concerning Transfer Payments.

Timing: November 30, 2011

In addition, The CoE has communicated the above-noted approach to the Program Consultation Team when the members met on January 11, 2012.  NRCan’s Program Consultation Team is comprised of Departmental managers and administrators of Transfer Payment Programs as well as functional experts.

Timing: January 11, 2012

The CoE continues to maintain documentary evidence relating to its advice and guidance.

7.   The Program agrees and has started identifying and providing required training for staff in order to bring everybody to the same level of knowledge of G&C management.

Timing: By end of December 2011

CMSS Management agrees.

Program management is responsible for ensuring that managers and administrators of Grants and Contributions programs participate in the Departmental training and any required program-specific training. 

The CoE provides regular training, as well as customized training to Program teams.  Key elements of the CoE’s training curriculum include:  training materials (e.g.; checklists, templates, and presentations) last revised in November 2011; and, the creation of video training modules, which were completed on February 28th, 2012.  The training includes such elements as:  roles and responsibilities in managing Gs&Cs; and the application of Gs&Cs Policy. 

Timing: February 28, 2012

As a note, in-class training was delivered to team members of the EcoETI Program on December 8, 2011.  Additionally, three training sessions were offered to the Department on February 9th and 10th, 2012.

The CoE continues to provide departmental training on Grants and Contributions, and will periodically review and revise its departmental training materials as required.

APPENDIX A – STANDARD INTERNAL AUDIT OPINIONS AND STANDARD AUDIT RISK RATING

Standard Risk Types

Standard risk types are classified based on the COSOFootnote 5 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

Audit Objective Criteria
1. The Department has in place effective and efficient governance processes for grant and contribution programs.

The organization has clearly defined and communicated strategic directions and strategic objectives aligned with its mandate.
1.1 Management has an effective control framework for the design and delivery of grant and contribution programs.
1.2 Roles, responsibilities and accountabilities are clearly defined and communicated.
2. Programs are administered with due diligence and transparency in accordance with the approved terms and conditions. 2.1 Program Promotion and recipient application is conducted in a manner that is fair and accessible.
2.2 There are transparent control processes to ensure the consistent assessment and approval of projects to meet the objectives of the program.
2.3 Recipient agreements are consistently developed through a process that is tailored to address risk and recipient requirements.
2.4 Grants and contribution over $25,000 are disclosed in accordance with proactive disclosure requirements.
2.5 Collaboration exists within and among departments to harmonize grant and contribution programs and to standardize recipient requirements.
2.6 The department has a strategy to implement service standards. 
2.7 Recipients are engaged in support of transparency, innovation and continuous improvement.
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.
3.1 Recipient payments are made in compliance with the requirements of the Financial Administration Act (FAA) and the Directive on Transfer Payments.
3.2 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.
3.3 There are monitoring and reporting processes in place to support program review and the departmental performance measurement strategy.