Review of the Business Advisory Centre of Hamilton-Wentworth

Review of the Business Advisory Centre of Hamilton-Wentworth

for the fiscal year 1997 for the Internal Audit Bureau of Human Resources Development Canada

December 7, 1999

INDEX

Background  

Key Procedures Performed     

Key Observations        

Surplus on a Fund-by-Fund Basis - Appendix I

Deferred Revenue Reconciliation - Appendix II

HRDC Surplus  - Appendix III

“True” Deferred Revenue at December 31, 1997 - Appendix VI

1997 HRDC Surplus in Entrepreneurial Programs - Appendix VII

BACKGROUND

The Internal Audit Bureau of Human Resources Development Canada (HRDC) asked for a review of the Business Advisory Centre (“BAC”) of the Region of Hamilton-Wentworth to determine the:

1)     Existence of a surplus;

2)     Source of surplus;

3)     Reason for the surplus.

The major contributors funding the BAC are Human Resources Development Canada (“HRDC”),   , Ministry of

Economic Development for Trade and Tourism (“MEDTT”), and Industry Canada (“Industry”).

The scope of our review was limited to the 1997 year.  We performed a high level review of years from 1993 to 1998 to understand the nature of the surplus.  In this report we will indicate amounts that have been substantiated in the 1997 year and amounts that have been estimated for all other years.

KEY PROCEDURES PERFORMED

·        Discussions with key staff of HRDC, the

MEDTT and the BAC;

·        Financial review/analysis of the surplus and identification of the source of the surplus;

·        Detail testing of revenue and expenses by program for 1997;

·        Analytic testing of allocation of funds among programs;

·        Verification of cash balance as at December 31, 1997 and reviewed all monthly bank reconciliations;

·        Review of external audit working paper files for 1997 pertaining to deferred revenue;

·        Review and evaluation of internal control procedures over the accounting for program revenue and expenditures;

KEY OBSERVATIONS

We have determined that three main factors have contributed to the surplus:

·          Misunderstandings regarding the status of client living allowances

$80,000 in client living allowances were earmarked for the SEA-RB program to be given to the SEA-EI program.  The BAC expected to expend the funds on an as needed basis.  The funds were not expended in 1997;

·        HRDC claim forms submitted by BAC did not reflect actual expenses incurred.

·       

The calculation of the surplus as at December 31, 1997 has been derived by compiling audited financial statements of the BAC for the years 1993 to 1997.  The calculation is as follows:

Opening Surplus as at December 31, 1992

The excess revenues over expenses for 1993 – 1997 are as per the audited financial statements.

The cash balance of                                                  as at December 31, 1997 differs from

the surplus by                         .  The difference is made up of:  $70,000 in funding received in advance from HRDC for currently running programs (this being true deferred revenue) and                          . The remaining difference in cash               is due to changes in operations

In order to determine the source of the surplus we accumulated the additions to the surplus from 1993 to 1997 on a fund-by-fund basis (see Appendix I) using the audited financial statements for those years.  The financial statements separated the funds in the following manner:

·        Operating Funds – used to  run the Small Business Enterprise Centre

·        Entrepreneurial Programs (“EP”) – funds allocated to run the HRDC funded Self-Employment Assistance programs for both Employment Insurance and Reachback (“SEA-EI” and “SEA-RB”) and Healthcare programs;

·       

·         

We noted a “Designated Surplus” fund on the 1997 BAC audited financial statements at December 31, 1997.  Surpluses from the Operating fund                                                                                                were transferred to this “Designated Surplus” fund over the year reviewed.  As per the notes in the December 31, 1997 financial statements, this fund was set aside for specified projects under the following programs:

·       

·        Entrepreneurial Programs, and

·         

As part of our calculation of the surplus we took into account the transfers to this fund in order to accurately reflect the surplus.  With the exception of the HRDC Healthcare and Local Labor Market programs, separate general ledgers and bank accounts were maintained for programs to track revenues and expenses.  The separate tracking of programs provides good management control to monitor revenue and expenses related to each program.  The following general ledgers and bank accounts were maintained:

·     

·         

·        SEA-EI (part of EP)

·        SEA-RB (part of EP)

·        Entrepreneurial Initiatives (part of EP)

·        Jobs Ontario

·        Pathways Program

We performed testing on revenues and expenses from the BAC general ledger for the 1997 year.  This testing was performed to ensure completeness, accuracy, and appropriate accounting for funds received and dispersed.  Our testing indicated that the BAC was maintaining accurate records.

HRDC

We reviewed the 1997 audit working papers belonging to the auditor for that year (forwarded to us by the current auditor of the BAC) to determine how the “Deferred Revenue” account was calculated.  Revenues exceeding expenses for 1997 for the SEA-EI and SEA-RB programs were reversed out of income and added to deferred revenue.  “Deferred Revenue” was calculated as excess revenues over expenditures rather than as actual “Deferred Revenue” (revenues in excess of expenditures for current projects that have not been completed).  Therefore, in actuality the  “Deferred Revenue” account consists of actual “Deferred Revenue” and “excess revenues over expenditures” from completed prior year projects.

The “Deferred Revenue” account on the financial statements as at December 31, 1997 was $293,000.  According to the 1997 audit working papers, the BAC’s Manager of Entrepreneurial Programs stated in an interview that, ”SEA-RB and SEA-EI’s contracts with HRDC would require repayment of any surplus funds that arise.  However for practical purposes instead of repaying the surplus, the programs would run until the funds have been exhausted.”  However, the funds were never exhausted and these excess funds were never brought to the attention of HRDC when renewing contracts for subsequent programs.

We calculated actual deferred revenue for programs existing at December 31, 1997 as $70,000 (see Appendix VI).  The remaining $223,000 ($293,000-$70,000) is not actual deferred revenue as it relates to contributions in excess of expenditures for 1997 and years prior to 1997.  $30,000 relates to excess contributions from Jobs Ontario and the remaining $193,000 (see Appendix II) relates to HRDC funding.  This includes $ 10,000 from the Pathways program.

There is evidence of excess contributions over expenses for the SEA-EI and SEA-RB contracts for the 96/97 term. We noted a total difference of $22,000 between claim forms submitted over actual expenses incurred for the program as per the general ledger.  This amount ($22,000) is included in the $77,531 in Appendix V. We found that in 96/97, $80,000 in living allowances was claimed.  These amounts were not expended in 1997.  We did not determine whether these amounts were actually expended subsequent to 1997 as this was beyond the scope of our review.  Please note that the contract terms are not synchronized with the financial statement fiscal year (i.e. January 1 to December 31).

The HRDC expects the bank balance relating to a particular contract to be nearly exhausted (except for outstanding payables and cheques) prior to commencing the next contract.  However, it is evident based on the testing performed that this did not occur.  Interest has been earned on the bank balance over the years and is accounted for in the surplus amount indicated above.  As per the 1997 HRDC contract interest earned on cash balances must also be returned to the HRDC.

There may also be surplus amounts relating to HRDC excess contributions within the Entrepreneurial Initiatives programs.  The HRDC standard contracts for these programs indicate that accurate records must be kept for each program.  The Healthcare and Local Labor Market programs were combined into the Entrepreneurial Initiatives general

ledger and bank account along with fee-for-service programs, therefore, tracking of expenses relating to each program is not possible.

Since a separate general ledger was not maintained, we could not determine the expenses of the Healthcare program.  We performed an analytical review of the expenses of the Entrepreneurial Initiatives program to determine what portion of the expenses should have related to Healthcare.  Total expenses for the Entrepreneurial Initiatives program for the period of May 1997 to May 1998 (the length of the Healthcare contract) was $143,000.  We noted that the Entrepreneurial Initiatives program had 37 clients.  11 of the 37 clients (approximately 30%) were from the Healthcare program.  Since the same services were offered for both the Entrepreneurial Initiatives program and the Healthcare program, we calculated that $43,000 ($143,000 x 30%) of the expenses could directly relate to the Healthcare program.  HRDC contributed $114,000 to the Healthcare program.  Since the expenses of the program were estimated to be $43,000, HRDC overcontributed $71,000 ($114,000 - $43,000).  The portion of the overcontribution relating to 1997 is $41,000 ($71,000 x 7/12).  As this is an analytical calculation, we have not added this amount to HRDC’s portion of the surplus. 

Based on our review of each “Memorandum of Understanding” between MEDTT and the BAC, and between Industry Canada and the BAC, and conversations with both MEDTT and Industry Canada personnel, it is our understanding that the funding given to the BAC by both of these parties was a grant.  Therefore, neither party is entitled to repayment of funds. 

Jobs Ontario

The BAC has maintained a separate bank account and a separate general ledger for the Jobs Ontario program since its inception.  The Jobs Ontario program is finished , however $30,000 remains in its  bank account with the BAC.   Testing performed on revenues and expenses in 1997 indicated that amounts were accurately recorded in the general ledger and bank accounts for the various programs.  A review of bank statements for 1997 indicated no activity in this account (i.e. transfers from other BAC held bank accounts).  Therefore, the  $30,000 balance is excess funding provided by Jobs Ontario.

APPENDIX VII