INTERNAL AUDIT INFRASTRUCTURE BRANCH COMPLIANCE WITH KEY PROJECT APPROVAL AND CONTRIBUTION PAYMENT PROCESS CONTROLS Internal Audit Report For the 2003 2004 Fiscal Year Prepared by CONSULTING AND AUDIT CANADA on behalf of the QUALITY, INFORMATION AND TECHNOLOGY BRANCH CANADA ECONOMIC DEVELOPMENT FOR QUEBEC REGIONS February 2005
INTERNAL AUDIT INFRASTRUCTURE BRANCH COMPLIANCE WITH KEY PROJECT APPROVAL AND CONTRIBUTION PAYMENT PROCESS CONTROLS TABLE OF CONTENTS STATEMENT OF ASSURANCE 3 PAGE 1 INTRODUCTION 1.1 Background 4 1.2 Audit scope 5 1.3 Objectives 5 1.4 Methodology 5 1.5 Acknowledgments 6 2 AUDIT RESULTS 2.1 Main stages of the control process 7 2.2 Key control points 8 2.3 Sampling 9 2.4 Results key application approval controls 10 2.5 Results key payment approval controls 11 2.6 Other findings 12 3.0 CONCLUSION 12 4.0 MANAGEMENT S RESPONSE 13 Appendix 1: Flow Chart Project and Payment Approval Processes
August 13, 2004 Our reference: 344-4477 Canada Economic Development for Quebec Regions Quality, Information and Technology Branch Montreal, Quebec SUBJECT: INTERNAL AUDIT OF THE INFRASTRUCTURE PROGRAM: EXISTENCE OF KEY APPLICATION APPROVAL AND CONTRIBUTION PAYMENT PROCESS CONTROLS. STATEMENT OF ASSURANCE We have completed the internal audit of the Infrastructure Program regarding the existence of key project and payment approval process controls and their application by Canada Economic Development for Quebec Regions, Infrastructure Branch (hereinafter called CED or the Agency ) under the Canada Quebec Infrastructure Agreement, entered into on October 20, 2000. Our work was intended to provide assurance that the Agency had introduced the appropriate systems and procedures and taken the measures required to implement these key controls. The internal audit was carried out in accordance with the Treasury Board Policy on Internal Audit and the Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing. The audit took place between July 26 and August 6, 2004 and had two components: the first reviewed the project approval process and the second, the payment approval process. Both components covered the period between April 1, 2003 (end of the last audit period) and March 31, 2004. The audit included preparing a summary of key controls, reviewing a flow chart and examining project files. We carried out the tests deemed necessary in the circumstances to allow us to form an opinion. In our view, both the audit procedures followed and evidence gathered are appropriate and sufficient to support the accuracy of the conclusions in this report. The conclusions are based on an examination of the situations identified in light of the criteria established and apply to the program audited only. The evidence gathered meets professional audit practice standards and is adequate to satisfy senior management that the conclusions of the internal audit are well-founded. In our opinion, the systems, procedures and control procedures used by the Agency during the period audited are appropriate for managing the Infrastructure Program. Furthermore, during the period audited, payments under the program were made in accordance with the Treasury Board Policy on Transfer Paym ents and met the Agency s operational requirements in all material respects. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 3
1.0 INTRODUCTION 1.1 BACKGROUND As part of its commitment to maintain and improve the quality of life of Canadians, the Government of Canada launched a six-year program with the objective of renewing and improving Canada's physical infrastructure. The federal government assumes approximately one third of the cost of municipal infrastructure. The other two thirds are funded by provincial, territorial and municipal governments. The 2000 federal budget provided $2.65 billion in funding for the physical infrastructure program. On October 20, 2000, the Canadian and Quebec governments signed the Canada Quebec Infrastructure Agreement (hereinafter called the Agreement ). The federal government s contribution to the Agreement will amount to $515,508,000, spread over a six-year period. The Agreement s audit framework provides for independent and objective assurance regarding the systems and procedures in place to ensure that their management complies with the terms and conditions of the Agreement. The federal portion of the program is administered by Canada Economic Development for Quebec Regions Infrastructure Branch, and the provincial portion by the Quebec Department of Municipal Affairs, Sports and Recreation (hereinafter called MAMSL ), known as the Quebec Department of Municipal Affairs and Greater Montreal (MAMM) under the previous government, and the Quebec Department of Transport (hereinafter referred to as MTQ ). A management committee was set up to manage the Agreement. A Federal (the Director, Infrastructure Branch, CED) and Provincial Co-chair are the Agreement s main administrators. The provincial departments are the prime contractors of this infrastructure program. Applications are therefore sent to the provincial departments, which are responsible for analysing projects and determining whether they are eligible under the Agreement. Consequently, CED has little direct contact with applicants except concerning aspects related to the Canadian Environmental Assessment Act (CEAA). Only projects deemed eligible by provincial departments are submitted to CED in the form of fiches synthèses (fact sheets). CED analyses the fact sheets and ensures compliance with the CEAA. Projects are then approved by the Director before being submitted for higherlevel approval to the Minister of Industry and Minister responsible for the Economic Development Agency of Canada for the Regions of Quebec (until December 2003, projects had to be submitted to the Secretary of State). The project approval process is described in more detail in section 2.1 of this report. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 4
1.2 AUDIT SCOPE CED s Quality, Information and Technology Branch mandated Consulting and Audit Canada to audit the internal control systems and procedures applied by the Infrastructure Branch in Montreal. Two audits of this program have already been performed. The first, carried out in July 2002, covered the period between October 20, 2000 and March 31, 2002 and essentially reviewed project approval controls; the second, carried out in May 2003, covered the period between April 1, 2002 and March 31, 2003 to review project approval controls, and the period between October 20, 2000 and March 31, 2003 to audit payment approval controls. The audits did not reveal any major problems. The current audit is therefore a follow-up to the two previous ones. The audit was performed between July 26 and August 6, 2004 and covered the period between April 1, 2003, carrying on from the end of the previous period audited, and March 31, 2004. The audit included preparing a summary of key controls, reviewing the flow chart and examining project files. Carried out in two parts, the audit first reviewed contribution claim approval controls and then looked at contribution payment controls. In addition, reconciliations were carried out to compare the contribution amounts recorded in the Performance Measurement Report with the data available in the Shared Information Management System for Infrastructure (SIMSI), and program management fees recorded in the system with the information available in management fee files. Lastly, it was verified whether the recommendations made in the previous audit report had been acted upon. 1.3 OBJECTIVES Through meetings and discussion with the parties concerned, the auditors aimed to review and update the flow chart of transactions related to the analysis of applications received under the 2000 Canada Quebec Infrastructure Agreement, and to identify and describe key controls and ensure that they were being applied by performing compliance tests on a sample of files large enough to allow them to form an opinion. 1.4 METHODOLOGY The audit was performed under the authority of CED s Quality, Information and Technology Branch. It involved the application of internal audit standards generally recognized by the federal government. Since the approach was associative, fact-finding was validated with all parties concerned in the Agency. The various steps of the project and payment approval processes were validated by the program managers and through the information contained in project files and also with the help of reports generated by SIMSI, which served as a control. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 5
1.5 ACKNOWLEDGMENTS The audit team would like to thank the managers and staff members in charge of implementing the Infrastructure Program for their availability, excellent co-operation and useful contributions to this audit. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 6
2.0 AUDIT RESULTS 2.1 MAIN STAGES OF THE CONTROL PROCESS The following employees worked for and provided the Infrastructure Branch with services at the time of the audit: Director - Federal Co-chair of the Agreement Management Committee Assistant Director Three project analysts (advisors) Two environmental advisors Administration officer Three administrative technicians Administrative assistant Public relations officer The main stages of the control process had already been described during the 2002 and 2003 audits. Based on our conversations with program staff and our examination of the files, we noted that the process described previously had not changed significantly, apart from one item, which had been clarified: environmental advisors decisions regarding preliminary environmental assessments have to be approved by the Program Director in all cases and, when the federal contribution exceeds $1 million, by an Infrastructure Canada representative. Except for this detail, the description that follows does not differ from that in the previous audit. As indicated in the previous reports, the two Quebec departments involved in the program do not operate in the same manner. Preliminary fact sheets are received from MAMSL for comments. The sheets are analysed by CED and clarifications are requested, where necessary. New fact sheets, approved by the Agreement s Provincial Co-chair, are then issued by MAMSL for the federal government s approval. In the case of the MTQ, preliminary fact sheets are not provided, but a signed sheet is sent to CED, and informal discussions are held directly with MTQ advisors. CED then prepares an analysis request form using SIMSI and records a potential commitment. The form is signed by an advisor and approved by the program s Assistant Director. Based on the preliminary fact sheet, the environmental advisors at CED s Infrastructure Branch determine whether projects are subject to the CEAA. If necessary, the applicant may be required to conduct a preliminary assessment. The advisors will make their decision when the assessment is completed. A form for this purpose has to be completed and approved by the Director, Infrastructure Branch, CED. An Infrastructure Canada representative has to approve any projects where the federal contribution is greater than $1 million. Approval may be given conditional upon the applicant conducting an environmental assessment. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 7
A briefing book, for a single project or covering several projects, is prepared for signature. The book is reviewed and signed by the Director, Infrastructure Branch, CED, who also signs the provincial fact sheets as the Agreement s Federal Co-chair. The briefing book, together with the fact sheets, is then sent to the Minister of Industry and Minister responsible for the Economic Development Agency of Canada for the Regions of Quebec for signature (until December 2003, it was sent to the Secretary of State). Projects requiring a federal contribution of more than $1 million also have to be approved by the Minister of State, Infrastructure Canada. Projects requiring a federal contribution of more than $10 million have to be approved by the expanded Treasury Board, that is a board potentially made up of 13 members rather than the 6 regular ones. The expanded Treasury Board was abolished in December 2003, which means that projects worth more than $10 million now have to be approved by the regular Treasury Board. Documents are returned to CED and a letter from the Federal Co-chair, together with the fact sheets, is sent to the Provincial Co-chair, to confirm the federal authorities approval of the project. The Provincial Co-chair is responsible for notifying the applicant. Finalized commitments are recorded in CED s financial system. Any cost increases have to be approved by the departmental authorities or expanded Treasury Board, depending on the amount of the increase and the original contribution amount. The disbursement procedure is as follows: the provincial departments submit claims for payment to CED. The documents submitted vary depending on the department. MAMSL sends CED a Claim Summary, which may include one or more projects, together with a calculation of financial assistance to be paid for each project. The MTQ sends only a summary document indicating the amounts claimed. Before recommending payment, CED verifies that its share matches the amounts claimed, that the maximum amount of the federal contribution has not been exceeded, and that the project s environmental status allows payment. Claims have to be approved by the Federal Co-chair before the data may be entered in CED s financial system. Cheques are then issued directly to the Quebec Finance Minister (and not to applicants) by Public Works and Government Services Canada. 2.2 KEY CONTROL POINTS After interviewing CED staff involved in the management of the Infrastructure Program and reviewing several project files, we were able to validate the flow chart of transactions developed during the last audit (May 2003). The audit revealed the following key controls: C Fact sheet or preliminary fact sheet is analysed, depending on the project (1); C Application forms are approved by the Assistant Director of CED s Infrastructure Branch (2); INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 8
C Potential commitments are recorded in SIMSI (3); C Analysis is performed by A CED environmental advisor and the advisor s decision is approved by the Director of CED s Infrastructure Branch when projects are subject to the CEAA (4a, 4c, 4d); C Report for an exemption from application of the CEAA is signed by advisor, where applicable (4b); C Environmental advisors decisions on projects involving a federal contribution exceeding $1 million are approved by Infrastructure Canada (4e); C Fact sheets received from provincial authorities are approved by the Director of CED s Infrastructure Branch (5); C Briefing book is signed by the Director of CED s Infrastructure Branch (6); C Approval is given by the Minister of Industry and the Minister responsible for the Economic Development Agency of Canada for the Regions of Quebec (previously the Secretary of State); (7) C Projects involving a federal contribution exceeding $1 million are approved by the Minister of State, Infrastructure Canada, and projects involving a federal contribution exceeding $10 million by the Treasury Board (8); Commitments are entered in SIMSI (9); C Letter of approval is sent to the Provincial Co-chair; (10) C Changes involving cost increases are approved (11). With regard to payments, the following key controls were identified: C MAMSL s computation form for assistance received is verified, where applicable (12); C Provincial claim for payment is approved by the Director (13); C Compliance with environmental requirements is verified before payments are made (14); C Payment limits are respected (15); C Invoice amounts are checked; (16) C Payment claims are properly recorded (17). Samples were prepared for audit purposes and tests were conducted to verify the existence and application of these key controls. 2.3 SAMPLING The first representative sample was prepared using the discovery sampling method based on a confidence level of 95% and a margin of error of ± 10%. The population consisted of 97 projects approved between April 1, 2003 and March 31, 2004, accounting for total approved federal contributions of $152,348,360 and eligible costs of $467,299,006. Based on these parameters, a sample size of 49 files was required. Fifty were selected to make it easier to calculate proportions. All projects for which eligible costs were greater than 1% of the total eligible costs, or $4,672,990, were examined, for a total of 10 projects. The sample was completed by a random selection of 40 files, which was proportional to the INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 9
number of projects per component. The second sample was prepared to verify the compliance of contribution payments with key controls. This time, the population consisted of all projects for which payments had been made between April 1, 2003 and March 31, 2004, or 277 files, accounting for a total amount paid of $55,810,600. The sample included all projects where payments were greater than 1% of the total amount paid, or $558,106. Twenty projects were selected in this way, amounting to a total of 42 payments and representing more than 41% of the total amount paid. 2.4 RESULTS KEY APPLICATION APPROVAL CONTROLS Compliance procedures with regard to key controls governing project approval revealed that, on the whole, controls were used correctly and complied with the procedures required. The audit yielded only two deviations, both of which concerned the preliminary environmental assessment. In the first case, the Infrastructure Canada representative s approval of the environmental decision reached on a project for which the contribution amount was greater than $1 million was missing; in the second, the Program Director s approval of a recommendation made by an advisor on the preliminary environmental assessment was missing. In the interests of continuous improvement, the following paragraphs will deal with other minor items revealed during the audit. For example, on two occasions, we noted that the sequential order of the controls making up the approval process was not always entirely respected. Although this practice did not comply with the prescribed process, it was of no consequence to the ultimate objective of the control process, which is to ensure that all approvals are obtained before decisions are forwarded to the provincial authorities. Indeed, an improvement was noted in this respect from the previous audit. In terms of the completeness of documents and of the information required for files, we noticed in seven cases that the letters of acceptance sent to applicants by Quebec were not in the files. A list of these projects has been forwarded to CED, which plans to take steps to obtain copies of said letters. We also noted three missing preliminary fact sheets, which normally should have been forwarded by MAMSL for analysis and comments. Finally, we noticed that, in eight files, signatures were missing in Section 7 of the CEAA exemption forms, which usually indicates whether the information has been recorded in SIMSI. However, a verification of the system confirmed that the information had indeed been entered, so these omissions were of no consequence. We also observed that, on a few occasions, the advisors had made changes to the final fact sheets (signed by all parties) without these having been dated or initialled by the Program Director. Such a practice makes it impossible afterward to check whether changes were approved by those authorized, and it would therefore be preferable to have changes initialled by either the Director or an authorized signatory. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 10
2.5 RESULTS KEY PAYMENT APPROVAL CONTROLS The compliance procedures used on a sample of 20 files, including 42 payments, did not reveal any deviations from the key controls related to payments identified previously. The payment limits were respected in all cases, the amounts to be paid were all entered correctly in the computer systems, and the order of key payment controls was always respected. The following items serve mainly as reminders of situations highlighted in the previous audit. Firstly, it has already been noted that the information forwarded to CED by the provincial departments participating in the Program to explain computations of amounts payable was, on the whole, inadequate to allow the federal authorities to check the reasonableness and accuracy of claims. In fact, the MTQ does not provide any documents to explain how the project completion rate, on which the amount to be paid is based, is calculated. CED therefore has little way of verifying the accuracy of amounts to be paid. For example, the total planned contribution for a project carried out in partnership with the MTQ was paid in full even though only 63% of the expected costs had been incurred, simply because the completion rate noted on the summary sheet was 100%. Although MAMSL provides a document entitled Calcul de l aide financière à verser with detailed explanations, the document does not set out clearly the method and steps used for its computations. Nonetheless, as such situations would not result in payments exceeding the maximum contribution planned, the risk in such cases is relatively insignificant. There was no indication that communication between federal and provincial partners regarding this type of information had improved in 2003 2004, despite the fact that management assured us that comments on the situation had been drafted by the Management Committee. Furthermore, although the steps of MAMSL s computation were reconstructed during the last audit, CED staff has not introduced a review procedure for these calculations. Such a procedure would enable the federal partner to ensure that the computations submitted for MAMSL claims are error free. As was observed during the previous audit, Hermès, the system used to record payments, is not compatible with the type of calculations made by MAMSL, which means that the data found there for costs incurred and CED s contribution rate do not correspond to reality. However, internal mechanisms to compare data in Hermès and SIMSI have been developed so that amounts can be validated before being submitted for payment. Lastly, some specific observations were made during the audit. For example, it was noted that payments had been made for a project that had been conditionally approved. The project in question, however, was divided into two phases, of which only the second required an environmental assessment, whereas the payments were limited to the costs of the first phase. As the previous audit already drew attention to this situation and it concerns the same project, the conclusion remains the same: the situation was not the result of a failure in the control chain concerning compliance with the Canadian Environmental Assessment Act, and the level of risk associated with such a procedure is minimal. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 11
2.6 OTHER FINDINGS At the request of the Quality, Information and Technology Branch, the management fees charged to the program were also examined without, however, auditing the validity of the amounts claimed. The review revealed that the maximum amount eligible under the Agreement, that is $3,508,000, had not been reached yet on March 31, 2004. In addition, a reconciliation between the Program s cumulative expenditures recorded in the 2003 2004 Performance Measurement Report and the data available in SIMSI, on the basis of which the audit sample was established, revealed that both sources yielded equivalent totals. 3.0 CONCLUSION Based on the compliance procedures carried out, it is our opinion that key controls are being applied correctly by CED s Infrastructure Branch. The tests performed on a representative sample of 50 files showed that the deviations from key project approval controls represented a rate of non-compliance of only 4% among all the files examined. As for payment approval, it seems that key controls are applied effectively because our audit did not reveal any cases of non-compliance among the 42 payments reviewed. In general, the other items observed appeared to have little material impact on the risk level. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 12
4.0 MANAGEMENT S RESPONSE We are satisfied with the results of the compliance tests that were carried out. Despite the few minor deviations observed, the quality and usefulness of the key controls show that they are, on the whole, effective. With respect to the fact that the submission of claims and, more particularly, that, in general, the information given to CED is insufficient, the Agreement s Co-chairs agreed last year that the claim submission and review procedures and the terms governing the payment of financial assistance could be reviewed when the terms and conditions of a new infrastructure program are drafted. Further to this report, we have, however, added a prerequisite control for the payment of claims submitted by MAMSL. For 1 project in 10, the project sheet calculations submitted in support of claims are checked; our calculations are subsequently included in the claim and project files. If a significant difference is detected between the amount claimed by MAMSL and the amount calculated, the appropriate parties are informed and asked to provide an explanation. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 13
FLOW CHART PROJECT AND PAYMENT APPROVAL PROCESSES INFRASTRUCTURE PROGRAM CANADA ECONOMIC DEVELOPMENT APPENDIX 1 PROVINCE CED Claims 3 1 Preliminary fact Sheet for comments Final fact sheet signed by Provincial Co-chair 2 Project Analysts Environmental Advisors Administrative Technicians Excel Files Questions & Answers Analysts Advisors Technicians Claim for payment Checked and approved by Director Analysis Evaluation Recommendation Environmental Assessment when subject to the CEAA Study by applicant Cheque issued by HERMES Signed by Assistant Director Authorization for batching DATA ENTRY HERMES EXCEL - SIMSI Application finalized by analyst, generated by SIMSI File Information book Batching by technician Briefing book long and short versions Advisor s decision Approved by Assistance Director, where necessary. Summary signed by Director Fact Sheet Signed by Director Submitted for approval of departmental authorities Note : For projects requiring a contribution greater than $10 million, a submission to Treasury Board is made, without preparing or submitting a briefing book, as batching is not necessary. Fact sheet signed by Director sent to Province Letter from Province to applicant about project approval. INTERNAL AUDIT REPORT - FEBRUARY 2005 PAGE 14