AUDIT OF MISSION HOSPITALITY EXPENDITURES

Transcription

1 AUDIT OF MISSION HOSPITALITY EXPENDITURES Foreign Affairs and International Trade Canada Office of the Chief Audit Executive (ZBD) May 2009 This document may not be fully accessible. For an accessible version, please visit

2 TABLE OF CONTENTS EXECUTIVE SUMMARY i 1.0 INTRODUCTION OBSERVATIONS AND RECOMMENDATIONS Framework for Administering Hospitality Official Hospitality Outside Canada (OHOC) Policy Committee on Mission Management and Mission Hospitality Guidelines Hospitality Work Plans Corporate Services Learning (CFSS) Training Centre of Learning for International Affairs and Management (CFSD) Training COMPLIANCE WITH OHOC POLICY REQUIREMENTS Application of Internal Controls Data Integrity of Hospitality Budget Allocations and Expenditures Completion of the Hospitality Diary (EXT 52) Admissibility and Reasonableness of Claimed Costs Substantiation of Claimed Costs Inventory of Alcoholic Beverages Pro-Active Disclosure CONCLUSION 14 APPENDIX A About the Audit...15 APPENDIX B Audit Recommendations and Management Action Plan...17 APPENDIX C Listing of Missions Included in the Sample 28 APPENDIX D Suggested Clarifications to the OHOC Policy...29

3 EXECUTIVE SUMMARY The Department s Audit and Evaluation Committee approved an audit of Mission hospitality expenditures in The Office of the Inspector General undertook this audit of hospitality expenditures outside Canada as part of the approved audit plan for This audit was subsequently finalized by the Office of the Chief Audit Executive. Official Hospitality Outside Canada (OHOC) is governed by the provisions of two Treasury Board directives: the Heads of Post Directive and the Foreign Service Official Hospitality Directive. These directives are complementary and together constitute the basis for the allocation and spending of funds for official hospitality purposes by the Order-in-Council appointed heads of Canadian diplomatic and consular missions and all other government employees abroad who have official hospitality responsibility. The amount of hospitality expenditures recorded by roughly 174 missions in the Department s Integrated Management System (IMS) 1 during 2005/06 and 2006/07 represented 0.28% and 0.39% of the department s overall operating expenses ********. Departmental guidance with respect to hospitality expenditures incurred by missions is contained in Chapter 9 of the Protocol Manual entitled Official Hospitality Outside Canada (OHOC). The content of Chapter 9 was found to be consistent with the information contained in the Treasury Board directives. The objectives of the audit were: to assess the adequacy of the framework applied by missions to administer hospitality expenditures; and, to determine the extent to which mission staff complied with the Department s OHOC policy a policy for which this audit recommends substantial revisions. The audit work included testing a sample of 375 hospitality transactions incurred during the fourth quarter of fiscal year Twenty-five (25) missions were selected and fifteen (15) transactions were randomly selected from each of these Missions. Complete audit objectives, criteria, methodology and scope are included in Appendix A About the Audit. Although opportunities to improve and strengthen compliance and demonstrate sound stewardship of fund were noted: the auditors found no indication of abuse of hospitality funds; and, costs claimed for hospitality were reasonable. The audit team concluded that they found no evidence of major control failures, abuses or other forms of inappropriate use of hospitality. Opportunities for strengthening compliance and demonstrating sound stewardship of funds by the Missions were identified in the following areas: 1 IMS is the Department s corporate financial system. Office of the Chief Audit Executive, DFAIT i

4 Documentation to adequately substantiate hospitality expenditures, linking events to program objectives. Documentation to demonstrate: o the Committee on Mission Management s oversight efforts with respect to due diligence and provision of guidance; and, o hospitality event planning which aligns funds with the needs/importance of the program area. Training to ensure that the hospitality policy and procedural requirements are well understood by those involved in the expenditure of hospitality funds. Policy guidance and in particular the appropriateness of developing and using unit costs. The audit results indicated that, in order to comply with all elements of the policy, the Department will have to improve its documentation with regards to hospitality expenditures. Compliance issues noted during the transaction testing related to: Completeness and accuracy of documentation with respect to supporting hospitality costs, proof of payment, authorization, demonstrating value-for-money and reporting on expenses; and, Inventory control. Summary of Recommendations The OHOC policy should be further updated to address the areas requiring clarification or increased emphasis as identified during the audit. The policy elements should be reviewed to confirm their applicability and effectiveness in terms of strengthening the control framework as opposed to simply adding layers of administrative burden. The process for recording and reporting hospitality expenditures for proactive disclosure should be clarified to ensure accuracy and consistency. Departmental hospitality training should: o Place emphasis on the roles and responsibilities of all mission and headquarters stakeholders o Describe the purpose of the Hospitality Diary (EXT 52) and the Official Hospitality Advance and Expense Reporting form (EXT 904) and demonstrate how to properly complete them. Hospitality Work Plans should be developed to clearly define key events, the linkages to program objectives, targeted attendees and estimated costs in order to provide an overall view of hospitality and the allocations to program areas. The Heads of Missions should strengthen their hospitality administrative practices to ensure more rigorous compliance with the OHOC policy requirements, including the documentation and effective application of key financial controls. A complete listing of recommendations and a Management Action Plan to address the audit recommendations is contained in Appendix B. Office of the Chief Audit Executive, DFAIT ii

5 1.0 INTRODUCTION Official Hospitality Outside Canada refers to a management approved expression of friendly reception or representation either extended or accepted by an employee outside Canada in the interests of developing or maintaining such relationships with persons within the country of assignment as are necessary for the successful execution of government programs. 2 Heads of Missions are provided annually with funds, allocated by the appropriate bureaus, to meet the reasonable costs of providing official hospitality in support of government programs abroad. Hospitality funds are then allocated by the Head of Mission after discussion with the Committee on Mission Management (CMM), subject to budgetary restrictions, in proportion to the hospitality requirements of the program activity. The CMM must make provision for a contingency fund, or reassess its spending priorities, to cover the hospitality costs of major events not foreseen at the time of finalizing the mission s annual hospitality allocations. Hospitality funds, advances or allocations are program resources allocated to designated individuals strictly on the basis of program needs. All advances and expenditures are fully accountable. 3 The Office of the Inspector General, conducted an audit of mission hospitality expenditures incurred by Heads of Missions in Since that time, the Department revised its Official Hospitality Outside Canada policy and instituted proactive disclosure requirements 4 with respect to the travel and hospitality expenditures incurred by Heads of Missions. The amount of hospitality expenditures recorded by missions in the Department s Integrated Management System (IMS) 5 during 2005/06 and 2006/07 represented 0.28% and 0.39% of the department s overall operating expenses *******************. Hospitality charges are discretionary and subject to scrutiny. Consistent application of the Treasury Board and Departmental policies and directives is required. The planning and examination phases of the audit took place during the period of June to September The missions included in the sample are listed in Appendix C. The transactions included in the sample represented hospitality expenditures incurred in the fourth quarter of Treasury Board Foreign Service Official Hospitality Directive, April 1, DFAIT Protocol Manual, Chapter 9 Official Hospitality Outside Canada 3 Pro-active disclosure requirements apply to positions classified at the EX-4 level and above. 5 IMS is the Department s corporate financial system. Office of the Chief Audit Executive, DFAIT 1

6 2.0 OBSERVATIONS AND RECOMMENDATIONS 2.1 Framework for Administering Hospitality The following areas were reviewed when examining the management framework applied to administer hospitality by the Missions included in the sample. Official Hospitality Outside Canada Policy Committee on Mission Management Operations and Hospitality Guidelines; Hospitality Work Planning; and, Hospitality Training Official Hospitality Outside Canada (OHOC) Policy Official Hospitality Outside Canada is governed by the provision of two Treasury Board directives: the Heads of Post and the Foreign Service Official Hospitality Directives. Departmental guidance with respect to hospitality expenditures incurred by missions is contained in Chapter 9 of the Protocol Manual entitled Official Hospitality Outside Canada (OHOC). The content of Chapter 9 was found to be consistent with the information contained in the Treasury Board directives. The Corporate Finance, Planning and Systems Bureau (SMD) updated the OHOC policy in Modifications were made in several areas (i.e. roles and responsibilities, club membership fees, indirect hospitality, etc.) which strengthened the quality of the policy direction. This was a positive step. The OHOC policy provides guidance in 14 different areas. Audit results of transaction testing and the audit team s review of the policy, suggest that there are still a number of policy areas that could benefit from greater clarification or increased emphasis. These include: roles and responsibilities, hospitality fund allocation, and hospitality objectives. These policy areas, related audit observations and the nature of the clarification/emphasis required are detailed in Appendix D. The methods to claim hospitality expenditures are one critical aspect of the policy. Two acceptable methods for claiming hospitality expenditures are outlined in the OHOC policy unit costs and actual costs. Not all hospitality events are catered or take place at a commercial establishment; under exceptional circumstances, therefore, it is not always possible to use actual costs as a means for reimbursement. Unit costs become necessary in those cases where receipts cannot be provided. Additionally, unit costs aid in the forecasting of expenses during event planning even where actual costs will be reimbursed. Office of the Chief Audit Executive, DFAIT 2

7 The policy is not clearly worded. References within the policy suggest that unit costs should be used for the following: Determining costs to be claimed when all receipts are not available; Planning events and the forecasting of expenditures; Establishing a maximum ceiling for hospitality costs claimed based upon actual costs. Demonstrating that hospitality expenses incurred (whether based on actual or unit costs) are reasonable. The policy indicates that, with the exception of smaller missions: the Committee on Mission Management (group of senior program managers under the chairmanship of the Head of Mission) must establish unit costs for events held at commercial establishment as well as the Official Residence and staff quarters; unit costs should be established based on a representative sample of actual costs; unit costs be established for each type of function (i.e. breakfast, lunchregular, lunch-special occasion, dinner); and, unit costs must be reviewed annually by the Committee on Mission Management. Audit tests indicated that: hospitality expenditures were usually claimed based on actual costs incurred, whether the event was held in a commercial establishment, the Official Residence or staff accommodation; unit costs, were not always developed for each type of function; unit costs were not often developed based upon a representative sample of actual costs; specific elements factored into the unit cost were not always indicated; and, claims based upon unit costs were rarely supported by any supporting receipts as evidence of the event as required 6. The development and use of unit costs as a basis of claiming hospitality expenditures have been problematic as evidenced by the issues raised above. If a standardized alternative approach could be developed, the operational efficiency of missions would improve as resources would not have to be invested into developing individual unit costs that are seldom used. The financial and operational impact of any change should be analyzed prior to implementation. 6 Claimants are not required to submit receipts that substantiate the total (i.e. 100%) amount being claimed. That is, section states that when unit costs are claimed, claimants should attach any supporting receipts as evidence of the event. Office of the Chief Audit Executive, DFAIT 3

8 Overall, the OHOC policy provides direction to mission staff in a comprehensive manner. The audit team did, however, identify a number of policy areas that could benefit from additional clarification or emphasis. This would strengthen the policy, encourage a consistent interpretation of its requirements and promote coordination and cost-effectiveness of official hospitality abroad. Recommendation 1: The Director of Financial Policy, Control & Community Development Division (SMO) should update the OHOC policy by revising the text of the policy areas that require clarification or increased emphasis as identified in Appendix D. The policy review should use the following filters to streamline processes and clarify messages; relevance and practicality. Recommendation 2: The Director of Financial Policy, Control & Community Development Division (SMO) should: Clearly define the intent of unit costs and their significance; Explore alternative methods for establishing unit costs as well as maximum cost per person ceilings not to be exceeded by claimants at commercial establishments unless fully justified and pre-approved by the Head of Mission Committee on Mission Management and Mission Hospitality Guidelines Committees on Mission Management are a group of senior program managers under the chairmanship of the Head of Mission that provide advice and assistance in carrying out mission programs. Committees on Mission Management have important functions with respect to hospitality guidance on reasonable costs, hospitality planning, coordination and oversight. The Committee, therefore, assists the Head of Mission in discharging his/her responsibility for the proper stewardship of mission hospitality resources. For this reason, the audit team expected to see evidence in the minutes that these roles were exercised. In addition to the above, the OHOC policy recommends that the CMM provide guidance in the following areas: Planning and organizing of hospitality events; Cost of domestic help attributable to a hospitality event; Occasions for giving gratuities and the suitability of gratuity; Use of office premises for hospitality functions; and, Use of local transportation to and from hospitality functions. A review of minutes of the fiscal year indicated that often, the minutes did not contain evidence of the overall use of hospitality funds. This should not be interpreted to signify that the Head of Mission and the Committee were not effectively exercising their guidance and oversight role. Rather, the results Office of the Chief Audit Executive, DFAIT 4

9 indicate that their efforts in this regard need to be better documented in order to demonstrate the extent to which due diligence was being exercised as well as serving as an important record for new Heads of Missions and other rotational staff. Recommendation 3: The Geographic Group (GEM, GLM, GNM, GPM and DFM) should ensure that Committees on Mission Management: Improve documentation of their oversight and due diligence efforts with respect to the use of hospitality funds; Provide guidance in the areas stipulated in the OHOC policy; Ensure that a documented analysis of a representational sample of actual costs is prepared that clearly defines the cost components included in each hospitality unit cost and substantiates its amount. [Note that should an alternative means be adopted (as suggested in Recommendation 2) this recommendation may not be applicable] ; and, Integrate hospitality work planning into existing mission planning practices Hospitality Work Plans Recipients of hospitality funds are required to plan their expenditures with a view to achieve program objectives as economically as possible and admissible costs may only be reimbursed when incurred for an approved hospitality function. The documentation supplied by the missions contained some evidence (i.e. calendar of events, portion of business plans, etc.) of hospitality work planning. However, none of the missions in our sample had instituted a practice of preparing a work plan that would: Identify the planned hospitality events for the fiscal year; and, Describe the objectives, target attendees/participants, timeline and estimated cost of each of the planned hospitality events. This information would provide an overall view of planned hospitality. It would identify clear linkages between hospitality events and program objectives, ensuring that Heads of Mission discharge their responsibility of allocating hospitality funds in proportion to the requirements of the demonstrated program need. Recommendation 4: Missions should develop hospitality work plans that clearly define the key events for the fiscal year, their linkages to program objectives, the target attendees and estimated cost of each planned event. Office of the Chief Audit Executive, DFAIT 5

10 2.1.4 Corporate Services Learning (CFSS) Training CFSS is responsible for designing and delivering the Management Consular Officer Development Program (MCDP), Administrative Assistants Development Program (AADP) and the Locally Engaged Staff (LES) In-Canada Training for Accountants and for Administrative Assistants to Heads of Program. Since 2002, the topic of hospitality has been incorporated into these training programs. While hospitality training has been provided, it was essentially a repetition of the content of the OHOC policy; the focus has not been placed on describing the roles and responsibilities of missions and headquarters. In addition, emphasis has not been placed on the objectives associated with the two primary Departmental hospitality forms the Hospitality Diary (EXT 52) and the Official Hospitality Advance and Expense Reporting form (EXT 904) and how to complete them correctly. Based on the audit test results, the Official Hospitality Outside Canada course needs to place emphasis on three key areas: mission and headquarters stakeholders roles and responsibilities; purpose, significance and completion of the EXT 904 and EXT 52 hospitality forms; and, OHOC policy areas requiring clarification or increased focus as identified during the audit. CFSS recognizes the importance of placing attention on these areas and has structured the course s outline accordingly Centre of Learning for International Affairs and Management (CFSD) Training CFSD is responsible for delivering the Head of Mission Pre-Departure and Program Managers Abroad training programs. Hospitality is one of several topics covered during the delivery of these programs and the amount of time was proportionate to the course objectives (i.e. not purely a hospitality focus). The results of the audit suggest, however, that finance specialists participating in the delivery of these training programs need to place greater emphasis on this area. Recommendation 5: The Director of Financial Policy, Control & Community Development (SMO) should ensure that appropriate training is provided to employees involved in the hospitality process. Specifically, Revisions made to the OHOC policy should be communicated to Corporate Services Learning (CFSS) and the Centre of Learning for International Affairs and Management (CFSD) in order that they may update hospitality training materials, as applicable; Finance specialists should be made available for hospitality training provided by CFSS; Training content should: o emphasize roles and responsibilities; Office of the Chief Audit Executive, DFAIT 6

11 o describe the purpose of the EXT 904 and 52 forms and demonstrate, by way of examples, how to properly complete them; o describe the key financial controls associated with the payment of hospitality expenditures, their associated objective(s) and how they are to be effectively applied and documented; and, o include inventory control. Recommendation 6: Corporate Finance and Operations (SCM) should increase the emphasis placed on the Official Hospitality Outside Canada policy during the portion of the Head of Mission Pre-Departure and Program Managers Abroad training programs led by finance specialists in this area. 2.2 COMPLIANCE WITH OHOC POLICY REQUIREMENTS The Official Hospitality Outside Canada policy specifies a high number of elements that require compliance; these elements have various degrees of significance. Section 9.13 of the OHOC policy requires any exceptions to the policy requirements to receive prior written authorization from the Deputy Minister. It should be noted that none of the instances of non-compliance with the requirements of the OHOC policy described in this section had received the Deputy Minister s prior approval. Nor would it have been reasonable to involve the Deputy Minister in the compliance issues noted as they were relatively minor in nature and were not planned in advance. Recommendation 7: The requirement for receiving prior approval of the Deputy Minister for issues of non-compliance should be addressed in the context of the OHOC Policy review to ensure it is practical. Should the requirement remain, emphasize to the Heads of Missions that any exception to the requirements of the OHOC policy must receive the prior written authorization from the Deputy Minister Application of Internal Controls An Official Hospitality Advance and Expense Reporting form (EXT 904) must be completed for each disbursement related to official hospitality. The process involves the following steps: Claimant prepares, signs and dates the form and attaches receipts as appropriate; Mission Accountant signs and dates the claim to verify it; Office of the Chief Audit Executive, DFAIT 7

12 Head of Mission (or other designated program manager) signs and dates the form under Section 34 of the Financial Administration Act (indicating receipt of goods or services); Form and attachments are forwarded to the Mission accounting section for verification; Individual with delegated signing authority for Section 33 of the Financial Administration Act (payment authorization) signs and dates the form. This process is designed to ensure appropriate segregation of duties and that only persons with delegated authority are authorizing hospitality transactions at the appropriate time to ensure the integrity of the payments. Testing of the Official Hospitality Advance and Expense Reporting form (EXT 904) revealed cases where signatures and dates indicating verification and approval of Section 34 and Section 33 of the Financial Administration Act were missing. Additionally, there was no segregation of duties in the one case where the same person signed Sections 34 and 33. There were also three cases where the claimant had signed their own claim. Including the date along with the signature is important to demonstrate that the controls in place operated effectively and that the claim had been appropriately reviewed prior to payment. If it is not possible to determine the date that the Mission Accountant/MCO reviewed it for appropriateness and completeness prior to the signing of Section 34 and that Section 34 was signed prior to Section 33, the controls related to segregation of duties are not as meaningful. Recommendation 8: Heads of Missions should strengthen their hospitality practices to ensure more rigorous compliance with the OHOC policy requirements, including the documentation and effective application of key financial controls. Recommendation 9: The Director General, Assignments & EX Management Bureau (HFD) should develop standardized text for managing hospitality expenditures for inclusion in Performance Management Agreements/Plans. Associated performance measures should be developed as part of financial management responsibilities Data Integrity of Hospitality Budget Allocations and Expenditures Claimants are required to submit an Official Hospitality Advance and Expense Reporting form (EXT 904) within 10 days following the end of a quarter. The form lists the hospitality events that occurred during the quarter and specifies their date and total cost 7. The EXT 904 also has a new advance section which 7 The Section of Chapter 9 also requires claimants to prepare a Hospitality Diary form (EXT 52) for each event listed on the EXT 904. The Hospitality Diary provides a more detailed description of the event Office of the Chief Audit Executive, DFAIT 8

13 provides information on the claimant s hospitality advance (where applicable) and the balance remaining of his/her budget allocation 8. As such, information contained in the new advance section serves a financial control purpose. The following observations were made based on examination of the information reported in the new advance section of the EXT 904s. The total cost of each hospitality event reported on the EXT 904 agreed with the amount reported on the associated EXT 52 and in most cases could be traced to the corporate financial system. The total cost of all hospitality events reported on the EXT 904 was accurately calculated in 98% of the instances. Overall, the information contained in the new advance section of the EXT 904 was accurately calculated and consistent with Hospitality Diaries and the Integrated Management System. Incomplete and inaccurate information on the revised allocations line reduced the usefulness of the data and increases the risk of a claimant incurring hospitality expenditures in excess of his/her allocation Completion of the Hospitality Diary (EXT 52) Recipients of hospitality funds, including Heads of Missions, are required to record all hospitality on a Hospitality Diary (EXT 52). The form must include, at a minimum, the following: Date, form and location of the event; Linkage between the hospitality event and approved program objective(s); Purpose of, or circumstances giving rise to, the hospitality event; Evaluation of the event; Costs incurred, detailed as appropriate, including whether alcohol was consumed out of inventory; Names, position/title and organization of all persons who attended the event; and, Signature of the employee. Information contained on the EXT 52 serves two primary purposes. First, to capture tombstone data related to the hospitality event and, second, to record information that will demonstrate the extent to which the expenses incurred represent an effective use of hospitality funds (i.e. achievement of value-formoney) by documenting the link between the hospitality event and program objectives. and specifies its cost which should agree with the amount claimed on the EXT The EXT. 904 establishes the remaining balance of a claimant s allocation as follows: revised allocation equals total expenditures to date + amount of new advance. Office of the Chief Audit Executive, DFAIT 9

14 Overall, claimants consistently and accurately completed the tombstone data fields of the EXT 52. The official forms were used, they were signed and dated appropriately by the claimant and the date and type of hospitality event were indicated. There is room for improving the consistency of indicating the specific location of the event and whether or not alcohol from inventory was consumed. There is no place indicated on the diary to report the latter. One section of the EXT 52 is designed to demonstrate the extent to which valuefor-money was achieved in the use of hospitality funds. While claimants consistently completed this section, the information recorded did not always meet the intended purpose of demonstrating clear linkages between the hospitality event and the proposed program objectives. As well, the evaluation of the event did not often articulate the resulting outcome(s) and how it contributed to the achievement of approved program objectives. It must be noted that the audit team s assessment of the extent to which valuefor-money was demonstrated was limited strictly to the information recorded on the EXT 52. It did not include any reports or briefings that staff may have made as a result of having attended the event. As such, it should not be interpreted by the reader as implying that the Department did not receive value-for-money from the associated hospitality events. Rather, the observations indicate that the selected missions need to demonstrate the extent to which value-for-money has been received by clearly documenting the event outcomes on the EXT 52 and linking it to the achievement of specific program objectives. In addition to the compliance element, reliable value-for-money oriented information would assist Mission management in making appropriate allocations of hospitality funds to programs and revisions as required. The development of hospitality work plans, referred to in section would serve the purpose of documenting this important information and of reducing the extent of details required on the EXT 52. Recommendation 10: The Director, Financial Policy, Control & Community Development Division (SMO) should improve the effectiveness and ease of use of the Hospitality Diary by: Creating a new data field to record the quantity and value of alcoholic beverages consumed from inventory (need for improved documentation discussed further in 2.2.6); and, Providing guidance with respect to the degree of detail required under the headings Type of Function,Program Objective, Purpose of Function and Evaluation of Event to ensure that complete and accurate information is recorded. Office of the Chief Audit Executive, DFAIT 10

15 2.2.4 Admissibility and Reasonableness of Claimed Costs Admissible costs are services and goods used or consumed on any occasion where an employee extends or receives official hospitality in support of an approved program activity. Guidance as to the admissibility and reasonableness of claimed costs is provided in several sections of the OHOC policy. Two particular areas that the auditors focused on for admissibility were: (i) hospitality extended to Mission employees; and, (ii) spousal attendance at events. While costs must be substantially lower than equivalent diplomatic functions, it is admissible to extend official hospitality to mission staff for certain types of occasions such as: Functions involving Mission staff required to brief Ministerial or Senior Official Delegations; Refreshments, meals or both if Mission employees must participate in work sessions extending over meal hours or beyond normal working hours; A formal recognition ceremony for employees (e.g. long service awards); and, One annual Mission team-building event authorized by the Head of Mission. All occasions where hospitality was extended to Mission employees respected the above criteria. Under certain circumstances, spouses may be required to host or attend official hospitality functions. Expenses incurred on these occasions must have the prior approval of the Head of Mission. There were six cases in total where the file documentation did not clearly indicate that the Head of Mission had pre-approved the attendance of spouses. There is no place on the forms to indicate preapproval nor does the policy require written pre-approval. In thoroughly reviewing these six cases, the attendance of spouses appeared to be appropriate. While pre-approval should be sought from the Head of Mission, the risk related to this non-compliance appears to be minimal in the files tested. Reasonable costs could be defined as falling within predetermined maximum costs for a particular type of event. As discussed in Objective 1 of the audit however, there was confusion and inconsistency in the development and application of unit costs. This makes it difficult to use them as a basis for determining reasonableness. Audit test results indicated that the actual costs exceeded the unit costs in only 12% of the diaries examined. In another 13%, a unit cost had not been established. After thorough review of documentation (menus, receipts etc) on each of these files, the auditors concluded that costs claimed were reasonable. Office of the Chief Audit Executive, DFAIT 11

16 2.2.5 Substantiation of Claimed Costs All hospitality claims must be supported by original receipts except for claims based upon unit costs. For the latter, claimants should attach any supporting receipts as evidence of the event. The Departmental policy on Acceptable Forms of Receipts for Expense Claims describes the information that should normally be reflected on a receipt, including proof of payment. The OHOC policy also states that all costs incurred must be appropriately detailed when submitting the Hospitality Diary (EXT 52). Costs claimed were, at times, not substantiated by original receipts and evidence of proof of payment. While receipts were provided in most cases where the claims were based on actual costs, there were at least six claims processed that had no receipts attached. Additionally, often there were no receipts attached as evidence of the event where claims were based upon unit costs 9. The Management Consular Officer (MCO)/Mission Administrative Officer (MAO) is responsible for verifying hospitality claims to ensure compliance with the requirements of the OHOC policy. In addition, an individual with delegated financial signing authority must certify claimed hospitality expenditures under Section 34 of the FAA. Test results point to a need to improve the effectiveness of these internal controls in order to mitigate the risks of reimbursing claimants for inadmissible costs or costs that were not incurred. Recommendation 8 would effectively resolve this issue as well Inventory of Alcoholic Beverages Missions make, at times, bulk purchases of alcoholic beverages in order to showcase Canadian products at hospitality events. A written inventory of these purchases is to be maintained and updated, at a minimum, on a quarterly basis. In addition, a physical inventory count is to be conducted on an annual basis and its result reconciled to the mission s inventory records. The reconciliation report is to be attached to the fourth quarter hospitality claim(s) submitted by employees. Mission inventory records varied in format and did not always specify the opening and closing balance of the inventory item. In addition, inventory records did not often specify the cost, date, quantity and description of alcohol purchased or the hospitality event where the inventory was consumed. A copy of the year-end reconciliation report, comparing information (i.e. type, quantities, value, etc.) contained in the mission s inventory records to the results of a physical count of the stock, was not generally attached to the EXT 904 forms. 9 Claimants are not required to submit receipts that substantiate the total (i.e. 100%) amount being claimed. That is, section states that when unit costs are claimed, claimants should attach any supporting receipts as evidence of the event. Office of the Chief Audit Executive, DFAIT 12

17 These observations indicate that the controls applied to the inventory of alcoholic beverages are not adequate. Data required to reconcile the results of the annual physical count of inventory to mission records is not consistently captured. ******************. Recommendation 11: Management of inventory of alcoholic beverages must be well controlled and documented appropriately to ensure that inventory can be effectively reconciled to the results of the annual physical count. Inventory control is fundamental to mitigating the risk of misuse or theft Pro-Active Disclosure On December 12, 2003, the Prime Minister announced a new policy on the mandatory publication of the travel and hospitality expenses for selected government officials. There were three individuals from our sample of 25 missions whose hospitality expenditures were required to be disclosed in accordance with the Prime Minister s announcement. The audit team reviewed the information disclosed by these individuals on the Department s website and found that: All hospitality events were proactively disclosed on the Department s website; The expenditures disclosed could not always be compared against supporting hospitality diaries. In one mission, the Head of Mission did not complete diaries for events held at the official residence; these events were, however, proactively disclosed. There were 2 cases where the amounts disclosed were not accurate. Accurate proactive disclosure of hospitality expenditures is important for the reputation and credibility of the Department. Recommendation 12: The Director, Financial Policy, Control & Community Development Division (SMO) should ensure that: OHOC policy recording and reporting requirements are clarified and respected; and, The amount of expenditures disclosed on the Department s website is consistent with the information recorded in the corporate financial system (i.e. IMS). Office of the Chief Audit Executive, DFAIT 13

18 3.0 CONCLUSION The audit team concluded that hospitality expenditures in missions are being used as intended. Auditors also concluded, however, that there are opportunities for improvement in regards to the framework for administering hospitality applied by the missions in the following areas in order to strengthen compliance and demonstrate sound stewardship of funds. Policy guidance and in particular the appropriateness, development and use of unit costs. Documentation to demonstrate: o the Committee on Mission Management s oversight efforts with respect to due diligence and provision of guidance; o hospitality event planning which aligns funds with the needs/importance of the program area; and, Documentation to adequately substantiate hospitality expenditures. Training. The audit results indicated that, in order to comply with all elements of the policy, the Department will have to improve its documentation with regards to hospitality expenditures. Compliance issues related to: Completeness and accuracy of documentation with respect to supporting hospitality costs, proof of payment, authorization, demonstrating value-for-money and reporting on expenses; Admissibility of spousal attendance at events preapproval by Head of Mission is required; and, Inventory control. Despite these compliance issues, it is important to note that: the auditors found no indication of abuse of hospitality funds; and, costs claimed were reasonable. Office of the Chief Audit Executive, DFAIT 14

19 APPENDIX A ABOUT THE AUDIT AUDIT OBJECTIVES The overall objective of the audit was to provide assurance that hospitality expenditures are being administered in accordance with Departmental and central agency policies and directives. The specific objectives of the audit were to: i) Assess the adequacy of the framework applied by missions to hospitality expenditures and to confirm that they administer their programs with due regard to Treasury Board Secretariat (TBS) and Departmental policies and directives; ii) Determine the extent to which there is compliance with Departmental and central agency policies and directives pertaining to hospitality; and iii) Identify opportunities for improvement and cost savings where appropriate. AUDIT SCOPE The audit scope included all hospitality expenditures claimed at selected Missions during the fourth quarter of the 2006/2007 fiscal-year (January to March 2007), including Heads of Missions, Canada Based Staff and Locally Engaged Staff, as well as any mission specific policies/guidelines related to the use of hospitality funds. AUDIT CRITERIA The following general audit criteria were used to assess mission hospitality framework documentation and expenditure information related to the fourth quarter of the 2006/07 fiscal year. Mission Hospitality Framework Hospitality budgets are allocated by the Head of Mission after discussion with the Committee on Mission Management (CMM) in proportion to the hospitality requirements of the program activity. The CMM establishes unit costs for hospitality functions held at commercial establishments and the Official Residence (OR) on an annual basis. The CMM has established guidelines as stipulated by the Department s Official Hospitality Outside Canada (OHOC) policy. Original hospitality claims are verified to ensure compliance with the OHOC policy and stored within the Mission s Finance section. Departmental Hospitality Forms Hospitality diaries are fully completed and signed for hospitality given and received. The actual cost per person of a hospitality event does not exceed the applicable unit cost established by the CMM. Office of the Chief Audit Executive, DFAIT 15

20 Original receipts are present and provide sufficient detail to confirm the date and time of the event as well as the number of guests. Expenses claimed are admissible under the OHOC policy. Section 34 and 33 certifications are signed by an authorized individual. Evidence of the Mission Finance Section s verification of the hospitality expenditures claimed exists. The Head of Mission s quarterly hospitality expenses, where applicable, should be accurately disclosed on the Department s Intranet website. The objective(s), purpose and evaluation of the hospitality event are sufficiently detailed to demonstrate value for money. The hospitality diary form (i.e. EXT. 52) should clearly describe the linkage between the hospitality event and the mission s program objectives. AUDIT APPROACH The audit approach consisted of completing the following major tasks: Reviewing applicable Departmental and central agency financial policies and procedures; Scheduling and conducting interviews with Mission and HQ staff; Drawing a sample of Missions - obtaining the Q4 2006/2007 hospitality files and assessing them against the Audit Criteria; Debriefing stakeholders on the results of the audit; Preparing a draft audit report as well as management letters for sampled Missions, if required; Obtaining management responses to the audit report; and, Finalizing the audit report. Office of the Chief Audit Executive, DFAIT 16

21 APPENDIX B - SUMMARY OF RECOMMENDATIONS AND MANAGEMENT ACTION PLAN Level of Significance* Recommendation Management Response Directorate/ Person Responsible Expected Completion Date 1 1. The Director of Financial Policy, Control & Community Development Division (SMO) should update the OHOC policy by revising the text of the policy areas that require clarification or increased emphasis as identified in Appendix D. The policy review should use the following filters to streamline processes and clarify messages; relevance and practicality. The Financial Policy, Control & Community Development division (SMO) submitted on August 31, 2008, a project plan to Corporate Finance, Planning and Systems Bureau (SMD) management team in order to revise sections of the OHOC policy that required clarification and emphasis as identified during the audit (i.e. Appendix D). The project plan included consultations with stakeholders. SMO has prepared a draft Chapter addressing the different areas identified in Appendix D of the audit report requiring a review. A first consultation round was held in October 2008 with a selection of Missions. Based on feedback received, key issues were raised that required additional modifications to the draft Chapter (unit cost, gifts, bulk alcohol management, receipts, hospitality to staff, usage of form, etc ). SMO sought feedback from Missions in a variety of ways including site visits, feedback at conferences/training session and correspondence. The draft Chapter was adjusted and sent out for a second round of consultation in March 2009 to select stakeholders at HQ (including Internal Audit and the Inspector General) and at Missions. It is estimated that an updated draft Chapter will be approved by June 30, 2009, broadcasted by July 15, 2009 and effective for September 1, SMO Approval: June 30, 2009 Broadcast: July 15, 2009 Effective: Sept 1, 2009 Office of the Chief Audit Executive, DFAIT 17

22 APPENDIX B - SUMMARY OF RECOMMENDATIONS AND MANAGEMENT ACTION PLAN Level of Significance* Recommendation Management Response Directorate/ Person Responsible Expected Completion Date 1 2. SMO should: Clearly define the intent of unit costs and their significance; Explore alternative methods for establishing unit costs as well as maximum cost per person ceilings not to be exceeded by claimants at commercial establishments unless fully justified and preapproved by the Head of Mission. SMO conducted a first round of consultation with stakeholders (MCOs at Missions) to determine the impact of implementing this recommendation. Based on feedback received from the first round of consultation, SMO updated the draft Chapter and held a second round of consultation in March 2009 with stakeholders at Missions and at HQ. The updated draft Chapter stipulates that unit costs can only be used for non-catered events and only cover the cost of food, thus significantly reducing the items eligible for inclusion in unit costs. Given the differences of local customs abroad, usage of unit costs has been retained for the Chancery and the Staff Quarters in addition to the Official Residence. The updated draft Chapter proposes a standardized process to establish different hospitality rates limits. It also includes the usage of the TB meal rates which is in line with the Hospitality in Canada policy of Treasury Board. Missions would have the possibility to modify (up or down) these TB rates, when properly justified and documented, in order to better reflect the costs at their missions. The updated draft Chapter clearly states that claimant must justify and seek approval by the HOM if rates are exceeded. SMO June 30, 2009 Office of the Chief Audit Executive, DFAIT 18

23 APPENDIX B - SUMMARY OF RECOMMENDATIONS AND MANAGEMENT ACTION PLAN Level of Significance* Recommendation Management Response Directorate/ Person Responsible Expected Completion Date 3. Ensure that Committees on Mission Management (CMM): Improve documentation of their oversight and due diligence efforts with respect to the use of hospitality funds. A message was sent to all HOM s in mid-february 2008 stressing this point. (RGM0006, 15/02/08) As part of the May 2008 communication on new year reference levels and mission hospitality budgets, the findings and recommendations of particular audits, including the Audit of Mission Hospitality Expenditures, were emphasized to HOMs and MCOs in a targeted manner. GEM, GLM, GNM, GPM, DFM Complete 2 Provide guidance in the areas stipulated in the OHOC policy. Ensure that a documented analysis of a representational sample of actual costs is prepared that clearly defines the cost components included in each hospitality unit cost and substantiates its amount. [Note that should an alternative means be adopted (as suggested in Recommendation 2) this recommendation may not be applicable]; and An updated message will be sent to all HOM s to provide clear instructions in order to comply with these recommendations. A copy of the final audit report will be attached to this updated message once it is finalized and approved by the Deputy Minister. The HOM s will be asked to implement these recommendations. The HOM will also be asked to coordinate with the MCO to improve the quality of the documentation as well as the financial controls in order to meet the requirements. GEM, GLM, GNM, GPM, DFM Once the audit report is finalized. Integrate hospitality work planning into existing mission planning practices. Office of the Chief Audit Executive, DFAIT 19

24 APPENDIX B - SUMMARY OF RECOMMENDATIONS AND MANAGEMENT ACTION PLAN Level of Significance* Recommendation Management Response Directorate/ Person Responsible Expected Completion Date 1 4. Develop hospitality work plans that clearly define the key events for the fiscal year, their linkages to program objectives, the target attendees and estimated cost of each planned event. We have consulted with the Missions Board on the proposed changes in the policy. Given the nature of hospitality events, the value of a detailed plan at the beginning of the year was questioned. Although a number of events are known in well in advance, a significant number of events are planned with only with a few weeks notice or less. Mission Board members emphasized that the events should be linked to the country strategy and evaluated upon completion. SCM has agreed to review this and further consult with the Missions Board before finalizing this section of the policy. SMO Complete 5. Ensure that appropriate training is provided to employees involved in the hospitality process. Specifically, SMO June 30, Revisions made to the OHOC policy should be communicated to Corporate Services Learning (CFSS) and the Centre of Learning for International Affairs and Management (CFSD) in order that they may update hospitality training materials, as applicable; SMO will communicate the revisions made to the approved updated Chapter 9 to CFSS and CFSD by June 30, SMD will ensure that the hospitality training materials include all the revisions made to the approved updated Chapter 9. In addition, CFSS and CFSD will be invited to be part of the core project team to advise on training content and delivery throughout the policy review process. It is expected that the Hospitality training will start with pre-posting training in May, June and continue throughout the fiscal year as scheduled by CFSS. Finance specialists should be made available for hospitality training provided by CFSS; SMO will provide a subject matter expert for the training provided by CFSS during the rollout period of the approved updated Chapter as no new resources are SMO Beginning May 2009 Office of the Chief Audit Executive, DFAIT 20