Audit of NRCan’s Implementation of the Economic Action Plan 2012 Project AU1302

TABLE OF CONTENTS

• EXECUTIVE SUMMARY
  • Audit Purpose and Objectives
  • Scope
  • Strengths
  • Areas for Improvement
  • Audit Conclusion and Opinion
  • Statement of Conformance
• INTRODUCTION
  • Audit Purpose and Objectives
  • Scope and Methodology
  • Criteria
• FINDINGS AND RECOMMENDATIONS
  • Establishment of a Management Control Framework
  • Cost Reduction Initiatives have been Implemented
• APPENDIX A – STANDARD RISK TYPES AND AUDIT RATINGS
• APPENDIX B – AUDIT OBJECTIVES AND CRITERIA

Executive Summary

In 2011-2012, federal departments and agencies were required to complete a comprehensive review of expenditures with the objective of identifying opportunities to enhance the efficiency and effectiveness of operations, services and programs that would result in cost savings.

Natural Resources Canada (NRCan) was part of this review and cost savings process, the results of which were included and approved in Budget 2012. Budget 2012 approved $107 million^{Footnote 1} in cost savings within NRCan, which is equivalent to approximately 10% of the review base for the Department. Savings are to be phased in over a 3 year period. A total of fifteen higher level projects comprised of fifty-five cost savings initiatives from across all Sectors in the area of personnel & employee benefits, operating & maintenance (O&M) and grants & contributions (G&Cs) have been approved as part of the Budget 2012 reduction plan.

To implement the personnel reduction, NRCan used the Government of Canada “Work Force Adjustment” (WFA) directive, a procedure which allows the deputy head to decide that the services of indeterminate employees will no longer be required beyond a specified date.

NRCan’s Risk-Based Audit Plan 2012-2015, approved by the Departmental Audit Committee on April 12, 2012, identified an audit of the Implementation of the Economic Action Plan 2012 (EAP 2012) as a “High Audit Priority.” This audit was selected for several reasons, notably, the risks associated with the implementation of the Departmental reductions to ensure compliance with the federal government directives and achieve the set targets.

AUDIT PURPOSE AND OBJECTIVES

The overall purpose of the audit was to provide reasonable assurance on the two following objectives:

• NRCan’s overall management framework (plans, communication, monitoring, governance and reporting) supported the Departments implementation of the EAP 2012, and
• The initiatives identified in NRCan’s implementation of EAP 2012 were being implemented as set-out in NRCan’s contribution to the GoC’s Economic Action Plan (Budget 2012) and in compliance with appropriate guidelines and policies.

SCOPE

The audit reviewed NRCan’s implementation of the EAP 2012 cost reduction initiatives and supporting management control framework. The scope of the audit focused on the activities identified for reduction in FY 2012 and also included the monitoring and oversight mechanisms which remain relevant in future years.

STRENGTHS

NRCan has set up an overall management framework to support the implementation of the Department’s EAP 2012. Plans were established that included objectives and targets; actions and resources were communicated to staff; a governance framework was set up to provide monitoring and oversight; and required reports are being submitted to both Senior Management and Treasury Board.

The cost reduction initiatives have been implemented as set-out in NRCan’s contribution to the GoC’s Economic Action Plan (Budget 2012) and in compliance with appropriate guidelines and policies. The overall WFA process including communication and providing the necessary resources and tools to WFA employees was well managed. All WFA actions reviewed showed timely notification to employees and were in accordance with the activities approved in the implementation plans.

AREAS FOR IMPROVEMENT

Improvement is required to ensure Quarterly Reports are completed in a timely manner. Timely reporting of information improves the communication of results and reporting of outcomes for the implementation of the EAP 2012 initiatives. This improvement will allow Senior Management to quickly respond to challenges as they arise.

AUDIT CONCLUSION AND OPINION

Reasonable assurance can be provided that NRCan’s has developed and implemented an adequate management control framework including planning, communication, monitoring and oversight of the Department’s implementation of EAP 2012. Sufficient evidence was also available to confirm that cost reduction initiatives are being implemented as set-out in Budget 2012 and in compliance with appropriate guidelines and policies.

In my opinion, NRCan’s implementation of EAP 2012 is meeting the corporate commitments as set-out in Budget 2012; however an opportunity exists to strengthen the internal reporting process by improving the timeliness of internal quarterly reports. This will help ensure the reliability and completeness of future reporting on the implementation of EAP 2012.

STATEMENT OF CONFORMANCE

In my professional judgement as Chief Audit Executive the audit conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the internal Quality Assurance and Improvement Program (QAIP).

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

INTRODUCTION

In 2011-2012, federal departments and agencies were required to complete a comprehensive review of expenditures with the objective of identifying opportunities to enhance the efficiency and effectiveness of operations, services and programs that would result in cost savings.

Of the $75.3B in direct program spending examined across Government, $5.2B was identified for savings, representing 6.9% of the review base.^{Footnote 2} Natural Resources Canada (NRCan) was part of this review and cost savings process. Following NRCan’s internal review and Treasury Board (TB) decision, the resultant cost saving measures were approved in Budget 2012.

Budget 2012 approved $107 million* in cost savings which is equivalent to approximately 10% of the review base for the Department. A total of fifteen higher level projects comprised of fifty-five cost savings initiatives from across all Sectors in the area of personnel & employee benefits, operating & maintenance (O&M) and grants & contributions (G&Cs) have been approved as part of the Budget 2012 reduction plan. Personnel & employee benefits represent 23%, O&M 25% and G&Cs 52% of the total annual savings of $107 million.

The funding reductions associated with NRCan’s contributions to the Economic Action Plan (EAP) initiative are being phased in over a 3 year period as follows:

Table 1: Total Annual Budget Reductions

	Annual Reductions ($ Millions)
April 1, 2012	67.8
April 1, 2013	84.7
April 1, 2014	107*
Ongoing Annual Reductions	107*

*Does not include $5M Horizontal Review for the International Assistance Envelope

To implement the personnel reduction, NRCan used the Government of Canada “Work Force Adjustment” (WFA) directive, a procedure which allows the deputy head to decide that the services of indeterminate employees will no longer be required beyond a specified date because of:

• A lack of work;
• The discontinuance of a function;
• A relocation in which the employee does not wish to relocate; or
• An alternative delivery initiative.”^{Footnote 3}

A total of 394 NRCan employees received notice in April 2012 that their positions were affected by the budget reduction exercise. This meant one of two things:

1. The employees positions were eliminated and the affected employee would be part of the Work Force Adjustment program; or
2. The overall number of positions was being reduced and current employees in those positions would be subject to a selection for retention process. Staff that were not successful in this process would be part of the Work Force Adjustment program.

All employees affected by WFA have been notified, thus NRCan is not expecting additional reductions to staffing in the remaining two years of reductions arising from Budget 2012 implementation. Where possible, the Government of Canada has matched employees who were not successful in the selection for retention process to equivalent positions within the Department or Public Service. This process is referred to as “Alternation”. It allowed employees who wanted to leave the Public Service to switch positions with an employee affected by WFA and who wished to remain in the Public Service.

The Risk-Based Audit Plan 2012-2015, approved by the Departmental Audit Committee on April 12, 2012, identified the Audit of NRCan’s Implementation of the Economic Action Plan 2012 as a “High Audit Priority.” This project was selected for several reasons, notably, the risks associated with the implementation of the Departmental reductions to ensure compliance with the federal government directives and achieve the set targets.

AUDIT PURPOSE AND OBJECTIVES

The overall purpose of the audit was to provide reasonable assurance on the two following objectives:

• NRCan’s overall management framework (plans, communication, monitoring, governance and reporting) supported the Departments implementation of the EAP 2012, and
• The initiatives identified in NRCan’s implementation of EAP 2012 were being implemented as set-out in NRCan’s contribution to the GoC’s Economic Action Plan (Budget 2012) and in compliance with appropriate guidelines and policies.

SCOPE AND METHODOLOGY

The audit reviewed NRCan’s implementation of the EAP 2012 cost reduction initiatives and supporting management control framework. The scope of the audit focused on the activities identified for reduction in FY 2012 and also included the monitoring and oversight mechanisms which will remain relevant in future years. The audit conduct stage was completed in May 2013.

The audit methodology was based on internal auditing guidelines and included:

• Reviewing key documents and relevant background documentation including implementation plans, Treasury Board Secretariat (TBS) reports, tools and resources made available to assist with WFA;
• Reviewing business and operational plans;
• Interviews with the key personnel responsible for monitoring, reporting and oversight;
• Reviewing pay and benefits files and HR processes for WFA;
• Reviewing internal and external communications; and
• Reviewing financial and non financial reporting processes and outputs.

A judgemental sample of 12 cost reduction initiatives were selected from a total of 55 initiatives. Initiatives were selected with consideration given to the following factors:

• Materiality;
• Risk assessments completed by the Science & Policy Integration Sector (SPI);
• Sector representation;
• Areas of cost reduction (Personnel & Employee Benefits, Grants & Contributions, Operating & Maintenance); and
• Type of project to include representation of major classification of initiatives.

Table 2: Summary of Initiatives Reviewed

	FY 12/13 $ (000’s)	# of positions affected for WFA
Total of 12 cost reduction initiatives reviewed	$47,482	100

In addition, a judgemental sample of payments made to 18 WFA employees was selected to review the accuracy of the severance and transitional support measure (TSM) calculations.

CRITERIA

The audit criteria selected for this engagement were developed from generally accepted and reasonable standards of performance and control, the Treasury Board of Canada’s Core Management Controls and the relevant associated polices. The criteria were approved by management prior to the commencement of the audit. Please refer to Appendix B.

FINDINGS AND RECOMMENDATIONS

ESTABLISHMENT OF A MANAGEMENT CONTROL FRAMEWORK

Summary Finding

NRCan has developed and implemented an adequate management control framework to support the planning, communication, monitoring and oversight of Economic Action Plan 2012 budget reductions. Not all Sectors are completing internal quarterly reports on a timely basis which could impact the reliability and completeness of future reporting on the implementation of EAP 2012.

Supporting Findings

Establishment of Operational Plans and Objectives

The audit team reviewed the planning process for the implementation of EAP 2012 at both the corporate and sector level. Interviews were held with key individuals responsible for developing the operational plans and objectives and approving the cost reduction initiatives selected in our sample.

Various committees had major roles in the planning of EAP 2012. The Science & Policy Integration Sector (SPI) was responsible for managing the overall planning process for NRCan’s cost reduction initiatives. The SPI worked with the Sectors to develop and review the proposals and supported the Strategic Operating Review (SOR) Secretariat which provided information to the Minister on the cost reduction initiatives.

Each Sector was responsible for planning and submitting proposals for potential cost savings in their sector. With input from NRCan’s Executive Committee, cost saving initiatives were finalized and approved. At this time, final decisions were made regarding where the funding would be reduced and the amount and timing of reductions.

The review of documentation demonstrated that detailed implementation plans were created for all cost saving initiatives. These plans identified the areas to be reduced, risk mitigation strategies, communication strategies, reduction targets, deadlines and responsible individuals.

The audit team reviewed documentation and conducted several interviews to conclude that the planning process was well established and supported by various committees and levels of senior management.

Communication of Plans and Objectives

On March 29, 2012 the Government of Canada tabled its Budget: the Economic Action Plan 2012. On April 10, 2012, the Deputy Minister (DM) at NRCan held a Department wide webcast, to present the implications of EAP 2012 for NRCan. This announcement communicated the need for adjustment, NRCan’s expenditure reductions and the process of adjustment and identifying opportunities for affected employees. Following the DM’s announcement, each Sector held their own meetings with staff to provide specific information on how the cost reduction initiatives would affect their sector.

Following the DM’s announcement, information was made available and communicated to NRCan staff through dedicated web pages on the Departmental Intranet site known as the Source and on the NRCan Resource Wiki, a collaborative website. Information was also communicated by email and in person.

The Budget 2012 page on the Source, was created to help keep NRCan employees informed about the EAP 2012 and its implications for NRCan. Employees were able to access Budget 2012 documents, DM Speech, DM Messages sent via email, Fact Sheets and Questions & Answers. The page also included links to NRCan’s Wiki pages on Workforce Adjustment (WFA) and Alternation, where employees could find additional documents, questions and answers pertaining to these subjects.

Numerous tools and resources were made available to staff regarding WFA and Alternation through the Wiki including What is WFA, WFA Agreements, NRCan’s Approach, Career Counselling, Resources and Key contacts. Checklists and guidelines to assist employees and managers with the WFA process were also available.

In addition to online resources, employees impacted by WFA were invited to attend information and training sessions in person and had the opportunity to meet with a member of Senior Management regarding their affected position. The DM and Associate DM held a series of engagement sessions with affected employees in May and June of 2012, and visited all of NRCan’s major regional offices during that same time period. They met with employees across the country to answer questions and speak to the future of the organization in this time of transition.

As part of the audit of EAP 2012, a judgemental sample of 12 cost reduction initiatives was reviewed and demonstrated appropriate internal and external communications. Communication plans were also well documented within the implementation plans along with the specific actions where required.

The interviews conducted and documentation reviewed demonstrated that there was on-going communication to NRCan staff with respect to the implementation of EAP 2012 and resources available for employees affected by WFA.

Establishment of a Governance Framework for Monitoring and Oversight

The Science & Policy Integration Sector (SPI) was responsible for managing the overall planning process for EAP 2012. Once the plans were approved, SPI was also responsible for monitoring and reporting on the cost reduction initiatives. SPI created tools and templates to assist with monitoring and reporting at both the sector and corporate levels.

The Implementation Steering Committee (ISC) and the WFA Committee also had significant roles in monitoring and providing oversight on the implementation plans. Both committees had established objectives, activities, roles and responsibilities that were clearly defined in a Terms of Reference document.

The Implementation Steering Committee (ISC) was created to provide leadership and oversight on a number of initiatives impacting NRCan’s workforce and to ensure effective implementation of associated change.

The NRCan WFA Committee was created to support the Executive committee and Bargaining Agents to adopt and apply consistent Department wide principles to the management of WFA within NRCan (e.g. expenditure review decisions, federal budgets, etc.). This approach was to minimize and manage WFA situations in a way which supported continuous employment opportunities and career transitions for as many employees as possible.

The actions of the Committees were recorded in records of decision (RoD) documents, dated for each meeting. The auditors reviewed a sample of these RoDs for each Committee along with the supporting documentation for the required actions. The RoDs reviewed demonstrated the actions taken to provide leadership in human resources, risk management and oversight.

The interviews conducted and documentation reviewed demonstrated that a governance framework was established to provide monitoring and oversight over the implementation of EAP 2012. Evidence was available to demonstrate that the committees responsible for the governance of EAP 2012 were active in their governance related roles and responsibilities.

Reporting on the Implementation of EAP 2012

Senior Management have received reports on the implementation of EAP 2012, including WFA, on a regular basis. The ISC developed implementation plan and quarterly reporting templates for sectors to complete. Sectors were asked to report on their individual plans, identifying whether the implementation was completed, on track or required attention. Sectors were also required to report on whether the risk assessment for the implementation plan had changed from the previous report. Once the information was collected from the reports, it was presented to the ISC and Executive Committee.

The ISC created and maintained a WFA Database that tracked and monitored the status of all affected employees. This database was used to generate regular status update reports related to WFA which were presented to Senior Management and the WFA Committee. The WFA Committee provided updates on WFA actions to its members and dealt with issues as they arose.

External reporting requirements to TBS are being completed as required. Financial Management Branch (FMB) was responsible for generating semi-annual reports to TBS regarding the status of EAP 2012 implementation and an annual report for WFA. The WFA report was not yet due at the time of this audit, however, will contain information regarding the costs the Department incurred for WFA resulting from Severance pay, Relocation, Educational Allowances, Pay in Lieu, etc.

The interviews completed with the Human Resources Branch, FMB, ISC and WFA Committee, along with the documentation reviewed demonstrates that there has been on-going reporting of the implementation for EAP 2012 to Senior Management and TBS.

Sectors are required to complete their reports on a quarterly basis. An analysis of the timeliness of submitted quarterly reports was completed for the sample of 12 cost reduction initiatives. SPI issued notifications, requesting the completion and updates to the implementation plans and quarterly reports with clear deadlines. The quarterly reporting template was customized for each initiative along with an instructional guide to assist sectors in updating the reports. The analysis of the reports reviewed indicated that reporting information was not always collected in a timely manner with a high percentage of reports being submitted late.

Table 3: Analysis of Timeliness of Reporting

	1st Quarter	2nd Quarter	3rd Quarter
Reports Submitted on Time	50%	33%	17%

There was evidence that follow-up actions were taken by SPI to notify sectors that had not submitted the reports on time, however, sectors indicated that the notifications were not being sent directly to the individuals responsible for completing these reports. This was seen as a contributing factor to the delays in reporting. The lack of complete and timely reporting of information may cause issues when communicating the results and outcomes of the implementation of EAP 2012 initiatives.

RISK AND IMPACT

The lack of timely project information may reduce the reliability and completeness of performance information and make it difficult to respond to challenges as they arise.

RECOMMENDATION

Sectors, excluding Canadian Forest Service (CFS) and Corporate Management and Services Sector (CMSS), should strengthen reporting processes to ensure that reporting timelines are respected.

MANAGEMENT RESPONSE, ACTION PLAN AND TIME FRAME

Management agrees.

Sectors will make every effort to submit DG- and ADM-approved final reports (electronic and hard copies with wet signatures) to the Planning, Performance Management and Reporting Branch of SPI by the established due date, but no more than 10 business days beyond the deadline.

Responsible sector ADMs will be accountable for monitoring and ensuring that reporting obligations against the implementation of Budget 2012 savings measures are met.

Responsible Position: ADMs of ES, ESS, IETS, MMS, PAPMS and SPI

Timing: On a quarterly basis until March 31, 2014

Cost Reduction Initiatives have been Implemented

Summary Finding

The initiatives identified in NRCan’s implementation of EAP 2012 are being implemented as set-out in NRCan’s contribution to the GoC’s Economic Action Plan (Budget 2012) and in compliance with appropriate guidelines and policies.

Supporting Findings

Cost reduction initiatives

NRCan identified $107 million^{Footnote 4}in cost savings as part of Budget 2012. The reductions occurred over fifteen higher level projects comprised of fifty-five cost savings initiatives from across all Sectors.

A judgemental sample of 12 cost reduction initiatives was selected for review. Interviews were conducted for each of the 12 initiative and numerous documents were analyzed to determine whether the financial and non-financial reductions were implemented as planned and in compliance with appropriate guidelines and policies. The audit reviewed the approved implementation plans and quarterly reports for each initiative to determine whether targets and indicators were established and whether deliverables were defined. Evidence was also obtained to determine whether the deliverables were achieved. The extent of supporting documentation varied depending on the specific initiative and cost reduction activity however, the audit team was able to confirm that the financial and non-financial reductions were being implemented as planned.

Work Force Adjustment

A total of 394 NRCan employees received notice in April 2012 that their positions were affected by the budget reduction exercise. The retention process confirmed 169 of the 394 affected staff into positions. The remaining 225 employees were included in Work Force Adjustment. All employees that were affected by this process have been notified. Of the 225 employees included in Work Force Adjustment, NRCan provided employees with a variety of resources to assist them with their decision making.

From the sample of 12 initiatives reviewed, 7 had components in the area of personnel & employee benefits. The audit examined the WFA process in general and specific elements within the 7 initiatives such as the timely notification of affected status to employees and the accuracy of the calculation of payments made to those leaving the Public Service. Affected employees were notified in a timely manner that their positions were affected and provided with the necessary tools to assist them with their decisions.

WFA Employees who opted to leave the public service, depending on the option selected, were entitled to one or a combination of the following payments:

• Transitional support measure;
• Education allowance;
• Severance; and
• Payment in lieu.

A judgemental sample of payments made to 18 WFA employees from across the Department was selected to review the accuracy of the calculations for these payments. A WFA calculator was provided to Compensation and Benefits to assist in calculating the severance and TSM payments for WFA employees. Instructions were included on how to use the tool and provided to HR staff across the Department. After reviewing the supporting documentation and confirming the calculations, the audit concluded that the pay actions taken were accurate and consistent with the guidance provided by TBS.

RECOMMENDATION

No recommendation required.

APPENDIX A – STANDARD RISK TYPES AND AUDIT RATINGS

Standard Risk Types

Our standard risk types are classified based on the COSO^{Footnote 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:

APPENDIX B – AUDIT OBJECTIVES AND CRITERIA

The criteria have been developed from the key controls set out in the Treasury Board of Canada’s Core Management Controls, Management Accountability Framework and relevant associated policies, procedures and directives. Actual performance is assessed against the audit criteria and conclusions against objectives are reported.

The overall purpose of the audit was to provide reasonable assurance that Natural Resources Canada had established a management control framework that supported the implementation of the EAP Budget 2012 reductions and the approved initiatives were being implemented as required and in compliance with policy.

Audit Criteria Used to Conduct the Audit

Audit Sub-Objectives	Audit Criteria
Sub-Objective 1:To ensure that the management framework (which includes plans, communication, monitoring, oversight and reporting) supports the implementation of the EAP 2012 budget reductions.	1.1 It is expected that operational plans and objectives are established for meeting EAP 2012 strategic objectives. 1.2 It is expected that EAP 2012 re-allocation plans and actions have been communicated to staff and others where appropriate on an on-going basis. 1.3 It is expected that management has created a governance framework which includes documented tools, templates and processes for the monitoring and oversight of the budget reductions. 1.4 It is expected that reports are being submitted when required to both Senior Management and Treasury Board.
Sub-Objective 2: To ensure that the initiatives approved in the Economic Action Plan 2012 are being implemented as required and where applicable comply with policy.	2.1 It is expected that the approved financial and non-financial re-allocations have been established and implemented. Where Personnel and EBP consists of 75% or more of the total costs of an initiative the WFA process will be audited; Initiatives which require reductions in Operations and Maintenance costs will be audited for implementation; and Initiatives which require reductions in Grants and Contribution costs will be audited for implementation.