Audit of 2009 Strategic Review Implementation Project AU1208

Executive Summary

BACKGROUND

The Government of Canada introduced a new expenditure management system in 2007 to ensure value for money for all government spending. Strategic Review is a key element of this system and it is designed to provide Cabinet with ongoing advice with respect to aligning spending to government priorities and ensuring performance as well as value for money. Each department is required to undertake a Strategic Review of 100 percent of its direct program spending and the operating costs of its major statutory programs once every four years.

Natural Resources Canada (NRCan) completed its first Strategic Review in the Fall of 2009 after a 5 month comprehensive program assessment. The final report was delivered to Treasury Board Secretariat (TBS) in October 2009. A total of 23 initiatives were approved for implementation and these were included in Budget 2010. As a result, the Department started a 3 year implementation program in 2010-11, and is moving towards its completion by the end of 2012-13. When Strategic Review is fully implemented these initiatives will result in $43.3 million of on-going annual cost reductions.

While there was no direct re-investment from the $43.3 million in cost savings, NRCan did receive new money in Budget 2010. Specifically the budget provided money for the following programs:

  • Next-generation Renewable Power Initiative $100 million
  • Production of Isotopes $35 million
  • GeoConnections $11 million
  • Targeted Geoscience Initiative $12 million

AUDIT OBJECTIVES

The purpose of this audit was to provide reasonable assurance that the required financial and non-financial reallocation measures are being implemented, monitored and reported on in a timely manner.

SCOPE

There were 23 initiatives in the amount of $43.3 million approved in the 2009 Strategic Review and all have been included within the scope of this audit. The audit covered the implementation period of April 1st, 2010 to March 31st, 2012.

STRENGTHS

The Strategic Review Implementation Plan provides a comprehensive management framework document that was communicated to the various stakeholders in support of the implementation activities.

It is evident that all budget reductions were implemented at NRCan Sector level.

AREAS FOR IMPROVEMENT

The Strategic Review Implementation did have a detailed management framework that included processes, principles, roles and responsibilities, communication activities, HR strategy, and monitoring and reporting requirements. The monitoring and reporting component would have added more value if it had included more detailed reporting of actual financial and non-financial results against the reduction plan of $43.3 million.

AUDIT CONCLUSION AND OPINION

While the Audit Branch can provide reasonable assurance that all Strategic Review financial reductions were implemented at the specific program level, reasonable assurance cannot be provided that the specific savings were realized as identified in the approved plan.

In my opinion, there is opportunity for NRCan to improve the monitoring and reporting of future expenditure reductions.

STATEMENT OF ASSURANCE

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the opinion provided and contained in this report. The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed on with management. The opinion is applicable only to the entity examined.

Christian Asselin CA, CMA, CFE
Chief Audit Executive
Audit Branch

TABLE OF CONTENTS

INTRODUCTION

BACKGROUND

The Government of Canada introduced a new expenditure management system in 2007 to ensure value for money for all government spending. Strategic Review is a key element of this system and it is designed to provide Cabinet with ongoing advice with respect to aligning spending to government priorities and ensuring performance as well as value for money. Each department is required to undertake a Strategic Review of 100 percent of its direct program spending and the operating costs of its major statutory programs once every four years.

Strategic Reviews have been designed to ensure that every government program is achieving results for Canadians. Through this process, all programs must demonstrate that they are effective and efficient, focus on core federal roles, and meet the changing needs of Canadians. Strategic reviews are proving to be an effective tool in helping to control spending growth by providing a mechanism for reviewing the performance and relevance of existing programs and their alignment with government priorities.Footnote 1

In fulfilling Natural Resource Canada’s (NRCan’s) obligation, a comprehensive program assessment and strategic planning exercise was conducted in the Department over a 5 month period. NRCan delivered its final Strategic Review report to the Treasury Board Secretariat (TBS) in October 2009 after this exercise. The final report proposed 24 initiatives in the amount of $55.4 million, staged over three years. Reallocations are the operational changes required to realize reductions, eliminate activities, or make efficiency improvements in a department.

Twenty-three initiatives were included in Budget 2010. Appendix B provides the highlights of these reductions by fiscal year, expenditure type and sectors. As a result, the Department started a 3-year implementation program in 2010-11, and is moving towards its completion by the end of 2012-13. At that time, NRCan should have fully implemented these initiatives resulting in $43.3 million of on-going yearly cost reductions.

While no direct re-investment was made from the $43.3 million in cost savings, NRCan did receive new money in Budget 2010. Specifically the budget provided money for the following programs:

  • Next-generation Renewable Power Initiative $100 million
  • Production of Isotopes $35 million
  • GeoConnections $11 million
  • Targeted Geoscience Initiative $12 million

AUDIT OBJECTIVE

The NRCan Risk-Based Audit Plan for 2011-12 included an assurance audit of the Strategic Review Implementation.

Specifically, this audit was intended to provide reasonable assurance that the required financial and non-financial reallocation measures are being implemented, monitored and reported on in a timely manner.

DEPARTMENTAL RISKS

Based on analysis of the Strategic Review Implementation, the following were identified as the principal risks to the achievement of NRCan’s deliverables with respect to implementation process:

  • Risk that reporting and monitoring of operational and financial information is not taking place as required in order to ensure the reliability and integrity of financial and operational information.
  • Inherent risk, probability or likelihood of weaknesses in the management control framework due to the complexity of the process and the multiplicity of sectors involved.
  • Inherent risk, probability or likelihood of non-completion of reallocation requirements by one or more Sectors.
  • Inherent risk, probability or likelihood of not meeting the expected deadlines.

SCOPE AND METHODOLOGY

The planning and conducting of the audit were based on professional standards to ensure that the audit’s findings and conclusions would be appropriate and consistent with the evidence collected. The internal audit process involved three main phases – planning, conducting and reporting – each of which is subject to a quality assurance peer review.

There were 23 initiatives in the amount of $43.3 million approved in the 2009 Strategic Review that were included within the scope of this audit. The audit covered the implementation period of April 1, 2010 to March 31, 2012.

The audit approach addressed the stated objective against the audit criteria developed during the planning phase. Observations, assessments and conclusions were drawn using a detailed audit program to carry-out audit testing. Interviews with management and the process owners were completed, as well as the identification and documentation of the key processes and controls, the control objectives for those activities, those responsible for performing the key controls and the risks related to these activities. It was necessary to evaluate the control design and ensure that the controls are working as intended by testing the results obtained.

AUDIT CRITERIA

Audit criteria are reasonable standards of performance and control that are used by the Audit Branch to assess the adequacy of NRCan’s Strategic Review implementation process and practices. The criteria were developed to guide the audit conduct and form the basis for developing the audit testing activities and against which the overall audit conclusion and reporting is derived.

The specific audit criteria developed for this audit were:

  1. The organization has in place operational plans and objectives aimed at achieving the Strategic Review implementation objectives.
  2. The approved financial and non-financial reallocations have been implemented.
  3. Implementation of the reallocation process is being monitored.
  4. Reports are being submitted as required to Senior Management.

FINDINGS AND RECOMMENDATIONS

OPERATIONAL PLANS ARE IN PLACE

Summary Finding

Overall, NRCan has in place the required operational plans aimed at achieving the Strategic Review implementation objectives. The Department is committed to meet the spirit and intent of the reallocation commitments it made through Strategic Review 2009. TB approved reallocations were announced in Budget 2010. The Department is implementing these reductions over a 3-year period from April 1, 2010 to March 31, 2013.

Supporting Observations

NRCan’s commitment to Strategic Review is evident by the documented management framework that was developed to support the implementation plans being carried out for the 23 approved initiatives. This management framework describes the processes, principles, roles and responsibilities, communication activities, HR strategy, risks, monitoring and reporting requirements, as well as the detailed operational plans for each of the initiatives that required implementation. Each reallocation implementation plan presents details as to the quantitative planned reductions, as well has some qualitative measures needed to meet the commitment the Department made to achieve the cost savings. The Assistant Deputy Ministers (ADMs) from impacted Sectors (Canadian Forest Service, Energy, Earth Sciences, Minerals and Metals and Innovation and Energy Technology) concerned have identified the lead Directors General (DGs) to implement, manage and monitor their Sector specific reallocations. An overview of the management framework applied to Strategic Review is presented in Appendix A.

The operational plan, included in the management framework, was effective April 1, 2010 and demonstrates, for each reallocation, the specific operational changes required to realize the reductions, eliminate activities or make efficiency improvements over the 3-year period. These detailed plans demonstrate for each reallocation activity how the financial and non-financial objectives will be attained and who is responsible for attaining the objectives established in order to ensure that NRCan will have fully implemented the suite of reallocations by 2012-13.

The management framework included a Corporate Human Resources Implementation Strategy. The Strategy included direction with respect to dealing with the 178 staff that were affected by Strategic Review. These strategies include the following:

  • Job Placement – Staff implicated by Strategic Review could be placed into an equivalent vacant position with similar job requirements;
  • Attrition – Many of the reallocation plans included achieving reductions from employee retirement or resignations;
  • Termination of Term Employment – Staff in term positions could be terminated when there was no longer a need for their position; and
  • Work Force Adjustment – This program identifies the employer’s obligations to an indeterminate employee once a decision has been made that the employee’s services will no longer be required beyond a specific date.

While the initial Human Resources plan identified potentially 66 staff that would be managed through Work Force Adjustment, in fact only 14 had to be managed through the program. This was consistent with the Department’s commitment to support staff and minimize staff impacted by Strategic Review.

REALLOCATIONS ARE BEING IMPLEMENTED

Summary Finding

The implementation plan indicated that at the end of the 3-year implementation period in 2012-13, NRCan will have fully implemented the suite of reallocations approved in Budget 2010, resulting in $43.3 million of on-going reductions. The audit team confirmed that Sectors budgets were in fact reduced by the amounts indicated in the plan.

Supporting Observations

The governance component of the management framework for the Strategic Review implementation specified that the ADMs were accountable and responsible to deliver both the financial and the non-financial reallocation commitments for their respective Sectors. As well, Sectors DGs were tasked with ensuring that reallocations were advancing, as detailed in the Strategic Review plan, as they were approved.

The audit team confirmed that funding for the programs impacted was eliminated or reduced at the beginning of each fiscal year as per the reallocation schedule and found no discrepancies. The financial objectives are presented in Appendix B by fiscal year, by Sector and by expenditure type. The funding control was recognized as a key preventive control that removed or reduced the budget available to the program activity. This measure forced the Sectors to manage with reduced funding, putting financial pressures in each fiscal year to reduce or eliminate the activities identified by the implementation plan. This funding control was implemented by the Corporate Management and Services Sector. The Sector received funding at the reduced reference levels for the program activity specified by each reallocation. The specific programs within each Sector then further developed their budget control to the specific areas of responsibility covered by each of the reallocations.

IMPLEMENTATION IS MONITORED

Summary Finding

Although the budgets were decreased in accordance with the approved reductions, there was limited analysis of financial and non-financial information with respect to the detailed expenditure reductions achieved against the approved Strategic Review plan.

Supporting Observations

The Science and Policy Integration (SPI) Sector has developed a standard self-assessment reporting template that is sent to Sector ADMs and DGs twice a year. The focus of the Sectors’ self-assessment report is the monitoring of the actual implementation activities. Information and results obtained are analyzed, rolled-up and presented to the senior management Executive Committees twice a year as part of departmental financial review.

At the time of the audit, there was limited formal financial and/or non-financial information reported that would confirm that the expenditure reductions have occurred in accordance with the baseline reduction plan. There was no specific financial reporting to verify that the reductions of $43.3 million are being realized in accordance with the baseline 3-year financial implementation plan objectives. While there is detailed information for staff managed through the Work Force Adjustment ProgramFootnote 2, there was limited information for staff managed through other HR strategies i.e. attrition or job placement. In August 2011 the Department started reporting information for staff that were being placed through job placement or were leaving due to retirement or resignation.

The reporting requirement for Strategic Review only required confirmation that the plan has been implemented. It did not require confirmation that specific costs were no longer being incurred. The plan did not establish performance measures to monitor against. It was evident to the audit team that certain programs were no longer being promoted and/or that grants and contributions costs were reduced or eliminated. It was more difficult to determine whether operating and maintenance costs were reduced since these costs were not necessarily identified by a unique cost centre. Interviews with the Financial Management Branch and the DGs of the impacted Sectors confirmed that they were not tracking these specific reductions as they had the monies deducted from their respective budgets upfront and therefore were making the necessary reductions across all operating and maintenance expenditures.

More specifically, tracking salaries and staff reductions was very difficult. Sectors confirmed that timely implementation of the HR component of the reallocations has been more difficult than originally planned. HR reductions were identified in the implementation plans and the funding was reduced as of the first day of each fiscal year, however, in some cases, the reductions were only realized near the end of the year or in subsequent fiscal years. Sectors tried to risk manage the positions and worked to find vacancies for affected staff. Of the 178 positions eliminated through Strategic Review only 14 had to be managed through the Work Force Adjustment Program. This program runs approximately 12 months before NRCan is no longer incurring salary costs, hence the delay in the termination of costs.

There is no question that 100% of the proposed reductions were deducted upfront from the budgets at the beginning of each fiscal year. Nevertheless, it is difficult to assess whether proposed activities associated with these reductions were also reduced or eliminated.

The Strategic Review total reduction amount was a very small portion of the overall NRCan budget. This was not the only reduction the Department was dealing with during this period. Operating and maintenance funding had been frozen, funding was transferred to Shared Services Canada as part of that initiative, several programs that were being funded over a fixed period were coming to an end and TB had advised that Budget 2012 would bring further spending reductions.

Risk and Impact

There is a risk that reductions for approved programs and/or activities identified in Strategic Review may not be fully achieved.

There is value in measuring and documenting the actual results obtained against the baseline objectives. Good financial and non-financial analysis is required for decision making. Conducting this analysis would provide monitoring and reporting information of the actual financial resources reduction relative to the initial budget baseline financial results. However, the audit team recognizes that this was not a requirement at the implementation of Strategic Review and because of other constraints that were happening at the same time it would be very time consuming and not necessarily value added to go back and try to ascertain and document where the specific operating and maintenance reductions were implemented. As Sector budgets have been reduced, the audit team considers this to be a minor risk however the Department does need appropriate measures and tools to better monitor and manage future expenditure reductions.

Recommendation

1. The Chief Financial Officer (CFO) in partnership with Science and Policy Integration and the Sectors should ensure that the necessary controls and mechanisms are in place to confirm that any future expenditure review initiatives are being implemented in accordance with the approved plan. This includes providing the tools and templates necessary to collect actual information against any targeted reductions with regular reports to Senior Management for decision making.

Management Action Plan

Management agrees with both recommendations.

The ADM of SPI and the CFO will establish a planning, monitoring and reporting framework, covering both non-financial and financial information, to track progress in implementing future expenditure reductions including Budget 2012 reductions. Together, the CFO and the ADM of SPI will work with colleagues (e.g., DG of Human Resources in the case of workforce adjustment) to put in place the necessary controls, mechanisms, tools and templates to ensure spending reductions are implemented in accordance with approved plans. Additionally, the CFO and the ADM of SPI will work with Sector ADMs to coordinate quarterly reports to the NRCan Executive Committee on financial and non-financial indicators, respectively, to ensure the department provides timely information to enable decision making and meets external reporting requirements.

Completion Dates:

Framework – June 2012

Controls, mechanisms, tools and templates – June 2012

Beginning in summer 2012, quarterly reports both internally to the Executive Committee and externally to the Treasury Board Secretariat, and as required.

REPORTING TO SENIOR MANAGEMENT

Summary Finding

Overall, Strategic Review implementation status is reported to NRCan’s senior management on a timely basis, however, the information provided did not have sufficient key performance indicators to measure actual results against the proposed implementation plan.

Supporting Observations

The status on the Strategic Review implementation is reported to Executive Committee twice a year. The process involves the SPI Sector sending a standard reporting template that is completed for each of the approved reallocations by the affected Sector. Once the reporting templates are completed, the Sector senior management will review and sign-off on the self-assessment before the information is communicated to SPI.

SPI completes a review of the results presented by each Sector. The performance status based on the self-assessment is rolled-up and presented to the Executive Committee. For the fiscal year 2010-11, the performance results presentation to the Executive Committee occurred on June 1, 2011, while the most recent results for the Mid-Year 2011-12, where presented on November 9, 2011.

The progress reports presented to the Executive Committee report on the Strategic Review implementation performance results as well as the status of the programs’ funding reductions as per the baseline plan objectives. The reports also show the status of the program direction changes laid out in the implementation plan and the implementation areas that require attention.

The initial plans did provide very specific information with respect to the number of staff that would be impacted however other non-financial measures such as dates for programs to be closed or activities to be eliminated were not always included.

The audit team confirmed that the existing reporting is in compliance with the established management framework for Strategic Review. More detailed information would be useful to the Executive Committee as it would provide further assurance that expenditures and programs are being reduced in accordance with the detailed plan.

Risk and Impact

There is a risk that reductions for approved programs and/or activities identified in Strategic Review may not be fully achieved. Without detailed reporting on actual expenditure reductions and key performance indicators for reductions activities Senior Management may not have sufficient information for decision making.

The audit team recognizes that this was not a requirement at the implementation of Strategic Review however reporting this information to Senior Management on a regular basis allows the Department to take corrective action where necessary to ensure that reductions are realized as required.

Recommendation

2. The Assistant Deputy Minister of Science and Policy Integration in partnership with the CFO and the Sectors should ensure that any future expenditure review targets include non-financial performance indicators that are monitored against actual performance results for regular reporting to Senior Management.

Management Action Plan

Same response as for Recommendation 1.

Management agrees with both recommendations.

The ADM of SPI and the CFO will establish a planning, monitoring and reporting framework, covering both non-financial and financial information, to track progress in implementing future expenditure reductions including Budget 2012 reductions. Together, the CFO and the ADM of SPI will work with colleagues (e.g., DG of Human Resources in the case of workforce adjustment) to put in place the necessary controls, mechanisms, tools and templates to ensure spending reductions are implemented in accordance with approved plans. Additionally, the CFO and the ADM of SPI will work with Sector ADMs to coordinate quarterly reports to the NRCan Executive Committee on financial and non-financial indicators, respectively, to ensure the department provides timely information to enable decision making and meets external reporting requirements.

Completion Dates:

Framework – June 2012

Controls, mechanisms, tools and templates – June 2012

Beginning in summer 2012, quarterly reports both internally to the Executive Committee and externally to the Treasury Board Secretariat, and as required.

APPENDIX A - MANAGEMENT FRAMEWORK OVERVIEW

Management Framework Overview

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text version - Appendix A

APPENDIX A - MANAGEMENT FRAMEWORK OVERVIEW

Appendix A is a 4 column table that provides an overview of the management framework used for Strategic Review. The first column identifies the Department of NRCan. It identifies how reallocations for strategic review were approved by Treasury Board. It also demonstrates that NRCan designed and implemented a Department specific management framework that included processes and principles, roles and responsibilities, communications, human resources strategy, monitoring and reporting and implementation plans. It also indicates that the Executive Committee at NRCan will be reviewing implementation progress twice per year. The second column identifies Corporate Management Services who are responsible for implementing reference level reductions at the program activity architecture level. The third column identifies the Science and Policy Integration Sector which is responsible for preparing monitoring templates, reviewing and rolling up non-financial information and reporting results to Executive Committee twice per year. The fourth column identifies the responsibility for each Sector which includes implementing budget reductions at the responsibility/fund centre level, implementing non-financial activities, and completing reporting templates.

APPENDIX B - STRATEGIC REVIEW FINANCIAL OBJECTIVES

Cumulative Reductions by Fiscal Year
Fiscal Year Total
$000
Total %
2010-2011 $22,615 52%
2011-2012 $37,353 86%
2012-2013 $43,288 100%
Total ongoing at 2012-2013 $43,288 100%
Reductions by Sector
Sector Number of
Initiatives
Number of
Full Time Equivalents
Total
$000
Total %
Canadian Forest Service 1 1 $395 1%
Energy 8 36 $14,168 33%
Earth Sciences 6 77 $13,714 32%
Innovation and Energy Technology 4 36 $11,985 27%
Minerals and Metals 4 22 $3,026 7%
Internal Services - 6Footnote 3 - -
Total ongoing at 2012-13 23 178 $43,288 100%

Reductions by Expenditure Type
Expenditure Type Total
$000
Total %
Internal Services $1,887 4%
Operating and Maintenance & Capital $25,296 58%
Grants and Contributions $16,105 37%
Total ongoing at 2012-13 $43,288 100%

APPENDIX C - STANDARD INTERNAL AUDIT RISK TYPES AND RATINGS

STANDARD RISK TYPES

Our standard risk types are classified based on the COSOFootnote 4 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.