PACP Committee Report
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David
Christopherson Dear Mr. Christopherson: Pursuant to House of Commons Standing Order 109, on behalf of the Government of Canada, I am pleased to enclose the Government Response to the recommendations of the Fifth Report of the Standing Committee on Public Accounts: Chapter 1, Financial Management and Control and Risk Management, of the 2011 Status Report of the Auditor General of Canada. Parliament and Canadians expect the federal government to be well managed through the prudent stewardship of public funds, the safeguarding of public assets, and the effective, efficient and economical use of public resources. They also expect reliable financial reporting that provides transparency and accountability for how government spends public funds to achieve results for Canadians. Through the Treasury Board Policy on Internal Control the Government of Canada has demonstrated its commitment to meeting these expectations. The objective of this Policy is to manage risks relating to the stewardship of public resources through effective internal controls, including over financial reporting. The Policy requires that the results of risk-based assessments of financial reporting controls, and an action plan to address any necessary adjustments, be published each year as an annex to departmental annual financial statements. As requested by Recommendation 1 of the Standing Committee on Public Account’s (PAC) Report, attached are the reports on the risk-based assessments of the design and effectiveness of the financial reporting controls in the Department of Finance Canada and Veterans Affairs Canada. These two assessments demonstrate that both departments are maintaining an effective system of internal control over financial reporting, identifying risks and taking action to mitigate them. Once available, the reports confirming the completion of the assessments from the Departments of Agriculture and Agri-Food Canada, Foreign Affairs and International Trade, Human Resources and Skills Development Canada, Aboriginal Affairs and Northern Development and Transport Canada will be provided to the Committee by the respective responsible Ministers. In regards to the Committee Report’s Recommendations 2 and 3 concerning accrual based budgeting and appropriations, the Treasury Board Secretariat is following the plan presented by the President of the Treasury Board in early 2008 to the Chairs of PAC and the House of Commons Standing Committees on Government Operations and Estimates (OGGO). The nature of appropriations is separate from the issue of financial reporting. Changing the accounting basis used in appropriations is not a mere accounting change but a fundamental change in the manner in which Parliament exercises expenditure control. While there are many perspectives on what basis might be most appropriate for control purposes, there are no established best models or recommendations from recognized standards setting organizations. International experience is mixed on the issue. Australia, long seen as the “front runner” of accrual-based appropriations, decided in 2009 to introduce appropriations on the basis of net cash requirements in part because accrual appropriations had led to problems with the way agencies managed and reported on appropriations, and perceptions that accrual appropriations had led to a loss of transparency. Witnesses appearing before OGGO for its recent study in this Parliament on the Review of the Process for Considering the Estimates and Supply have also provided a range of perspectives on accrual appropriations. Several witnesses have supported accrual-based appropriations, most have not, with some recommending other changes to the nature of appropriations. The Treasury Board Secretariat is using information from, among other sources, the OGGO Review of the Process for Considering the Estimates and Supply and an assessment of departmental accrual-based budgeting being conducted this fiscal year to develop a recommendation on accrual-based appropriations. This recommendation will be communicated to PAC. I would like to take this opportunity to thank you and the members of the Standing Committee for your work. Sincerely, Hon.
Tony Clement Enclosures DEPARTMENT OF FINANCE CANADA STATEMENT OF MANAGEMENT RESPONSIBILITY INCLUDING INTERNAL CONTROL OVER FINANCIAL REPORTING 1. Introduction This document forms an integral part of the Department of Finance Canada’s (‘the Department’) Statement of Management Responsibility Including Internal Control over Financial Reporting as well as the Departmental Financial Statements for the fiscal year 2010‑2011. The Treasury Board Policy on Internal Control (‘the Policy’) became effective for the Department on April 1, 2009. This policy requires that measures are taken to maintain an effective system of internal control over financial reporting (ICFR) within the Department and that this system be assessed, on an annual basis, to determine its ongoing effectiveness. Among other things, an effective system of ICFR is a foundational element to the Department’s ability to produce relevant and reliable Departmental Financial Statements and to undergo a controls‑based external audit of those financial statements should a requirement to do so exist. The Policy also requires that an annual report which summarizes the results of the ICFR assessment along with actions taken in response to significant issues which may have arisen as a result be attached to the Statement of Management Responsibility Including Internal Control over Financial Reporting, in the form of this Annex. 1.1 Authority, Mandate and Program Activities The Department develops policies and provides advice to the Government with the goal of creating a healthy economy for all Canadians. For example, it:
1.2 Financial Highlights The Department’s unaudited financial statements are a component of the annual Departmental Performance Report. Highlights of the 2010‑2011 fiscal year are as follows (amounts expressed in $millions, unless otherwise stated): Statement of operations
Statement of financial position
1.3 Service Arrangements Relevant to Financial Statements The Department relies on other organizations for the financial reporting, or inputs into the financial reporting, of certain transactions. It also relies on other organizations to provide the infrastructure relating to transaction settlement and treasury management. The following are key areas, relative to their overall importance to the financial statements, where reliance is placed on external service providers:
1.4 Material Changes in Fiscal Year 2010‑2011 Fiscal year 2010‑2011 has seen the following changes in key areas for the Department.
2. Control Environment of the Department 2.1 Key Positions, Roles and Responsibilities Below are the
Department’s key positions and committees with responsibilities for maintenance
and oversight of the effectiveness of its system Deputy Minister – The Department’s Deputy Minister reports directly to the Minister and, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. The Deputy Minister serves as a member of the Departmental Audit and Evaluation Committee. Chief Financial Officer (CFO) – The CFO supports the Deputy Minister by establishing and maintaining a system of internal control related to financial management, including financial reporting and departmental accounts and by acting as a key steward with respect to relevant legislation, regulations, policies, directives and standards. Senior Departmental Managers – The Department’s senior departmental managers in charge of program delivery are responsible for maintaining and reviewing effectiveness of their systems of ICFR falling within their mandate. Internal Audit and Evaluation (Chief Audit Executive) (CAE) – The Internal Audit and Evaluation team provides internal audit and evaluation services to the Deputy Minister, departmental managers and the external Audit and Evaluation Committee. It supports the Deputy Minister and senior management in attaining the strategic objectives of the Department by providing them with objective, independent, and evidence‑based information, assurance, and advice on the effectiveness, efficiency and economy of departmental activities. Departmental Audit and Evaluation Committee (AEC) ‑ The AEC is an advisory committee, composed mainly of members who do not occupy a position within the federal public administration, which provides independent, objective advice and guidance to the Deputy Minister. The committee recommends for approval by the Deputy Minister the departmental audit and evaluation plans, oversees the performance of internal audit and evaluation function in the Department and reviews and recommends the Departmental Financial Statements for approval to the Deputy Minister. It also reviews the results of audits and evaluations as well as management responses and action plans developed to address audit recommendations. Additionally, it reviews the corporate risk profile and departmental internal control arrangements. 2.2 Key Measures Taken by the Organization The Department’s control environment also includes a series of measures to equip its staff through raising awareness, providing appropriate knowledge and tools as well as developing skills. Key measures include:
3. Assessment of Finance Canada's System of ICFR 3.1 Assessment Approach In support of the Policy on Internal Control, an effective system of ICFR has the objectives to provide reasonable assurance that:
To ensure these objectives are met over time, assessments of the design and operating effectiveness of the system of ICFR must take place at appropriate intervals and be supported by a process for continued monitoring through an on‑going monitoring program. Design effectiveness provides the assurance that key control points are identified, documented, in place, aligned with the risks they aim to mitigate and that any required remediation is addressed. Operating effectiveness ensures that controls, as designed and implemented at a point in time, continue to operate effectively over a prolonged and defined period and that any required remediation is addressed. An effective on‑going monitoring program identifies areas for continued or periodic observance, update and testing on a defined rotational basis consistent with the level of risk associated with business processes. The Department has formalized its strategy to meet these objectives. There are two key elements to its approach which are determined and re‑confirmed on an annual basis. First, there is an assignation of an appropriate level of financial‑reporting risk to each significant business process in place within the Department. Risk‑levels are delineated between high, medium and low risk in accordance with criteria as follows:
Second, an on‑going monitoring framework is developed that determines how often and in what way a business process would be examined. Currently, this framework is as follows:
Circumstances which might require a re‑assessment of risk or a re‑examination of a business process outside of this established frequency can include the introduction of common financial business process guidelines by the OCG, new initiatives undertaken by the Department or an internal or external audit issue brought to the attention of management. Periodically, or in relation to material departmental changes, the effectiveness of general computer and entity level controls will also be revalidated. Internal audits within the Department are conducted in accordance with an audit plan approved annually by Deputy Minister on the advice and recommendation of the AEC. If the nature, extent and scope of an internal audit are relevant to the objectives of the Policy, they are appropriately incorporated into the assessment for any given year regardless of the business process being audited. This approach provides for internal efficiencies. 3.2 Departmental Assessment Scope The Department completed its annual risk assessment process in accordance with the steps and framework described at Section 3.1. The results of this approach determined, in particular, the scope of work necessary for 2010‑2011. This work‑plan is described in the table below:
4. The Department's Assessment Results The Department has completed the work established as part of its 2010‑2011 annual assessment scope. The significant results of these assessments are discussed at Sections 4.1 and 4.2 below. 4.1 Design Effectiveness of Key Controls During the course of it work, management has noted four areas for improvement or further review. These are: Confirmations: the Department confirms the contractual cash flows of its significant financial transactions prior to actual payment. In some cases, the confirmation process is designed to elicit a response from the counterparty only in situations where there is an initial disagreement over amounts or other details of these upcoming payments. A requirement for the counterparty to positively confirm their agreement with payment details could provide additional predictive value to the confirmation process. Authorization: the Department has noted an opportunity to streamline its debt‑auction process through the elimination of redundant or repetitive controls. Frequency of review: the Department would benefit from increasing the frequency of review of domestic coinage inventories against contractually agreed levels. Frequency of review: the Department processes significant expenditures within the SPS which are date sensitive by contract or statute. After these payments have been processed using normal review and authorization procedures, a secondary review takes place confirming payment details. This secondary review would benefit from further confirmation of the payment date. Where areas of improvement have been noted, it is important to consider that these areas have been assessed within the context of all the key controls identified within a business process. Accordingly, an area(s) for improvement is not an indication that controls within a business process, on an overall basis, are not designed effectively. 4.2 Operating Effectiveness of Key Controls During the course of its work, management has noted one instance where key controls were not operating effectively. These are: Financial coding of transactions: for a particular statutory transaction, it was noted that although proper authority to make a payment was properly documented and obtained, the subsequent coding of the transaction within the accounting system was to an unrelated fund centre. Where an observation has been made with respect to the operating effectiveness of key controls, it is important to consider that these areas have been assessed within the context of the key controls identified within a business process. Accordingly, an area(s) for improvement is not an indication that controls within a business process, on an overall basis, are not operating effectively. 5. The Department's Action Plan 5.1 Progress As of March 31, 2011 During 2010‑2011, the Department continued to make significant progress in assessing and improving its key controls. Progress to date is summarized below: The Department has completed:
The Department has substantially completed:
The Department has commenced or partially completed work to: · Undertake a review of the confirmation processes employed in the settlement of certain financial transactions, as discussed at section 4.1 5.2 Action Plan ‑ Future Years By the end of 2011‑2012, the Department plans to:
VETERANS AFFAIRS CANADA Statement of Management Responsibility, Including Internal Control over Financial Reporting Note to the reader With the Treasury Board Policy on Internal Control, effective April 1, 2009, departments are now required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR). As part of this policy departments are expected to conduct annual assessments of their system of ICFR, establish action plan(s) to address any necessary adjustments, and to attach to their Statements of Management Responsibility a summary of their assessment results and action plan. Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:
It is important to note that the system of ICFR is not designed to eliminate all risks, rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate. The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess the effectiveness of associated key controls and adjust as required, as well as to monitor the system in support of continuous improvement. As a result, the scope, pace and status of those departmental assessments of the effectiveness of their system of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances. 1.0 Introduction This document is attached to the Department of Veterans Affairs’ Statement of Management Responsibility Including Internal Control Over Financial Reporting for the fiscal-year 2010-2011. As required by the Treasury Board Policy on Internal Control, effective April 1st 2009, this document provides summary information on the measures taken by Veterans Affairs Canada (VAC) to maintain an effective system of internal controls over financial reporting (ICFR). In particular, it provides summary information on the assessments conducted by VAC as at March 31, 2011, including progress, results and related action plans along with some financial highlights pertinent to understanding the control environment unique to the department. This is the second annex produced by this department. 1.1 Authority, Mandate and Program Activities Detailed information on VAC’s authority, mandate, priorities, strategic outcomes and program activities can be found in the Departmental Performance Report External link, Opens in a new window and Report on Plans and Priorities. 1.2 Financial Highlights Financial statements (unaudited) of Veterans Affairs Canada for fiscal-year 2010-2011 can be found on the Veterans Affairs Canada Web site. Information can also be found in the Public Accounts of Canada site.
1.3 Service Arrangements Relevant to Financial Statements VAC relies on other organizations for the processing of certain transactions that are recorded in its financial statements. Common Arrangements:
Specific Arrangements:
1.4 Material Changes in Fiscal-year 2010-2011 A plan over the next five years was initiated in 2010-11 to transform the benefits and services offered to VAC’s clients as well as program business processes. An integral part of transformation was the addition of an Associate Deputy Minister to lead transformation throughout the Department. During 2010-11, there has been improved governance through the third year of operation of the Departmental Audit Committee. 2.0 Control Environment of Veterans Affairs Canada relevant to ICFR VAC recognizes the importance of setting the tone from the top to help ensure that staff at all levels understands their roles in maintaining an effective system of ICFR and is well equipped to exercise these responsibilities effectively. The focus is to ensure risks are managed well through a responsive and risk-based control environment that enables continuous improvement and innovation. 2.1 Key positions, roles and responsibilities Below are VAC’s key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR. Deputy Minister – VAC’s Deputy Minister, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Deputy Minister chairs the Senior Management Committee. Chief Financial Officer (CFO) – VAC’s CFO reports directly to the Deputy Minister and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR, including its annual assessment. Falling under the CFO responsibilities is also the management of the Department’s Corporate Risk Profile. Senior Departmental Managers - VAC’s senior departmental managers (Assistant Deputy Ministers and Deputy Minister Direct Reports) in charge of program delivery and corporate services are responsible for maintaining and reviewing effectiveness of the system of ICFR falling within their mandate. Chief Audit Executive (CAE) – VAC’s CAE reports directly to the Deputy Minister and provides assurance through periodic internal audits which are instrumental to the maintenance of an effective system of ICFR. Departmental Audit Committee (DAC) - The DAC is an advisory committee that provides objective views on the department’s risk management, control and governance frameworks. It is comprised of the Deputy Minister and three external members. Established in 2008, the committee is responsible for reviewing VAC’s Corporate Risk Profile and its system of internal control, including the assessment and action plans relating to the system of ICFR. Senior Management Committee (SMC) - As the VAC central decision-making body, SMC reviews, approves and monitors the Corporate Risk Profile and the departmental system of internal control, including the assessment and action plans relating to the system of ICFR. Departmental Investment Board (DIB) - The Board, a sub-committee of SMC, reviews proposed projects to ensure they are fully researched and are within the Department’s capacity to be completed. To ensure effective and efficient management of VAC funds, DIB also monitors the Department’s performance against planned expenditures throughout the fiscal cycle. The Board is chaired by the ADM, Corporate Services with representatives from all DM direct report organizations. 2.2 Key measures taken by VAC The Department's control environment also includes a series of measures to equip its staff to manage risks well through raising awareness, providing appropriate knowledge and tools as well as developing skills. Key measures include:
3.0 Assessment of VAC’s system of ICFR 3.1 Assessment Approach To satisfy the requirements of the Policy on Internal Control, the department must be able to maintain an effective system of ICFR with the objective to provide reasonable assurance that:
Over time, this includes assessment of design and operating effectiveness of the system of ICFR leading to ensuring the on-going monitoring and continuous improvement of the departmental system of ICFR. Design effectiveness means to ensure that key control points are identified, documented, in place and that they are aligned with the risks (i.e. controls are balanced with and proportionate to the risks they aim to mitigate) and that any remediation is addressed. This includes the mapping of key processes and IT systems to the main accounts by location as applicable. Operating effectiveness means that the application of key controls has been tested over a defined period and that any required remediation is addressed. Such testing covers all departmental control levels which include corporate or entity, general computer and business process controls. On-going monitoring means that key controls are monitored on a regular basis to provide reasonable assurance that they continue to function effectively over time. 3.2 Scope of Departmental Assessment During Fiscal-Year 2010-2011 The department has taken measures to assess its system of ICFR starting from its financial statement with a focus on the following main accounts:
For each significant account, the Department completed the following:
4.0 Departmental assessment results during fiscal-year 2010-2011 4.1 Operating Effectiveness The operating effectiveness of key controls was tested during fiscal-year 2010-11. As a result of the testing, exceptions were noted in certain ITGC elements. The significant findings were around access management and change control. Corrective action commenced during fiscal-year 2010-11 to address these issues with the objective to complete these actions in early fiscal-year 2011-12. 4.2 Ongoing Monitoring Program VAC is now following a rotational on-going monitoring schedule to ensure that all ICFR remain up-to-date and effective. A dedicated until called Controls Assessment has been created under the direction of the CFO. This unit is responsible for a well-integrated risk-based approach to on-going monitoring; to monitor the completion of remedial actions identified; and to put in place a program to raise awareness and understanding of VAC’s system of ICFR at all levels. Process documentation, including narratives and descriptions of all key controls, are updated and revalidated on a rotating basis by process owners. 5.0 Departmental Action Plan 5.1 Progress during fiscal-year 2010-2011 During 2010-2011, VAC continued to make significant progress in assessing and improving its controls. Below is a summary of the main progress made: The Department’s substantially advanced work includes the following necessary adjustments:
The Department’s completed work includes the following necessary adjustments:
Summary of progress during fiscal year 2010-2011 in VAC Action Plan: 1. Testing of Operating Effectiveness of Key Controls:
2. Remediation of operating effectiveness of key control deficiencies
5.2 Action plan for the next fiscal-year and subsequent years 5.2.1 By end of 2011-12, VAC plans to:
5.2.2 By end of 2012-13, VAC plans to:
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